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Update: iShares MSCI Brazil UCITS ETF

Der Leitindex auf den brasilianischen Aktienmarkt ist zwar auf Branchenebene breit diversifiziert, die Top fünf Aktien machen allerdings die Hälfte des Gewichts des MSCI-Index aus. Anleger sollten den Zinszyklus beachten, der die Wirtschaft unter Druck setzen könnte.

Caroline Gutman 07.11.2014

Rolle im Portfolio

The iShares MSCI Brazil ETF provides exposure to many of the biggest and most liquid components of the Brazilian equity universe. Brazil has seen remarkable growth over the last several decades, and now ranks as the world’s seventh largest country by nominal GDP. In turn, Brazilian equities have gone from fringe emerging market exposure to an increasingly important part of a globally balanced portfolio. The MSCI Brazil Index is broadly diversified by sector, but diversification at the company level is limited, with nearly 50% of the index within the top five firms.

Returns from Brazilian equities have been erratic, exhibiting annual volatility of more than 35% since 1999, versus about 16% for the MSCI World. An investment like this therefore requires a lengthy time horizon and a strong stomach to handle the swings. The fund pays out dividends from its underlying holdings on a quarterly basis, so it may suit an investor looking for income.

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Fundamentale Analyse

Thanks to a wealth of natural resources, Brazil benefited from the rise in commodity prices over the last decade and the growth of raw material exports to China. With China’s growth slowing, however, the demand trajectory for Brazil’s commodities --especially iron ore and oil-- is in doubt. Further muddying the picture is the extensive shale gas discoveries in the US, which could put pressure on prices.

Politically, Brazil is in flux. President Dilma Roussef secured a second term in the October 2014 election by a narrow margin, showing the country’s growing social unrest and public dissatisfaction with ineffective government spending, but her approval rating remains low. Roussef has promised to introduce political reforms in her second term, but persistent political corruption and an unwieldy bureaucratic system could hamper her efforts.

Against this backdrop, Brazil’s growth has been rather erratic in recent years. From its record setting 7.5% in 2010, GDP growth tumbled to 0.9% in 2012 before recovering to 2.3% in 2013. The HSBC Brazil Composite Output Index, which measures conditions in both the manufacturing and services sectors of the economy, was 51.2 in September 2014(a value above 50 indicates expansion). Much of the expansion has come in the run up to the 2016 Olympic Games, although the degree of expansion has tapered off from higher levels earlier in 2014 following the completion of the FIFA World Cup.

Inflation, however, is still a real concern for the country. Brazil has a target inflation rate of 4.5% but actual inflation has approached 6.75%, above the maximum deemed tolerable. To combat rising prices, Brazil’s central bank, which is not entirely independent, hiked interest rates to 10.75% in February before reaching 11.25% in October, a reversal after two years of loosening policy brought rates as low as 7.25%. If that tightening stance continues, it may weaken an already fragile economy. But at the same time, it could also help support the Brazilian real by attracting investors who seek higher returns.

Expensive financing is one of the difficulties facing Brazil’s largest corporations. For instance, state-owned oil giant Petrobras, which make up about 11-13% of the MSCI Brazil, is burdened by debt. In fact, Petrobras currently holds the unenviable record of being the world’s most indebted company, with debts of about $170 billion as of June 2014. The government has limited Petrobras’ ability to raise domestic fuel prices, earnings from which could help reduce its debt. As a result, the company, which is also mired in scandals, has lost much of its global competitive edge. Brazil is still trying to figure out what role public-private partnerships should have in the country’s economic development, and until it does, the government is likely to stay heavily involved.

Over the past 15 years the index has had an annualised return of 13.4%, versus 4.1% for the MSCI World Index. Unsurprisingly, it suffered significant losses during the financial crisis, and its peak-to-trough drawdown of 65.5% exceeds many of the more developed markets.

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Indexkonstruktion

The MSCI Brazil Index is a free float market capitalisation-weighted index currently consisting of 80 securities and covering approximately 85% of the Brazilian equity market. New entrants must pass minimum requirements for liquidity and length of trading history. It is reviewed quarterly, and rebalanced semi-annually with new size cut-offs calculated. The median market cap of the constituents is $2.5 billion. The top sectors are financials (30-35%), followed by consumer staples (16-18%), materials (15-17%) and energy (14-16%). There is a great deal of concentration within the top companies. Including both the common stock and preferred shares, oil company Petrobras makes up 11-13% of the total, and mining group Vale accounts for 10-12%. The top five names in the index make up roughly half its total value. About 50 of the 75 securities in the index have weights of less than 1%.

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Fondskonstruktion

The fund uses full physical replication to try to capture the performance of its benchmark, owning – to the extent possible and efficient – shares in the underlying constituents in the same weights as those of the index. The fund uses futures for cash equitisation purposes, which helps to limit tracking error. The fund does not engage in securities lending.

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Gebühren

The fund’s total expense ratio (TER) is 0.74%, which is higher than that of other ETFs offering similar exposure. Other costs potentially carried by the unitholder but not included in the total expense ratio include transaction costs on the infrequent occasions when the underlying holdings change, and bid-ask spreads and brokerage fees when buy and sell orders are placed for ETF shares.

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Alternativen

A number of providers offer products tracking the MSCI Brazil Index, including Amundi, Lyxor, HSBC and db x-trackers. The Amundi and UBS funds have the lowest TERs, at 0.55%, but comparably higher tracking differences (fund return – index return), which more closely reflects the total cost of holding the fund. Another choice for Brazilian exposure is Lyxor ETF Brazil, which tracks the similar Bovespa Index.

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Über den Autor

Caroline Gutman  ist Fondsanalystin bei Morningstar.