Controversial though it may seem, especially in view of recent events in Kenya, asset managers are claiming Africa is ripe for investment. Keren Holland weighs up their claims
Asset managers offering funds to institutional investors agree Africa offers plenty of opportunities to those willing to accept the risks, but say one of the biggest limitations is the small universe of stocks available to invest in.
Dylan Emery, investment marketing director at STANLIB, the US$45bn Johannesburg-based asset management operation of Standard Bank, which this year launched two African equity funds, said currently foreign pension funds were not in Africa to any great degree, but some of the largest funds had started to invest there.
Up until a year or two ago, he explained, pension funds gained exposure to emerging markets by giving their money to a generalist emerging markets manager.
However, regions such as China and India had proved such a good investment story that the bigger funds were now giving money to managers focused solely on individual emerging market countries.
He said: "They have started to buy individual China or India funds, and then, once they do that, they move down to Brazil and Eastern Europe. South Africa comes in at about 8% of the MSCI Emerging Markets Index and Africa at about 1%.
"Where we have seen the interest is from those very big pension funds which have decided to go 'best of breed' right down at the market level and clearly Africa is just about on the radar.
"That pattern is also being followed by some of the fund of fund managers who typically gave emerging markets to a generalist manager, but, because of the popularity of the markets, and in order to be seen to be earning their additional fees, are now going right down the market level and selecting individual managers there."
Hendrik du Toit, chief executive of Investec, said of the 20 biggest pension funds in the world, Investec deployed capital for two of them in Africa.
He said the firm was noticing highly sophisticated funds searching for "exotic" beta. "We think Africa is an interesting source of exotic beta worth pursuing and we have a few of the very large pension funds which have given initial investments," he said.
"Some of the very large funds have spoken to us, but it is almost for them a 'get to know' journey because the amounts of money we are prepared to take at this stage are not large enough to justify a big commitment to that market.
"But we think, as the private equity interest grows, we will be seeing more interest. Private equity and real estate, the illiquid assets, are probably more appropriate to pension funds because they can deploy larger amounts of money."
According to du Toit, some large pension funds are deploying capital in capital-starved regions such as Africa as a way of meeting their environmental, social and governance standards.
He explained: "There is this idea of being a positive influence, and we have had calls from a few large public funds which want to discuss that with us.
"It comes out of their social responsible investing (SRI) budget, but it's not classic SRI, it's looking at how they could channel capital in the right way, earn a good return and, by their mere presence, make an impact."
Nick Beecroft, portfolio specialist at T. Rowe Price, which this year launched a Middle East and Africa fund, said it had also received a positive response from pension funds in Europe.
He said: "Certainly on the continent the big pension funds are expressing some interest in this region. Some of the very large pension funds are already investing in Africa, others are realising they have no exposure and it's potentially a very interesting area for them.
"Undoubtedly it will be a very small allocation, because it is a high risk area, but I think they recognise there is a lot of blue sky growth out there, a lot of potential and it is a great diversifier."
However, investors in Africa do face increased risks, the biggest being political, according to Beecroft.
He explained: "South Africa is a very big economy and a very big market and there are elections coming up there.
"More broadly across the rest of Africa, we are moving from a period where we have some potentially undemocratic nations and potentially we are seeing very early stage democracies in some of these areas.
"But these are emerging democracies so always we think that political risk is very high."
That this is true was evidenced by the troubles that broke out in Kenya - supposedly one of the more politically stable countries on the continent - following elections in December 2007.
But Beecroft said pension trustees had the ability to delegate the risk to funds which only invested in companies able to make it through their thorough screenings.
He said: "We take a very close look at the companies we invest in and the countries we invest in, we have some pretty rigorous screens that we have to get past before our internal compliance and risk management committees will let us open in these markets."
Cynthia Steer, managing director and chief research strategist at RogersCasey, said one of the biggest barriers to investing in Africa was concern about the continent's stability, as many investors had little exposure to the region apart from images such as those coming out of Darfur.
She said: "There is a tremendous amount of misperception about the risks and not very much knowledge about the strides that have been made in governance, market capitalisations and opportunities.
"In fact, the risk is enormously lower than some would think. Particularly if you are a North American investor, you tend to correlate Africa with Darfur.
"What 2008 is going to be all about is understanding that this is no longer the case, and that a thoughtful asset allocation in Africa, which would include private equity, infrastructure and real estate, is going to be well worth the time that committees spend educating themselves."
Another issue is the size of the markets, which restricts the investments that can be made. Beecroft explained: "If you are taking a pretty broad approach to investing in Africa, which we are not yet doing, you are looking at investing in some pretty small companies, and are almost getting into private equity type investment.
"That's a pretty high risk strategy so our approach is to be very selective in the investments we make in Africa, we are not going to be looking at those very small companies, we are looking at much larger stocks and will be quite selective about taking those."
Emery at STANLIB said while there were about 1200 companies listed in Africa, excluding South Africa, once the firm applied its filter, stripping out companies such as those with foreign ownership restrictions and tradability issues, it was left with a universe of only about 200 stocks to choose from.
He estimated the amount currently invested by foreign investment funds was around US$1bn to $2bn. He said: "We feel that could probably be multiplied by two but once we get to that level, it's going to be quite difficult."
However, Emery said the situation was improving, with some big IPOs coming out of countries such as Nigeria and Kenya.
In the meantime, pension funds are gaining some exposure to Africa through emerging market funds which invest globally.
Martin Currie has not followed other fund management firms in launching a specific Africa fund, but does invest in South Africa.
Andrew Mathewson, investment manager on the team, said the reason for this was the best opportunities in emerging markets still laid elsewhere.
He said while Martin Currie continued to speak to companies in Africa and look at opportunities there, it did not have room in the fund for companies where it did not have high conviction.
He said: "At the moment, the reality for emerging market funds is that the emerging markets index does not have much Africa exposure outside South Africa.
"That is one reason why there is less interest. We would be willing to invest to some extent off index, but so far we haven't found attractive investments.
"For us, the fundamentals of the company have to stack up. So far the valuations of companies that we have come across, which are mostly in Nigeria where the biggest opportunities are, are not as attractive as the rest of the emerging markets.
"The growth isn't so attractive and the risk is higher versus some other emerging markets, and yet the valuations are higher."
However, despite the barriers to entry, and the limited investment opportunities, those already there remain upbeat about its future.
Du Toit of Investec believes the continent will eventually form a key part of a new frontier markets asset class, separate from emerging markets, which will include current no-go areas in Asia, Russia and Latin America.
He said: "We are keen to establish a presence across more frontier markets than just Africa. We think if we can operate in the ultimate frontier, many of the other ones will be easier."
Steer of Rogerscasey added: "My feeling is that within three years, Africa will be a staple of emerging market investing."
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