An Africa-Focused Mutual Fund Versus 2 Index ETFs: A Matter Of Less Risk

Includes: AFK, GAF
by: Robert Roach

By Robert G. Roach, Jr. and Brittany S. Kielhurn

In July, Seeking Alpha featured an article by Ryan Hoover which looked at the relative performance of the Nile Pan Africa Fund (NAFAX) and two Africa Exchange Traded Funds (ETFs), the Market Vectors Africa Index (NYSEARCA:AFK)[1] and the S&P Emerging Middle East and Africa Fund (NYSEARCA:GAF)[2]. We think it's important to investors that we expand upon some themes of the article as well as provide greater perspective on the Nile Pan Africa Fund.

The increasing attention being paid to opportunities for investing in Africa is quite appropriate, especially given the economic prospects, aging demographics and leverage issues of developed economies. We believe that Mr. Hoover was correct in many of his observations about investing in the Continent. However, we would like to provide some additional detail about the Nile Pan Africa Fund - a fund managed by our firm, Nile Capital Management.

First for the clarifications: In discussing the relative returns of NAFAX (13.9%), AFK (3.3%) and GAF (13.2%), the article stated that the Nile Pan Africa Fund’s sales load and expense ratio were not included in the performance calculations. The investor should note that the operating expenses of the Nile Pan Africa Fund are netted out and included in all NAV performance data. As for the sales load, investors should be aware that NAFAX is available on a load-waived basis on a number of mutual fund platforms.

In addition, the article points out that consistent outperformance is often difficult for active managers, which can make it difficult for investors to justify paying higher fees when they could invest in passively managed ETFs. However, Mr. Hoover also notes that “if consistent outperformance through active management is possible, it’s most likely to be possible in Africa.” In fact, his article states:

“The continent is arguably home to the world’s most inefficient stock markets. As a whole, they tend to be illiquid, under-researched, and slow to react to events. That’s fertile ground for a skilled fund manager who can identify mispricings and then patiently wait for the market to catch up.”

We absolutely believe that this statement is pertinent to any investor contemplating an allocation to emerging markets and, more specifically, Africa. In fact, in a White Paper published in January of 2011 entitled “How Active Portfolio Management Can Maximize Opportunities in Africa,” Nile Pan Africa Fund Portfolio Manager Larry Seruma noted:

“We believe that there are a number of overlooked opportunities trading at attractive valuations which a more active approach will help discover. Active management facilitates risk management in a portfolio, while allowing investors to patiently invest in less liquid stocks, identify key investment themes and opportunities, and follow attractive catalysts. To simply invest in an index or exchange traded fund means missing many of the benefits a more active strategy could provide.”

The full paper, which can be requested online at, expands on these ideas, and in fact draws comparisons between the Nile Pan Africa Fund and the ETFs mentioned in Mr. Hoover’s article. A strong argument may be made that there is a place for active management in Africa because the business, economic, and political spheres are developing and complicated, and it is important to have someone who can spot risks ahead of time as well as understand the socio-economic and political cultures that can affect these markets. This should allow active portfolio managers, like Mr. Seruma, who understand the environment in Africa, to identify opportunities and trends that others may not see or fully grasp. Of course, there is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses.

As for a direct comparison between NAFAX, AFK and GAF, a deeper analysis may be helpful for investors to make a more informed assessment. Part of the analysis should focus not just on comparative return, but comparative risk. The chart below indicates the relative performance and risk (standard deviation of monthly returns[3]) for NAFAX, AFK and GAF from the inception of NAFAX (April 28, 2010) through June 30, 2011. As shown, since inception, Nile’s NAFAX has generated higher returns with less volatility than AFK and GAF.

While one year and less performance results are more mixed when compared to GAF, GAF’s risk profile is considerably higher than NAFAX’s. NAFAX has also achieved higher Sharpe[4] and Sortino[5] ratios since inception which points to NAFAX’s better risk adjusted performance than the ETFs. The maximum drawdown is a statistical measure that provides the maximum loss incurred during the period from peak to trough. For example, NAFAX experienced a maximum loss of -4.7% during the period versus the maximum loss for GAF of -13.0%. This is another indication of volatility.

click to enlarge

See disclaimer with performance data pertinent to this chart below

On the surface it may seem that all three funds are similar Pan Africa strategies. However, that nomenclature may not be entirely correct. GAF in fact is vastly (well over 80%) invested on South Africa’s exchange, with a small allocation to Egypt and Morocco. AFK is somewhat more diversified across the continent, but carries a mandate to invest in only the largest firms across Africa. Thus, for benchmarking purposes both ETFs may be similar to NAFAX on the surface, but are not the same. In comparison, of the 24 capital markets across the Continent, NAFAX is often exposed to more than half.

Although Mr. Hoover notes that Nile “doesn’t appear to be very active on the continent’s most inefficient stock exchanges,” NAFAX is the most active of any mutual or exchange traded fund invested in the continent. In fact, NAFAX’s relative underweighting in South Africa (approximately 30% of the portfolio versus South Africa’s estimated 80% share of Africa’s total market capitalization) would indicate the portfolio manager’s strong belief in the continent’s growth prospects outside of South Africa. NAFAX’s portfolio allocation may also be a factor in the fund’s lower risk profile, as measured by volatility.

In addition, we would like to clarify that although many of NAFAX’s largest holdings are in the natural resource space, by no means is its investment strategy focused on metals and mining as the article implies. Rather, NAFAX invests in opportunities across the continent in a number of sectors, and the portfolio is constructed on three key themes: natural resources, infrastructure, and consumer goods.

