New research from Cape Town based Novare Investments paints an encouraging picture of the investment talent at work in the nascent African markets, providing increasingly sophisticated liquid product offerings for investors.
The report, entitled “Investing in Africa Funds and Managers Survey”, comes amid strong growth in Africa’s financial markets since 2000, as well as improved macroeconomic fundamentals, increased political stability, high commodity prices and robust domestic demand.
“Africa is relatively under-researched which creates exciting investment opportunities including potential investment in often overlooked, well-established companies in markets that are under-exploited,” says Eugene Visagie, risk manager at Novare. “With the assistance of a professional fund manager in these markets, exposure to high-quality companies can be obtained in an optimal portfolio set-up to maximise return and minimise risks for the investor.”
Novare’s report covers 39 funds with total assets under management of US$2.9 billion as at end June 2010. It notes that the emergence of specialised African funds in recent years illustrates increasing investor confidence in these markets on the part of managers and investors.
The data shows a wealth of experienced investment talent at work, despite the early-stage investment opportunity. Almost 80% of the managers surveyed had a track record of at least three years. And while around 30% of funds had a track record shorter than one year, these housed just 3.4% of assets.
A team approach is also common, showing depth of skill – with just 3.9% having one individual responsible for managing their African offering. Just over 26% had a two-person team, while a similar number had a team of three. A full 23% of funds have a team of more than five people dedicated to fund management.
By location, 52.8% of fund advisers representing 55% of assets are based in South Africa, with 25% based in the UK (11.5% of assets). Around 25% of assets are managed from the US and a further 2.6% from Mauritius.
Most funds that participated in the survey are long-only equity funds that invest in African stock markets, with limited investments in South Africa. Companies that are dual listed or listed elsewhere and derive the majority of their income from the continent are often also included in portfolios.
Good news for investors is that the African product offering is becoming more sophisticated, with managers including instruments to control risk and maximise returns. The report notes that funds established more recently tend to have broader mandates that allow gross exposure exceeding 100% (shorting is allowed) as well as the inclusion of other asset classes such as fixed income and currencies.
“Only a few African stock markets allow shorting of instruments, but as more investors enter these markets liquidity and depth should increase which will enable them to facilitate a broader investment universe including the development of a derivatives market,” Visagie said.
Most funds surveyed operate on a 2% annual management fee and 20% performance fee model, the report finds, demonstrating the capital-intensive nature of on-the-ground research in multiple frontier markets.
By trading activity, lower liquidity levels mean that many funds take a long-term view, an important aspect for investors to bear in mind. Around 27% of managers housing 34.6% of assets turn their portfolios by less than half of the fund’s net asset value per year, while more aggressive managers with a turnover of two to three times a year amounted to just 11% with total assets of 1.4%.
Where are managers investing? More than 85% allocated to both Nigeria and Egypt, with 80% investing in Ghana. Three quarters allocated to Kenya and Zimbabwe. Zambia, Mauritius and South Africa are also high on the list, with smaller markets such as Rwanda, Malawi, Mozambique and Senegal included in some portfolios. By actual asset exposure, Nigeria accounted for 26% as at the end of June, followed by Egypt (19.4%) and Zambia (4.9%).
The bulk of capital was in listed equity (86.8%) with 0.1% in listed fixed income, 1.1% in direct currencies and 0.1% in unlisted equity.
The investor base is diverse, the report notes, showing plenty of room for growth. Most of the assets are invested on behalf of long-term insurers and fund of funds (accounting for 26.6% and 25.8% respectively). Direct investments from high-net-worth investors account for 12.6% of assets under management, with direct pension fund investments at 7.8%. South African investors accounted for 38% of assets, with UK investors at 19% and investments from Africa (ex-SA) at 8.9%. Lesser allocations are from Australia (7.7%), North America (3.6%), the Middle East (1.2%) and Asia (0.2%).
“Our research shows that the necessary skills and infrastructure already exist in well-established funds or asset management houses, providing a solid platform for potential investors to access the African markets and reduce overall operational, country or market risk,” Visagie concludes.
The report covers funds invested in financial markets, but Novare notes that there are other African-focused strategies that offer different options for investors, including private equity, commodity trade finance and structured finance funds. Copyright. HedgeNews Africa – October 2010.
View full report here.