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Getting exposure to Africa’s riches

Oct 07 2011 09:00
Nearly a third of the world’s largest public companies by market capitalisation are now based in rapid growth markets, according to recent research by global consulting firm Ernst & Young.

The focus until now has been mainly on Brazil, Russia, India and China (the BRIC countries). However, Africa is also being tipped for bigger and better things.

Ernst & Young estimates that the continent will see more than US$150bn in foreign capital inflows by the year 2015. This, it says, will be achieved despite attracting only around 5% of global foreign direct investment project revenue.

“The demand for investing in Africa has visibly increased over the past few years,” observes Jonathan Kruger, Portfolio Manager of the Prescient Africa Equity Fund. “The situation in Africa has improved significantly during the past decade or two, despite the severe political and others risks prevalent in some regions.”

As a precursor to launching its Africa Equity Fund, Prescient, the Cape Town-based investment house, spent three years investigating challenges and prospects. Biggest pluses, it found, include growing populations, improved living standards and better education.

Growth of the middle class is furthermore on a roll, opening up new market opportunities. One example has been the exponential growth in disposable income and demand for luxury goods in Nigeria.

Africa is also becoming more tech-savvy than many investors may appreciate. Currently, Kenya boasts cheaper and faster Internet access than South Africa. The reduced lag in technological developments has opened the door to business and economic opportunities.

Growth emphasis in several North African countries is manifested in consumer companies, finance, services, telecoms, chemicals, fertiliser and construction. Higher oil prices meanwhile have boosted growth in oil-producing countries, with often considerable revenue directed to new infrastructure.

The establishment of think-tanks and quasi-academic organisations over the past decade has helped fuel positive political debate and greater economic liberalisation.

Economically, Africa is currently performing better than it has done historically and in recent years it has notched up some of the best stock market performances globally.

The Prescient Africa Equity Fund is a South African domiciled unit trust priced in rands. It gives investors the opportunity to invest in equities outside of South Africa on the African continent. The benchmark comprises 90% MSCI Emerging and Frontier Markets Africa ex South Africa index and 10% US Dollar Treasury Bills.

The Fund’s managers have identified the biggest and most liquid African markets to invest in, which include Nigeria, Kenya, Mauritius, Egypt, Morocco and Tunisia.

The fund’s underlying strategy corresponds with Prescient’s quantitative philosophy, aimed at generating superior performance relative to the benchmark in a structured way. The selection process targets those equities that offer the best value. Prescient calls this price indifferent indexation (PII). Other differentiated factors are then blended with the PII core to reduce the overall volatility of the portfolio.

Kruger does extensive research in Africa. “Different countries have different accounting standards, and considerable effort has to be put in by Prescient’s researchers to scrutinise the numbers and ensure that they are correct.”

As stated elsewhere in this survey, Kruger points to Prescient being an investment house that refrains from engaging in market forecasts. Rather, it uses financial statements, price, yield, market volatility and other factors to construct portfolios able to deliver outperformance over time.

The philosophy and process used in the Africa Equity Fund are not new. Rather Prescient has been managing money in this manner since the end of 2006. The Prescient Equity Active Quant Fund is a unit trust that invests in the South African equity market. Adriaan van Niekerk, the Portfolio Manager says: “Our aim was to develop a fund that delivers consistent outperformance of the benchmark. The quantitative process takes forecast risk out of investing and we believe this has delivered more certain results.”

Van Niekerk says: “We spent time to find those factors that work locally. We wanted to have a portfolio that’s not style dependent and hence tested different factors and blending techniques until we found the solution. The core of the portfolio is price indifferent indexation, where we focus on finding value. As value can be out of favour in the market, we have added two other factors to ensure that out-performance is stable over all market cycles.”

Van Niekerk adds that the Fund is designed to deliver consistent outperformance. It is an ideal core portfolio. Blending the Prescient Equity Active Quant Fund with other portfolios generally result in a reduction of overall risk.
 
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