This article was first published in the third-quarter 2012 edition of Personal Finance magazine.
Individual South African investors who want exposure to the good returns that are expected from African equity and other markets still have relatively little choice of investments.
Asset managers that have launched African equity unit trust funds mostly offer these funds to institutional investors or the funds have very high minimum investment amounts.
Momentum’s rand-denominated Africa Equity Fund is available to individuals through its linked-investment services provider platform. The minimum investment is R100 000.
Prescient’s rand-denominated Africa Equity Fund is available to individual investors who have a minimum of R10 000 to invest.
Eric Kibe, manager of Sanlam’s Dublin-based African Frontier Markets Fund, which is available only to institutional investors, says retail investment flows are more volatile during periods of instability. This may unduly prejudice investment strategy and necessitate a shorter-term horizon than is optimal.
Jonathan Kruger, manager of the Prescient Africa Equity Fund, says trading costs in African equity markets are high, and although it may not be efficient to have money flowing in and out of the portfolio too frequently, cash flows can help a fund manager to buy a share without necessarily selling another one to finance it, and vice versa. This dynamic can in fact reduce portfolio turnover.
Humphrey Gathungu, who co-manages the rand-denominated Stanlib Africa Equity Fund, which is also available only to institutional investors, says few African funds are available to retail investors because the costs of running funds that invest in under-researched areas such as Africa are high.
Investec has a rand-denominated Africa Fund for institutional investors only, with a minimum investment of R50 million.
Coronation’s Africa Frontiers Fund is a United States dollar-denominated fund listed on the Irish Stock Exchange. The minimum investment amount is 100 000 euros.
You may find offshore funds that invest in Africa that are open to individual investors, but none of them is among the offshore funds that are registered with the Financial Services Board (FSB) as funds suitable for local investors.
For example, Imara Asset Management, part of the Botswana-based Imara Group, has a number of African funds: an African Opportunities Fund – with a 25-percent exposure to South Africa – a Nigeria Fund, a Zimbabwe Fund, an East Africa Fund and an African Resources Fund. They are companies, and the African Opportunities Fund is an open-ended investment listed on the Irish Stock Exchange. The minimum investment amounts are high – US$100 000 for each fund or combined into more than one fund.
There are two index-tracking products available to retail investors who want exposure to Africa – both are exchange traded notes (ETNs) listed on the JSE.
As with exchange traded funds (ETFs), ETNs offer you low-cost exposure to indices, baskets of equities, bonds, currencies, commodities or other financial assets. The main difference between an ETF and an ETN is that an ETF actually invests in the underlying shares, whereas an ETN may not always do so. An ETN is more like a debt or a bond. The issuer in return promises to give you a return that replicates that of a basket of shares, an index or even a commodity and may or may not invest in those underlying shares or commodities.
One of the two index-trackers for retail investors, the Deutsche Bank MSCI Africa Top 50 Capped Total Return ETN, offers you the performance of 49 companies listed in four African countries.
The ETN includes an exposure of 55 percent to the JSE, making it less useful if you, as a South African investor, already have a large exposure to local assets.
Apart from shares on the JSE, the performance of the Deutsche Bank ETN is based on exposure to shares in other countries – 18 percent to Morocco, 18 percent to Egypt and nine percent to Nigeria.
The Standard Bank Africa Equity Total Return ETN provides the performance of an index that covers 179 companies from 29 different African countries, excluding South Africa. The index shares are listed on either African or international stock markets.
The Standard Bank ETN has an exposure of 37 percent to sub-Saharan Africa, 23 percent to North Africa and 40 percent to shares with exposure to Africa on international stock exchanges.
Both the Standard Bank and the Deutsche Bank Africa ETNs are capped indices and reduce concentration risk by limiting their exposure to any single security. The Deutsche Bank ETN caps the exposure to a particular share at below 10 percent, while the Standard Bank product caps any share at five percent of the ETN’s portfolio. Both ETNs reinvest any dividends and other income received to provide a total return product. The Deutsche Bank ETN has a total expense ratio of 0.85 percent, while the Standard Bank product charges an annual management fee of one percent, according to etfSA.
Both ETNs are registered as “inward-listed securities”, so investing in them will not affect your foreign exchange allowance or your foreign investment limits.
The Africa ETNs can be purchased through a stockbroker who is a member of the JSE or an ETF transaction platform, such as the etfSA investor scheme.
The notes are both relatively new and had not yet achieved a one-year performance track record at the time of writing.
