GAF: Barely Exposed to Emerging Middle East and Africa

At first blush, an ETF in exotic markets with an expense ratio of 0.59%, a p/e ratio of 9 and a dividend yield of 4.5% looks attractive. Indeed, with turnover of only 7 per annum, the SPDR S&P Emerging Middle East & Africa ETF (GAF) even appears to be well managed. Having risen from a low of USD 34.14 on the 9^th March, to the current price USD 47.78, it is even performing well. Why, then, does GAF almost always appear in the most ‘shorted’ threshold securities list?

The first thing to note is that in Q1 2009, the stock has traded at a 1.59% premium to NAV. That is quite a premium for an ETF.

Still, why short for such a small gain when the long case for the Middle East and Africa is so clear. Surely, it would not be surprising if investors, seeing the strong bounce in crude prices, concluded that the oil rich Middle East is the place to be. It would also not be surprising if investors who looked at the heavily oversold markets in Kenya and Nigeria (to name but a few) decided that it would be interesting to participate in the positive economic growth in these countries.

The trouble is, as the shorts indicate, such long term investors would be making a mistake. That mistake would not, however, be in their assessment of the Middle Eastern and African markets.

The case for the Middle East is clear and bullish. Namely: strong GDP, led by centralised spending and a new managerial class. The case for Africa is equally compelling. Namely: strong population growth, the technological leap and industrialisation which are finally transforming the continent. The mistake would be to assume that the SPDR S&P Emerging Middle East & Africa ETF gives exposure to any of the themes mentioned.

Take a look at the fund in more detail. The idea of the fund is to closely match the returns performance of the S&P/Citigroup BMI Middle East & Africa Index. Sounds straightforward enough. That is, until you look into what that Index actually represents. This ETF’s largest exposure is to South Africa, at 61.05%. The only other African exposure is 7.73% to Morocco and the same for Egypt. Nigeria, Kenya and the other African champions don’t have any exposure.

Meanwhile, the representation for the Middle East is even more bizarre. The only Middle Eastern exposure is a 24.99% weighting to Israel.

In short, investors are not getting a representative index at all. They are getting a resource tilted (20.66%) fund to the two most developed markets in the universe. Surely: a combination which will hold back performance.

Disclosure: Daniel Broby holds no long or short positions in GAF. Silk Invest holds no long or short positions in GAF. Silk Invest manages two funds in the same region, the Silk Africa Lions and the Silk Arab Falcons.

Comments

[RiskReturnO...:]

Egypt has promising growth potential due to demographics and proximity to Europe and Middle East markets.

May 13 02:04 PM

[Alan Young:]

I agree, the ETF is misleading, and I have avoided it for that reason. I hate to say it, but people who buy products like this without even a cursory look under the hood get what they deserve.

However, it's understandable that a truly diversified ETF in Africa and the Middle East would be hard to maintain. Most Middle Eastern countries have very limited foreign-accessible stock markets, and the smaller African countries don't have a lot of companies with enough liquidity to satisfy the trading needs of an ETF. There aren't even any closed-end funds (on US exchanges) trading in this area, AFAIK, even though that would be much easier to manage. Maybe in a few more years.

May 13 02:50 PM

[Living4Divi...:]

Just a guess - but if you look under the hood some you'll probably find that the turnover was artificially low do to short time of the funds initial reporting period. Look for a higher turnover once this fund has matured.

May 13 06:18 PM

[donzelion:]

Alan Young is spot on in terms of the challenges of building any real exposure to domestic equities in the Middle East. Take Saudi Arabia - the largest market by far - which only started permitting foreigners to own depository receipts last year. But an investor who wants exposure to this region probably doesn't want domestic equities anyway: too much uncontrollable political risk.

Far better to invest in foreign companies deriving profits from this region - autos, construction, oil services, basic infrastructure, pharms, and the like. They're all here, doing fine work - and are seldom subject to the same political games that transform real estate speculators from bust to billionaire to bust again within a handful of years.

May 13 06:18 PM

[lary:]

5% of the fund is AU and GFI. I guess that there are simpler ways to gain commodities exposure and specifically gold/platinum/uranium exposure. Now TEVA at 13% of the holdings makes the mix completely bizarre in my view - 13% is way too much for a single stock in the supposedly (or so it appears from the fund name) diversified fund.

May 14 05:20 AM

[Daniel Broby:]

Hi Aly-Khan,

Thanks for this. Great to get feedback from an Africa investment guru! Sorry I missed you when I was last over in Kenya.

My only concern on Safaricom is the large stock overhang. Otherwise, totally agree with you.

Best regards,

Daniel


On May 13 09:34 AM Aly-Khan Satchu wrote:

> Dear Daniel,
>
> Good to see you again.
>
> I have to agree with your SSA prognosis, we are just beginning to
> exit a VERY FAT TAIL.
>
> Re: This ETF It seems to me a common problem of ETFs in that what
> is in them is frequently different to what Investors might expect
> from the Sticker.
>
> Safaricom looks very cheap at 2.80 PE implied of 8 and the Cables
> have landed just outside Fort Jesus in my home town of Mombasa.<br/>bring
> the Communications unit price from a fancy $3500 to $100.00 per unit.
>
>
> You can track level 1 prices in real time via rich.co.ke richlive.co.ke
> for free.
>
> best wishes
> Aly-Khan Satchu
> rich.co.ke

May 14 07:18 AM

[Graham and ...:]

Depending on how well Israel and South Africa do, GAF won't necessarily underperform its benchmark. What it will likely to, however, is "mistrack."

May 20 03:44 PM