Going beyond Jim O’Neill’s BRICS to investing in MIST

Jim O’Neill of Goldman Sachs is well known as the man who coined the acronym BRIC. He has now created another acronym gaining traction thanks to a fund he launched last year: MIST, which stands for Mexico, Indonesia, South Korea and Turkey. 

Image courtesy Erich Fredinand: http://www.flickr.com/photos/erix/

Kasaba, Turkey

The MIST countries are the four biggest markets invested in the Goldman Sachs N-11 Equity Fund (GSYAX, quote). Launched in February 2011, the fund was introduced to target the countries that O’Neill considers the next big 11 emerging markets

The Goldman Sachs N-11 Equity Fund is an open end mutual fund, which means it can issue an unlimited number of shares and is bought and sold once a day at the close of trading. Funds like this are sold through brokerage firms and carry sales charges. There are three share classes, A, C and I. The I shares are for institutional and very high net worth individuals and is generally out of reach for us regular folk. C shares are sold with no up-front charge, but generally have the highest expenses and a redemption penalty if sold within a year. Ongoing supervision by regulatory agencies has stifled some of the sales volume C shares once received. A shares are the most commonly sold and I will focus on that class here.

The class A shares of GSYAX carry an up front sales charge of 5.5%. That means that on a $10,000.00 dollar investment, Goldman takes $550.00 up front. Your account shows a position worth $9,450.00 and you need to earn 5.5% just to break even. Higher initial investment amounts will qualify investors to lower up-front charges, but the fact they exist is still an impediment. This fund also has annual expenses of 1.8%, which is on the high side for traditional mutual funds. It is expected to be high as funds that invest in asset classes and sectors that require a greater investment of money and human capital to operate reflect those higher costs in their fees.

But these fees bring into question the merits of the fund. GSYAX is invested primarily in the MIST countries; more than 80% of its total is in those four. The breakdown is as follows:

Mexico     24.1%

Korea       21.8%

Turkey     17.1%

Indonesia 16.0%

Nigeria       4.2%

Egypt         4.1%

Philippines  4.6%

Pakistan     3.8%

Vietnam      2.2%

Bangladesh 2.0%

In addition there are 74 holdings. When a fund is diversified across a lot of stocks like this, the performance of the portfolio becomes more greatly determined by the overall market rather than by any particular stocks the fund owns. Given that this reduces the fund to basically an index of the MIST countries, it is reasonable to consider an alternative: ETFs.

There is at least one ETF exclusive to each MIST country and many more which have exposure to them. If we follow O’Neill and invest in MIST countries, we can try to replicate the allocation of his fund. 

Mexico has its own ETF, the iShares MSCI Mexico Investable Market Index Fund (EWW, quote). The fund has 42 positions which diversifies it to the point that it functions as an index of Mexican stocks. The key thing here is that its annual operating expenses are only .52%, less than a third of GSYAX’s 1.80%.

Indonesia has two ETF choices, the Market Vectors Indonesia Index ETF (IDX, quote) and the iShares MSCI Indonesia Investable Market Index Fund (EIDO, quote). IDX has 42 positions and annual of expenses of 0.57%, while EIDO has 87 positions and annual expenses of 0.59%. 

South Korea has three ETFs. The first is the First Trust South Korea AlphaDEX® Fund (FKO, quote). This fund has 50 total positions and annual expenses of 0.80%. South Korea’s small cap ETF, the Index IQ South Korea Small Cap ETF (SKOR, quote), has 100 positions and annual expenses of 0.79%, while the third South Korea ETF, the iShares MSCI South Korea Index Fund (EWY, quote) has a total of 106 holdings and annual expenses of 0.59%.

Finally, Turkey has the iShares MSCI Turkey Investable Market Index Fund (TUR, quote) with 99 positions and annual expenses of 0.59%.

Rather than investing in MIST through O’Neill’s GSYAX, cost conscious investors can do so at a fraction of the expense. The most expensive ETF — FKO with 0.80% annual expenses, is still less than half the Goldman Sachs MIST fund. And with the rest of the ETFs at much lower expenses, the benefit of using them is clear. 

The variable that might compel you to buy GSYAX rather than ETFs is the belief that through better stock selection O’Neill and his team can outperform these ETFs. The statistics regarding fund managers beating indexes are well known — it is tough to do. It is much easier to make a macro-call, and in that regard I will heed O’Neill’s word. But I am not so confident in his or Goldman’s stock-picking abilities that I am willing to pay 5.5% up front and have nearly 2% in expenses bled away each year. 

Yes, there are transaction costs to buying and selling ETFs, but a long term investor should be buying and holding. And you’d have to do a whole boatload of trading at $7 or $8 a trade to catch up to the expense of owning GSYAX. Personally, I’ll be happy to construct my own MIST portfolio, content with the knowledge that these are good countries to be in and that over time, thanks to lower expenses, my performance may even be better than O’Neill’s.

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