Africa is the final frontier for the bold and patient investor
Some respected fund managers expect big results from this rapidly growing region. By Emma Dunkley
Saturday 01 June 2013
Africa has supposedly been the next big thing for investors for the past decade but each time promise has been followed by grave disappointment. This time, however, against a backdrop of global stockmarkets surging ahead, many respected voices say that Africa could well deliver big for those willing to take the inevitable risk.
"Africa is an area of particular interest to me right now," says Dr Mark Mobius, the doyen of emerging market investment and long-standing fund manager at Franklin Templeton. "Africa is a very fast-growing region—from 2001 to 2010, six out of 10 of the fastest-growing countries in the world were in Africa. So we are very excited by the growth prospects in those countries."
Unlike China, Russia and other large 'emerging' countries, most parts of Africa are dubbed 'frontier' markets and are considered their smaller, less developed cousins. And with this comes the possibility of rapid expansion and the chance of reaping much higher returns.
"I view frontier markets as having tremendous potential for long-term investors, if — and this is a big 'if'— you are able to be patient and show some perseverance," says Dr Mobius. "Just a few decades ago, China and India were considered frontier markets, and when I began my investment career Japan was considered an emerging market."
With a wealth of oil, natural reserves and vast amounts of land for agriculture, the continent will likely play a greater role in providing for growing global consumption, especially as other emerging markets start to mature and make greater demands. More than half of the region's population is aged under 20, with predictions that in less than three decades Africa will have a larger working age population than China.
"Investors are always looking for the next big investment idea or sector where they can make their fortune and with the huge quantity of natural resources and excellent demographic numbers, investing in Africa can seem very appealing," says Patrick Connolly of AWD Chase de Vere.
And alongside this untapped potential, the continent is opening up to more foreign investment money. At the end of last year, Moody's assigned first-time public credit ratings to Keyna, Nigeria and Zambia, on the back of growing demand from investors for insight on sovereign creditworthiness. But be warned that even though the continent has come a long way, investing in Africa is not for the faint-hearted. While the gains could be hefty, you could experience a rocky ride or get hit with large losses in a short space of time.
"As the African market is not as developed and there are not as many investors, it could be difficult to sell out at a reasonable price in times of crisis and pressure," says Adrian Lowcock of Hargreaves Lansdown. "This is not for you if you need to access your money quickly; you would need to invest in Africa for the long-term – around 10 years or more."
Indeed, the problems with buying and selling shares in this market is a serious issue that forced the closure of the New Star Heart of Africa fund in 2009 — barely a year after its launch, says Mr Connolly. The problem also means the few Africa-specific funds available largely invest in South Africa, Nigeria ad Kenya, missing out on other countries.
"The JPM Africa Equity fund, for example, has 89 per cent invested in South Africa, Nigeria and Kenya, while the Neptune Africa fund has 81 per cent in South Africa and Nigeria, with the bulk of the rest being invested in the UK or held in cash," says Mr Connolly.
The questions you should ask, then, are how much of your portfolio should you allocate to these countries. And when money does rush into Africa, how much worse will the issue of buying and selling shares in this market get?
"These are real concerns and because of them we have no direct exposure to African equities in our clients' portfolios," says Mr Connolly. "Investing in Africa should only be considered by investors who fully understand and accept the high risks involved and, even then, for only a very small part of their portfolio."
In order to benefit from the compelling Africa growth story, though, without having to take on the risks involved with buying local companies that don't necessarily have the same corporate governance standards, you can buy a broader emerging markets fund that has some exposure to the continent or invest in a fund with Western companies that have activities in Africa.
"For most investors who may be better off investing in a more generalist fund, I like Fidelity EMEA managed by Nick Price," says Darius McDermott, managing director of Chelsea Financial Services. "Almost half (47 per cent) of this fund is invested in South Africa but there is a decent proportion in Nigeria (9 per cent) and some in Kenya (3 per cent). Nick is a very experienced manager with a good track record in this asset class."
Similarly, Gavin Haynes at Whitechurch Securities suggests opting for a broader fund that gives you access to Africa, but alongside other countries so you are not putting all your eggs in one basket. "I would prefer a frontier markets fund which can provide you with exposure to Africa as part of a wider remit. I recommend the Franklin Templeton Frontier Markets fund, managed by the highly experienced Dr Mobius, although this fund is going to be closed to new investors at the end of June."
You can also gain wider access to Africa by investing in themes, not just regions. Mr Lowcock suggests the JM Finn Global Opportunities fund, which is based on the global theme of rising urbanisation and industrialisation.
"For the majority of people, I would say go for a broader fund," says Mr Lowcock. "A manager who can be flexible and make investment decisions and move in and out as they see fit, rather than Africa-specific, which is much higher risk. The JM Finn fund has around 13 per cent in Africa and the Middle East, so this would be my tip."
So while Africa is on course to see some stellar growth rates and could play a small role in spicing up your investment portfolio, this region is higher risk than many others. It is, after all, the final frontier where few have boldly gone before.
Emma Dunkley is a reporter at citywire.co.uk
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