Opportunity Investing

Africa, megacaps may offer a great balance of risk and reward

The emerging markets in Africa and the Middle East have too often been synonymous with corruption, volatility, or both. But T. Rowe Price has decided the potential rewards of investing in countries from Bahrain to Nigeria now outweigh the risks. “The investment opportunities are much greater in these regions than they would have been a few years ago,” says T. Rowe spokesman Brian Lewbart.

By early November, two months after its introduction, the no-load T. Rowe Price Africa & Middle East (TRAMX) fund had gathered $80 million in assets. The fund is managed by Christopher Alderson, who has invested in emerging markets for 18 years with T. Rowe Price and has led the company’s emerging markets equity team for the past decade.

The fund, which is aimed at aggressive, risk-tolerant investors, is being launched amid improved political stability in Africa resulting from booming oil and commodities markets as well as Western countries’ debt relief. In the Middle East, meanwhile, the oil bubble has spawned opportunities in areas such as banking and infrastructure projects, says Lewbart.

Economic Growth Rates

GDP GROWTH

2006

2007

Bahrain

7.7%

6.9%

Egypt

6.8

6.7

Nigeria

5.3

8.2

Oman

5.9

6.0

Qatar

8.8

8.0

South Africa

5.0

4.7

Source: T. Rowe Price

TIME TO THINK BIG
When the U.S. economy starts to wobble, cautious investors head for large companies, which are considered more recession-proof than their smaller, faster-growing counterparts. So it was a sure sign of shifting investor sentiment when The Vanguard Group announced plans in September for three “mega-cap” index funds, according to Burton Greenwald, an independent mutual fund consultant in Philadelphia.

“You’ve had seven or eight years of small-caps outperforming large-caps,” he says. “A lot of people are predicting that trend will change dramatically.”

The Russell 2000 index of small-cap stocks returned16.8% over the five-year period ended Nov. 5, while the S&P 500 index returned 12.4%.
Vanguard’s Mega Cap 300, Mega Cap 300 Growth, and Mega Cap 300 Value funds, which were expected to launch in December, will track large-company indexes of the largest stocks in the market. Mega-cap stocks are understood to be those of the largest companies by market capitalization, which is a company’s stock price multiplied by the number of its outstanding shares. As a point of reference, ExxonMobil, the largest U.S. company, has a market cap approaching $500 billion.

Large-cap stocks, by comparison, include those with market caps starting at a mere $5 billion, according to Standard & Poor’s, the company behind the S&P 500 index.

Keep an eye on Vanguard’s growth fund: Many market watchers believe the performance pendulum may be swinging toward stocks with strong earnings momentum. Such swings are common and are largely based on the relative cost of the different stock categories. Because growth stocks had been out of favor, their prices relative to their

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