Fund name: T. Rowe Price Africa & Middle East Fund (TRAMX)

Objective: The fund seeks long-term growth of capital by investing primarily in the common stocks of companies located or with primary operations in Africa and the Middle East. Their "primary emphasis" for now is on Bahrain, Egypt, Jordan, Kenya, Lebanon, Morocco, Nigeria, Oman, Qatar, South Africa, and United Arab Emirates. They’ll add to the list as markets develop and opportunities present themselves. It’s nondiversified and the managers expect to hold 30-40 stocks, many of which may be in the telecom and banking sectors. Price ranks this among their highest expected risk funds.

Adviser: T. Rowe Price. Price was founded in 1937 by Thomas Rowe Price, widely acknowledged as "the father of growth investing." The firm now serves retail and institutional clients through more than 450 separate and commingled institutional accounts and more than 90 stock, bond, and money market funds. The company’s international investment arm T. Rowe Price International is headquartered in London and has offices in Buenos Aires, Hong Kong, Paris, and Singapore. As of March 31, 2007, Price had more than $350 billion in assets under management.

Manager: A team led by Christopher D. Alderson, who has been at Price since 1988 and who also manages T. Rowe Price Emerging Markets. The other managers are Ulle Adamson (who assists with the Media & Telecom fund), S. Leigh Robertson (who took over Emerging Europe from Alderson when this fund launched), and Joseph Rohm (who assists with Financial Services).

Management’s Stake in the Fund: Mr. Alderson has over a million dollars invested in T. Rowe Price funds, including several hundred thousand in his main charge (Emerging Markets Stock) but none in his Emerging Europe & Mediterranean fund. There’s no data available for the other three.

Opening date: September 5, 2007.

Minimum investment: $2,500 for a regular account, $1,000 for an IRA or UTMA account. The minimum is reduced to $50 for folks setting up an automatic investing plan.

Expense ratio: 1.75% after waivers. In general, Price’s international funds end up with below average expenses, per Morningstar. There’s also a 2% redemption fee on shares held fewer than 90 days.

Comments: We should start with the good news. First, you’re not over-invested in Africa and the Middle East now. Many of these markets, most especially the African ones, have no coverage in the mutual fund/ETF universe. General emerging market mutual funds typically have investment in only three or four of the region’s markets (South Africa, Egypt, Israel, and maybe one other). Of roughly $100 billion invested in emerging market funds, only about $28 million is invested in the smaller African markets. There are no other African regional funds available to US investors. There is one small ETF, SPRD S&P Emerging Middle East and Africa (GAF), but over 85% of its assets are invested in just two countries, Israel and South Africa. And so this will diversify your portfolio.

Second, you might be getting in on the ground floor of Something Big. It’s pretty clear that a lot of private investment money is flowing now into the region. The flagship might be the decision by Harvard’s endowment managers to quietly launch what they hope will become a billion dollar Middle East investment fund. Mohamed El-Erian, long-time PIMCO emerging markets manager and just-departed Harvard endowment manager, is quoted in the Financial Times (6/6/07) as saying "[i]n the economies of the GCC [Gulf Cooperation Council] and North Africa you have enough going on to accelerate opening up of the investment management world, implying more sophisticated techniques, a broader set of players and greater opportunities." In the Middle East, the scope of those opportunities is suggested by the comparison of the region’s p/e ratio (13) with its earnings growth (20% per year). The figures for the US are a p/e of 16 and growth around 11%. So, if you’ve long wanted to invest like Harvard, here’s your chance.

But should you take it?

Beyond the general case for Africa and the Middle East, one can make a case for T. Rowe Price funds in particular: their management is first rate, their regional offerings (Europe, Emerging Europe, Latin America, Japan, New Asia) are all somewhere between respectable and spectacular, Price has a strong corporate culture which centers on matching risk to return, their expenses are low, manager turnover is limited, and so on.

That needs to be balanced by a really clear grasp of some of the issues confronting investors in the region:

• The African stock market is virtually non-existent. At the end of 2005, there were 15 operating stock markets in sub-Saharan Africa. Thirteen of those markets had total market capitalizations (i.e., the value of all publicly traded companies, nationwide, combined) of less than $7 billion. Only Nigeria ($19 billion) and South Africa ($565 billion) were above that threshold. That means that South Africa alone is 14 times larger than all other sub-Saharan markets combined. In such markets, liquidity plays a huge role in returns: a sudden inflow of investment – not even all that much inflow – can create a bubble very quickly and a sudden outflow can be devastating.



• Trading volumes in the African markets is minuscule. Only two markets had trading volume in an entire year than exceeded $600 million. The third most active exchange in the region traded well under $2 million/day in equities. The least active exchanges traded a few thousand dollars a day in stocks. That would make it hard to establish an economically significant portfolio position without dominating the entire exchange.



• The Middle Eastern exchanges are, by comparison, titans. Together, the 15 Arab markets have a capitalization of $1.3 trillion dollars. That’s almost a ten-fold increase since 2000. Unfortunately, size has not been accompanied by stability. Over the first five years of this decade, virtually every Arab market returned more than did the U.S. and U.K. In 2005, for example, eight of the world’s 10 best performing stock markets were Arab. Dubai frequently saw its market move by double-digits in a single day. In 2006 and early 2007, the Arab markets dropped by 50% with some individual countries taking much harder hits: Dubai dropped 68% and Saudi Arabia nearly as much.



• African societies struggle with widespread corruption. According to Transparency International, which rates perceived corruption in 182 nations, "[o]ut of the 52 African countries included in the index, 36 scored below three, indicating that corruption is perceived as rampant. . ."



• Much of the money already invested in the region is "smart money." Which is to say, it comes from hedge funds and other highly leveraged investors. The combination of a small, illiquid market and substantial leverage is a recipe for really substantial short-term pain.



• Most funds which have attempted to invest in the region, Africa in particular, have failed. The Center for Global Development reports that a wave of Africa-focused funds opened in the mid-1990s amidst a rush of euphoric rhetoric. CGD notes, "Much of this initial enthusiasm for Africa funds was short-lived. The vast majority have since closed owing to poor returns, lack of investor interest, or, in at least one case, mismanagement."

There are, in addition, regulatory challenges (governments may limit or prevent foreign stock ownership in some sectors of the economy) which are only gradually being overcome.

Bottom Line: The Harvard-like (or, better yet, Yale-like) returns are generated by going boldly where no one has gone before. That might mean buying forests when other folks are buying tech stocks, snatching up piles of possibly worthless securitized sub-prime loans at pennies on the dollar or being the first Western investor in a Zimbabwean corporation despite that economy’s 17,000% annual inflation rate. But before seeking those returns, keep two things in mind: (1) Harvard’s investment horizon is measured in centuries. And (2) Harvard is capable of absorbing enormous losses (e.g., the $350 million loss on their Sowood Capital investment) without noticeable discomfort. If your time horizon is somewhat shorter and your ability to absorb losses somewhat less, proceed with care (if at all), but take some comfort in the fact that Price offers about as reliable a guide as you’re able to find.