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Investment Strategy
Thursday, July 18, 2013 - 02:16
Long term view

Over the past few years the attention paid to Africa as an investment destination has increased dramatically – more recently the continent has been given a major platform by various asset management companies. “Africa is another ‘investment story’ and as with any tale, clients should remain sceptical until they have found out why the story is being told,” says Mike Browne of Seed Investments.
There are a couple reasons for the increased coverage:
• Legislation was recently changed in South Africa to allow retirement funds an additional 5% allocation to Africa on top of their 25% offshore allowance – this has radically boosted the demand for African investment options, and the supply has followed in close pursuit.
• Performance over the past 18 months has been excellent (after a poor 2011) – product providers can therefore offer a product with a ‘compelling investment case’.

“At Seed we think that the first reason is a good one. Essentially it allows retirement funds a broader investment universe. The second reason shouldn’t be a major consideration. We would rather look at performance through at least one investment cycle – and then also determine how African investments are expected to perform in relation to other high risk investment options.”

The basis for the investment case (to be differentiated from a ‘feel good story’) is one of shifting demographics, notably the growth in the middle class population over the next 10 – 30 years (depending on the specific country).
A couple of charts can show how a small shift in income distribution can have a large impact on the demand for certain products. Chart 1 shows how the average Kenyan in 2011 earned US$832pa versu US$478 just seven years prior, and how this 74% increase in income resulted in car sales growing 385% as many moved up into middle class! Note that there is still a large portion of the population that still doesn’t earn enough to buy a car.
Chart 1: Kenyan income distribution

Source: Imara

Chart 2 gives an illustration of the per capita demand for beer across various developed and developing countries. “Notice that, in general (excluding us South Africans and the Angolans), beer consumption is extremely low in comparison to the other developing countries (like China, Peru and Argentina), and even more so than developed markets,” says Browne. “Make no mistake, beer companies aren’t expecting consumption to move to levels seen in Australia and the UK, as these countries have big beer drinking cultures. What they are hoping for is for per capita consumption to increase three or four fold (putting them on a par with China) on a growing adult population base. If this kind of growth can be achieved over the next 30 odd years – the companies supplying these countries with beer will be sitting pretty.”
Chart 2: Beer consumption in selected countries

Source: GondoVisio

While the shifting demographics are naturally key to the success or otherwise of Africa as an investment destination, the continent is fortunate in that it is relatively politically stable when compared to the past 40 – 50 years and at the same time governments aren’t heavily indebted – see Chart 3.
Chart 3: African Government debt versus Developed Markets

Source: Momentum Asset Management
“There are risks attached to any investment, and investing in Africa is no different,” he says. “There are just different risks that need to be managed when compared to other countries.”
At Seed we haven’t yet taken an active position in Africa, but are currently in the process of further investigating the investment case. Should we make an allocation of our clients’ capital into Africa we want to be very sure that they will be adequately rewarded. An investment in Africa (like any other) needs to be done at the right price (i.e. ensure that the markets aren’t overly expensive) and with an investment horizon far in excess of the three – seven year horizon that we typically have at Seed. Further, the manager should be benchmark agnostic, spend the majority of his time ‘on the ground’ visiting companies in his investment universe, be significantly co-invested in the fund, and have been through a full market cycle.

Copyright © Insurance Times and Investments® Vol:26.7 1st July, 2013
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