Around the Institute

Africa pure plays emerging for retail audience

January 23, 2011  • Deborah Nason

As posted by InvestmentNews

January 23, 2011

Africa is emerging as the last great investment frontier, described by the press as a “gold rush” and a “bonanza.”

Growing investor interest and the evolution of the region’s financial infrastructure have resulted in more investment vehicles available to retail investors — as seen by the launch last year of the first two pure-play African mutual funds in the United States.

“Flows were positive into Africa regional funds for 72 of the past 75 weeks, which dovetailed with an era of political and economic reform in Africa, strong investments by China and a spike in the GDP growth rates of a number of African [countries],” said Brad Durham, managing director of EPFR Global.

Interest in Africa began to rise in about 2007 as global investors discovered frontier markets, he said.

“We’ve reached a tipping point to make [a retail mutual] fund viable due to improved liquidity and the technology now used by the local exchanges,” said Larry Seruma, founder of the new Nile Pan Africa Fund (NAFAX), which was launched last April. By Dec. 31, NAFAX had risen 23.3%.

“There has been a big change [in Africa] since 2000 — when there were 10 stock markets — to now, when there are 23,” he said.

Mr. Seruma, a Uganda native and longtime international portfolio manager, travels frequently to Northern and sub-Saharan Africa, working with local contacts to evaluate countries in terms of their economic growth, political stability and regulatory environment. The strongest areas for investment are in commodities, consumer products and services, and infrastructure, he said.

“I am absolutely sick and tired of the amount of ignorance and bias about investing in Africa,” said Joseph Wambia, a Kenyan who founded of Global Africa Funds, which comprise four funds focusing on equities, infrastructure, income and natural resources.

From its inception Aug. 3 to year-end, the GAEAX fund realized a non-annualized yield of 6.3%.

“Many people are concerned about a lack of liquidity, but it can be a plus because it limits panic selling and buying,” Mr. Wambia said.

A different mindset is necessary for African investment success, he said.

“Western business strategy is top-down and says, “Where are the people who will buy my product?’ But there’s a kind of an [economic] revolution taking place in Africa, where the opportunity is bottom-up; markets are being created,” Mr. Wambia said.

Consumer spending will be a significant economic driver, as Africa, with its billion-plus population, already has more middle-class households than India, according to McKinsey & Co.

Mr. Wambia, who spent nearly 30 years as an international-finance specialist with the World Bank, places an emphasis on investor education, offering his clients access to discounts, and high-level invitation-only conferences and educational events related to the African economic climate.

“I am very excited about the focus on Africa, and these new vehicles are allowing the common investor access to this emerging market,” said Grace Wellwerts, president of Rocky Mountain Planning Group Inc. “They could be very promising.”

Ms. Wellwerts advises, however, that investors proceed with caution.

“When you’re in a very difficult market, you tend to go for a manager that provides more alpha. However, there’s not enough history with these funds to apply any analysis — plus there are high redemption fees and extended redemption periods, along with liquidity issues, to consider,” Mr. Wellwerts said.

Socially focused entities could play an important role in creating opportunities for retail exposure to Africa.

“Growing the Africa portfolio is a priority for us,” said Eliza Erikson, interim chief lending officer for the Calvert Foundation.

“We have 9% of our portfolio in Africa, which we’ve increased mostly over the past two years. We are primarily supporting microfinance and agriculture in sub-Saharan countries,” she said.

Calvert’s Community Investment Notes have been invested in Africa since 1999.

The Calvert Foundation and Hewlett Foundation recently helped fund the TransFarm Africa Investment Fund, a pilot private-equity venture with a mission to combine private investment and best practices to develop a mid-cap agricultural industry within identified “development corridors” throughout Africa.

One of TransFarm’s ultimate goals is to create an avenue for a broad range of investors to support the guided growth of African agriculture, hobbled by underutilized land and inadequate infrastructure. The organization sees both global and domestic food demand as a tremendous market opportunity.

“America is not present in African agriculture in the form of large or small [investors]. We need to bring them in some way,” said Kurt Hoffman, director of TransFarm Africa.

“We envisage TransFarm to be that platform [eventually]. We believe that as the [African agricultural] market develops, the returns available will be sufficient to attract the retail investor,” Mr. Hoffman said.

It may be a while before new investment vehicles in Africa reach acceptance, but they are beginning to show up on retail advisers’ radar screens. “It’s understandably expensive to run new mutual funds like these, and I don’t know if the returns justify the expense yet — but I’m interested and I plan to keep track of them,” Ms. Wellwerts said.