BOSTON -- If there's a last frontier for U.S. investors, it's Africa. The world's second-most populous continent is an afterthought for anyone looking to construct a diversified portfolio of foreign stocks.
Consider that there are just two mutual funds specializing in African stocks, compared more than 100 focusing on Europe. About three-dozen focus on a single country, China. So much for the vast African continent and its underground wealth from oil, minerals and metals.
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Another sign of Africa's low profile is the dearth of information about the stocks of its top publicly traded companies. Check the business pages of a newspaper or an investing website, and it's relatively easy to find data on the performance of indexes from most foreign countries or regions. But you'll probably have to look elsewhere to find references to the few African indexes, such as the MSCI Emerging Frontier Markets Africa or the Dow Jones Africa Titans 50.
"It's probably the world's last great untapped market," says Derrick Irwin, co-manager of the Wells Fargo Advantage Emerging Markets Equity fund (EMGAX).
Unlike the two Africa-focused funds, Irwin's 4 star-rated fund is geographically diversified, owning stocks across a broad swath of the world's fastest-growing economies.
He sees growing opportunities in African stocks as well as foreign companies that do business on the continent, and it's not just because of its well-known natural resources. He sees the greatest potential in its 1 billion people and the expansion of Africa's middle class.
One indicator of that potential: Nigerian sales of Guinness beer now surpass those in Ireland, despite the dry stout's origins in Dublin. That's made Africa's most populous country a key growth market for Guinness parent Diageo, based in the United Kingdom.
While Irwin didn't patronize many bars during a recent trip to Nigeria, it was clear in the grocery stores "that Guinness and Heineken dominate the market," Irwin says.
Many investors have been scared off by Africa's widespread poverty and its seemingly intractable political instability and corruption. In North Africa, the Arab Spring uprisings that began a couple years ago helped several countries move toward democracy. But turmoil persists in countries such as Egypt, making them unattractive to potential investors.
That's one reason why investing in Africa requires a strong will. Expect sharp ups and downs in performance.
In a recent interview at his Boston office, Irwin discussed the risks and rewards of investing in Africa. Below are excerpts, edited for clarity:
Q: What are Africa's key strengths, from the standpoint of U.S. investors?
A: There's huge growth potential. The top five African economies have more than 400 million people. Across sub-Saharan Africa there are more than 425 million cellphone subscribers.
Despite the growth, foreign companies have very low penetration into Africa. It's been ignored, and it's still perceived by outsiders as a bit of a basket case. But it's no longer the debt-ridden continent that it used to be, with corrupt dictators running most countries. There are now well over 20 democratically elected governments in Africa, compared with about three in the 1980s. I don't want to sugarcoat it in any way, because there are problems, including extreme poverty. But it's a much different place than it used to be.
Q: As an American consumer, I don't see any African brand names on the shelves, or any visible indications that African companies have a substantial presence in the global economy. Am I missing something?
A: It's there, it's just that Americans don't see it. A lot of the trade with African countries is with other emerging markets in places like China, India and Turkey. That trade has increased about tenfold over the past decade.
Q: So why hasn't U.S. investing in Africa taken off?
A: Africa is one of those markets where the story looks so good on paper that it often gets disassociated from the investment realities. For example, Nigeria has unspeakably bad infrastructure. Traffic is horrible. And it's incredibly hard for foreigners who want to invest directly in Nigeria. One reason is the bureaucracy. All the worst aspects of the old British bureaucracy are still in place, but with an economy that's 50 times larger than it was in the colonial era. If you're visiting a company's management, you're not getting past the gates or front desk unless you have the proper paperwork. And it's hard to overstate the corruption and cronyism.
Q: What about corporate governance?
A: It's not even close to what it is in the developed world. There are exceptions. It's world-class at South African banks. But it's much different with Nigerian banks. The upside is that Nigerian banks are very simple. They take deposits, charge for it, and give out loans to a small segment of the population, and to medium and large corporations. They don't offer credit cards or mortgages, and that's a humongous opportunity for foreign companies.
Q: Why do you see potential in Nigeria?
A: Out of a population of more than 160 million, more than 50 million live above the poverty line. That's bigger than the entire population of South Africa. Nigeria's oil wealth has been important, and it's helped develop a vibrant domestic market, including a strong banking system. Sure, there are plenty of problems. But it's a very large, accessible market.
Q: What advice would you offer to an investor looking for specific exposure to African stocks?
A: You can't just rely on the financial statements that companies issue. You have to understand how these businesses operate, and where the opportunities are. It's probably more important in Africa than anywhere else to spend time on the ground, kicking the tires. It takes so much due diligence if you're investing directly in Africa, rather than through a mutual fund.