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What Are BRICs

And how to invest in them

BRIC is one of the new investment buzzwords and it stands for:
  • Brazil
  • Russia
  • India, and
  • China

The term BRIC is mainly used in the investment world where a number of financial institutions have set up so-called BRIC funds to offer clients exposure to the 4 economies and stockmarkets.

What's so special about the BRIC economies
  • Population - Combined they contain 43% of the world's population
  • Their economies hold real potential looking 5-20 years into the future, far more than established Western economies but of course with increased overall risk

  • Growth potential - For example, India's economy is expected to grow by 6%+ in 2010 whereas the UK economy, according to the European Commission, is expected to show virtual stagnation in 2009/10

  • New economic superpowers -The Chinese economy could overtake both the UK and German economies from 2015 onwards and it's expected to deliver over 1 billion new consumers to the global economy over the next 25 years

One of the key points of the BRIC countries is that as these countries develop more money filters down to the general population which in turn gives them more spending power for goods and services as well as property.

How to invest in the BRIC economies

For retail investors there are two ways -

  1. Fund management companies - most offer BRIC funds or BRIC related funds such as funds that only invest in smaller companies or certain sectors such as infrastructure
  2. Via ETFs - stands for Exchange Traded Funds, which mostly offer a far cheaper investment alternative to the fund managers
Investing in BRICs via the Fund Management companies

The main problem many people have with investing in funds run by the asset management companies is that they're often expensive in relation to the performance offered. For example -

  • Initial fee - Many charge an outrageous 5% initial fee, often called a front-end load. If you invest £1,000 just £950 goes into the fund, with the £50 balance being retained by the fund manager. There is no credible reason for this

  • Management charges - Expect to pay between 1.5% and 3% a year even if the fund loses money

  • Portfolio turnover - it costs money to buy and sell shares, especially when a fund is large and so the share deals have to be equally large. Experts suggest that portfolio turnover loses the average fund around 2%-4% a year, and sometimes even higher if the fund aggressively buys and sells

  • Manager turnover - many funds change managers every 18-24 months so there's little or no continuity as the new manager wants a clean house and starts buying the shares he favours - and of course, that's yet more portfolio turnover
The implications of high costs with investment funds

1% here, 2% there it never seems that much does it? But even small amounts deducted from your investment can add up over the years when compounded. Work it out for yourself, see what a saving of 2% a year on management fees will result in after 10 years - I think you'll be shocked at the figure.

However high costs are never a problem if associated returns are delivered. But sadly this isn't often the case with the fund management industry where study after study has proved that well over 75% of funds fail to beat the returns of the benchmarks they follow.

I believe that the reason for this gross underperformance is purely down to costs. Costs are like a millstone round a runner's neck. The runner himself might be excellent, world class even, but it's going to be hard to compete and show his true class when lumbered with such a disadvantage.

So in my view a far better way to get exposure to the BRIC stockmarkets is via ETFs.

Using ETFs to invest in BRIC stockmarkets

ETF stands for Exchange Traded Fund which are possibly the most cost efficient way to get stockmarket exposure, and not just for BRIC markets.

In its simplest form an ETF is a passive investment vehicle that tracks an index. For example, you can buy an ETF on the FTSE 100 and in turn the ETF invests in all the constituents of the FTSE 100 in their relevant weightings (Vodafone has a higher percentage than say British Airways).

So if the FTSE 100 moves higher the ETF will almost perfectly track it, ie if the FTSE rises 5.57% the ETF will also rise by a similar amount.

  • Tracking at first doesn't seem like so much of an advantage but considering over 75% of funds fail to beat their benchmarks it is an advantage especially when running costs are taken into account

  • Running costs are the main selling points with ETFs and they average between 0.15% and 0.75% per year whereas for actively managed funds the costs average 1.75% - 2.5%

  • Another advantage to ETFs is that they are fully tradable on the stockmarket, just like a stock. So buying £1,000 of Vodafone is the same process as buying £1,000 of an ETF

And if you're really adventurous and a trader at heart then ETFs can also be sold short - See our guide to short selling for information on how this works.

