Africa: ‘A Whole New World for Investors’

Grace Pineda runs two large foreign mutual funds for Merrill Lynch that count roughly $1.3 billion in combined assets. But it is as manager of a much smaller, sibling portfolio that she says she has the most fun.

That fund is Merrill Lynch Middle East/Africa, a portfolio that has attracted $11 million in assets since its December, 1994, launch date. What makes this unlikely choice more enjoyable?

“Africa represents a whole new world for investors,” Pineda says.

Among the globe’s inhabited continents, Africa is the last to be touched in a big way by Americans through mutual funds. Ethnic tensions, hostile governments and illiquid stock markets have conspired to keep investors away.

Like early European explorers who spent most of their efforts sailing around Africa rather than to it, modern-day fund owners have shown more interest in the greater perceived potential of Asia and Latin America.

But that’s in the process of changing. Encouraged by various developments--including the peaceful shift to majority rule in South Africa and the adoption of liberalized commercial practices and pro-capitalist economic policies in various nations--fund companies have started to set up shop.

Merrill Lynch, Calvert, Morgan Stanley and Alliance are among the companies that have introduced African-oriented portfolios within the past three years, and other groups are nibbling away through more broadly diversified emerging-markets funds.

The lure, of course, is growth potential.

“Africa and Indochina are at the bottom . . . in terms of economic development,” says Tom Haslett, co-manager of the Montgomery Emerging Markets Fund in San Francisco. “Africa represents a relatively untapped frontier.”

Yet from an investment standpoint, the continent offers considerable diversity that defies stereotyping. South Africa, for example, is an advanced nation with a sophisticated stock market that has been “picked over” by European investors for most of this century, Haslett says.

Then there are a handful of other former British colonies such as Ghana, Zimbabwe and Kenya with accounting and legal structures derived, like America’s, from a common English root. These nations offer a welcome “user friendliness” to outside investors, says Justin Beckett, manager of the Calvert New Africa Fund, based in Bethesda, Md.

Meanwhile, some of the former French colonies are in the process of forming a common stock market to be headquartered in the Ivory Coast, which could boost investor interest in those nations, Beckett says.

And a few Arabic nations along the Mediterranean coast such as Morocco already have vibrant stock markets.

Fund managers who follow Africa are attracted to the continent for different reasons. Beckett, for instance, says he’s intrigued by the growth of a middle class in Africa and has invested in companies such as a Kenyan power utility, a Zimbabwean soft drink/beer firm and a South African telecommunications outfit.

Conversely, Montgomery Emerging Markets has taken modest positions in South African and Ghanian firms that focus on mining or agriculture.

Unlike many Latin American and Asian economies, Africa’s are not so closely intertwined with that of the United States. “That makes African stocks better diversification vehicles,” Pineda says.

African funds differ in various ways. The Calvert portfolio, for instance, focuses entirely on African stocks, with South African issues currently weighing in with about 75% of assets and the rest spread among Ghana, Kenya and Zimbabwe. But Merrill Lynch Middle East/Africa has positions in Israel and Turkey to complement its African stakes.

Another distinction concerns fund structure. Both the Calvert and Merrill Lynch portfolios are regular or open-end mutual funds. But three rival funds have a closed-end structure, which means they have issued a set number of shares and don’t have to buy them back when investors decide to sell.

Consequently, closed-end funds have more stable asset bases--an advantage when dealing with illiquid, volatile markets like those of Africa.

Shares of closed-end funds trade in the U.S. stock market, and the price you pay can be above or below the “net asset value” or true per-share worth of the fund’s holdings. Currently, all three African funds trade at discounts of about 20%, meaning investors can buy African stocks for about 80 cents on the dollar.

Mark Hake, a Scottsdale, Ariz., investment adviser who lived in Nigeria during the Biafran War, doesn’t think the size of these discounts is justified. He has bought shares of one closed-end vehicle, Morgan Stanley Africa Investment, for clients who can handle the risk.

But discounts or no, Hake cautions against going overboard on Africa’s nascent, volatile markets.

“These types of funds are appropriate for only a very small part of your international portfolio,” he says.

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African Connections

The following open- and closed-end funds target Africa’s nascent stock markets. All have debuted within the past 18 months. Dollar figures represent fund assets:

Calvert New Africa: Open-end, $2 million, (800) 368-2748

Merrill Lynch Middle East/Africa: Open-end, $11 million, (609) 282-2800

Morgan Stanley Africa Investment: Closed-end, $227 million, (800) 221-6726

New South Africa: Closed-end, $80 million, (800) 852-4750

Southern Africa: Closed-end, $109 million, (800) 227-4618