adminTHE one notable factor of funds that invest in Africa is the variety of investment approaches.
They do have some fundamental things in common: they look for companies with good cash flows that offer value. Competitive advantage and experienced management teams are also sought after.
From there they diverge. Even the funds that adhere to the bottom-up, value approach, such as the Imara African Opportunities Fund and the Allan Gray Africa ex-SA Equity Fund, keep an eye on macro issues.
Momentum’s Africa Equity Fund emphasises discipline and risk management on the premise that avoiding mistakes in the less-liquid Africa markets is key to outperforming its benchmark, the MSCI Emerging Frontier Markets Africa ex-SA index.
Prescient and Stanlib have developed their own in-house approaches they believe are more suited to conditions on the continent. The Prescient Africa Equity Fund follows “a middle-of-the-road approach between value and growth”, though it is quantitative-based.
With growth stocks, it tries to capture market sentiment. “If a sector is running,” says fund manager Johan Steyn, “you will underperform if you don’t have growth stocks.” Within such a sector he seeks out companies that still offer value.
Stanlib’s Africa Equity Proposition Fund marries a bottom-up and top-down approach, with a scorecard that takes into account a company’s fundamentals but also considers macroeconomic factors including political and currency risk.
In terms of country exposure, Nigeria, Kenya and Egypt are the big three with interest also in Mauritius. One exception is Prescient, which has about 10% invested in Morocco, with Maroc Telecom a top 10 holding.
In a fund report, Allan Gray’s Andrew Lapping says African markets have generally done well over the past year and there is no market that stands out as an outlier in terms of value.
“The only possible exception is Zimbabwe, which is still generally cheap, but even this market has done well of late.”
In sector terms, most funds have their biggest exposures to financial stocks, followed by consumer companies. Imara is the one fund that has a higher exposure to consumers at 43% against 33% in financials.
Banks are always popular in Africa because, apart from the potential earnings growth in banks themselves, they provide access to some of the fast-growing African economies where, in many cases, listed companies are tightly held and liquidity is low. In a developing market, as business activity increases and companies grow, banks grow with them.
“Financial companies are usually among the largest companies and the first to list; they understand the machinations of finance and there is low market penetration so they have potential to grow,” says Stanlib’s Humphrey Gathungu.
In the long term, though, the consumer sector offers exciting potential and is driving the Africa growth story, given rapid urbanisation and a growing middle class in many markets. Mishnah Seth,
Momentum’s head of frontier strategies, outlines why. “Africa is the world’s most youthful continent, with more than 200m people aged between 15 and 25.
Furthermore, it is expected that by 2035 the continent will have the world’s largest workforce. A key investment theme for the continent therefore is increasing consumption expenditure underpinned by a growing middle class and favourable demographics.”
However, she says in the key markets of Egypt, Nigeria and Kenya, consumers are coming under pressure, reflected by tight disposable incomes in Nigeria and Kenya and decreasing savings levels in Egypt. — Business Day
Online Reporter