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.
[caption id="attachment_69957" align="alignright" width="300"
caption="Kasaba, Turkey"]
[/caption]
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.
