Investors retreating from the economically pressured BRIC countries (Brazil, Russia, India and China) have become increasingly hungry for another flavor of alphabet soup.

Equity funds dedicated to the MIST markets (Mexico, Indonesia, South Korea and Turkey) took in a net fund flow of $786 million during the six weeks ending August 31, according to fund-tracker EPFR Global of Cambridge, Mass. Managers of big, diversified global emerging markets funds allocated another $909 million to the MIST markets during this period.

"Interest has taken off quite sharply," says Cameron Brandt, EPFR's director of research, who notes that the $786 million fund flow amount is equal to 4.6% of the total assets these funds had under management in mid-July. MIST fund flows climbed steadily from the start of 2009 into the third quarter of 2011 while BRIC fund flows have turned negative after leveling off in early 2010.

What's Fueling The MIST Mania?
 "We think these countries have exciting economic potential," says Anna Stupnytska, an executive director and macroeconomist with Goldman Sachs Asset Management. "One of the main drivers of this potential is [a] rising middle income class [in these countries] and associated consumption implications."

London-based Stupnytska works closely with Goldman Sachs Asset Management chairman Jim O'Neill, who coined the term "BRIC" back in 2001. Last year, the team started classifying the MIST economies as growth markets because each of the four now account for more than 1% of global gross domestic product.

Although Goldman Sachs says the BRICs will remain the main growth engine, it expects the MISTs to collectively contribute an additional $3 trillion to global GDP over the current decade (the U.S. is projected to contribute just under $4 trillion). The firm expects the MISTs and BRICs together to contribute another $15 trillion, two to three times that of the U.S. and euro zone combined.

 Globally, two billion people are expected to join the middle class between now and 2030, says Stupnytska. Mexico, Indonesia and Turkey are already seeing many cross this threshold-an annual income of $6,000 to $30,000 in U.S. dollars (controlled for inflation and purchasing power across countries).

The Goldman Sachs N-11 Equity Fund (named for the next 11 largest emerging markets after the BRICs) is trying to capture the rise in discretionary spending from the growing middle class, says Stupnytska and has an exposure of more than 20% to the consumer sector. Its top holdings as of June 30 included América Móvil, the leading provider of wireless services in Latin America (which makes up 7.9% of holdings). Another 5.3% are in Korean consumer electronics manufacturer Samsung Electronics. The fund also has large holdings in Turkish banks, a 3.9% allocation to Turkiye Garanti Bankasi and a 3.0% allotment to Akbank. Mexico-based beverage holding company Fomento Economico Mexicano makes up 3.1% of assets, and Korean carmaker Kia Motors represents 2.9%.

The fund's biggest country exposures as of June 30 were Mexico (which represents 24.0% of holdings), Korea (20.6%), Turkey (16.7%) and Indonesia (16.0%).

The Goldman Sachs N-11 Equity A fund (GSYAX) was up 13.71% for the year as of September 11, while the Goldman Sachs BRIC Fund (GBRAX) was up 3.31%. The N-11's benchmark is the MSCI GDP Weighted N-11 ex-Iran Index.

Country Snapshot
Goldman Sachs Asset Management is attracted to the relatively strong macroeconomic picture in Mexico. The country saw robust GDP growth during the first half of 2012, largely driven by consumer spending, and it is projected to grow 3.6% for the year, says Stupnytska. Its central bank has also been able to ease financial conditions amid moderate inflationary pressures. Mexico also offers long-term advantages, she says. It has a relatively low external debt burden. The country enjoys improving life expectancy and education and a high urbanization rate. And the cost of starting a business is relatively low. However, the country loses some points for its political instability and its weak spending on research and development. Mexicans also have generally less access to PCs and secure Internet servers.

Stupnytska is also enthusiastic about Indonesia. "Both from a cyclical perspective and longer-term growth environment, it's a relatively solid picture there," she says. Goldman has forecast a strong 6% GDP for Indonesia in 2012, growth driven by the country's robust domestic demand, helped by the acceleration of credit. Inflationary pressures, which drove up food and energy prices last year, have also been very benign in the country this year, Stupnytska says. In the longer term, Indonesia's expanding middle class is expected to take off this decade, which will create numerous investment opportunities.

Indonesia is also benefiting from China's rising wages, since Chinese companies, including some technology companies and clothing manufacturers, are now turning to Indonesia for cheap labor, she says. Japanese auto manufacturers have also started using it as a production base.

