Africa still scares fund managers
Even for pension funds.
But despite the overwhelming prospects, the age-old fear of the unknown prevails and money managers are not ready to make the jump.
Speaking this week at a conference on Africa and hedge funds, Ayo Salami, chief investment officer of Duet Africa at Duet Asset Management based in London, said the African investment story was about structural reform and the emerging middle class, not commodities.
Since the collapse of Lehman Brothers in the United States in September 2008, the G7 markets and the larger emerging markets have recovered their losses, but Africa and other frontier markets have yet to recover.
But, Salami said, it was good news considering that corporate earnings were growing as fast on the African stock markets. "African equities are cheap relative to their fundamental value," he said.
"There are few places to get low p/e [price-to-earnings ratio] stocks with double-digit earnings growth … If you missed the first bite of the cherry between 2000 and 2008, you have a chance to get it again."
Salami said the return to those who invested in Africa over the past decade was 8% a year. "With compound interest over 10 years, you've doubled your money."
However, the perception that investing in Africa is a risky endeavour remains the biggest challenge. A panel discussion with representatives involved in government and union pension funds illustrated that some in South Africa were not yet biting, despite relaxed regulations allowing a further 5% investment in Africa.
Mojo Ngubeni, benefits co-ordinator of the National Union of Mineworkers, said member trustees were worried about the risk and investing in Africa therefore did not "feature much in our discussions".
On the other hand, the Government Employees' Pension Fund has invested in Africa, according to its deputy chairperson, Prabir Badal.
Salami said although pension fund managers abroad were often hesitant to invest fund money in Africa, they would invest their personal funds.
"That's the first hurdle to get an investor over … But it is no more risky than investing in any other emerging market."
He said the returns were not at the cost of volatility, at least not in sub-Saharan Africa where the standard deviation was no different from any other emerging market.
Kryptonite for risk
"In fact," Salami said, "Africa is the kryptonite for risk – it derisks your portfolio – as you still have uncorrelated markets and returns.
"Africa is not a poor country. Poor management in the past has been its issue," he said.
Emile du Toit of Harith Fund Managers, which is at the forefront of the African investment story and manages the Pan-African Infrastructure Development Fund, said people could not ignore the Arab Spring – a wave of revolutions and protests that made its way across the Arab nations at the end of 2010 – but, "as long-term investors, we see that as highly positive". The revolutions were likely to lead to higher economic growth in future, he said.
Jarred Glansbeek, chief executive of RisCura, said there were several institutions monitoring and auditing governance on the continent. One negative aspect, however, was the high cost of trading, even though some countries, such as Namibia, had legislated costs. In general, though, these costs appeared to be coming down.
Glansbeek added that the opportunities related to the development of infrastructure were "phenomenal".
"You are going to buy into Africa … you will invest in it," Salami said. "But do you go in when the p/e is seven, or when it is 20?"