Heat and hype: will Brics hit the wall or keep smashing through it?

As the starting gun fired for 2006, "Brics" were the fastest thing out of the blocks in the race for investors' money.

Back in January, these new funds directing cash into Brazil, Russia, India and China were being talked about by independent financial advisers (IFAs) and fund managers as the investment for 2006.

Stock markets across the world were booming and these four giant, emerging economies - which between them account for 40 per cent of the world's population - were rising in wealth and influence.

Offering huge natural resources, such as gas and oil, cheap labour and a vast manufacturing capacity, as well as burgeoning consumer cultures, these countries seemed just the thing for investors looking to spice up their portfolios with a high-risk stake.

Big investment banks and fund managers including Goldman Sachs, Templeton and Schroders launched Bric funds to try to win new investors. Some went even further, with Axa stirring Korea into the mix to create a "Brick" fund.

Fast forward to the end of 2006, and it's difficult to dispute that this has been a lucrative year for Brics, especially when compared with results from mainstream investments and from Brics' nearest rival, "emerging market" funds, which tend to spread their resources across a broader range of countries and companies.

In the five months since its launch, the Templeton Bric fund has returned 10.6 per cent for investors, while Axa Talents Brick has risen by a third over the past 12 months.

The Allianz RCM Bric Stars fund, supported by a big marketing push, has also performed robustly: a £1,000 investment at its launch in February would now be worth £1,162 - an increase of 16.2 per cent.

Compare that performance to a mere 0.7 per cent return over the same period from the global emerging markets sector (calculated by the Investment Management Association). Even the star managers of this sector couldn't keep up with the Brics. The First State Global Emerging Markets fund has made 4 per cent between February and this month, while Aberdeen Emerging Markets has returned just 2.2 per cent.

Over this turbulent period - emerging markets were hit particularly hard by the global stock market wobbles in May - you would have been better off in a UK tracker fund: the FTSE All Share rose by 8.5 per cent.

The performance of the Allianz fund has impressed IFA Hargreaves Lansdown, at first sceptical about the sector, to the extent that it has been added to the adviser's "Wealth 150" list of recommended funds.

"This did require a lot of thought, since Bric is [really] a great marketing concept," says Meera Patel, senior analyst at Hargreaves Lansdown. "But in the year to date it has outperformed all the emerging market funds, which are more broadly based. It has not been as risky as we thought."

Other IFAs, though, say the funds are beginning to lose their gloss. For a start, debate still rages over whether the four countries should be grouped together.

The term "Bric" stemmed from a paper written in 2003 by the Goldman Sachs economist Jim O'Neill, who suggested they could become the world's dominant economies by 2050.

But while the vibrant new hi-tech industries of China and India suggest that growth in these countries is built on enduring foundations, Brazil and Russia appear to have been benefiting not so much from economic development as from the boost to the value of their natural resources from soaring commodity prices. The concern is that this upsurge may be transient.

Second, it is hard to shake off the feeling that Bric funds are a marketing phenomenon above all else. "You could just as easily launch a fund investing in Korea, Indonesia and Singapore," says Neil Shillito, director of SG Wealth Management. "A Kis fund would be a great name and makes as much sense as Bric."

Third, there is anxiety over the risk run by investors. As a Bric fund comprises only four countries, an economic shock to just one nation would have a big impact on cash held in it. In an emerging markets fund, your money, and your risk, are spread more widely.

Andy Gadd of IFA The Lighthouse Group also believes that investors in a Bric fund are particularly vulnerable to currency movements.

"[Look at] the massive devaluation in the rouble in 1998 after the Russian government defaulted on its debt payments. Any repeat could massively reduce returns," he says.

However, Michael Konstan-tinov, manager of the Allianz RCM Bric Stars fund, argues that it is vital for investors to focus on Brazil, Russia, India and China because, as they rise in importance, money will flood into their companies' shares.

"If you talk to global equity investors in 10 or 15 years' time, they will be making asset-allocation decisions not just between the US, Japan and Europe, but also the Bric countries."

For example, he says, the Russian energy giant Gazprom is already the fifth-largest company in the world. The recent listing of the Chinese bank ICBC - which has a market value of close to $170bn (£85bn) - demonstrates how the Bric nations are already rising in importance.

Mr Konstantinov adds that the most important players in his portfolio aren't oil and gas firms but consumer companies. These produce the goods and services for the rapidly expanding middle classes in Brazil, Russia, India and China.

Nevertheless, most IFAs suggest that investors should tread carefully in this potentially rewarding area. Justin Modray, an adviser at IFA Bestinvest, says: "Emerging markets are high-risk, high-octane stuff and you have to be quite sensible about it.

"For most people, they should make up no more than 10 per cent of an equity portfolio."

Tim Sharp writes for 'New Model Adviser' magazine, published by Citywire.

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