South Africa gets a bit less attention today than it did in the heady days leading up to the World Cup. But investors would do well not to let the country fall off their radar.
Why? No other country is as widely engaged in the Sub-Saharan economy than South Africa. The country’s economic growth has slowed since the end of the soccer-fueled construction boom, but it’s still chugging along at a 3.2% clip. Its currency, the Rand, has been on a tear the past couple years, appreciating 35% versus the greenback since the start of 2009.
Still not convinced? The smart cookies that manage the Harvard endowment sure seem to be. Their portfolio’s fourth largest holding is the subject of this post.
So, what’s the easiest way for a Yankee to participate in this market? The iShares MSCI South Africa Index (NYSE: EZA).
EZA is an exchange-traded fund comprised of 46 stocks listed on the Johannesburg Stock Exchange. It has performed quite well in 2010, posting a 20.7% return compared to the S&P500’s tepid 3.3%.
Like the other two Africa-focused ETFs (NYSE: AFK and NYSE: GAF), EZA’s holdings are skewed toward the mining sector (24.7% weight), and gold and platinum mining in particular. That’s something to consider if your portfolio is already overweight on commodities, or if you have concerns about the social and environmental impacts of mining. Anglogold Ashanti (NYSE: AU) (6.6%) and Impala Platinum (JNB: IMP) (5.3%) rank among the fund’s ten largest holdings.
The ETF’s largest holding, however, is MTN Group (JNB: MTN), and with an 11.0% weight, its fortunes have a significant impact on the entire fund’s performance. The company is South Africa’s leading cellular provider, but it also operates (or has substantial ownership in) wireless companies throughout Africa and the Middle East. It presently trades at a trailing P/E ratio of 15.9, and it grew adjusted earnings by more than 20% during the first half of the year.
It’s worth noting that the fund also holds shares of one of MTN’s biggest competitors, Vodacom Group (JNB: VOD). All told, EZA’s exposure to the telecom sector amounts to 12.9% of the total portfolio.
Other EZA holdings of note include energy giant Sasol (NYSE: SSL), Naspers (JNB: NPN), a South African media conglomerate, and the large Standard Bank Group (JNB: SBK). These three holdings are weighted 9.6%, 7.5% and 6.5% respectively. Take a look at the entire portfolio here.
EZA trades near its all-time high at the moment, but with a price at 12 times its aggregate trailing earnings, it doesn’t strike me as overly expensive. As with most investments, building a position gradually through dollar-cost averaging makes very good sense here.