Finally, it is true that a concern often raised about active management is the relatively higher fee structure. For an investor to benefit from allocating capital to an active fund, the returns should outperform a more passive strategy by enough of a margin to recoup the increased cost. However, as the article points out, the benefit of active management is often the ability for managers to discover opportunities where information is limited. When investing in a large, diversified and developing region such as Africa, the importance of independent research and information discovery should not be underestimated. We believe that an active strategy can nimbly take advantage of Africa’s overall macroeconomic growth prospects. Navigating Africa’s capital markets which are smaller, less researched and invested may, over time, pay off for investors who are seeking growth and risk adjusted returns from their emerging markets allocations.

Bio Info

Robert G. Roach is the COO/CFO of Nile Capital Management, LLC., an investment manager that manages funds focused on Africa including a Pan Africa mutual fund ( Mr. Roach has more than 25 years of investment and investment banking experience. He received a BA in Economics from Dartmouth College and an MBA in Finance from the Booth School of Business at the University of Chicago. Mr. Roach may be contacted at

Brittany S. Kielhurn is an Analyst with Nile Capital Management, LLC. Ms. Kielhurn has four years experience in investment management and research. She received a BA in International Relations & Economics from Duke University. Ms. Kielhurn may be contacted at


The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Past performance is no guarantee of future results. As stated in the current prospectus, the Fund's total annual operating expense ratio (gross) is 9.85% for Class A. The Fund's investment adviser has contractually agreed to reduce its fees and/or absorb expenses of the fund, at least until July 31, 2012, to ensure that the Total Annual Fund Operating Expenses After Fee Waiver (exclusive of any acquired fund fees and expenses, borrowing costs, taxes and extraordinary expenses) will not exceed 2.50% for Class A, subject to possible recoupment from the Fund in future years. Please review the Fund's prospectus for more detail on the expense waiver. Results shown reflect the waiver, without which the results could have been lower. A Fund's performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. For performance information current to the most recent month-end, please call toll-free 1-877-68-AFRICA. The maximum sales charge for Class A Shares is 5.75%.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Nile Pan Africa Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 1-877-68-AFRICA. The prospectus should be read carefully before investing. The Nile Pan Africa Fund is distributed by Northern Lights Distributors, LLC member FINRA. Nile Capital Management, LLC is not affiliated with Northern Lights Distributors, LLC.

Mutual Funds involve risk, including possible loss of principal. Because the Fund will invest the majority of its assets in African companies, it is highly dependent on the state of the African economy and the financial prospects of specific African companies. Certain African markets are in only the earliest stages of development and may experience political and economic instability, capital market restrictions, unstable governments, weaker economies and less developed legal systems with fewer security holder rights. Adverse changes in currency exchange rates may erode or reverse any potential gains from the Fund's investments. ETF's are subject to specific risks, depending on the nature of the underlying strategy of the fund. These risks could include liquidity risk, sector risk, as well as risks associated with fixed income securities, real estate investments, and commodities, to name a few. Non-diversification risk, as the Funds are more vulnerable to events affecting a single issuer. Investments in underlying funds that own small and mid-capitalization companies may be more vulnerable than larger, more established organizations.


[1] Market Vectors Africa Index ETF (the Fund) seeks to replicate as closely as possible the price and yield performance of the Dow Jones Africa Titans 50 Index (the Index). The Index is a rules-based, modified capitalization-weighted, float-adjusted index consisting of publicly traded companies that are headquartered in Africa or that generate the majority of their revenues in Africa. The Index is calculated by Dow Jones Indexes. The Index comprises a diversified group of 50 companies. Companies eligible for inclusion in Index should be headquartered or generating majority of revenues in Africa with market cap exceeding $200 million; should have three-month average daily turnover greater than $1 million, and should be traded on domestic or international stock exchanges. The Fund is passively managed and may not hold each Index component in the same weighting as the Index. The Fund’s investment advisor is Van Eck Associates Corporation.

[2] SPDR S&P Emerging Middle East & Africa ETF (the Fund) seeks to replicate as closely as possible the total return performance of the S&P/Citigroup BMI Middle East & Africa Index (the Index). The Index is a market capitalization-weighted index that defines and measures the investable universe of publicly traded companies domiciled in emerging Middle Eastern and African markets. The Index is float adjusted, meaning that only those shares publicly available to investors are included in the Index calculation. The Fund uses a passive management strategy designed to track the price and yield performance of the Index. The Fund’s investment manager is SSgA Funds Management, Inc.

[3] Standard deviation of monthly returns is commonly referred to as volatility

[4] Sharpe Ratio: A ratio developed by Nobel laureate William F. Sharpe that is used to measure risk-adjusted performance. The Sharpe ratio is calculated by subtracting the risk-free rate, such as that of the 10-year U.S. Treasury bond, from the rate of return of a portfolio and then dividing the result by the standard deviation of the portfolio returns. The Sharpe ratio indicates whether a portfolio's returns are due to smart investment decisions or are a result of excess risk. This measurement is very useful because although one portfolio or fund can reap higher returns than its peers, it is a good investment only if those higher returns are not a result of taking on too much additional risk. The greater a portfolio's Sharpe ratio is, the better its risk-adjusted performance has been. A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward price movements on standard deviation to measure only return against downward price volatility.

[5] Sortino Ratio: A variation on the Sharpe ratio that measures the risk-adjusted return on an investment. The Sortino ratio considers the possibility that an investment will fall below the required rate of return, rather than volatility in general. It is calculated as follows: Sortino Ratio = (Realized return - Required return) / Downside risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am the COO/CFO for Nile Capital Management, LLC, the investment manager for the Nile Pan Africa Fund (NASDAQ:NAFAX).

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