Returns from the motherland.

Beyond the romantic notion of investing in Africa is the potential for breath-taking gains -- but heart-breaking losses, as well.

AFRICA HAS BEEN A CONUNDRUM FOR Centuries. A continent steeped in natural resources, until recently, it's been a pauper in terms of sheer economic power. Even now as changes for the better begin to surface, Africa remains one big riddle for individual investors, too. Many of its burgeoning stock markets have rocketed so quickly in value, they've surpassed even robust gains by the S&P 500. Stateside, though, investors haven't gotten a glimpse of the jackpot. Of the nine U.S. mutual funds that focus on Africa, the dosed-end Morgan Stanley Africa Investment fund lead the peck with a meager 10% for the year ending January 31, 1997. At the same time, four others posted losses as great as 21%, according to Lipper Analytical Services.

So what's to blame? Political upheaval? Outside flare-ups in countries like Zaire, the continent has been making strides to install democracies from the Mediterranean to Cape Hope. How about economic woes? Wrong again. Yes, some of the continent is still having trouble, but in many countries, bloated state enterprises are being privatized and a renaissance is under way. Zimbabwe, for example, has cut inflation in half and saw its gross domestic product jump 8% last year, compared to a measly 2% for the U.S. economy.

So how about shaky currencies? True, the South African market gained over 10% last year while losing 21% in dollar terms because of a devalued rend. But Johannesburg was the exception rather than the rule, when you consider that markets like Zimbabwe and Nigeria were up more than 50% in dollar terms. Instead, the dismal records of mutual funds available to individual investors is a testament to just how tricky investing profitably in Africa can be.

By now, you're probably wondering if Africa is simply the playground of big institutional investors who have the girth to come in, take big stakes and walk away winners. Not necessarily so. All the same, investing in Africa is not for the meek; there's potential for breath-taking gains, but colossal losses, as well.

Before looking further, it's best to know the ups and downs of international investing. Simply put, the rationale for investing abroad is similar to your mother's admonition never to put all your eggs in one basket. Yes, stocks at home have boomed, but as we all know, markets move in cycles, and share prices are inevitably doomed to fall at some time. That's when it pays to be invested in foreign markets, some of which are growing much faster than the U.S. economy.

Says George Van Amson, a principal at Morgan Stanley & Co.'s listed equities desk: "With diversification over the long run, you get better returns with less risk."

Emerging markets, including the African economies, are a special beast. Their growth, however spectacular, can be highly volatile and erratic. Local currencies soar and dip year after year. A year of outsized gains can be wiped away if a country's money dives relative to the U.S. dollar.

That said, we'd first recommend that you have a solid footing at home before setting off for Africa. As a slice of your overall portfolio, money managers say international stocks should make up 10%-40% of your investments, according to your temperament for risk. As tempting as Africa might seem, Clifford Mpare, a portfolio manager for the Calvert New Africa Fund, suggests that since emerging markets account for approximately 12% of the total capitalization of global markets, the average investor may wish to have 2%-4% of his or her portfolio invested in emerging markets like Africa. Thus, even if you are a daredevil investor, we recommend that you place no more than 10% of your portfolio overall in investments there. We'd also suggest you get ready to do some serious homework. You'll find statistics on African markets and companies relatively difficult to come by, even when you're working through a broker. Secondly, your research should cover country economies as well as stocks and mutual funds. And finally, we offer one of the fundamental tenets of African investing: don't believe the hype. In the words of Francis Daniels, managing director of the Africa-America Group, who got into the business after years of studying the continent, "To do well in Africa, you must be capable of suspending your prejudices in order to look coldly and clearly at the political and economic trends."

A MAP AND A COMPASS: LEARNING THE LAY OF THE LAND

Research by the IFC, a division of the World Bank, shows that as a group, the 14 African stock markets act as a very good foil to periods when the U.S. market might slow. That's unlike other emerging markets in Latin America and Asia, whose dependence on U.S. trade is so great that the minute the New York Stock Exchange catches cold, they catch the flu. What's more, African markets seem quite autonomous, meaning turmoil in Zaire has no effect on Nigeria. John Niepold, a portfolio manager with Emerging Markets Management, says no one looks at Africa as a single country. "In actual fact, you have many diverse countries and markets," he says.

So how does Africa shape up as a continent of stock market opportunities? Well, in terms of size, there's South Africa and everyone else. A market capitalization of $253 billion makes the Johannesburg Stock Exchange (JSE) the 12th largest in the world, roughly six times the size of all the other stock markets on the continent combined (see map). Miles Morland, of London-based Blakeney Asset Management, says South Africa's market is well researched and, in many ways, easier to invest in than Italy's or Spain's.

Bigger hasn't proven to be necessarily better. In 1996, the South African market declined some 24% in dollar terms because of a devaluation of the local currency, the rend. At the same time, Egypt, up 87%, Zimbabwe, rising over 70%, and Nigeria, up some 56%, all did exceedingly well. (The U.S. market rose 24% that year.) In 1995, South Africa returned 15% to investors, Cote d'Ivoire racked up a 141% increase in dollar terms and tiny Namibia was up 40%. The U.S. market, meanwhile, had one of its best years ever, rising 34% that year.

For better or worse, both professional and individual investors tend to focus on South Africa to the exclusion of the rest of the continent. The strategy makes some sense when you consider the relative size of its economy, its highly developed stock exchange and the historic political gains the country has enjoyed. It also doesn't hurt that there is ample research produced by American stock brokers for investors to review.

