Fund Profile: T. Rowe Price Africa and Middle East

by By Ann C. Logue

This is a new fund, so there's not a lot to say about its historical performance. That's okay, because investing is about the future--and the future in the Middle East and Africa is going to be interesting. The nations in these regions have large, young populations that are desperate for economic development and political reform. The potential is enormous, but so is the risk.

The fund's mandate is to invest at least 80% of its assets in the common stocks of companies based in the Middle East and Africa. Most of the investments will be in Bahrain, Egypt, Jordan, Kenya, Lebanon, Morocco, Nigeria, Oman, Qatar, South Africa and United Arab Emirates, as these are the most developed nations in the group, but the fund has the right to invest in Algeria, Botswana, Ghana, Kuwait, Mauritius, Namibia, Tunisia and Zimbabwe. If you know your geography, you realize that there are several countries that aren't on the list. That's because places like Iran are closed to Americans, while nations such as Sudan and Malawi are a long way from having enough commerce to support a mutual fund's interest.

Many of the public companies in the region handle mining and natural resources extraction. That's likely to change with development. Typically, emerging nations start by opening their utility and banking companies to private investment, and the Africa and Middle East Fund's prospectus states that the fund expects to concentrate in these industries. These businesses provide the basic infrastructure that a nation needs to conduct trade, so they tend to be more developed than others. They also tend to grow at the same rate as GDP, so if the economy is zooming, so will these stocks. When Mexico began opening its capital market to international investors, one of the very first offerings was the telephone company. Telefonos de Mexico (NYSE: TMX) came public in May 1991 at a split-adjusted price of $2.54. On Nov. 1, 2007, it closed at $35.08, for a compound annual price appreciation of about 17%-- paying dividends the whole way. 

Most countries in North Africa and the Middle East have large Muslim populations, and that favors equity as a source of capital. Many Muslims follow the religion's Shariah laws, which govern every aspect of life, including business. Shariah prohibits people from charging or paying interest. It states that investment returns must be based on asset productivity and business risk--and that is associated with equity. All else being equal, a company run by Muslims or in a Muslim country is going to raise equity faster than a similar company elsewhere, which might turn to debt on occasion.  

The fund does not invest in Israeli companies, officially because Israel is included in the T. Rowe Price Emerging Europe and Mediterranean Fund. But unofficially, many people in the Middle East will not do business with people who do business with Israel, so including that country's stocks might limit the Africa and Middle East fund managers' abilities to do research.  

Like most T. Rowe Price funds, this one has no load, although there is a 2% back load charged on the redemption of shares held for 90 days or less. The fund's stated expense ratio is 1.75%, and T. Rowe Price has agreed to bear extra expenses in order to keep the fund's expense ratio there through February 2010, otherwise it could quickly get eaten up--travel to the Middle East and Africa isn't cheap! It is hoped that in two years, the fund will have enough assets that a 1.75% expense ratio will cover its operating costs. If not, the ratio will go up. 

By the way, covering part of the expenses is one of many tactics that fund management companies use to ensure that a new fund is successful. Some nascent funds operate in stealth mode, meaning that the fund company puts up the initial investment and does not accept any customer accounts until the fund has a track record. Ideally, the fund managers post great numbers that can be immediately promoted (although it's a lot harder to manage an active open-end mutual fund, with constant investments and redemptions, than it is to manage a static account). Other funds start with a huge marketing push in the hopes of getting assets in quickly enough to cover the start-up costs. 

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