New look at an old-fashioned world

Africa is a no-no for many advisers, but some would entrust clients’ money to a manager with a track record in the continent and a way round liquidity risks. Investec’s new fund may fit the bill.

Mention “investment in Africa” to financial advisers and responses cover the whole spectrum. At the least enlightened end, it will be “Africa is just civil war, corruption and chaos.”

For those whose view of the continent postdates Boys Own Paper, it is more like “Yes, I know there are good things going on, there’s mineral wealth and an emerging middle class wanting consumer goodies. But my clients were stung in New Star’s Heart of Africa fund.”

Heart of Africa lasted barely a year and lost day one investors over half their money. It blamed its closure on ­liquidity problems resulting from elections in Ghana and religious holidays in Nigeria.

But at the enlightened end of the spectrum, there are those with a positive view of Africa’s future who are happy to invest retail money if they could see both a fund manager track record and a way round potential liquidity problems.

”There are few derivatives to worry about, there is no high-frequency trading to cause alarm, and the only dark pools are deep in the rainforests”

Roelof Horne of Investec says his firm’s new Africa Opportunities fund “aims to meet those criteria – an investment house performance record and the liquidity requirements of the retail market”. Horne, based in Cape Town, is the manager of Investec’s institutional Pan Africa and Africa Middle East funds. He is also part of the team running the Africa Opportunities fund, of which the lead manager is Malcolm Gray.

Africa’s population, at about one billion, is little short of India’s. But while India’s quoted concerns are worth about $1.6 trillion (£1 trillion), those of Africa are valued at only $600 billion, with two-thirds of that in South Africa. Egypt, Morocco and Nigeria come next with about $70 billion, $60 billion and $40 billion respectively. The remaining countries – many of which have no stockmarkets – account for $30 billion.

Pan Africa, which has returned 9.2% a year since launch five years ago, invests with a bias away from South Africa. (article continues below)

“South Africa is a significant constituent of the MSCI global emerging market index but this fund is trying to capture frontier Africa, far away from the South African stocks quoted in London,” says Horne. “The South Africa weighting is currently under 4% but it has been as large as 40%. The bulk of the fund is now in Nigeria [34%] and Egypt [23%].”

The fund can invest in companies quoted outside the continent that have most of their business in Africa – one method whereby the liquidity of the new Opportunities fund is managed. One example is Eni, the Italian integrated energy company, which operates in countries from Algeria to Angola.

Another liquidity route will be a concentration on the ­easier-to-trade bigger African markets. Horne concedes that easier trading and daily pricing requirements will reduce the new fund’s investable universe compared with the $215m Pan Africa. “Institutional investors can live with illiquidity and monthly valuations. Retail investors cannot, so they have to accept some limitations,” he says.

Investec’s approach to Africa is bottom up. “We look at individual companies rather than economies because that works, rather than looking at countries and their economies,” says Horne. “Sector investing does not work either because while in developed markets banks or telephone companies, for instance, will tend to run together, that does not apply in Africa. We may have 40% financials in the Pan Africa fund at one time but they are not well correlated.”

The idea in both Pan Africa and Africa Opportunities is to look for companies that are under-researched, under-rated but over-delivering. Many of these start with a low base but have that vital first-mover advantage in their markets, with lower or no competition coupled with scope for expansion.

“A favourite with the fund is Egypt’s Ghabbour Auto,” says Horne. “The automotive market in Egypt, like elsewhere on the continent, is very fractured, dominated by small companies or back street workshops. Ghabbour listed five years ago – it was family run. It was the first firm in that country to import and assemble vehicles. It has good-quality servicing outlets – something you take for granted in Europe but hard to find in Egypt. It has the Hyundai franchise, and because of Ghabbour after-care, Hyundai has the best second-hand values in the country. It also has a Mazda franchise. There are only 30 cars per 1,000 people in Egypt so there is scope for selling more. Ghabbour is also in buses – some exported to Iraq – trucks and those tuk-tuk three-wheelers you see everywhere in Asia.”

Africa’s frontier status means it is not correlated with the rest of the investment world. Other than affecting Nigeria, the 2008 banking crisis passed it by. But the crash ensured that the appetite for equity and debt funding dried up, leaving some companies, in mining in particular, with shares diluted to zero.

“That hurt,” says Horne. “However, there are good pros­pects for those that survived.”

Africa’s stockmarket “backwardness” has another advantage. “There are few derivatives to worry about, there is no high-frequency trading to cause alarm, and the only dark pools are deep in the rainforests,” says Horne. “This means it is an old-fashioned world where fundamentals such as value and growth prospects still predominate. We can look for real businesses with real opportunities without having one eye over our shoulders on the last half-second on the trading screen.”

But while the superfast dealers have yet to penetrate Africa, there remains the danger of emerging/frontier market hot money moving from continent to continent.

Horne says: “This is a potential problem. But so far Africa has not attracted the big wall of money that could create a ­bubble. If stocks quoted in sub-Saharan Africa become too hot we could divert funds to the Middle East or to developed world quoted stocks with substantial African links. It’s a problem we would like to have.”

Despite its successful hosting of the summer’s World Cup, Africa has ­difficulty selling itself because of its history and reputation. But in the past decade or so foundations have been laid for policies that have led to better economic management in at least some parts of the continent.

“Judging Africa by Sierra Leone makes as much sense as judging Europe by Albania. It is a diverse continent with 5% to 6% average growth potential for the next two decades,” says Horne.