InvestmentsApr 16 2014

Fund Review: T. Rowe Price Middle East and Africa Equity

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A focus on finding quality growing companies that are benefiting from structural growth in the region has helped the $45.8m (£27.4m) T. Rowe Price Middle East and Africa Equity fund deliver consistent positive performance since its launch in 2007.

Oliver Bell, who has managed the fund since 2011, notes that the investable universe is all of Africa and all of the Middle East, adding: “To some extent it is agnostic as to what benchmarks have decided are emerging or frontier.”

He explains the aim is to find quality growing companies that are benefiting from the structural growth in the region, and as the fund has a geographical remit as soon as countries become investable “then they enter into our universe. We don’t have to wait for any index changes for that to be the case”.

While Mr Bell is the portfolio manager he is supported by a team of four analysts and also benefits from the firm’s fixed income team that focuses on these regions, including specialists in sovereign and credit debt in Africa and separately in the Middle East, to provide an additional macro view.

“There are four people we rely on in the fixed income team who can give us what I like to think of as the weather forecast for each country. Then if the weather forecast is particularly gloomy, it might override a stock decision, but if it is generally okay then the stock is the overriding factor.

“Having said that this region is a bit like the emerging markets of the 1990s, you get exaggerated economic cycles and you get booms and busts.”

One of the most significant changes to the portfolio in the past nine months has been the decision to take profit out of Sub-Saharan Africa, particularly Nigeria. This has since been put to work in the area of the Gulf Cooperation Council, particularly the United Arab Emirates, Qatar and Saudi Arabia.

Mr Bell explains: “That was partly a reflection of the risks building in Nigeria as we enter the election cycle, and an increasingly high reliance on a high oil price. The election cycle, the retirement of a central bank governor that was important to that country and the fact a lot of companies are up by roughly 150 per cent in a fairly short space of time meant we took a lot of that profit and put it in the GCC because we realised the markets were underappreciating the strength of those economies.”

For the five years to April 14 2014 the fund has delivered a return of 77.2 per cent, while it produced a three year return of 34.66 per cent, which covers the period that Mr Bell took over the fund.

The manager adds: “There is evidence we’ve picked the right stocks in each of the sectors we can invest in, so that’s driven a lot of performance. Combined with that we have been underweight those countries that on the whole have underperformed.

“A lot of outperformance has come from a correct call on financials. We have had nothing in the financials in South Africa, because of the weakness in the currency they haven’t performed very well. We got very good performance from Nigerian banks, then we took profit out and put it in GCC banks which have also done well. So we’ve been ahead of the herd in terms of investing in the correct financials.”

Looking ahead the manager tends to split the region into four distinct parts, the GCC, North Africa, Sub-Saharan Africa and South Africa, with the GCC offering some of the better opportunities.

But he adds: “There is a technical factor in that the MSCI is upgrading Qatar and UAE into emerging markets in May, so we are aware there may be a lot of passive money coming into those markets in the next few months that might send the valuations very high.

“We fundamentally like these countries and the stocks within them but we are concerned that it gets overdone in the very short term, it depends what happens through that transition in May.”

EXPERT VIEW

Jon Beckett, chartered MSCI, senior reviewer and fund analyst, Chartered Institute for Securities and Investments

VERDICT

Investors may be surprised by the large South Africa allocation, which will correlate some of the fund’s returns with Africa funds. The fund’s small size will restrict retail and pension linked investment for the foreseeable future until it crosses over £100m. The T. Rowe fund runs a large position in Middle Eastern financials, however given the fund’s size it may likely change and expand if its asset base grows.