The United States Of America investment community is waking up to the African growth story. Doubtful as usual and suspicious of all Not Made in America, they are taking cautionary baby steps approaches but at last they are definitively now open to doing more win-win business with the continent. As a result, an increasing number of mutual funds and ETFs now boast significant African stock holdings. These funds have huge bias against French speaking zones of Africa as well as countries on the coastal line of Africa. However this is certainly a good start in the right direction. There are many Africans like myself with enough money than what is needed for their daily needs. However many of us are not very knowledgeable about the markets we would like to invest in, nor do we reside there. Henceforth this reliance on such ETFs and mutual funds. In Mama Africa, ROIs are much bigger, but so are their potential. All right with my bla-bla-bla, enough! Here’s the story:
But, before I continue just a quick reminder for those folks who do not know anywhere outside their county of birth: Africa is not a country. It’s a diverse continent with a myriad of different cultures, leaders, resources, and economies. Beware, then to refrain from generalizations and one size fits all approach to your portfolio investment patterns.
So, I thought it might be helpful to dig into these US funds’ portfolios to determine where exactly they are placing their bets.
Investing in the Sub-Sahara
The table below lists 11 funds ranked according to their degree of sub-Saharan African exposure.
| Fund Name | Ticker | Sub-Saharan Weight | Portfolio Date |
|---|---|---|---|
| iShares MSCI South Africa Index | EZA | 100.0% | 11/13/12 |
| SPDR S&P Emerging Middle East and Africa | GAF | 91.3% | 11/13/12 |
| Commonwealth Africa Fund | CAFRX | 84.6% | 7/31/12 |
| Nile Pan Africa Fund | NAFAX | 84.5% | 6/30/12 |
| Market Vectors Africa Index ETF | AFK | 59.2% | 11/13/12 |
| T. Rowe Price Africa & Middle East | TRAMX | 46.2% | 7/31/12 |
| Wasatch Frontier Emerging Small Countries Fund | WAFMX | 32.4% | 6/30/12 |
| Templeton Frontier Markets | TFMAX | 23.2% | 6/30/12 |
| HSBC Frontier Markets Fund | HSFAX | 17.5% | 9/30/12 |
| iShares MSCI Frontier 100 Index Fund | FM | 15.5% | 11/14/12 |
| Harding Loevner Frontier Emerging Markets Portfolio | HLMOX | 14.5% | 4/30/12 |
To me, the Sub-Saharan weights of the Market Vectors Africa ETF (AFK) and T. Rowe Price’s TRAMX are the table’s biggest surprises.
How is it that these two Africa funds deploy only half of their assets to sub-Saharan stocks?
Well, AFK invests heavily in North Africa and in companies that do business in Africa but which are domiciled in the US, Europe, or Australia. The same goes for TRAMX, but, unlike AFK, it also invests in Middle Eastern stocks.
Now, let’s check out the sectors that each fund invests in.
Screening Out the Mining and Oil Plays
I’ve often noted that I’m not a fan of mining and oil stocks. I see the most long-term, sustainable growth in sectors with more direct exposure to the African consumer — banking, retail, and construction.
The following chart measures the exposure of each fund to sub-Saharan listed stocks excluding those mining and oil companies.
| Fund Name | Ticker | Sub-Saharan Weight (excluding Mining and Oil) |
|---|---|---|
| iShares MSCI South Africa Index | EZA | 73.6% |
| Nile Pan Africa Fund | NAFAX | 72.5% |
| SPDR S&P Emerging Middle East and Africa | GAF | 68.2% |
| Commonwealth Africa Fund | CAFRX | 51.9% |
| Market Vectors Africa Index ETF | AFK | 43.1% |
| T. Rowe Price Africa & Middle East | TRAMX | 38.7% |
| Wasatch Frontier Emerging Small Countries Fund | WAFMX | 32.2% |
| Templeton Frontier Markets | TFMAX | 22.9% |
| HSBC Frontier Markets Fund | HSFAX | 17.5% |
| iShares MSCI Frontier 100 Index Fund | FM | 15.5% |
| Harding Loevner Frontier Emerging Markets Portfolio | HLMOX | 13.8% |
Now we see some real separation between the funds that give their investors exposure to the rise of an African middle class (EZA, NAFAX, GAF) and those that bet heavily on natural resources (CAFRX) or other geographic regions (HLMOX).
But let’s dig still deeper.
Who’s Investing In Frontier Africa?
Clearly, many of these funds invest heavily in South African stocks. South Africa, with its relatively developed infrastructure, and slower economic growth rate may not offer the same ground floor investment opportunity that faster growing countries like Nigeria and Kenya do.
This next table screens out South African stocks from each fund’s portfolio to determine which one invests most heavily in rising incomes in the African frontier.
| Fund Name | Ticker | Sub-Saharan Weight (excluding South Africa, Mining, and Oil) | Frontier African Countries Represented |
|---|---|---|---|
| Nile Pan Africa Fund | NAFAX | 25.1% | Nigeria, Ghana |
| Wasatch Frontier Emerging Small Countries Fund | WAFMX | 23.9% | Nigeria, Kenya, Ghana, Namibia |
| Market Vectors Africa Index ETF | AFK | 20.8% | Nigeria, Kenya |
| Templeton Frontier Markets | TFMAX | 18.9% | Nigeria, Kenya, Zimbabwe, Mauritius, Ghana, Malawi |
| HSBC Frontier Markets Fund | HSFAX | 17.5% | Nigeria, Kenya |
| iShares MSCI Frontier 100 Index Fund | FM | 15.5% | Nigeria, Kenya, Mauritius |
| Harding Loevner Frontier Emerging Markets Portfolio | HLMOX | 13.8% | Nigeria, Kenya, Ghana, Mauritius, Senegal |
| T. Rowe Price Africa & Middle East | TRAMX | 10.7% | Nigeria, Ghana, Zambia |
| Commonwealth Africa Fund | CAFRX | 4.0% | Nigeria, Kenya |
| iShares MSCI South Africa Index | EZA | 0.0% | |
| SPDR S&P Emerging Middle East and Africa | GAF | 0.0% |
So, there you have it. If you are in the market for an Africa-focused mutual fund with significant exposure to frontier markets, then you should take a close look at the Nile Pan Africa Fund (NAFAX).
You might consider the Wasatch Frontier Emerging Countries Fund if you’re less biased toward Africa and more concerned about geographic diversification.
The bigger revelation for me, however, is that there appears to be an excellent opportunity to launch a frontier Africa fund.
Any takers?
Jonathan Nzali Tips 