For close to two years, the dominant theme in the Middle East has been the Arab Spring. While the shift toward democracy has been thrilling for many watching the political change, for investors in the region, it hasn't amounted to much.

"The Arab Spring so far has only affected the countries that aren't really investable," says Oliver Bell, manager of the $150 million T. Rowe Price Africa & Middle East Fund. The markets of countries like Egypt, Libya, Syria and Tunisia are so small that they don't have much to offer investors.

But as a whole, Africa and the Middle East represent a tantalizing investing opportunity, Bell contends. In many ways, he says, these frontier markets are where China, Brazil and India, the big dogs of the emerging market sector, were 25 years ago. And if Africa and the Middle East follow in the footsteps of the renowned BRIC nations, patient investors could be well rewarded.

What has Bell so enthusiastic? In a word, demographics. Within the investing universe that his fund is allowed to explore, "you have 65 countries with more than a billion people, 60% of whom are under the age of 24," Bell says. "Fast forward to 2025, and just think of the number of working people this region will have. This is a multi-decade story."

With geographic and cultural diversity, the area gives Bell plenty of places to maneuver if political hot spots flare up. "If something is happening in Syria, it doesn't necessarily impact the other countries," he says.

Since its ill-timed debut in mid-2007 on the eve of the worldwide financial crisis, the T. Rowe Price Africa & Middle East Fund has had trouble. For the three years ending Oct.15, it has been up at an annualized rate of only 1%, putting it in the bottom 29% of the emerging markets category. For the five-year period, the record has been even worse: a decline of 5.8% a year, consigning it to the bottom 19% of the group.



But Bell, who moved to T. Rowe Price from the asset management wing of the Swiss bank Pictet, where he ran a portfolio invested in the same region, has already started to turn things around. The fund's third manager, Bell steered the fund to a 16.2% gain in the year that ended on Oct. 15, a period that correlates with his tenure. That has landed the fund in the top 5% of the emerging markets category, according to Morningstar.

Bell has been helped by the markets themselves. MSCI's Frontier Market Africa index rose almost 50% in the 12 months through Oct. 15. As growth has sputtered in more developed markets, investors are looking toward new investing opportunities.

Bell, who spent a short time in Saudi Arabia as a child, came to investing in Africa and 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.



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 informal, 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 Financial Services, best known for its insurance 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.



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 profits in consumer stocks in order to load up on the banks.



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."



Ilana Polyak, a Financial Planning contributing writer, has also written for The New York Times, Money and Kiplinger's.




T.Rowe Price Africa & Middle East Fund


Credentials: B.S. in chemistry, University of Exeter

Experience: Portfolio manager, T. Rowe Price Africa & Middle East fund (2011-present); emerging markets research manager, Pictet Asset Management (1997-2011); scientific publishing (1992-1997)

Ticker: TRAMX

Inception of fund: September 2007

Style: Diversified emerging markets

AUM: $150 million

Three- and five-year performance as of Oct. 15: 0.97%, -5.76%

Expense ratio: 1.50%

Front load: None

Minimum investment: $2,500

Alpha: -0.88 vs. MSCI Emerging Markets

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