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 Acronym investment — putting money into small groupings of markets
which often have little in common beyond a broad economic concept — is giving way to acronym anxiety.
Former Goldman Sachs economist Jim O'Neill set the ball rolling in
2001 when he created the BRIC family of Brazil, Russia, India and
China.
Many of these countries and others lumped together under separate
acronyms have, at least until recently, enjoyed turbo-charged
economic growth. But investment gains are not guaranteed and
underperforming local stock markets have led fund managers to flee
what had been fashionable groupings.
Assets under management in BRIC funds fell to 9 billion euros at the
end of last year from 21 billion at the end of 2010, according to
Lipper data, while assets under management in broader emerging
equity funds have grown in that time.
Goldman Sachs's own BRIC fund has lost 20 percent in value over the
past three years.
Undaunted, O'Neill has coined a new acronym. In a series on BBC
radio this month, he championed the MINT group — Mexico, Indonesia,
Nigeria, Turkey — as the next giants after the BRICs. O'Neill
stresses that MINT — like BRIC before — is an economic, not an
investment, concept and his programs explored each country's
problems as well as its potential.
Nevertheless, the appeal of acronym investment is fading. Fund
managers say such groupings do not take into account different
stages of development of the countries involved and risk sidelining
other promising markets. The groupings have also frequently suffered
from disappointing performances of their listed companies, the main
target of foreign investors.
O'Neill's timing is not ideal. Turkey has been rocked by an
investigation into alleged corruption following street protests last
summer, while Nigerian politics are in turmoil before elections next
year.
Indonesia, along with other emerging economies which are running
large current account deficits, is experiencing a flight of
investors.
"Mexico, Indonesia, Nigeria and Turkey are all very interesting
countries but not much connected beyond the excuse for having an
acronym," said Richard Titherington, chief investment officer of
emerging equities at JP Morgan Asset Management. Titherington
prefers groupings by concepts such as markets where companies offer
the highest dividend yields.
Investors in the BRIC countries have already found out the hard way
that economic growth may not convert into stock market gains, and
some analysts blame problems with corporate governance in markets
such as Russia and China.
BRIC markets have underperformed the broader MSCI index of emerging
stocks in dollar terms in the past three years, with emerging
markets in turn lagging developed markets.
NO MORE CIVETS
In another sign of acronym anxiety, HSBC closed its CIVETS fund last
year, leaving no managers tracking another group of emerging markets — Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.
Both the BRIC and MINT groupings focus on demographics — countries
which are going to grow rapidly by the middle of the century, due to
their young populations.
This is an attraction of frontier economies — those which are at an
earlier stage of development than established emerging markets. One
such is Nigeria, whose stock market has been an extreme outperformer,
doubling in value last year.
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But relying exclusively on demographics to make investment decisions
is risky, says Andrew Brudenell, frontier fund manager at HSBC Asset
Management.
Instead, investors should look at countries with weaker corporate
regulation and where relatively low levels of goods and services are
available, offering potential for growth.
These factors should produce the best returns on company earnings.
"Demographics are definitely one of the (investment) criteria, the
others are also criteria," Brudenell said. "We would not necessarily
decide MINT are interesting countries to invest in, there are lots
of other ones."
Nigeria is at an earlier stage in the development cycle than the
others. According to IMF estimates, its per capita gross domestic
product (GDP) was about $2,800 last year measured by purchasing
power parity. That compares with around $5,000 for Indonesia and
more than $15,000 for Mexico and Turkey.
Turkey is the country most out of kilter in stock performance terms.
It has been hit by weakness of its currency as foreign investors
pulled out before the U.S. Federal Reserve begins scaling back its
bond-buying this month, a program that had depressed yields in U.S.
markets and encouraged investors to seek higher returns in riskier
assets.
The Turkish stock market has underperformed even the BRICs in dollar
terms in the last three years. The corruption inquiry, which led to
the resignations of government ministers, aggravated the problem.
"Turkey remains a long-term investment opportunity but in the short
term remains quite risky," said Mauro Ratto, head of emerging
markets at Pioneer Investments.
As with Turkey, investors are wary of political risk in Nigeria
before the next year's elections and amid uncertainty over whether
President Goodluck Jonathan will run.
Whatever their differences or similarities, the danger with all
emerging markets is that their performance is not always dictated by
local stories, but by the global economic outlook.
"These countries do not have an independent monetary cycle," said
Bill O'Neill, chief UK strategist at UBS Wealth Management. "In
these environments, emerging markets do struggle short term."
Jim O'Neill said investors had got the wrong end of the stick by
banking on the BRIC. "It is very important for me to emphasize,
being Mr. BRIC, that I created the BRIC as an economic concept, not
as an investment theme," he said.
The same went for the MINT grouping, said O'Neill. "Each of the four
MINT (economies) make up more than 1 percent of the world's GDP,
except Nigeria — which has the best potential to make up 1 percent
of GDP," he added.
And as always, timing is vital with investing. While Goldman's BRIC
fund has fallen in the past three years, it is up 26 percent since
its launch almost eight years ago.
"If you invested in the BRICS in 2008 for the first time, you would
not be very happy. If you had invested in them in 2000, you would be
very happy," he said.
(Additional reporting by Sujata Rao;
editing by David Stamp)
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