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A Rough Ride on BRIC Road

Funds stumble trying to capitalize on a big idea.

Gregg Wolper, 03/19/2013

Goldman Sachs recently announced that Jim O'Neill, chairman of Goldman Sachs Asset Management, is retiring. As every article about his impending departure noted, O'Neill gained attention for coining the BRIC acronym in November 2001. In a Goldman Sachs research paper, he argued that because Brazil, Russia, India, and China were so important economically, and would become even more so in the coming decade, they should have a place in global decision-making bodies such as the G7.

Criticism of the BRIC concept soon arose. Why lump together such disparate countries, ignoring other fast-growing emerging markets, and assign them an easy-to-remember acronym, unless there's more than a hint of self-promotion involved?  Was this just Goldman Sachs trying to essentially trademark the idea that China and other big emerging markets would continue to grow?

Some of the cynicism was justified. Even so, viewed from today's perspective, O'Neill was on target in broad terms. Led by China, these four countries have become far more central to every discussion of important issues than they had been, from the outlook for global economic growth to debates about energy production and climate change to forecasts of stock-market performance and currency movements.

And in the narrow sense, O'Neill did succeed in making the BRIC acronym commonplace. It even made the jump from idea to reality when the four countries began holding summit meetings, which now include South Africa. (For an excellent discussion of O'Neill and the BRIC concept, see Gillian Tett's 2010 story in the Financial Times.)

As with many trendy ideas, though, things got sticky when fund companies tried to turn the BRIC concept into investment vehicles. The first publicly available open-end BRIC mutual funds in the United States were not launched until the summer of 2006, when Franklin Templeton and Goldman Sachs each brought out a BRIC-focused equity offering. By the end of 2007, three index-tracking exchange-traded BRIC funds were available as well.

How have these BRIC offerings fared? For the actively managed Goldman and Templeton funds, the answer is simple: badly. For the ETFs, the story is mixed. Moreover, the vast differences in mandates among funds ostensibly following the same straightforward concept illustrate that the risk of weak performance isn't the only complication in turning an idea into a real, logical, and successful investment vehicle.

The Mutual Funds: Nothing to Write Home About
Goldman Sachs BRIC GBRAX opened in June 2006, a few weeks after Templeton BRIC TABRX. Overall, the Goldman fund's performance has been dismal. Its 4.9% annualized return from inception through March 13, 2013, is nearly 2 percentage points worse than the average for the diversified emerging-markets category. The fund's showing lags even further behind the performance of a broad, cheap emerging-markets index-tracker, Vanguard Emerging Markets Stock Index VEIEX.

The history of Goldman Sachs BRIC does include some sweet spots. It enjoyed outstanding gains during the huge rallies of 2007 and 2009. But it has been crushed when markets sank, and it failed to keep up in 2010's upturn. The fund's trailing five-year return, which doesn't include 2007's success, lands in the category's bottom 10% and trails the group average by more than 4 percentage points, annualized.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

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