How to invest in booming Africa

Africa: difficult to get to grips with

Chinese executives are swarming across Africa in a quest for commodities and key minerals. China is, after all, said to be the factory of the world, and this factory needs raw materials.

Last week I made the point that we would do very well to follow China in on this African adventure.

The only thing is, Africa is a notoriously difficult for the average investor to come to grips with. Even the regulated markets that do exist are thinly traded. And the investment opportunities are limited. And then there’s the logistics. You certainly wouldn’t want to start looking for a stock broker in Botswana, Ghana, or Ivory Coast.

For most of us, this means we’re forced down the investment fund route. That is, through a professional fund manager.

But even then, when it comes to Africa, there isn’t much about. There’s not enough demand to warrant the big banks and fund management houses splurging out on dedicated teams to tackle these limited markets. Yet, we knw that Africa offers massive opportunity.

Thankfully, there is one small, dedicated investment fund that fits the bill. For the moment, this fund is listed on London’s Aim, and is only capitalised at about $50m. But as you’ll see, it’s a great little fund. What’s more, it recently passed a resolution to increase its capital base, practically tripling in size – and with a plan to move to the main market.

220% growth in five years

The Africa Opportunities Fund is registered in the Caymans, and trades in London under the ticker AOF. It was established in 2007 to allow a select bunch of investors to get exposure to African equities and debt instruments, be they quoted on exchange, or unlisted investments.

As you can see from the chart, the fund has had a great run. Over five years, it’s up from just under 40 cents to over $1.25 today.

And still the fund trades at a discount of 6% to its net asset value.

Five years of decent growth

Africa Opportunity Fund

Source: Digital Look

Past performance is, of course, no guide to the future. But I have to say, I like the guys in charge of this fund. I think there’s considerable mileage in it.

For starters, these guys don’t just invest in the big regional markets like South Africa, and maybe Nigeria. Instead, this fund has a wonderful geographic diversity. A diversity that’s driven out of specific investment opportunities, rather than slavishly sticking to the main markets.


Source: Africa Opportunity Partners

A big chunk of the fund is invested in an exciting Ghanaian insurance company, Enterprise Group. In 2013, this one investment was up over 205%.

The fund has also benefited from great returns in Tanzania Breweries (up 175%) and Okomu Oil (up 126%) and even Zimbabwean listed Old Mutual. Another big holding is the dominant Senegalese mobile phone operator, Sonatel – again, a business in the right place, at the right time.

I’ve always liked the range of this fund’s holdings, and I like the themes the manager has brought together.

Good yield, low PE, fast growth… what’s not to like?

The fund manager says that the top ten holdings are yielding an average of 5.1%. As far as investing in emerging markets, let alone frontier markets, that’s a great income stream. The average price/earnings ratio of the top holdings comes in at 11.5 times; again, not bad for companies still very much in the growth phase. And displaying a return on equity of 18.1% –  these seem to be well-run businesses that make up the bulk of the portfolio.

The fund’s stated focus is “investing in companies with minimal debt that sell goods and services that are in short supply in Africa. We also invest in commodity related companies, on a selective basis, when we can implicitly purchase the underlying resources at a material discount to spot market values…”

“… In our opinion, 2014 offers an exciting investment vista for the value investor in Africa”

Well, I have to say, I concur.

AOF is up nearly 100% – and I think there’s more to come

Of course, this investment comes with great big dollops of risk too. I mean, the fund is up nearly 100% over the last year alone –  in adverse circumstances, that could all be reversed. Very few fund managers manage to outperform the markets consistently.

The fund’s top ten holdings make up about 75% of the fund. Again, this type of ‘concentrated portfolio’ is a risky way of investing, but if it works, it tends to pay off, big time.

Overall, I like the fund, I like the manager, and I like the investment themes. If you want to join the Chinese and invest in Africa, then this fund could be a good way of doing so. It’s certainly one to consider for the long run.

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  • chr.chr

    Hi Bengt. Interesting looking investment. Do you have any thoughts on the progress and outlook of Agriterra, another of your favourite African themes. Is it worth sticking with them – the news always sounds good from them but the share price is disappointing.

  • GMatt

    Worth noting that the TER is 3.34%. Given Money Week’s attitude to high costs, I’m surprised you don’t mention that, Bengt? It’s going to have to do pretty well just to stand still.

  • Hammish

    Can’t see this on HL ‘s offering. Any idea which platform has access to this fund?

  • AGS, Ltd.

    This is good information, my concern is there place of domicile prior to listing. This is one example of the opportunities that are being explored by those who want to take part of the growth which is Africa. I have been stressing the growth potential and opportunities found on the continent. Global Finance magazine also did a write up and ranking of some funds that are investing on the continent. Also there are some reputable local funds that are performing well on the continent.

  • sjgray

    Would love to invest in ‘Booming Africa’, particularly with this fund but it doesn’t settle through CREST. This knocks out many of the big tax efficient platforms. Any thoughts?

  • tapjib

    I would love to invest in this fund and was going to through a ISA as its currently listed on the AIM markets. However this fund is now moving off AIM and going to specialist fund market so cant get the tax breaks. Anyone know the best tax efficient way of investing into this fund?

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