Two Strong Africa ETFs

Let me just start out by saying that there are truly many reasons not to invest in Africa. The political landscape is far from stable. Corruption is rampant. The continent is rocked with conflict without rest. Infrastructure is pretty much non-existent. However, similar to the Middle East, Africa has unparalleled quantities of potential. This is the side of Africa that gets less press - the side that is full of hopeful, enterprising people who are confident of a better future. This is the Africa that is home to some of the most attractive potential investments in the world today. Africa is the fastest growing continent and the richest in terms of resources. It is prime for investing.

Even with the great investment potential that exists here, it is difficult to invest in the majority of the smaller countries within this continent through the U.S. stock exchange system. This is where ETFs come in very handy. One great fund, the PowerShares MENA Frontier Countries Portfolio (PMNA), is invested in Morocco and Egypt, among others. The Fund may invest at least 80% of its total assets in securities of companies that are domiciled in or principally traded in a Middle East or North African frontier country. The index included 67 companies with market capitalizations between $243 million and $10.4 billion.

Up 1.22% today alone, this fund has a large growth potential. 34.7% of this fund's assets are applied to the top 5 holdings, which include Arab Bank, Mobile Telecommunications Company, Maroc Telecom, Emaar Properties, and Orascom Construction Industries. This indicates a modestly diversified fund holding real estate, telecommunications, finance, and development. I would prefer not to see two telecommunications holdings in the top five companies. However, telecom companies have been performing quite well lately. The fund is currently being sold at a 0.07% premium. Just what I like. From my perspective, the closer a fund trades to NAV, the less room it has to fall.

Another great fund is the Market Vectors Africa Index ETF (AFK). This fund invests in Egypt, Morocco, Nigeria, and South Africa, among others. It is also well-diversified across sectors, with its top 5 holdings being Tullow Oil, Mobile Telecommunications Company, Orascom Construction Industries, Old Mutual, and Mtn Group Limited. The fund, utilizing passive or indexing investment approach, attempts to approximate the investment performance of the Africa Titans 50 Index by investing in a portfolio of securities that generally replicates the Africa Titans 50 Index.

This fund also trades amazingly close to NAV, currently at a 0.40% premium. AFK is more diversified than PMNA. Also, it pays out dividends and has a much less volatile and more optimistic growth pattern. This fund is comprised of 53 of the largest companies that drive their revenue stream from Africa. AFK shares a similar growth pattern with the Dow Jones Africa Titans 50 Index (DJAFK), though it naturally trades much lower. The African continent is ripe with potential. Now is the time to invest in this emerging market. South Africa is stable, Mugabe is virtually gone from the scene, not to mention the people are standing up full of hope and pride. Now is the time to invest in Africa.

Disclosure: No positions

Comments

[Mad Hedge F...:]

fgm. Feel like investing in a state sponsor of terrorism? How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped? Another country lost four wars in the last 40 years. Still interested? How about a country that suffers one of the world’s highest AIDs rates, endures regular insurrections where all of the westerners are massacred, and racked up 5 million dead in a continuous civil war? Then Africa is the place for you, the world’s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo. Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms. Goldman Sachs has set up Emerging Capital Partners, which has invested $1.6 billion there. China sees the writing on the wall, and has launched a latter day colonization, taking a 20% equity stake in South Africa’s Standard Bank, the largest on the continent. In fact, foreign direct investment has jumped from $53 billion to $61 billion, while cross border M & A leapt from $10.2 billion to $26.3 billion. The angle here is that all of the headlines above are in the price, that price is very low, and the perceived risk is much greater than actual risk. Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. The reality is that Africa’s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure. For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It reminds me of the early days of investing in China in the seventies, when the adventurous only played when they could double their money in two years because the stakes were so high. This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has risen 59% since March, and the SPDR S&P Emerging Middle east & Africa ETF (GAF).

Sep 04 09:28 AM

[Mary Daniel:]

I certainly understand any hesitation to invest in the continent. Like I said, there are many reasons not to invest. And to most those reasons would greatly outweigh any advantages. But if you can look past all the bad, then true enough there is an untapped market filled with millions of people. Not accustomed to having much available to them, the demand is limitless. Great comment here. Lol, maybe you should be the one writing the article.

Sep 04 11:37 AM

[AndrewBaker:]

Africa as an investment is just not on. You could wait 40 years to get a profit but be bust in one. The most successful sub-Saharan countries were Zimbabwe (previously Southern Rhodesia) and South Africa. South Africa is slowly going down under its current benign but incapable leaders, and we all know what happened to Zimbabwe.

If you want to spend money in Africa: go as a tourist. It's beautiful.

Sep 04 02:48 PM

[Moise Levi:]

Born and raised in Kinshasa, Congo (ex Zaire) ; done business with many countries you mentioned in those ETF's.

I suggest you visit the companies listed in those ETFs ; find out how they are managed .....

You'll change your mind

Sep 04 03:10 PM

[Deepv:]

This is the kind of part of the world where it's worthing paying up for active management. I would look at TRAMX.

