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An African adventure While the emerging markets story is now well documented, investors may want to consider some additional exposure to Africa, as Rob Langston discovers
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alk of frontier markets can often leave investors feeling cold, conjuring up images of warravaged and corrupt economies and high-risk investments with little real prospect of ever seeing the money again. Frontier markets will often be eschewed in favour of lower-risk emerging market countries and regions, such as Russia, China or Latin America. However, the inexorable rise of the economies of Brazil, Russia, India and China has seen many investors looking for the ‘next big thing’. The recent football World Cup helped to showcase South Africa as a developed economy within the region and its ability to put on one of the largest sporting events to have been hosted on the continent. Investors and fund managers will have already been aware of the strength of the South African economy, as it is a longestablished source of natural resources. Yet, the attention on Africa during the summer months may also have helped bring other economies into the spotlight. In its monthly outlook, the International Monetary Fund said economic growth projections for the Middle East & North Africa and Sub-Saharan Africa were likely to be 4.1 per cent and 5 per cent in 2010. The UK, meanwhile, is estimated to grow at a rate of 1.7 per cent, while advanced economies as a whole are forecast to grow at 2.1 per cent. Despite concerns over perceived instability, investment in Africa has been more popular
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in recent years. The case for investing there has become even more compelling with the growth of the mining and oil industries, and other consumer-facing sectors. The International Monetary Fund said rising oil prices had contributed to a strong recovery in the Middle East & North Africa region. Further south, in Sub-Saharan Africa, a recovery in commodity prices and exports – along with growing consumer demand – has helped boost the economies in the region.
‘The rise of Brazil, Russia, India and China has seen many investors looking for the next big thing’
More recently, the World Bank has highlighted the need for greater investment in infrastructure in North Africa, to help spur growth in the Middle East & North Africa (MENA) region. It plans to raise US$1 billion (£635 million) to fund infrastructure projects that could facilitate growth and provide further investment opportunities. The number of African equity funds within the Investment Management Association (IMA) universe is still relatively small compared with other regions and emerging market countries. In this survey, a number of funds where Africa falls within the remit of a fund’s investment mandate have been included.
A fledgling sector As a relatively new phenomenon, open-ended African equity funds have shorter track records. The best-performing fund within the IMA’s fund universe is the JP Morgan Africa Equity Fund. Over one year it would have returned £1,214 from a £1,000 investment. Claire Simmonds, client portfolio manager at JP Morgan Asset Management, says its African Equity Fund has taken a thematic approach towards investing in the continent. ‘The way we think about investing in the fund is split into three themes,’ she explains. ‘The first is emerging Africa: South Africa, Morocco and Egypt. Then there is “frontier Africa” including Nigeria, and then we think about the natural resources space.’ Simmonds says the fund’s focus on natural resources allows the team to pick stocks listed outside Africa on exchanges in London and Canada. She explains that the investment management team on the fund – which is headed by Sonal Pandit and Oleg Biryulyov – take a bottom-up approach to investing where stock specifics are deemed more important than the macroeconomic picture. ‘The fund has a strong bias towards opportunities in the consumer staples sector, as well as being overweight consumer discretionary where we expect that demand is going to be maintained,’ she says. ‘Natural resources represents 30 per cent of the portfolio. From a country perspective our largest overweight is Nigeria – representing the growth level and demographics.’