Dibanisa Fund Managers, the index-tracking subsidiary in the Old Mutual Group, recently launched an offshore African index-tracking fund, but this is currently only for institutional investors. The manager says it will consider offering it as a unit trust as well should there be sufficient demand.
Investors can use their offshore allowance to invest directly in shares on African stock exchanges. A number of stockbrokers – including African Alliance, Imara Securities, Securities Africa, Morgan Stanley, Standard Bank and Renaissance Capital – can put together such portfolios for you.
Imara is a Botswana-listed investment banking and asset management group that has been investing in African markets for the past 20 years. Imara Securities has a South African-based African securities desk. Simon Reid, who heads Imara Africa Securities, says Imara can put together a diversified African portfolio for investors who have from R30 000 to invest.
He says some African shares are illiquid, but portfolios can generally be structured within days to suit your individual needs and risk profile. For example, you may want to achieve growth or income, or you may want to be exposed to value shares or resources shares, or you may want exposure to specific shares.
Portfolios can be run by Imara on a full-discretion basis, where the company decides what shares to hold, or you can instruct the company to buy certain shares for you.
Reid says the advantage of having a portfolio of shares over an index-tracking product is that you can access any share on any African market, whereas an index will include shares only on the basis of their market capitalisation.
A share such as Zambeef is a proxy for a country experiencing a massive boom but is unlikely to be included in an ETF, Reid says. Zambeef is an agricultural business involved in producing, processing, distributing and retailing beef, chicken and dairy products, and is listed in both Zambia and London.
To invest in a portfolio of shares, you will need to open an account with a stockbroker and pay brokerage and other costs on each transaction. If the broker selects shares on your behalf, you will pay an annual management fee.
Another way to gain exposure to African shares without having to use your offshore investment allowance is to invest in African companies that dual-list on the JSE. Unfortunately, few African shares have taken up the opportunity to list on the JSE.
In 2009, the JSE launched an African board to encourage African companies to list on the local exchange, but earlier this year the JSE announced it would close this platform because it had managed to attract only two companies: Botswana’s Wilderness Holdings, an ecotourism company, and Trustco Group Holdings, a Namibia-based micro-insurance and micro-finance company. The two companies migrated to the JSE’s main board in May this year.
When the closure of the African board was announced, Siobhan Cleary, director of strategy and public policy at the JSE, said companies perceived the African board as less visible than the main board.
Imara Securities says the African board’s timing was wrong, because it started just before the global financial crisis, when appetite for listings was very low, and it may have been ahead of its time.
In addition to Wilderness Holdings and Trustco, the JSE has the following dual-listed African shares: Cafca, in the electronic and electrical sector, and Hwange Colliery, in coal, both of which are also listed on the Zimbabwe Stock Exchange; Delrand Resources, in diamonds and gem-stones, which is also listed on the Toronto Stock Exchange; Nictus, in general retail, which is also listed in Namibia; Oando, in the oil and gas sector, which is also listed on the Nigerian Stock Exchange; Tawana Resources, in diamonds and gem-stones, which is also listed in Australia; and ZCI in non-ferrous metal, which is also listed on the Zambian Stock Exchange.
On the AltX board, there are three companies in the mining industry that are also listed on the London Stock Exchange: African Eagle Resources, Kibomining and Lonrho.
Some South African companies listed on the JSE also offer you exposure to African markets – notably MTN, Shoprite and Standard Bank, but Reid says the South African earnings of these companies dwarf those of their African operations.
After reading the case for investing in Africa, you may be hoping that your retirement fund has some exposure to African markets, but you may be disappointed, because fund managers say that most retirement funds have been slow to take up investments in Africa.
Changes to the prudential investment guidelines for retirement funds, by way of amendments to regulation 28 of the Pension Funds Act, have enabled retirement funds to invest up to 20 percent offshore and an additional five percent in African markets.
Few funds are using these additional limits.
Fungai Tarirah, head of Africa investments at Momentum Asset Managers, believes retirement funds will eventually come round, but they should not wait too long, because shares prices will not stay as low as they are now.
Thabo Ncalo, who co-manages the Stanlib Africa Equity Fund, says Stanlib has an emerging markets property fund and is launching an African fixed-income fund. The fixed-income markets in Africa have been very bullish, whereas the equity markets have been quite sleepy, he says, and retirement funds may be more keen to invest in African markets when they can do so through a balanced (or asset allocation) offering that diversifies across equities, fixed income and property.
Investec Africa Fund manager Roelof Horne says institutional investors that have placed portfolios with balanced mandates with Investec have about 2.5 percent of their portfolios in Africa.
