Leveraging Africa’s future potential
aThe Old Mutual Africa Frontiers Fund has generated a 14.3% return in dollar terms in the past year. And while different regions and countries in Africa are in different phases of development, the continent’s growth looks set to continue.
compelling case exists for high-net-worth clients, pension funds, trusts and the like, seeking above-average, long-term returns to consider the Old Mutual African Frontiers Fund – which has generated a 14.3% return in US dollars during the past year. Launched in May 2010, its annualised dollar return since inception is 3.2%, and the three-year annualised return 3.9%.
The R3.6bn portfolio is managed by Cavan Osborne, an awardwinning portfolio manager who has been with Old Mutual Investment Group for the past 11 years and previously at Credit Suisse Standard Securities for 10 years.
He is backed by a solid team who travel extensively on the continent; are multi-lingual (including Arabic); have a deep institutional knowledge of their universe; have lived through various cycles; and consistently apply the group’s investment philosophy to the benefit of its clients.
Their base case for Africa (excluding SA) is that it has enjoyed the best ever decade of growth and economic development in its history, and the next decade is likely to be similar.
True, different regions and different countries are in different phases of developments, Osborne points out, but kickers among frontrunners are sound demographics; enhanced literacy and education; escalation of developed world involvement; improved financial services and governance; new technology; better logistics; and rapidly growing trade.
According to the IMF, among the fastest-growing economies in 2017 were Ethiopia at 10.9%; Ghana at 8.4% and Tanzania, Senegal and Ivory Coast all north of 6%. Algeria,
Libya and Gabon are oil-rich, while Botswana is mineral-rich.
Zimbabwe and the Democratic Republic of Congo, of course, have the potential to be among the world's richest nations, but currently rate badly due to pervasive political corruption, warfare and braindrain of workforce.
“A starting point in our broad approach is getting currencies right,” Osborne emphasises. “This involves monitoring volatility and identifying symptoms leading to blowouts. Often, when there has been a blowout, it’s a good time to invest.”
He points out, however, that other African currencies are not generally as volatile as the South Africa rand and, in several cases, currencies are linked to the US dollar or are euro-pegged.
The fund’s recent outperformance, he says, has been enhanced by a mix of excellent companies in Egypt, avoiding the Nigerian consumer, and being underweight Kenya, which is currently wrestling with a host of fiscal and currency deficits and a capping of interest rates.
“Egypt has been our top destination for the past two years. It recovered from a 100% currency blowout in 2016; went through a lot of adjustments that came with devaluation; has good company management and low labour rates; and volumes in some of the better-run smaller businesses are growing generally at around 10%.”
Osborne also points favourably to Mauritius, with its sound banking system and high dividend yields, stable currency and rapidly growing tourism. “Over the last three years, growth in visitors to the island has compounded at around 7% each a year. This is feeding strongly into the economy.”
The Frontier Fund’s biggest allocations by country are Egypt 27.1%, Nigeria 17.3%, Kenya 11.1%, Mauritius 7.2%, Morocco 5.2% and Botswana 3.8%.
It’s been deliberately underweight Nigeria in recent years because of difficulties in repatriating money, though Osborne notes its position is improving due to the oil price recovery.
“The majority of our exposure in Nigeria is to the banks, some of which are delivering 10% dividend yields,” he adds.
Morocco, Osborne says, is one of the more developed countries on the continent, but his team considers the valuations extremely expensive and coming off pretty low growth. It’s also wary of Zambia, which is considered too illiquid, and Tanzania which is showing nationalisation tendencies, particularly toward the mining industry.
The fund’s sector allocation shows financials at 45%, consumer staples 20.3%, telecommunication services 7.1%, materials 5.1%, healthcare 3.8%, real estate 2.4% and energy 2.3%.
Principal holdings comprise Guaranty Trust Bank (Nigeria) 6.4%, Commercial International (Egypt) 6.3%, Zenith Bank (Nigeria) 6%, Safaricom (Kenya) 4.6%, MCB Group (Mauritius) 4.4%, Credit Agricole Egypt SAE 3.9%, Integrated Diagnostic Holdings (Jersey) 3.5%, Egyptian Kuwaiti Holding Co 3.2%, Kenya Commercial Bank 3.1%, and Obour Land for Food Industries (Egypt) 3.1%.
“The fund focuses on those companies where we have actively engaged with management,” Osborne explains. “With industry and company information largely limited, we believe that we need to spend time in countries meeting with management, suppliers, customers, shareholders and other contacts to find out what is really going on and to gain a greater understanding of specific sovereign risks and opportunities.”
The team looks out primarily for companies showing potential to expand and grow; are significantly undervalued; and where reasonable exposure can be acquired, he adds.
“Integrated Diagnostic Holdings, for instance, is one of the finest companies I’ve come across in my entire career,” he says. “Londonlisted and in the medical laboratory business, it’s highly cash generative, boasts excellent earnings, and a high dividend payout. The business’s primary operations are in Egypt, and interestingly, unlike South Africa, it is more of a walk-in than a medical-aid funded business.”
Likewise, he’s enthusiastic about Obour Land, with similar attractive investment characteristics as Integrated Diagnostic Holdings. It’s in the business of producing and selling soft white cheese that it sells in longlife tetrapak cartons. Cheese is the primary protein source in Egypt. It’s also expanding into milk and fruit juices sold in tetrapaks.
The minimum investment in the African Frontier Fund is R1m. ■ Portfolio manager at Old Mutual Investment Group