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Financial attractions Interest in Nigeria has stemmed from the country’s burgeoning financial services industry, which has drawn a raft of interest from investors. The attraction to financial services in the continent has also been highlighted by the recent bid for South African bank Nedbank by HSBC, as it seeks to gain a foothold in the region. Simmonds says the African Equity Fund’s largest underweight is South Africa – which makes up 85 per cent of the fund’s MSCI Emerging and Frontier Markets Africa Index – at around 40 per cent of the portfolio. She says the fund has taken a particularly focused approach to managing liquidity within the fund, following the levels of redemptions witnessed at the height of the credit crisis: ‘Clearly, you have liquidity constraints when investing in Africa. In terms of how we manage companies, there are a number of factors. We think about a longterm investment horizon of between three and five years. ‘It is a high-risk market to be investing in – it is a frontier market – but the long-term investment horizon is very compelling.’ James Cook, product manager in the Europe, Middle East and Africa team at Fidelity Investment Managers, says there are a number of opportunities within subSaharan Africa for investors: ‘One of the attractions of the Emerging Europe, Middle East and Africa (EEMA) fund is that economies are in different stages of development. [EEMA fund manager] Nick Price tries to take advantage of uplift in the economies across sub-Saharan Africa – it’s not all about minerals and mining.’ He says recent overtures to African countries by the Chinese, interested in the continent’s natural resources, have helped bring cheap goods to the continent, stimulating growth in the consumer sector. ‘The consumer growth story is still relatively
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Best Africa fund JP Morgan Africa Equity Fund Managers: Sonal Pandit and Oleg Biryulyov Initial charge: 5 per cent Annual management charge: 1.5 per cent Fund size: US$367 million (£233 million) Reasoning: It is difficult to choose between the small number of Africa funds in the open-ended universe, particularly given the relatively short performance track records. However, with the support of the same analyst team behind the JP Morgan Natural Resources Fund, the JP Morgan Africa Equity Fund makes a compelling argument. Its focus on identifying and addressing potential liquidity issues also makes the fund stand out in a sector that suffered from high levels of redemptions in the past few years.
underappreciated by investors,’ explains Cook, highlighting the potential for growth the consumer discretionary sector and financial services sector in Nigeria. ‘Nigeria, with 140 million people, is the most populous country in Africa,’ he says. ‘[South African shopping chain] Shoprite has one store in Lagos. It is the only formal store in the city and is one of the most profitable outlets in the world.’ Cook adds, ‘All investors ever hear about Nigerian banks is their negative perception, but they are one of the most highly regulated areas in terms of capital reserves.’ There remain a number of other options open to investors within the offshore FSArecognised funds sector, managed by a number of fund management groups, some familiar and others not.
For example, over ten years, the offshore Orbis Africa Equity fund would have returned £9,157 from an initial £1,000 investment. The only other fund with an outstanding track record, the Lombard Odey EMEA fund, would have generated £3,441. The Orbis fund has the added distinction that it would have delivered a return to investors in nine of the past ten years. The bad news for investors, however, is that this fund is now closed to new investment, according to OBSR Fund Ratings. The bulls return In the global emerging markets space, fund managers are becoming more bullish about the region as things start to pick up following volatility in the region. Indeed, according to Cofunds – the fund platform for financial advisers – the most popular specialist funds have focused on global emerging markets (GEM), rather than single-country mandates. Managers from the GEM space are beginning to allocate more money to the sector, as new opportunities arise. Bryan Collings, manager of the Hexam Global Emerging Markets Fund, says there is increased corporate activity in South Africa right now. He says ‘Mergers and acquisitions are definitely alive and well.’ Competition is very high. There are initial public offerings [IPOs], but liquidity dries up rapidly’. Mark Mobius, manager of the Templeton Frontier Markets Fund, says there are a number of interesting investment prospects, particularly with the development of new stock exchanges: ‘We’re really very excited about Africa and will probably be increasing the amount [of the portfolio] in Africa. Our largest holding is in Nigeria but we also have investments in Kenya, Malawi and Zambia. We are definitely interested in Africa, and not just sub-Saharan Africa.’
