Goldman’s Next 11 markets are sinking faster than the BRICs

This time last year, it looked like Goldman Sachs Group Inc.’s selection of emerging market up-and-comers was ready to fill the void left by shrinking investment returns in Brazil, Russia, India and China.

Share prices in these “Next 11” countries — places like the Philippines, Turkey and Mexico — were trading at all-time highs as foreign investors flooded their markets with cash. Inflows into Goldman Sachs’s U.S.-domiciled Next 11 equity fund sent assets under management to twice the level of the firm’s BRICs counterpart.

Now, though, the Next 11 countries are looking even worse for investors than the larger markets they were supposed to supplant. MSCI Inc.’s Next 11 equity gauge has tumbled 19 percent this year, versus a 14 percent slump for the BRIC index. Foreign capital is rushing out, with the Goldman Sachs fund shrinking by almost half as losses deepened to 11 percent since its inception four years ago.

The turnaround shows how young populations and a rising middle class — characteristics that first lured Goldman Sachs to the Next 11 economies a decade ago — have failed to safeguard stock-market returns in a world facing higher U.S. interest rates, tumbling commodity prices and a Chinese economic slowdown. For John-Paul Smith, one of the few strategists to accurately predict the losses in emerging markets, it also illustrates the dangers of grouping so many disparate countries into a single investment theme.

Money managers “are increasingly moving away from acronym-based investment,” said Smith, the former Deutsche Bank AG strategist who founded Ecstrat, a London-based research firm, last year. “Within emerging markets, it is difficult to think of a market that has a combination of attractive valuations and constructive policy developments.”

Katie Koch, a managing director at Goldman Sachs Asset Management, said that even with this year’s decline, the Next 11 fund’s return since its 2011 start still beat the MSCI Emerging Markets Index, which lost 16 percent during the period.

“While we are certainly disappointed that the asset class headwinds have weighed on N-11, the fund has performed as designed by outperforming broad emerging markets through a full market cycle,” Koch said in a statement.

As investor pessimism spreads to the smaller developing economies, capital outflows are deepening. Exchange-traded funds that invest in emerging markets recorded withdrawals of $1.65 billion in the week ended Sept. 4, a 10th week of outflows. Among the Next 11 markets, funds focused on South Korea and Mexico had the biggest losses. The group also includes Indonesia, Nigeria, Bangladesh, Egypt, Pakistan and Vietnam. Iran is a member, but the Goldman Sachs fund doesn’t invest in the country because of international sanctions over its nuclear program.