South Africa, though, has had transitional pains aplenty. Economic growth has been weak, inflation high and black unemployment continues to hover around 50% by some estimates. All told, South Africa provides an excellent primer on the risks of emerging markets. Placing all your African eggs in the South African basket in 1996, or any year for that matter, substantially increased your risk without simultaneously enhancing your return.

Professional investors we talked to recommend you learn about markets other than South Africa to broaden your horizons. Says Niepold: "There's room for discovery if only because there are some $40 billion worth of listed stocks on the continent outside of South Africa."

THE INVESTMENTS

Now you know something about the playing field. What investments do you have at your disposal? In order of risk, we'd recommend looking at mutual funds first and then individual stocks, which are represented in U.S. stock markets by ADRs, or American depository receipts.

The menu of mutual funds, as you may know, is divided between closed-and open-end investments. Closed-end funds issue a fixed number of shares on a stock exchange and their prices fluctuate over time according to demand. Most closed-end funds trade at a discount to the net asset value of the underlying stocks that they hold. The African closed-end funds are no exception to this rule. So, new investors in these funds can immediately pay anywhere from 75-85 cents on the dollar for the African stocks held by closed-end mutual funds. The catch is that when it is time for you to sell your fund shares, you will also be unlikely to obtain full value for your shares. That's why some equity analysts suggest investors consider purchasing shares of an open-end fund, where you pay full value for the shares and you know upon sale you will receive full value for them, too. In general, the largest drawback in open-end funds is that they require that a local stock market be liquid, especially since a portfolio manager will redeem your shares by selling the underlying assets in the fund.

For that reason, closed-end funds are a safer bet in uncertain markets like Africa, because a change in investor sentiment doesn't necessarily force a portfolio manager to dump holdings. In Africa, where some stock markets operate for a few hours a day, or even a couple days a weak, that's important. Sales of large stakes could shake things up and push prices through the floor.

Another choice which is far less diversified and therefore riskier, is to opt for shares of a company traded as ADRs in the U.S.

THE FUNDS

As we've said before, the picture for mutual funds investing in Africa hasn't been a pretty one. There are currently three closed-end mutual funds in the U.S. that specialize in Africa: the Morgan Stanley Africa Fund (up 9.9% from 1996-97); the New South Africa Fund (down 22.4%) and the Southern Africa Fund (down 9%).

At present, the Calvert New Africa is the sole open-end fund that targets African investments uniquely. Like its closed-end sisters, the Calvert New Africa Fund posted disappointing returns in 1996 (down 10.75% for the year ending January 31, 1997) due largely to the fact that its biggest stake is in South Africa. As of March, the fund was up 15%, but long-term results aren't as rosy. Clifford Mpare, the portfolio manager, says larger funds that target Africa cannot ignore South Africa if they want to be fully invested and position themselves for the eventual turnaround.

Still, it's South Africa's volatility that leads us to recommend that you examine a fund's holdings. See how much of its assets lie outside of the Johannesburg market, where growth has been particularly robust. Jaideep Khanna, portfolio manager of the Morgan Stanley Africa Investment Fund, a closed-end fund, for instance, is 42% in South Africa, but has holdings in Zimbabwe and Egypt, where he sees potential for good growth this year.

AMERICAN DEPOSITORY RECEIPTS

Most ADRs provide investors with the information a domestic companies would. Further, some brokerage firms in the States cover these same companies, allowing you another way to gather research. According to the Bank of New York there are over 120 African ADRs, although not all are available to individual investors.

Look at South African companies first because information on their operations is readily available. Also choose companies with exposure to markets beyond their home base; that protects them from the ups and downs of their domestic market.

Finally, we have these tips:

* Remember, most of the world still sees Africa as the "dark" continent and an impenetrable place, a notion Maceo Sloan, head of New Africa Advisers, ties to institutional racism. Consequently, markets there will tend to overreact to bad news and underreact to good news.

* Pay attention not only to country politics and political cycles. Pick companies with strong and sustainable earnings growth.

* Compare mangoes to mangoes. Analyze investments in US dollar terms. Also remember that most African economies are commodity-based and prone to large swings depending on rainfall and harvest seasons.

* Assess the international experience of the mutual fund managers, not the parent company. Most funds are less than three years old and their record to date has been spotty, so it's important to determine the commitment of the fund to Africa.

Finally, of the ADRs available, we see interesting possibilities in South African Breweries (Nasdaq: SBWRY) and Ghana's Ashanti Goldfields (NYSE: ASL) if gold prices start to stabilize. South African Breweries is widely covered by U.S. brokerages. It has bought Coca-Cola bottling units throughout the continent. Ashanti Goldfields has also expanded beyond the borders of its home in Ghana, with management scouring the continent for acquisitions. Finally, Carson Inc. (NYSE: CIC), a U.S. hair care product maker, has opened plants in Africa and recently began trading on the Johannesburg exchange, making it a local stock with extended ties into Africa.

We recommend you approach Africa as a collector: do the legwork, focus on value and be prepared to hold on to investments. For more information, fund prospectuses are a good start. They outline the potential and give a good overview. Contact Calvert at 800-368-2748 or Morgan Stanley at 800-282-4404. To access resources used for this article, check the Web site: www.makola.com. Finally, an excellent guide to African stocks is African Equities by Christopher Hartland-Peel (Euromoney Books; 212-501-8181).

If you're ready to devote some time, remember there may not be any Asian"tigers" on the continent, but African "lions" abound if you are willing to search.