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The manager says the region has been buoyed by an increase in private equity flowing into the continent from countries such as China and Brazil, looking to take advantage of raw materials in order to fuel their own growing economies. There are also a number of exchange-traded funds (ETFs) covering African indices available for investors, such as the iShares MSCI South Africa, Lyxor ETF South Africa (FTSE JSE TOP 40), db x-trackers MSCI EM EMEA Total Return Index and the db x-trackers S&P Select Frontier ETF. The Lyxor and iShares ETFs – both focusing on different parts of the listed South African market – would have delivered positive returns, as shown in table 1. Hard sell There are a number of arguments against investing in frontier and emerging markets, including civil unrest, corruption and underdeveloped economies. Transparency International, an organisation set up to address corruption around the world, lists many African countries near the bottom of its annual Corruption Perceptions Index. However, fund managers are quick to point out that the more developed economies in Africa have made great strides in this area, particularly with regard to corporate governance. Problems remain, however. Last month, FTSE 100 gold mining company African Barrick Gold reported that its production output would be 30,000 ounces below earlier predictions after uncovering a fuel-stealing
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syndicate involving 60 staff and contractors. Political risk – often cited as a concern by investors in emerging markets – has been discounted by managers in Africa. More developed economies such as Nigeria, South Africa and Egypt are held up as examples of stability in the region. However, investment veteran Mark Mobius says fears over the economy can often be overplayed, even when the situation on the ground looks difficult. ‘In every country in the world where there is volatility or change taking place – there is no question that you have to be aware of situations,’ says Mobius. ‘As we’ve seen recently in Vietnam and Thailand, you can have riots, burnings and people getting killed, but the stock market keeps going on.’
‘The region has been buoyed by more private equity flowing in from countries such as China and Brazil’
Advisers remain reluctant to advocate any significant allocation to the region on its own. Often advisers prefer more general emerging markets funds with the ability to take exposure to the continent, rather than single country or region strategies. Given the larger number of more generalist global emerging markets funds with longer performance records available to investors, it is easy to understand the reluctance by advisers to recommend funds
Hot holding: Nigerian Breweries Share price: NGN 75.55 [Nigerian Naira] (32p) Stock exchange: Nigerian Stock Exchange Headquarters: Lagos, Nigeria
Nigerian Breweries has a long-standing reputation in the country and is the brewer of Star Lager, Heineken and Amstel Malt, among others. Founded in 1949, the firm last year reported increased turnover of NGN
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164.2 billion (£685 million) while profit before taxation grew to NGN 27.9 billion (£116 million). Chief Kola Jamadu, chairman of Nigerian Breweries, said the firm had delivered a strong set of results, despite the difficult economic backdrop. He said stringent banking regulations following the global credit crisis had made credit difficult to obtain but the company had anticipated the situation.
Hot holding: Shoprite Share price: ZAR 100.34 (£9.25) Stock exchange: Johannesburg Stock Exchange Headquarters: West Cape, South Africa Shoprite is the largest food retailer in Africa and has generated a lot of interest from fund managers seeking to take advantage of resilient consumer demand on the continent. It reported a ZAR 67.4 billion (£6.2 billion) turnover for the 53 weeks to June 2010, and is reported to draw around 50 million consumers every month. The group operates more than 1,160 corporate and 270 franchise outlets in 16 countries in Africa and the Indian Ocean Islands. In its preliminary results, the firm said it had managed to report a ZAR 3.5 billion (£323 million) profit, representing an 18.7 per cent increase year-on-year, despite challenging conditions caused by lower levels of food price inflation.
