From 2014 through 2016, as little as $75million in stock was traded per day across the continent. An efficient fund manager could have participated in 5% of that daily trade; about a $4m maximum in trades a day.
This limitation was more relevant for larger funds of $1billion. In reality, the fund managers were only physically able to trade 0.5% of their funds per day. As a result, it could take anywhere between 200 and 300 days to rotate or liquidate an entire fund.
Considering this risk, it’s startling to note that most listed equity funds operating in Africa today still have redemption terms shorter than fortnightly and, in many cases, daily. The risk of investing in a fund with anything less than quarterly liquidity is significant.
Over time, benchmark-cognisant managers tend to run portfolios that resemble the MSCI Africa; the 35 largest and most liquid stocks out of a universe of over 1200. And so closet index managers tend to underperform their peers, often markedly, since Africa investing is very much a stock-picker’s paradise.
Seasoned African listed equity fund managers not only limit the capacity of their funds and have longer redemption and subscription terms, but also broaden the scope of their mandate beyond the “investable” benchmark-cognisant universe.
Fund managers not focused on investing with liquidity as a primary priority, have more scope to find the best investment opportunities available in Africa.
Across African markets, there is a significant discrepancy between the stocks listed on the market and those actually accessible to investors. Furthermore, the listed African markets are not a true reflection of strong underlying growth in those economies. Investors therefore need to widen their net to capture the wider growth opportunities available.
The International Finance Corporation estimates the credit gap for small and medium-sized enterprises (SMEs) in Sub-Saharan Africa is $90billion per annum.
This opportunity is due to the lack of finance on offer from local and international banks. By investing in African private credit, and without taking on excessive risk, investors are able to achieve US dollar returns in excess of Libor plus 7% a year.
What does an allocation to Africa executed in this way bring to an institutional investor’s portfolio?
African listed equities (unconstrained) and African private credit have negative and zero correlations relative to the traditional assets. This has led to their inclusion into African portfolios with the aim of improving diversification and efficiency of overall portfolios.
Investors traditionally focused on infrastructure when driven by the potential impact an investment could make, but more investors are identifying the critical credit funding gap as an equally noble cause.
With this in mind, it is essential to support the growth of Africa’s capital markets and to broaden the financial inclusion of Africa’s citizens.
Todd Micklethwaite is a member of the client solutions and research team at Sanlam Investments.