Financial Planning - November 2012

PORTFOLIO

the Middle East after a stint in scientific publishing. Based in London, the former chemistry major spends a quarter of his time on the road, mainly visiting countries encompassed by the fund’s mandate.

From this perch, he sees several positive developments for investors. One is the rapid pace of economic growth in Africa. Over the past decade, gross domestic product grew at an average 5% annual clip, according to the African Development Bank. Now companies in and outside Africa see the continent as a potential growth engine.

Another change is improving corporate governance. On Bell’s first trip to meet the management of a company in Saudi Arabia in 2006, he remembers being whisked into a conference room with six directors who poured out irrelevant information. When he tried to ask questions, they turned the conversation around to other topics.

“Today, there’s one person who meets with you and he has a presentation ready, and then he turns to you and says, ‘What else would you like to know?’” Bell says.

GROWTH IN SOUTH AFRICA

Bell’s investment activity is currently focused on three themes: reform in Nigerian banks, diversification in the Saudi Arabian economy away from oil and the expansion of South African companies into other parts of Africa. (Some 30% of the fund’s assets are invested in South Africa.)

On that last theme, he is especially excited about Shoprite, a chain of South African supermarkets. The company has about 700 supermarkets in South Africa and 135 elsewhere on the continent. It plans to double that number in coming years.

As more Africans move into the middle class, they are providing a

growth opportunity for companies
catering to them. “Africa is fairly infor-
mal, but what you’re going to see
over time is more formalization,” Bell
explains. “The money that’s now being
spent in the market, that’s going to go
into more shops.”
Another holding is Sanlam Finan-
cial Services, best known for its insur-
ance products. It’s another play on
rising African incomes, Bells says. “It
starts off with simple funeral-type
products,” he says. The company has
expanded into other insurance and
financial offerings. “The opportunity
is huge,” he says.

REFORM IN NIGERIA

For many people, the words “Nigeria” and “banking” evoke email scams. But Bell says the Nigerian banking sector has recently been cleaned up and that a rare opportunity exists to purchase Nigerian banking stocks on the cheap.

With scores of unsecured loans that could not be repaid in the wake of plummeting oil prices and a stock market swoon, 10 of the country’s banks collapsed in 2009. Since then, the government of Nigeria, the most populous African country, has initiated reform efforts with bailouts and asset sales.

As a result, a number of banks now
have strong reserves and bad loans off
their books. With clean balance sheets,
the banks have been delivering returns
on equity in excess of 20%. “The banks
are probably funding themselves at an
8% rate and then extending loans at
20%, so there’s a massive margin,” Bell
says. “You can almost close your eyes
for the next three to four years.”
Bell has invested in all three of the
country’s biggest banks: Guaranty
Trust Bank, Zenith International Bank
and First Bank of Nigeria. He took prof-
its in consumer stocks in order to load
up on the banks.

CONSUMERISM IN SAUDI ARABIA

Unlike other places where Bell’s investment mandate takes him, Saudi Arabia already has a well-established stock market covering diverse sectors. Half of the T. Rowe Price fund’s assets are invested in Saudi Arabia.

As the kingdom moves its economy away from an extreme reliance on oil profits, Bell has looked to the consumer sector as the next growth opportunity. “You can invest in almost any area you can think of,” he says.

Half of the fund’s assets are made up of shares of Saudi companies, although the fund can’t hold them outright — it must use a third party. The fund’s largest holding is Al Rajhi Bank, the world’s largest Islamic bank.

Another Saudi play is United Electronics, the kingdom’s first big-box retailer selling electronics aimed at young people with disposable income.

As much as Bell likes the Saudi market, however, he is wary that the Arab Spring could show up at Saudi Arabia’s doorstep in coming years, and that would make for a very different investing world than the one he has navigated so far. The Saudi government is in the midst of spending massive amounts of its oil profits, to the tune of $700 billion, on infrastructure projects in the hopes that government largesse will quell any waves of discontent.

“They’re trying to spend their way out of the issue,” Bell says. But popular unrest is not inconceivable. “You can’t rule it out completely, because that’s the nature of one family running the country.” FP