associated with riskier countries. With the memory of the New Star Heart of Africa fund’s fall from grace at the beginning of 2009 still fresh in many IFAs memories, promoting investment in the region still seems to be a hard sell. The fund – formerly managed by Jamie Allsopp – was suspended and eventually sold on in 2009, after a wave of redemptions left it with a concentrated pool of illiquid investments. Adrian Lowcock, investment adviser at London-based IFA Bestinvest, believes the growth economies in more established emerging markets countries offer better opportunities to investors. ‘China and Latin America look interesting, but when you get to Africa and the Middle East there are immature markets that are very high risk,’ he explains. ‘We saw back in 2008 that liquidity was a problem when the problems in the West [started].’ Lowcock says funds such as the Aberdeen Global Emerging Markets and First State
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Table 1: Performance of Africa-focused funds £1,000 over: 6 months
1 year
DB - MSCI EM EMEA TRN Index USD
1,036
1,190
DB - S&P Select Frontier USD
1,022
1,068
iShares - MSCI South Africa USD
1,129
Lyxor - South Africa (FTSE JSE TOP 40) EUR
1,066
FUND AND PROVIDER
3 years
5 years
10 years
EXCHANGE-TRADED FUNDS
1,380
1,028
IMA FUNDS Baring - MENA
959
Fidelity - Emerging Europe Middle East and Africa
940
Franklin Templeton - Franklin MENA
924
950
Investec - Africa & Middle East
898
1,075
1,000
1,215
1,038
1,141
848
888
972
857
1,003
1,162
984
DWS - Invest Africa
959
1,103
Fidelity - Emerging Europe Middle East & Africa
949
1,198
Franklin Templeton - Franklin MENA
924
950
Imara - African Opportunities
924
1,034
1,032
1,233
Investec - Africa & Middle East
884
1,063
Investec - Africa
920
1,077
Investec - Middle East & North Africa
910
960
Investec - Pan Africa
924
1,116
1,174
JB EF - Northern Africa
956
1,075
1,225
JPM - Africa Equity
1,000
1,215
JPM - Emerging Europe Middle East & Africa Equity
1,000
1,263
1,099
1,644
944
1,141
787
1,160
1,003
1,228
1,004
1,712
961
1,075 1,542
2,362
JPM - Africa Equity
1,174
INVESTMENT TRUSTS Independently Managed - Africa Opportunity FSA-RECOGNISED OFFSHORE FUNDS Arab Bank - MENA Baring - MENA Charlemagne - Magna Africa
Imara - East Africa
LO - EMEA Morgan Stanley - Emerging Europe Middle East & North Africa Equity I EUR GTR in GB Nordea 1 - African Equity Orbis - Africa Equity
959
1,110
1,339
SGAM - Equities MENA
886
947
SGAM - Ocean Equities MENA Opportunities
909
976
Silk - African Lions
953
1,072
STANLIB - Africa Equity
1,424
890
1,029
3,441
9,156
951
869
985
615
1,028
1,200
739
T Rowe - Middle East And Africa Equity
909
1,015
UBAM - II MENA
903
951
STANLIB - South Africa Equity
1,412
What the table shows: Performance of £1,000 in funds specialising in Africa with a minimum of six months performance data. Figures are total return, offer-to-bid, to the end of September 2010. Source: Trustnet
Global Emerging Markets funds have good track records, offering investors exposure to the sector. Within the closed-ended fund sector, Lowcock tips the Templeton Emerging Markets Investment Trust, which has a strong track record under manager Mark Mobius. Good times ahead Yet, the outlook for the region remains persuasive. More recently, investment bank Goldman Sachs – responsible for identifying and coining the Brazil, Russia, India & China acronym BRIC – has identified a new group of countries capable of becoming the biggest economies of the 21st century, what it calls the ‘Next 11’. The group includes two African countries, namely Nigeria and Egypt, alongside a number of economies predominantly from Asia. A number of funds have been launched this year investing in the continent, as opportunities continue to present themselves. In recent weeks, Neptune Investment Management, Investec Asset Management and Renaissance Asset Managers have all launched funds. For investors who wish to take part in the African natural resources story but are less convinced by the resilience of consumer stocks, there are a number of options. Funds within the natural resources sector often have a high weighting towards Africa and can offer investors an alternative way of gaining exposure to the region without opting for a specific country play. For example, the Junior Oils Trust has a 23 per cent exposure to Africa, while a number of funds with large holdings in Londonlisted oil, gas and mining companies operating in Africa also have significant exposures to the continent. The JP Morgan Africa Equity Fund managers make use of its highly experienced natural resources team, which has itself produced one of the most successful funds in the natural resources sector, the JP Morgan Natural Resources Fund. ‘Sonal Pandit (co-manager of the fund) actively engages with the natural resources team – there is a lot of dialogue between them,’ says Claire Simmonds. ‘It is not limited by definition or sell-side coverage.’ N
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