Lever­ag­ing Africa’s fu­ture po­ten­tial

Finweek English Edition - - Fundfocus Introduction - By Leon Kok

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

Ca­van Os­borne

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