Export-driven South Korea, meanwhile, has been hurt by slowing global growth, particularly in China. Goldman forecasts real GDP growth of 2.5% in South Korea in 2012, and Stupnytska believes the central banks will likely cut interest rates a second time this year. If there's a push for growth stimulus in China, it could increase demand for Korean exports, brightening the latter country's near-term prospects, she adds. She notes that from a structural perspective, South Korea is well placed to achieve its economic potential, ranking above most of the G7 countries on Goldman's "Growth Environment Score" metric.

Relatively weak growth has also recently plagued Turkey, which has suffered sluggish domestic demand and weak exports to the euro zone, Stupnytska says. Goldman expects Turkey to see 3% GDP growth this year, but it depends on economic conditions outside the country, she warns. She expects to see those external conditions improve in 2013, which should trigger some recovery for Turkey, but it's important to watch the developments in Europe.

Turkey has several advantages that will help its long-term growth. It has plenty of human capital. Meanwhile, mobile technology has quickly spread throughout the country. And it costs relatively little to start a business there. Its weaknesses are its political stability and underdeveloped technology. The business environment is also less friendly to innovation.

More Fund Findings
Ivka Kalus-Bystricky, who manages two funds for Portsmouth, N.H.-based Pax World Management LLC, is also optimistic about Turkey. Approximately 3% of the Pax World International Fund portfolio is invested there, out of a total 10% allocation to emerging markets. The Pax World Global Women's Equality Fund has 1.5% of its assets in Turkey.

Though Turkey has been hit hard by Europe's woes and currency troubles, the Turkish lira has held up well this year, company valuations have become more compelling, and there are a number of strong fundamentals, says Kalus-Bystricky. She notes that Turkey is well-positioned to work with both Europe and the Middle East. It has also become more democratic, its inflation rate has cooled, its labor is cheap and 30% of its population is below the age of 30. "I always look for the long-term story," she says.

A top Turkey holding is Halkbank, a small-to-midsize enterprise bank that Kalus-Bystricky expects to benefit from the country's growing middle class and economy. It trades at 1.7 times book value, higher than European banks, which trade at less than 1 times book, but she thinks it's worth it since the return on equity tops 20% (double that of many European banks), and the return on assets is 2.3 (whereas it is less than 1 for most European banks). The bank's projected long-term earnings growth is in the midteens. "With regulations in Europe to raise capital, you'd be hard-pressed to see [earnings] growth there outside single digits," she says.

Kalus-Bystricky also likes Turkish cement company Mardin Cimento Sanayii, which she says is one of the few ways to invest in the country's infrastructure. The company has no debt, enjoys lots of cash flow, and benefits from a 12% yield and a feedback loop that includes the country's rising credit, growing middle class and stepped-up foreign investments, she says.
Despite her enthusiasm for Turkey, she is keeping a watchful eye on its political risks, which she says could harm the nation's sovereign credit ratings.

Kalus-Bystricky is trying to learn more about Indonesia. "It's a big place and potentially can be a much bigger player on the global stage," she says. "From a macro perspective, it looks fabulous." The consensus is that the country will see growth through 2016 of 6.5%; labor is cheap and GDP per capita growth has tripled since 2005, she says. She thinks the sweet spot in Indonesia will be consumer goods, transportation and financial services companies.

Her Mexico-related holding is Belgium-based global brewer Anheuser-Busch InBev, the largest stakeholder in Mexican brewer Grupo Modelo. AB InBev announced plans this year to acquire the remaining stake in Grupo Modelo that it does not already own. But she has eschewed South Korea, because she says it's hard to find companies there that meet Pax World's rigorous criteria for strong corporate governance.

Advisor Input
St. Louis-based EverBank Wealth Management, part of EverBank Financial Corp., provides high-net-worth individuals with exposure to the MISTs and other emerging markets through various asset classes. Its main equity exposure is through the Aberdeen Emerging Markets Fund (GEGAX) and the Vanguard MSCI Emerging Market ETF (VWO). The firm also invests in debt offerings such as the Templeton Global Return Fund (TGTRX) and the SPDR DB International Government Inflation-Protected Bond ETF (WIP).

EverBank also offers FDIC-insured certificates of deposit for single currencies and baskets of currencies. Its new MarketSafe CD will provide exposure to South Korea, Turkey, Israel and Colombia. By accessing currencies through CDs, investors can get exposure to the upside without downside risk, says Chris Gaffney, co-chief investment officer of EverBank Wealth Management and director of sales for the World Markets division of EverBank.

EverBank first looks at countries' fundamental factors, then macroeconomic factors and finally technical factors for entering and exiting markets. "Emerging markets are risky in general, but in the future I think that's where all the growth is going to occur," says Gaffney. "We feel that especially in these markets, capital preservation is going to be the key."