What ETFs are available for BRIC markets

Any financial firm can list and promote ETFs but normally they- re issued by one of the larger investment banks. iShares used to be owned by Barclays but has since been sold to a private equity firm. Nevertheless, here in the UK the iShares ETFs are normally the most liquid (highest volume) and the ones I'd recommend using.

iShares lists the following BRIC ETFs (London ticker code in brackets):

  • Brazil (IBZL)
  • Russia (IEER)
  • India (LNFT)
  • China (FXC)
Note the Russian ETF is actually called the Eastern European ETF and invests in Russia, Hungary, Poland and the Czech Republic. I like it because 60%+ of its holdings are in Russian companies plus the other economies are still very much Russian dependant. You however might want to seek out an ETF that invests 100% in Russian stocks.
Want things simple - Look into the iShares BRIC 50

If you like to keep your investing as simple as possible then look into the iShares BRIC 50 ETF to get instant exposure to the BRIC economies (London ticker BRIC)

The ETF invests in 50 of the largest BRIC companies with the largest holding of each country being (at the time of writing):

  • Brazil - Banco Itau Financeira (5.19% of the fund)
  • Russia - Lukoil (4.09%)
  • India - ICICI Bank (2.26%)
  • China - (China Life Insurance (4.34%)
ETF Summary

The downsides to ETFs is that they can never offer outperformance in relation to the index they're following. Using the FTSE All share index as an example -

  • An active fund manager could theoretically return 19.8% when the FTSE All Share returns 11.2% over the year
  • But it would be impossible for the FTSE All share ETF to return more than 11.24%

However, this fabled out performance is the carrot that's always being dangled by the marketing departments in front of potential customers. You can always see evidence of this via their glossy adverts and marketing blurb where they talk up their managers skills, dedication and overall superiority.

But as I've mentioned before, the vast majority of actively managed funds, normally down to their inherent running costs, fail to outperform their investment benchmarks.

When to consider using Fund Managers to invest in BRIC markets

Although the majority of actively managed funds are expensive in relation to the performance they offer that doesn't mean they're are not some good ones to consider.

Often you'll find some very successful funds in uncrowded and specialist markets such as the BRIC economies.

For example, anyone can easily become an expert in UK companies and the stockmarket. We speak the same language, we know the subtleties and nuances of UK business and law and visiting the companies or seeing their operations first-hand is never more than a few hours away. But not so in India or Brazil where specialist knowledge built up over many years can be invaluable.

So be on the lookout for fund managers of BRIC type funds who've been working for the fund (or in that market) for many years. For one they'll have plenty of experience of the market alongside good contacts. And if they live and work in the country they invest in, all the better.

In such a case I would be more than happy to invest in these funds, as long as they had a good track record but I'd balk at paying the 5% initial fee. Instead I'd see if I could buy through a Fund Supermarket where the fees are usually heavily discounted.

Summary

As you can see there are plenty of ways to invest in the BRIC economies. Personally I prefer using ETFs but as indicated above actively managed Funds should also be considered, especially as they have the potential to offer outperformance whereas ETFs don't.

However you invest though, there's no hiding from the fact that BRIC economies probably offer more scope for gains over the next decade than their western counterparts.

One final point - the BRIC stockmarkets, as has been witnessed over the last 5 years, have far more potential to rise in value (percentage terms) than European or US markets, but of course they can fall as well (the Russian market fell about 80%+ from its high in 2007/08).

So take this into account when investing and try to invest in a similar fashion to savvy market operators -

  • Be net sellers when prices are booming and everyone is raving about the market, and
  • A net buyer when stocks are beaten up and in the doldrums

Easy to say I know, harder to do, but doing the hard thing is often the secret to successful long term stockmarket investing.


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