Building a portfolio one BRIC at a time

By Mark Brown | April 19, 2006 | Last updated on April 19, 2006
5 min read

No-one would ever consider building an entire investment portfolio around BRIC — Brazil, Russia, India and China — but why risk watering down your returns with fluctuations in other markets when you can focus on the ones that are growing? That’s how Excel Funds Management’s CEO Bhim Asdhir sees it, and so far the strategy has worked quite well.

“We don’t want to diversify for the sake of diversification,” he says of Excel’s strategy. “Sometimes when you diversify too much what happens is you are not focus. We want to be a specialist; we want to delivery the best out of India and China.”

Excel is an anomaly in the Canadian fund scene. It holds only three funds, and two of them are country focused. The idea of country specific funds isn’t new. Not long ago there were funds available in Canada that targeted Brazil, Argentina, Japan, to name just a few. Currency crises and economic disasters all but ended that trend. Overseas, China and Japan are the only country focused funds that people think of these days.

But can a case be made for starting up these types of funds again, particularly in the case of India?

Consider this: India and China both have populations of more than a billion, markets are rapidly evolving and both are seen as economic engines, growing at a clip of between 7.5% and 9.5% a year. The other half of the BRIC is not performing nearly as well (see chart on page two). That’s not to say BRIC funds are under-performing. While still quite new, Franklin Templeton’s BRIC Corporate Class fund, the only fund in Canada that specifically targets these four emerging markets (including Hong Kong and Taiwan), has a year-to-date return of 20.3%.

Still, by some accounts, India is considered a better bet because it has a government structure that Canadians are more familiar with, as well as a rapidly growing middle class and a massive population under the age of 25 who will soon become consumers and producers.

Wal-Mart, Tesco and Carrefour all see India’s potential, and they are just some of the multinational companies that are actively trying to win the hearts and minds of the Indian people and their government to let them in.

“Ideally, it does not make sense to have a country specific fund when you have a small country, but India is a continent,” says Asdhir, “It is a special situation, the same thing with China as well.”

Investors have no problem investing in Canada, which is much smaller. “India and China over the next 10 years are going to be the best opportunity for any investor, provided you do it right. I don’t think there is any other opportunity that is more outstanding. Why? Because the pie is growing,” Asdhir says.

In 50 years, India and China combined are expected to eclipse the U.S. economy in terms of gross domestic product. According to Asdhir, the second half of the BRIC is projected to swell to $72 trillion US while the U.S. economy will be somewhere around $35 trillion US.

He particularly likes India because it has correlation with North America of just 0.4. What that means, he says, is that India is not as susceptible to the whims of the American consumer unlike some of the other BRIC countries, because most of India’s trade is still internal.

Asdhir stresses these are the only exceptions to the rule. Russia-focused funds are available in the U.S., but Asdhir’s experience tells him that the Canadian market isn’t ready for such an offering. An Eastern European-Russian fund though is a possibility and something Asdhir is investigating. Russia is just too small to be able to stand alone, he believes.

The latest earnings growth for Excel India in the first quarter of the year averaged 56%. While investment decisions should never be made based on short term figures, the numbers Excel has enjoyed are certainly enticing.

Looking back to Excel India’s inception the fund has returned 19.6%. Its one and five year returns are even more impressive at 57.7% and 26.4% respectively. Excel China, which has a much shorter history, has returned about 17% in a little more than two years.

Not all countries in the BRIC are equal(US$ in trillions)
Country GDP GDP growth
China $8.182 9.3%
India $3.699 7.6%
Russia $1.539 5.9%
Brazil $1.568 2.4%
More familiar
U.S. $12.41 3.5%
Japan $3.914 2.4%
Canada $1.08 2.9%
Source: CIA World Factbook

After a short conversation with Asdhir, it seems a case can be made to invest in India directly. But not everyone agrees.

Two years ago, AGF had an India fund of its own, but that was rolled into an emerging market fund. Stephen Way, AGF’s senior vice-president for global equities, says the fund’s small size and high volatility were the main reasons behind the decision to scrap the India fund. “Advisors didn’t want to be exposed to that type of volatility.”

As evidence, Way points to India’s beta, which is about 2.1, indicative of a volatile market.

The main concern was if the fund went sour, it could take years to recover. Way, however, is quick to add that AGF isn’t negative on India; it just isn’t interested in targeting the country with a stand-alone fund.

That explains AGF’s position on India, but then why does it have a fund focused on China? There is more demand for a Chinese product, Way explains. It’s easier to invest in and to understand. What’s more, India hasn’t been dubbed the new “Silicon Valley” for nothing. Much of India’s growth is being driven by IT whereas in China it’s manufacturing.

Asdhir makes several of the same arguments as Way. Investors know little about the market, he says. And like any country, India is not without its own share of problems: its infrastructure is extended beyond capacity, it’s running a high fiscal deficit and its bureaucracy is suffocating.

And Asdhir concedes Excel India shouldn’t be a core fund for investors. Advisors should only recommend this fund to clients who can park their money in it for at least five years, he recommends, adding that the fund shouldn’t comprise more than 5% or 10% of a portfolio.

While Excel India is the only fund of its kind in Canada, there are other ways to access this market. Consider Indian ADR’s or closed-end funds listed in New York, suggests Way. ETFs are another route, he adds.

But before suggesting any of these options to clients, it is important to understand the risks. Closed-end funds can be expensive and often trade at a premium. ETFs have MERs and have to contend with tracking errors. And ADRs are vulnerable to company risks.

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Mark Brown