So it comes as some surprise that on a list compiled by Lipper Inc. of the top performing emerging market funds, the top tier of leading funds includes several that specialize in Africa or in Africa and the Middle East, one that focuses only on smaller cap firms, and one that is so conservative in its investment strategy that it rarely finds itself at the head of the pack.
"The smaller markets in both Africa and the Middle East offer some opportunities for growth," Lipper research analyst Matt Lemieux says. "Sure there is a bit more volatility in those regions, but with questions now about growth in emerging markets in places like Brazil, China, India and Russia, all of which have become noticeably cooler, maybe the opportunities are better in Africa and the Middle East. I wouldn't say that China and India are being left by the wayside, but people are seeing that they are not as bullet-proof as in the past. Africa and the Middle East are the next big areas, and people are willing to go out on a limb to find the next growth story."
The top performer for 2011 is the Virtus Emerging Opportunity Fund A (HEMZX). The second-ranked fund is the Nile Pan-Africa Fund (NAFAX). Third is the Wasatch Emerging Market Small-Cap Fund (WAEMX). Fourth among the top five retail funds is the T. Rowe Price Africa-Middle East fund (TRAMX). Finally, in fifth place, is the Amana Developing World Fund (AMDWX), a steady performer that follows Islamic investment rules (no heavy debt, no alcohol, no tobacco).
Larry Seruma, the manager of Princeton, N.J.-based Nile Pan-Africa fund, which was ranked second by Lipper, agrees that there has been a lot of political unrest in North Africa of late, and that there has been plenty of negative news from the rest of the continent, ranging from droughts to coups to kidnappings. But, he says the bigger story is that Africa, a continent with more than one billion people, is growing rapidly. "People hear Africa and they think jungle," he says. "But in fact Africa has 52 cities [each] with over a million people, and as a result you are seeing tremendous demand for housing, infrastructure, and services."
Seruma, who hails from Uganda, argues that "people's perception about Africa is 15 to 50 years out of date. They hear about a polio outbreak somewhere in Nigeria or about a coup in Mali, and they think all Africa has polio and coups," he says. "The real story of Africa is not being told."
Oliver Bell, who recently took over as manager of the T. Rowe Price Africa Middle East Fund, which Lipper ranked fourth, agrees. "Nine countries in Africa and the Middle East had elections this year; 15 others last year," Bell says. "So democracy is slowly but surely taking hold. You're seeing rising GDP, increasing productivity and strong international investment, especially from China, with one-third of China's outward investment-$100 billion-going to Africa and the Middle East." Much of that investment is in the resource sector (oil and gas in the Middle East of course, but also increasingly in Africa, as well as minerals in Africa). Meanwhile, a growing middle class is also attracting investment interest from international companies like Walmart and Yum! Brands, the latter of which is putting up KFC outlets all over the place.
None of this is to say that the mainstays of emerging market investing are passé. Indeed, Lipper's top-performer, Virtus, is still focused on the Asia-Pacific region. "Specialized Africa and Middle East funds did well last year," Virtus fund manager Rajiv Jain, says. "But, these are specialized niche funds. You cannot put serious money to work in these markets." He argues that outside of South Africa and Egypt, "you are really talking about a frontier market in Africa," while in the broader Middle East, "you have to go country by country."
The top performer among emerging market funds for the one-year period ending June 19, 2012, the Virtus Emerging Market Opportunity Fund A, benefitted from not having a hot-dogging strategy. In a year when emerging markets took a beating, with the MSCII emerging market index falling 20%, Virtus managed a gain for the period of 3.66%.