Whether or not this is enough is a question of how the portfolio should be constructed, he says. Trustees need to consider how much their fund should be invested in emerging markets, frontier markets and developed markets, he says.
Eric Kibe, manager of Sanlam’s African Frontier Markets Fund, says there is a plethora of new Africa funds, with a myriad of strategies. It may take some time for retirement funds to distinguish what the different propositions offer, he says.
SUITABILITY OF INDEX-TRACKERS
Index-trackers are less effective in African markets than in bigger, more efficient markets where the cost differences are material, managers of actively managed African funds say.
Fungai Tarirah, head of Africa investments at Momentum Asset Managers, says the costs of exchange traded funds (ETFs) may be lower than those of active fund managers, but you need a good manager to pick undiscovered shares in frontier markets that will earn you outsize returns.
Although shares can at times be unbelievably undervalued, they can also at times be horribly overvalued, and a good fund manager can avoid the pitfalls while capitalising on the huge opportunities, Tarirah says. An ETF would not have been able to avoid the impact of the Nigerian bank crisis, he says.
He says 80 percent of the return in the Momentum Africa Equity Fund is a result of stockpicking.
Thabo Ncalo, who co-manages the Stanlib Africa Equity Fund, says the ETFs for Africa are not popular because the benchmarks are quite imperfect.
Investec Africa Fund manager Roelof Horne says if you invest in ETFs, you must understand in what you are investing and pick the ETF carefully.
For example, an ETF may have 55-percent exposure to resources or a 70-percent exposure to Nigerian markets, and if either resources or the Nigerian market falls sharply, your investment will, too.
IS AFRICA THE RIGHT INVESTMENT FOR YOU?
If you want to invest in Africa, you need to have a long investment horizon and you must understand the risks, fund managers say.
Eric Kibe, portfolio manager of the Sanlam African Frontier Markets Fund, says investors need to have patience while equity markets develop and deepen, and this slowly reflects in share prices. He also suggests you may need some unlisted investments in Africa to make the most of the opportunities suggested by the positive economic fundamentals.
Prescient Africa Equity Fund manager Jonathan Kruger says investors must be able to tolerate short- and medium-term volatility and have an investment horizon of no less than five years.
Stanlib Africa Equity co-fund manager Humphrey Gathungu agrees, saying the business cycle is longer in Africa. It is only now that Africa is improving its infrastructure, the cost of doing business is still high, and it is difficult to obtain the data you require to do business in Africa, he explains.
Investec’s Roelof Horne says you must make a conscious decision to allocate to Africa, and you should understand the region. You must also realise that African markets are still illiquid and investors may need to give notice periods before withdrawing, he says.
Investors brave enough to venture into the African frontier are likely to enjoy diversification benefits, etfSA chief executive Mike Brown says.
While the performance of South African equity market indices have a relatively high correlation with equity market returns in Europe, the United States and Asia (0.7 to 0.8 where 1.0 is a perfect correlation), the correlation between South Africa and the rest of Africa is only 0.3, Brown says.
THE AFRICAN INVESTMENT UNIVERSE
There are 880 stocks on African stock exchanges other than South Africa’s JSE, Fungai Tarirah, head of Africa investments at Momentum Asset Managers, says. The market capitalisation of these stocks is US$240 billion, compared with South Africa’s US$884 billion (as at April 2012).
Momentum chooses the African stocks in which it invests from a universe of just 92 shares, Tarirah says. It excludes all shares with a market capitalisation of less than $100 million, because these shares are too illiquid. These 92 shares make up 58 percent of the total market capitalisation of the African market, Tarirah says.
Although there are 53 African countries other than South Africa, most African funds are concentrated in just a few of these countries where stock exchanges are better developed. Typically, these markets include Botswana, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, Senegal, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.
As is the case with emerging market funds, many African funds include the shares of companies listed in developed markets where these companies have a high exposure to Africa through operations, profits or turnover.
Roelof Horne, who manages Investec’s Africa Fund, says resources companies that do significant business in Africa rarely list on the continent and prefer the Australian, Canadian and London stock exchanges, where mining shares are better understood.
Sanlam’s African Frontier Markets Fund is one exception, choosing to invest only in equities listed on African exchanges.
Fund manager Eric Kibe says the fund does not invest in shares listed on other exchanges, because this may result in unintended exposure to markets in which an investor is already invested.
Internationally listed stocks move in line with their own markets and therefore do not necessarily display the lower correlations to global markets that do African stocks, Kibe says.