Yum Brands. Diageo. Nestle. Wal-Mart. Coca-Cola. If you ever develop the urge to invest in Africa, look to buy stock in those five companies which are currently investing throughout the continent to mixed results, although Nestle is once again proving that it has the business model to make money anywhere.
I was reading through the T. Rowe Price Africa & Middle East Fund (ticker symbol TRAMX), and I was reminded of the statistic that there has never been an African-focused fund open to American retail investors that has beaten the S&P 500 because it is extraordinarily difficult to successfully predict African firms that would serve as suitable long-term investments.
Since its inception in 2007, the T Rowe Price Africa & Middle East Fund has returned only 3.16% per year. And to make matters worse, you got charged a 1.47% expense ratio while you achieved those returns.
What does that mean with someone who had $10,000 in September 2007 and decided to buy T. Rowe Price’s Africa & Middle East Fund on opening day? On a pre-fee basis, the investment performance would have only grown the investment to $12,433. But you would have had to pay $1,115 in fees to get that, so your returns would be $11,318. And if that investment was in a taxable account well, you wouldn’t even be able to walk away with all of that $1,318 after 7-8 years.
This isn’t to make fun of T. Rowe Price but rather to demonstrate that investing specifically in Africa is hard. Having broad notions such as “it’s easier for an African country to double its GDP than the United States to double its GDP” won’t do it—in this case, you need the specific companies like Emaar Properties, Samba Financial, Jarir Marketing, and Naspar to do well in order to profit. That’s tricky, to say the least.
Meanwhile, investing in large multinationals that have operations in Africa and the Middle East seems like a safer bet that, in this case, also tends to deliver superior returns.
What if, instead of buying T. Rowe Price’s Africa & Middle East Fund in September 2007 when it opened up shop, you instead invested in large companies that have African and Middle Eastern operations?
If you bought Yum Brands, you would have achieved 13.83% annual returns. Diageo? 8.51% annual returns. Nestle would have given you 11.61% annual returns. Wal-Mart would have given you 10.41% annual returns. And Coca-Cola would have given you 8.66% annual returns. Each large multinational working in Africa would have done significantly better, and plus, there’s no 1.47% fee eating at your returns. You pay your $8 in one-time brokerage fees to buy the stock, and then the only cost you have to pay after that would be dividend taxes if held in a non-retirement or charity account.
Some diversification away from American, British, and Swiss multinationals can make sense. Buying an international total world stock index fund or international small cap index, or even a U.S. small-cap index can provide intelligent diversification without turning it into an exercise in diworsification.
But when you feel the need to own an Africa & Middle East Fund outright in the name of diversification, you’ve probably crossed over into “too niche” territory. It’s hard picking winners, and the fees are usually so large that you don’t have much of a hedge if the pick doesn’t work out.
Meanwhile, assume that Coca-Cola had trouble growing in South Africa, Nigeria, Egypt, and/or Qatar. Fine, you lose a bit or don’t get to explore that avenue of growth, but shareholders of the parent company are still going to get their 8% earnings per share and dividend growth. And if it does work, great, your profits are higher than what you’d otherwise get. In other words, the consequences of failure or negligible to owners. The consequences of failure are not negligible to Africa & Middle East fund-holders, as you only see your money compound at 3% and you have to deal with paying out almost half your returns in fees.
This isn’t meant as a criticism of T. Rowe Price. Some of their funds, historically the Capital Appreciation and New Horizons Fund, have been excellent long-term holds that helped build the firm’s reputation. Instead, it’s a criticism of deliberately allocating a percentage of your portfolio to Africa & Middle East Funds. It can’t be done in a low cost way, and the ways that cost money haven’t proven superior performance to just owning the plain-old multinational firms that we usually discuss. Why overcomplicate things?