HONG KONG/TOKYO Funds betting solely on stocks in fast-growing Brazil, Russia, India and China are suffering sustained investor withdrawals due to poor returns, throwing into doubt the future of one of the hottest asset classes of recent times.
The 'BRIC' moniker was coined by Jim O'Neill of Goldman Sachs in 2001, and investing in the share markets of the four nations took off in the latter half of the last decade.
Money managers such as Templeton, Schroders and Deutsche Bank's DWS launched successful products.
Indeed, assets in BRIC funds surged 1,600-fold from a low base to about $38 billion between 2003 and 2007 as shares in the rapidly growing BRIC economies produced almost a 600 percent return.
The tide, however, has turned.
BRIC funds collectively have seen net outflows in every month since March 2010, according to data from fund tracker Thomson Reuters Lipper.
Their combined assets have shrunk by a fourth to just over $28 billion from the record high of 2007. The cumulative net outflows under such funds since March 2010 has risen to $9.5 billion.
By comparison, funds investing in the Asia-Pacific outside Japan have seen inflows worth about $4 billion in the same period, reflecting investor preference for a broader investment theme to cut down on risk.
Others such as gold and precious metals mutual funds have attracted a cumulative $4.5 billion during the period.
The fall from grace of the BRIC funds has been sparked by declining performance, policy tightening, capital controls in Brazil and a shift towards safety by investors.
"These kinds of funds were very trendy at launch, they remained trendy for a while and then the appetite of investors went down," said Francois Mouzay, head of fund development and services, Asia Pacific, for BNP Paribas Investment Partners.
"BRIC funds are an old concept. Investors want new things, especially here in the region," he said. BNP Paribas Asset Management runs the $135 million BNP Paribas BRIC fund .
BRIC nations, home to four in every 10 people on earth, were for many years seen as a great investment story, and a wall of money chased their shares, drawn by the promise of a growing middle class.
Goldman Sachs in a report last year estimated the BRICs contributed over a third of world GDP growth during the past 10 years, while they grew from one-sixth of the world economy to almost a quarter in purchasing power parity terms over the same period.
However, the BRIC story is too well known now. Expectations are higher and the valuation gap is smaller, with nearly 350 funds and their variants betting on the theme alone.
Then there are some 2,000 offshore funds that manage about $120 billion and make dedicated investments in the four countries separately. There are also thousands of other funds with broader investment mandates and local funds in the four countries that are hunting for opportunities.
"The same degree of outperformance seems much less likely, even if the BRICs deliver solid returns," Goldman said in the report.
Since 2007, the MSCI BRIC Index has fallen by about a third.
"The big four countries haven't performed well together this year, leading to a drop in performance of BRIC funds and interest from investors," said Xav Feng, head of Asia Pacific Research for Lipper.
"While China and India are hurt by inflation, Brazil suffered due to tax issues and foreign investor outflows. Russia was better before the U.S. debt crisis, after that, it also plunged over 25 percent in a week," he added.
BRIC-focused mutual funds tracked by Lipper have shed 16.7 percent of their net asset values on average this year with some losing more than 25 percent.
Investors are also shying away from BRIC funds after a series of policy tightening measures in the nations to control inflation and capital control measures imposed by Brazil.
The combination of the four countries is also posing a problem. Commodities exporters Brazil and Russia are not a perfect match with commodities consumers China and India in a portfolio, some analysts said.
Genzo Kimura, a bond fund manager at Sumitomo Trust Bank Asset Management in Tokyo, said there was still appetite for Brazilian bonds and real currency denominated funds due to high yields.
"Otherwise, investors are less enthusiastic about investing in other BRIC countries as their performance was severely hit by a series of tightening measures," Kimura said.
(Editing by Muralikumar Anantharaman)