Goldman's BRIC Era Ends as Fund Folds After Years of Losses

Do Emerging Markets Have Room to Boom?
  • BRIC fund loses 21% in five years, leading to investor exodus
  • Acronym-based investment strategy comes under greater scrutiny

The BRIC era is coming to an end at Goldman Sachs Group Inc.

The bank’s asset-management unit folded its money-losing BRIC fund, which invests in Brazil, Russia, India and China, and merged it last month with a broader emerging-market fund. Goldman Sachs pulled the plug on the nine-year-old product because it doesn’t expect “significant asset growth in the foreseeable future,” according to a filing to the U.S. Securities and Exchange Commission.

Fourteen years after former Goldman Sachs economist Jim O’Neill coined the acronym that ushered in an unprecedented investment boom, the biggest emerging markets are now sputtering. Russia and Brazil have fallen into recessions. China, long an engine of the world’s growth, is poised for its weakest expansion since 1990.

The downfall of the BRIC fund, which had lost 88 percent of its assets since a 2010 peak, also underscores how the strategy of bundling disparate countries into a single investment theme is losing its appeal among investors.

“The promise of BRIC’s rapid and sustainable growth has been challenged very much for the last five years or so,” said Jorge Mariscal, the chief investment officer of emerging markets at UBS Wealth Management, which oversees about $1 trillion. The BRIC concept was popular. But nothing is eternal.”

The BRIC fund is being swallowed up by the Emerging Markets Equity Fund as part of Goldman Sachs’s efforts to “optimize” its assets and “eliminate overlapping products,” the New York-based bank said in the Sept. 17 filing.

Fund Merger

Instead of liquidating the fund, Goldman Sachs opted for the merger because it will give investors access to “a more diversified universe” of developing nations. The bank pointed out that the emerging-market fund has outperformed in the one-, three- and five-year periods.

The BRIC fund lost 21 percent in the five years through Oct. 23, the last trading day before the merger. Its assets declined to $98 million at the end of September after peaking at $842 million in 2010, according to data compiled by Bloomberg.

“Over the last decade emerging market investing has evolved from being tactical and opportunistic to being a strategic part of most asset allocations,” said Andrew Williams, a spokesman for Goldman Sachs. “We continue to recommend that our clients have exposure to emerging markets across asset classes as part of their strategic asset allocation.”

O’Neill, who stepped down as the chairman of Goldman Sachs Asset Management in 2013 and became commercial secretary to the U.K. Treasury in May, declined to comment.

BRIC Power

In the decade following the creation of the BRIC moniker, the group surged as a global economic power, amassing 40 percent of the world’s foreign reserves. MSCI Inc.’s BRIC Index returned 308 percent in the 10 years through 2010, compared with a 15 percent gain in the Standard & Poor’s 500 index.

While the four countries still account for more than one fifth of the global economy, their growth prospects have dimmed. In a December 2011 report, Dominic Wilson, then chief markets economist at Goldman Sachs, said the economic potential for BRICs probably peaked because of a smaller supply of new workers.

The predicament has become even more striking this year. Brazil is reeling from a corruption scandal and the worst recession in a quarter century, while Russian companies are locked out of global capital markets because of international sanctions. In China, the government was caught off guard by a stock crash this year that wiped out $5 trillion in market value. Even in India, where growth accelerated, Prime Minister Narendra Modi is struggling to push through reforms.

Era Ends

The MSCI’s BRIC benchmark fell 0.6 percent at 9:09 a.m. in New York, extending this year’s decline to 8.2 percent on a total return basis. Over the past five years, it has lost 26 percent, compared with a 92 percent advance in the S&P 500 Index and a 16 percent decline of the emerging-market benchmark.

“The excitement came from the rapid growth from China,” said Anindya Chatterjee, managing director at City National Asset Management Inc. in New York. While China’s current shift away from exports and investment leads to a more balanced economy, it also slows its growth, “thus it is not a pretty environment” for emerging-market investing, he said.

Chatterjee’s $775 million City National Rochdale Emerging Markets Fund has returned about 8 percent annually over the past three years. It beat 98 percent of its competitors during the period by shunning companies in Brazil and Russia and focusing on those profiting from Asia’s growing middle class, including China’s Internet giant Tencent Holdings Ltd.

Fund Outflows

Investors have withdrawn $1.4 billion from funds investing in BRIC countries this year through Nov. 4, extending the outflow since the end of 2010 to more than $15 billion, according to EPFR Global. That is more than unwinding all the inflows since 2005.

The acronym-based investing strategy is flawed and has come under increasing scrutiny, according to Xavier Hovasse, who oversees $2.3 billion emerging market assets at Carmignac Gestion. That’s because markets are now driven more by country-specific factors than global trends, causing performance to diverge.

“The BRIC acronym didn’t make any sense in the first place because you just randomly group four countries which are completely different,” Hovasse said from Paris. “If you restrict your investment universe too much, it’s more difficult to perform. I am not surprised that those funds are collapsing.”

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