Brazil, Russia, India, and China. Together they have 40% of the world's population and generate 27% of the world's GDP. The average annual GDP growth of a BRIC nation was greater than 7% (before the recession), as compared to approximately 2% for a G-7 nation. Tremendous growth can create significant profits for successful companies.
How can you capture some of this opportunity in your portfolio?
The BRIC nations are a subset of the nations considered to be in the emerging market. However, the BRIC nations have, for the most part, underdeveloped capital systems; meaning that it can be difficult for residents of foreign countries to own shares in their companies. In addition, BRIC currencies can be especially volatile.
There are (theoretically) several ways to invest specifically in BRIC:
1. Invest in a BRIC mutual fund. I searched for, but did not find, a no-load BRIC mutual fund. Templeton has a BRIC fund, but it has a high expense ratio (2.17%), a high load (5.75%), and a performance that earned it Morningstar's lowest rating of one star. Conventional emerging market mutual funds tend to underrepresent BRIC's. BRIC's have five times the GDP of the more developed emerging nations of Taiwan, Mexico, South Korea and South Africa, but have less representation in the MCSI Emerging Market Index Fund (EEM) (37% vs. 44%)
2. Invest in a BRIC ETF. There is an index, the S&P BRIC 40, that includes forty of the largest, best capitalized, and most liquid investments available in the BRIC nations. Most of the underlying stocks trade as American Depository Receipts (ADRs) on an American stock exchange. Unlike mutual funds, ETF shares trade during the day, so they need to invest in things that can also be bought and sold during the day in a reliable and regulated manner, and that generally limits it to only the most liquid and well established BRIC stocks.
There are three popular BRIC ETF's: BKF, EEB, and BIK. Each of the ETF's charges a reasonable expense ratio (for an emerging market fund) of 0.50 to 0.70%. These ETF's apparently don't adhere strictly to the Index, as they each have slightly different country allocations.
3. Invest in several ETF's, each focusing on a particular country: Brazil, Russia, India, and China. This has the advantage of letting you allocate your investment per country as you see fit. If you feel that manufacturing in China has a better opportunity than the Russian oilfields, you can weight China more heavily. The country-specific approach has the disadvantage of having higher trading costs, as you need to execute more transactions every time you make an initial purchase, an additional investment, or rebalance.
Should you invest in BRIC's?
Investing in BRIC's is not for the faint of heart. During the recent recession the S&P BRIC 40 lost more than 67% in share price, peak to trough. Since then it's recovered about half the loss. If you choose to invest in the BRIC's, you should consider it to be a long-term investment, for at least ten years or so.
If you choose to invest in BRIC's it should be a very small percentage of your portfolio. If your overall asset allocation has 20% in foreign equities, and 30% of that is in emerging markets, then no more than 50% or so of the emerging market allocation should be in BRIC's. For this example, that works out to 20% of 30% of 50% for a total of 3%. Meaning, if you have a $100,000 portfolio, you might consider putting $3,000 in BRIC's.
If it is a relatively small sum that you are investing, then transaction costs matter. That almost certainly rules out investment option #3 (the individual country approach). If you invest and rebalance quarterly, you could easily make 30 transactions in a year. At $10 each, that's $300. To keep your transaction expenses below 1%, means you'd need to be investing $30,000 -- 10x our example above, meaning that the total portfolio would be on the order of $1M.
If you really want a specific allocation to BRIC's, then your best option is probably to invest in a BRIC ETF's.
But overall, as tempting as those growth numbers might seem, unless you have a rather large portfolio, it's hard to make a case for a specific allocation for BRIC's. There are a few good emerging market mutual funds (stay tuned for an upcoming post), and although they may not have as much emphasis as you might like on the BRIC's, they might be the more prudent path.
Update from the Telegraph.
Disclaimers: This information is provided for educational purposes only. It may not apply to your personal financial situation. Before investing, you may want to discuss your plan with an investment advisor or financial planner. Investments in ETF's and in mutual funds are not FDIC insured and can cause loss of principal. (You can lose money).
Disclosure: No positions.