Sep 04 10:53 PM

[Mary Daniel:]

Andrew Baker:
I certainly see your point. However, with Chinese demand in oil growing they have invested a lot of time and money into Africa. I'd bet on Chinese business practices over African politics any day of the week.

Moise Levi:
I don't have your personal experience when it comes to the area or the management practices of those companies. And honestly, that information is hard to come by. Sure, you get what they want you to know, but the truth is few and far between.

I do believe that the management practices of these companies is something that needs to be looked at more in-depth. However, as I've stated there is currently limited information out there about that.

DeepV:
I did take a look at TRAMX and wish I had included it in this piece. Good diversification. In line with the market. Looks like a solid investment.

And just to clarify, yes, Africa is an incredibly risky investment. No doubts there. But you also can't deny the extreme potential.

Sep 05 09:18 AM

[Chip Krakoff:]

I have lived and worked in many places in Africa and the Middle East over the past 25 years, and I agree that both of those regions present some exciting investment opportunities. I also think that the risk premium, for Africa especially, is higher than the facts warrant.

But with the exception of South Africa and a few African and Middle Eastern companies that have ADRs or listings on U.S. exchanges, it is hard to gain exposure to a single country in the region, much less a single company or sector. I am very positive about Egypt, - I am writing this from Cairo - and several other countries, including Nigeria, and if it were easy to invest in an Egypt fund I probably would - but I would not invest in PMNA. Emaar Properties, one of the fund's biggest holdings, is almost certainly technically insolvent, though it's hard to know because it belongs to the ruler/government of Dubai and things there are fairly opaque, especially when it comes to the distinction between personal, government, and private funds.

Pure plays are hard to find It's questionable whether Old Mutual, a huge South African insurance company (and one of AFK's biggest holdings), which demutualized and listed on the LSE quite a few years ago and is now part of the FTSE 100, and which operates in more than 40 countries worldwide, really counts as an Africa play.

Finally, many of these funds tend to be overweight in finance and telecoms and underweight in natural resources, largely because so many of the mining and energy companies operating in those regions are listed in Toronto or London or the US.

Disclosure: AFK long

Sep 05 03:30 PM

[The-Stock-M...:]

Your first sentence says it all - very difficult to make up the mind to invest in a politically unstable continent.

Sep 05 10:59 PM

[Chip Krakoff:]

It is meaningless to say that "Africa is a politically unstable continent." It's like saying that Asia or Latin America are unstable continents. There are both unstable and stable countries in all these places: Myanmar, unstable and Malaysia stable. Bolivia, unstable, Brazil stable. The same is true in Africa, which has 53 countries, some of them places you would definitely not want to invest (or even visit), and others that have many exciting opportunities, whether in listed securities or direct investment.

Sep 06 01:04 AM

[Chip Krakoff:]

It is meaningless to say that "Africa is a politically unstable continent." It's like saying that Asia or Latin America are unstable continents. There are both unstable and stable countries in all these places: Myanmar, unstable and Malaysia stable. Bolivia, unstable, Brazil stable. The same is true in Africa, which has 53 countries, some of them places you would definitely not want to invest (or even visit), and others that have many exciting opportunities, whether in listed securities or direct investment.

Sep 06 01:04 AM

[Mary Daniel:]

I am positive about Nigeria and Egypt as well. Also, I find South Africa has great potential. You are correct, it is difficult to gain exposure to one specific company. And I do not find that the portfolios on the funds I mentioned are as diversified as I would normally prefer. But like you stated most of the natural resources are listed on other exchanges. The Nigerian Stock Exchange seems to draw the larger oil companies, such as Oando. Thanks for the comment. I always appreciate when someone can add a little more to what I have found.

Sep 06 09:13 AM

[Mary Daniel:]

Chip:
Yes, I agree, there are both stable and unstable countries in this continent. I meant this from a general standpoint.

Sep 06 09:14 AM

[hksche2000:]

Compare HAO, TAO China etf's performance to EZA, AFK Africa etf's and you see where the action flows and the money goes, notwithstanding econono-political instabilities in both of those billion-people economies.
Plus, China is not a bad proxy to take advantage of african (same as brazilian/south amaerican) natres pearls prescreened -thank you- by savvy chineses on the ground.

Sep 07 09:28 AM

[Melvin Manchau:]

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Sep 26 07:17 PM

[Plant the s...:]

I grew up in Nigeria, so always like to hear analysis on Africa. The real question for Africa is institutional development, rule of law. Nigeria has a lot of money coming in but very little accountability. It also has over 100 million consumers but the consumer markets are fragmented and not well organized.

If an entrepreneurial class could develop and the corruption tax ('Dash') moderates then a real economic explosion could happen. The development of a middle class has been slow and not helped the growth of mass markets. The agriculture sector saw massive erosion as the oil economy developed.

Oct 27 04:25 PM

[Plant the s...:]

I would also look at GAF (I own it) because of the length of history will give some comfort from a risk standpoint. The drawback is that it is primarily invested in South Africa & Isreal and doesn't give you broad representation like AFK will.

Oct 27 04:30 PM