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Another Bric in the wall

The Allianz Bric stars fund is backed by an experienced team and in-house research system which has given it a competitive edge in an unproven market

Given the huge popularity of emerging markets and the Asian region generally, I am surprised that there has only been one launch of an onshore Bric fund.

There are offshore funds available to clients but it is only Allianz that has put its head above the parapet in the onshore market.

Bric funds involve four countries – Brazil, Russia, India and China. The concept originates from the Goldman Sachs note, issued in 2003 and revised in 2005, which suggests that these four countries have the fundamental economic conditions to become economic superpowers in decades to come.

I have no problems with the concept but I did wonder whether it was wise to restrict clients’ exposure to four countries, however big they were. Was it just a marketing gimmick, an add-on to a portfolio or an investment in its own right?

In honesty, I am not sure I have made up my mind. The concept is fascinating but my initial worry on the Allianz fund was far more to do with its timing as it launched in late February this year. These markets had already risen a long way over the preceding few years and performance had been excellent in the year to date. Here, at least in the short term, I was proved right as markets came off quite ferociously. But the Allianz Bric stars fund held up far better than I expected. Indeed, it held up far better than nearly all the global emerging market funds. Perhaps there is something in investing in a Bric fund itself.

The Allianz fund is headed by Michael Konstantinov, based in Frankfurt. The team have an average experience of 13 years and are backed by 65 analysts, with sector and regional portfolio teams. Their universe is 800 to 900 stocks, including around one-third outside the Bric universe to provide flexibility.

The top-down component is extremely important. It uses a country-scoring system which looks to identify the current market environment and potential trends within. This helps the team rank the relative attractiveness of each country. The Bric market capitalisation weighted index does not work very well as it creates huge variations, so the team have weighted the countries equally for their own benchmark. They then try to rebalance this every year to optimise returns. They can be overweight in any country by as much as 30 per cent. The present asset allocation is Brazil 25.2 per cent, Russia 19.9 per cent, India 25.9 per cent, China 23.7 per cent and other Bric-related countries 5.3 per cent.

Stock selection is enhanced by the in-house Grassroots system. This is a proprietary resource, founded in 1985, which allows the company to conduct very direct market research. It has 12 full-time staff, around 300 researchers and 50,000 industry contacts. Between 50 and 60 company or industry studies are run each month, allowing Allianz fund managers to check the facts that companies and analysts have provided with the actual people involved. This is unique among fund firms and I believe the process gives it a competitive edge.

The case for Bric funds is mouth-watering. The Bric countries accounted for close to 30 per cent of global growth in the past five years. They could make up 30 per cent of the world’s economy by 2025, with income per capita rising dramatically over the next 30 years or so.

Arguably, the countries complement each other in terms of their major attributes. This may be seen as simplistic but Brazil is looked at as a huge commodity warehouse, not only for metals but also for food. Russia has a huge energy store of oil and gas. India is a huge service centre and IT area. More Indian scientists work for Microsoft than US scientists. Finally, China is seen as one huge production plant. It is important to be aware that the biggest sector within the Bric countries is commodities (45 per cent), so a downturn here would hit these countries more than anything else.

Despite the huge rises in share prices over the last few years, respective p/e ratios for 2007 range from 7.8 in Brazil to 12.3 in India. These do not look unreasonable, given the fact that growth rates in Russia, China and India have been revised upwards this year. There are risks in the short term but these tend to affect all equity investment. They include a major slowdown in economic growth caused by further Federal Reserve tightening and/or a stalling in China’s growth.

It has been clear to me over the last couple of years that clients’ appetite to buy single-country funds in these areas has been strong. These can be even more risky so perhaps buying a Bric fund does give greater diversification than if you leave clients to their own devices.

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