Allianz RCM launched its Bric stars fund in 2006 to capture the story of these emerging markets, citing all four as long-term growth plays.
Co-managers Michael Konstantinov and Guido Stiel take a largely stock-specific approach to investing across Brazil, Russia, India and China, seeking good growth companies with credible management and solid balance sheets.
They use various screening techniques to reduce a universe of 2,000-3,000 to between 200 and 300 potential holdings, with analysts based around the world feeding into the selection process.
Rather than using the MSCI Bric index, the pair employ a four-way split benchmark and have considerable flexibility when allocating assets to the individual countries.
In 2008, for example, they cut the Russia weighting to about 10 per cent – although, with hindsight, Stiel admits zero exposure would have been beneficial – taking higher positions in Brazil and China.
“We can also have up to 20 per cent of the portfolio in other countries related to the Bric four so we held some positions in Taiwan during the financial crisis as a safer bet and we also own Sony as a play on demand for electronics from China,” he says.
Valuation is key to the overall process and was the main reason behind the Russia underweighting in 2008. Stiel says the country’s valuations were not justified at that stage – based largely on the prevailing $150 oil price – and the team pared back exposure.
“Given the market’s subsequent correction, being zero weighted would have been better but we had still identified some Russian stocks that looked attractive,” he says.
“During the slowdown, we saw China as safer on a relative basis, with defensive plays in areas such as telecoms and banks. Meanwhile, Brazil and India looked fully valued in IT, for example, so we took some money off the table while still focusing on more defensive areas such as pharma.”
In 2009 the Allianz team felt investors had become too bearish – particularly in light of stimulus measures in China – and reallocated to Russia.
Stiel says: “Russian valuations based on $150 oil were too high but they got much too low as the price hit $30.
“Political risks remain in the country but it is a solid play on the oil price and our fund benefited as prices rebounded throughout much of last year.”
Allianz Bric stars is currently slightly overweight Brazil and underweight India while broadly neutral in China and Russia.
“The Brazilian government has done an excellent job in keeping the economy moving, with the country benefiting from Chinese commodity demand as well as fixed asset investment and a strong currency,” says the manager.
“Against all this, valuations are trading around the middle of their historical range so we see stocks as broadly good value. In India, shares are not currently expensive but are getting more so and we are also concerned about inflation, which will be likely to force the central bank to raise interest rates and ultimately hurt the economy.”
Despite this, Stiel is still positive on defensive areas with strong growth prospects in India, highlighting pharma again as well as infrastructure companies.
As for China, the team is underweight bigger defensive plays such as China Mobile but heavy in banking and property.
“Again, the government has done a good job in recent years and we see current inflation levels of 3 to 3.5 per cent as not too dramatic, especially as a third of that comes from food pricing,” says Stiel.
“On the much quoted housing bubble, prices in Beijing and Singapore are high but actually no worse than London, New York or even Mumbai.
“More important, there are 150 cities in China with a million-plus population and the two so-called bubble areas only make up 9 per cent of the country.”
He says only 40 per cent of Chinese people live in cities, meaning a massive urbanisation trend will benefit the 148 cities without bubble tendencies.
Another key fact is that speculators only make up 10 per cent of housebuyers in the country, with a third of Chinese paying for property with 100 per cent cash and only a third using the credit-fuelled Western route.
Overall, Stiel stresses the Bric story is very much a long-term play, with demographics supporting decades of growth.
He says: “There may be short-term blips – this year, for example, global emerging market indices have outperformed Brics as many smaller countries caught up – but these are very much the key emerging markets looking into the future.”