3 Frontier Africa Funds for South African Investors

Last week we counted down the ten best African stocks of 2012. There were some eye-popping performances on that list.

This came as no surprise to those of you who have been following the performance of African stock markets. Nigerian investors saw their market rise 55% in dollar-adjusted terms over the past 12 months. The Nairobi Stock Exchange soared 54%. And Zimbabwean stocks jumped 32%.

In light of these gains, many of you have asked whether there are African mutual funds that will allow you to simply and easily direct a portion of your investment portfolio toward these markets.

I compiled a list of 11 Africa-focused mutual funds for U.S. investors in November, but they are less targeted than I would prefer.

Some, like the Nile Pan Africa Fund, do a respectable job of investing in sub-Saharan Africa’s fastest-growing economies, but most invest far less than half of their assets in rapidly-rising nations like Nigeria and Kenya, choosing to invest in more developed and accessible markets like Egypt and the Johannesburg Stock Exchange instead.

So, short of investing directly in Lagos or Nairobi, U.S. investors’ frontier Africa options are less than ideal.

South African Funds in the African Frontier

If you are South African, however, you have a few more options. Citizens of the Rainbow Nation currently have at least three frontier Africa-focused investment vehicles available to them.

Here’s a brief profile on each of them with one-year return figures compiled by Riscura Consulting.

Momentum Africa Equity Fund
Momentum Africa Equity Fund
Fund Size:$23.9 million
One-Year Return (net of fees):+29.6%
Total Expense Ratio:2.5%

This is the largest frontier Africa mutual fund (known locally as a unit trust) domiciled in South Africa. Portfolio manager Fungai Tarirah employs a bottom-up approach to stock-picking and screens out all but the continent’s most liquid names. This approach served his investors well over the past three years. During this time, the fund outperformed its benchmark by an average of 500 basis points per year.

Photo by Sean Garrett

As of the fund’s most recent report at the end of November, Tarirah had allocated 71% of assets to frontier sub-Saharan markets. The remainder he invested in Egyptian and Moroccan stocks.

His biggest wagers are on Nigerian and Kenyan stocks, which he awards a 38% and 24% weight, respectively.

As of September 30, 2012 especially prominent holdings included Nestle Nigeria, UAC of Nigeria, British American Tobacco – Kenya, and East African Breweries. Each accounted for at least 4% of the fund’s assets.

The Momentum Fund requires the highest minimum investment of any of the three in this article. You’ll need R100,000 (about $11,750) to invest.

Prescient Africa Equity Fund
Prescient Africa Equity Fund
Fund Size:$11.2 million
One-Year Return (net of fees):+28.2%
Total Expense Ratio:1.7%

The newcomer of this trio, the Prescient Africa Equity Fund launched in March 2011. It boasts a lower expense ratio (1.74%) than its counterpart at Momentum. So, it stands to reason that it would be a bit less geographically diversified than the Momentum fund and devote a larger allocation to North Africa.

Even so, managers Jonathan Kruger and Brett Kalil still invest heavily in three of frontier Africa’s most prominent stock exchanges; Nigeria, Nairobi, and Mauritius. These three countries combined account for 59% of the fund’s assets.

As of November 2012, the fund had big stakes in four Nigerian banks: Guaranty Trust (7.8%), First Bank of Nigeria (6.7%), Zenith Bank (6.4%), and Access Bank (4.6%). This focused approach paid off handsomely. Over the most recent 12 months, Kruger and Kalil have guided the fund to a 28% US-dollar return.

Other big bets include Nigerian Breweries (4.1%) and Kenya Commercial Bank (3.8%).

A very accessible unit trust, investors can participate in the fund with a R10,000 initial investment (about $1175) or by dripping R500 into it every month.

Standard Bank Africa Equity Index ETN
Standard Bank Africa Equity ETN
Fund Size:$66.0 million
One-Year Return (net of fees):+15.3%
Total Expense Ratio:1.0%

A bit of a strange bird, this is an exchange-traded note (ETN), not a fund. It is a debt instrument that will mature in May 2021 at a price linked to the Standard Bank Africa Equity Total Return Index (SBAFRITR) minus an annual management fee. In the meantime, it pays no coupons, but can be bought and sold just like an ETF. Over the past three years, it has posted an annualized return of -2.6%.

So, just what sort of assets are you gaining exposure to via the charmingly-named SBAFRITR?

Well, quite a lot of them for starters. The index includes nearly 200 stocks representing 28 African countries. It’s important to note, however, that a relatively small percentage of the index (36%) is allocated to stocks listed on sub-Saharan exchanges. The remainder goes to North African stocks and stocks listed outside the continent but that do a significant amount of business on the continent.

As of October 2012, the Index allocated a 20% weight to Nigeria and nearly 10% to Kenyan stocks. Notable names include Zenith Bank (4.1%), Guaranty Trust (3.8%), and First Bank of Nigeria (3.0%).

Because it is an ETN, there is no minimum investment requirement. Just contact your South African broker and pick up as much as you’d like.

Other Options?

Are you a South African investor interested in investing elsewhere on the continent? What ways have you found to do so? Let us know in the comments!

Comments

  1. Diego Souza says:

    Hi

    First of all I have to say this site is great!!! Well done :-)

    I am from Brazil. Can you say if I can invest in Prescient Africa Equity Fund? If so how?

    Sincerely,
    Diego Souza

    • Thanks, Diego! I’m so happy that you’re enjoying the site.

      Unfortunately, I believe the Prescient Africa Equity Fund is available only to South African investors. (I hope Jonathan Kruger will correct me if I am wrong on this.)

      But please stick around! There are new ways to invest in Africa every month, and I’ll do my best to stay on top of the opportunities.

  2. Rui Galvao says:

    Hi Ryan,

    The more I read your posts, the better I understand equities markets in Africa. Thanks so much for that and please continue empowering us!

    I have to say I am surprised that, given the potential of African stock markets, there aren’t more options to invest in them. I thought investment firms would be flocking to these opportunities, yet the reality is that for a US-based investor such as myself, it can be quite difficult to invest in African companies. Perhaps it’s a liquidity problem… In other posts you mention OTC stocks that trade in the US. This is a good idea and I should look into it more. Other options such as directly investing in for ex. the Ghanaian stock market seem a bit daunting (forms, foreign bank accounts, double taxation, currency fluctuations, etc.), especially if I want to invest in more than one country. Finally, as you describe in a recent post, mutual funds and ETFs for US investors have little real exposure to the fast-growing markets of Sub-Saharan Africa.

    This brings me to my question: even though the mutual funds mentioned in this post are for South African investors, would it be possible for someone not living in South Africa to invest in them if they created an account with a South African broker (and/or bank account)? That way, with just one foreign account, I could access a more diversified Sub-Saharan stock portfolio.

    Thanks again,

    Rui

    • Thanks, Rui.

      You’ve hit the nail on the head. Lack of liquidity is what keeps the big investors out of Africa’s frontier markets. This will change as the markets grow and trade volume increases. But, for now, individual investors and small funds can enjoy the benefits of these markets’ inefficiency. You’re right that it’s a hassle to open a foreign brokerage account, but, if you’re willing to put some time into it, it should pay off nicely down the line.

      In answer to your question, I have had some South African mutual funds (or unit trusts as they are known there) tell me that they will not take US investors. But this may not apply to residents of other countries (or to all mutual funds). It would be worth asking them. Just let us know what you find out! ;)

      Ryan

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