Bric originals shine among EM funds

Goldman Sachs economist Jim O’Neill (now Baron O’Neill of Gatley) first coined the acronym “Bric” in 2001 to describe the four developing economies he expected to drive global economic growth in the future.

These were Brazil, Russia, India and China. The fifth member of the group was a late arrival: South Africa formally joined the Brics group in 2010.

Brics as a group fell out of favour the last few years. Some analysts, like Kevin Gardiner, Rothschild Wealth Management’s global investment strategist, said treating the Bric nations as a single investment bloc “was a triumph of marketing over economic analysis”. Each of the four countries have fundamental economic differences that precluded them from being grouped together.

However, the top three performing emerging market funds over the last three years have been the original Bric funds.

The best performer is the HSBC GIF BRIC Equity fund, managed by Nicholas Timberlake since 2005. It has posted a 71.41% return over three years, with a Sharpe ratio — a measure of risk-adjusted returns — of 1.08, more than double the sector average.

Timberlake also manages the BRIC Markets Equity fund, which has identical top ten holdings with the same weightings.

The veteran HSBC fund manager’s biggest bets are to Russia’s Sberbank (6.59%) and Lukoil (6.11%). The funds’ allocations to the four Bric countries are about even, with a slight overweight to Russia.

His largest Brazil, India and China holdings are Banco Bradesco, Reliance and Tencent respectively.

In contrast, the second best performer, the Schroder ISF BRIC fund has largely put its eggs in an Asia-Pacific basket. The $1.2bn fund, managed by Waj Hashmi and Tom Wilson, has a 70% allocation to China and India, whose companies make up eight out of its top 10 holdings.

Its large exposure to China explains the fund’s 17.18% volatility, and a Sharpe ratio that is lower than HSBC funds and the 1.02 risk-adjusted return of the third place Templeton BRIC Fund, whose outright three-year cumulative return is only marginally lower (65.15%).

The Templeton fund also has an overweight to Asia-Pacific (61%), but has a bigger exposure to Russia than Schroders.

Worst performers

The worst performing emerging market funds – apart from single-region or country funds – are those with broader mandates. Diversifying away from the core Bric countries doesn’t seem to have paid off.

The Threadneedle Global Emerging Markets Equity Fund has a disappointing 5.64% three-year return, well-below its MSCI EM benchmark. Like the AB Emerging Markets Growth Portfolio Fund, it has large allocations to the Asian tech giants Alibaba, Tencent, Samsung Electronics and Taiwan Semiconductor Manufacturing, as well as significant exposure to Indonesia.

The third worst performer, the Aberdeen Standard SICAV Emerging Markets Smaller Companies Fund, has – as the name suggests – an idiosyncratic style that has done it few favours either against the broader EM universe or in comparison with its MSCI Global EM Small Cap benchmark.

Finally, perhaps just as significant as the top and bottom three fund’s allocations, are their fees. The three underperformers all have ongoing charges figures (OCFs) above 2%, and higher than the sector median of 1.92%.

Admission to the HSBC Bric fund costs only 0.79%.

Best and worst performing emerging market funds

Source: FE Analytics. 3-year performance to 19 Mar 2016 – 15 Mar 2019 in US dollars.

Comparative performance of MSCI EM indices

Source: FE Analytics. 3-year performance 19 Mar 2016 – 15 Mar 2019 in US dollars.

Best and Worst Performing Emerging Market Equities Funds

Source: FE Analytics. Three-year cumulative performance in US dollars.