Jeff Salway: Just another Bric in the wall of fund managers' marketing gimmicks

SOME four years ago, investors were introduced to the concept of the Bric fund. Investing in Brazil, Russia, India and China, the funds promised the most efficient exposure to the best that emerging markets had to offer, exploiting demand from two of the countries for the commodities and raw materials supplied by the other two.

The logic is entirely sound, as the four Bric countries form the bedrock of the emerging markets story. Allianz, Templeton, Schroders and Goldman Sachs – which invented the Bric term – launched the first Bric funds available to UK private investors in 2006 and quickly saw inflows that validated their initiative.

The launch of the funds contributed to more money being invested in emerging markets in the first quarter of 2006 than in the whole of 2005.

But are the funds anything more than a marketing gimmick? If there are areas in which fund management firms always out-perform, gimmickry, meaningless acronyms and self-justification are among them.

Over the past three years, the average Bric fund has returned 30.15 per cent, according to data produced for The Scotsman by Morningstar. However, the top ten funds in the emerging markets sector have outperformed all but one Bric fund. Similarly, in the Asia Pacific ex-Japan sector, the top nine funds have all outperformed the best Bric fund. The same goes for funds investing only in China.

Like individual country funds, including those focusing on China, Bric funds offer managers little room for manoeuvre in the event of one or more of the four countries experiencing serious problems, especially when you consider the strength of the correlation between the four countries, largely courtesy of the commodities theme.

And there is a danger of assuming that a Brics fund is an effective proxy for emerging markets as a whole. China accounts for less than 20 per cent of the MSCI Emerging Markets Index, while Brazil is weighted 16 per cent and India and Russia just 7 and 6 per cent respectively. Countries including Korea and Taiwan are responsible for a growing proportion of the index (13 and 11 per cent respectively), yet would be among the 18 countries overlooked by investors using only Bric funds for emerging markets exposure.

If you're looking for serious long-term growth in emerging markets, much of it may come from Korea and Taiwan and other Asian countries including Vietnam, Indonesia and Malaysia. All potentially very volatile, but offering diversification away from the Bric four.

So why would you invest in a Bric fund when you can invest in a road-tested emerging markets fund? That's where the marketing comes in, because for most investors there would be little need to include a Bric fund when building a diverse portfolio.

And for the average investor, diversification remains the most important discipline. Investing everything in a single country, region, industry or theme is to take an unnecessary risk. The latest Global Asset Performance study by T Bailey underlines the importance of spreading risks across different investments.

For instance, the best performing region for equities in 2008 was Japan, which also happened to be the worst performing global region in 2008. And while the Asia Pacific excluding Japan region was top in 2007, returning an average 36.4 per cent, it lost almost all of those gains the following year, according to T Bailey.

That doesn't mean Bric funds are to be avoided, but it underlines that they should be just one element of a strategy in which investment risk is spread across the vast emerging markets spectrum, just as it is across other regions and global themes.