Portfolio Manager - Peter Townshend, Coronation Fund Managers

Africa is quite a large continent providing investors with a large scale of investment opportunities. From a general point of view what are the most interesting markets in Africa?

Outside of South Africa, we find the most interesting markets to be in Nigeria, Egypt and Kenya; in that order. This partly reflects the size of these markets (market capitalization, number of companies listed and market liquidity), but also the specific investment opportunities available in these countries. The Nigerian market, for example, had a terrible 2008 & 2009 and presented us with opportunities to build significant positions in very undervalued companies. Subsequent returns have been very good, but we still have about a third of our portfolio’s invested there.

How do you choose stocks? Do you follow any index or do you rely on your own investment research?

We do not invest in indices and most African markets are anyway relatively undeveloped and do not offer such products. We are bottom-up investors. We do not make sector or macro investment decisions, but purely try to find companies that we think are undervalued.

Could you specify what the most attractive sectors on the African markets are?

Our portfolio’s are often quite different to our competitors. For example, while banks are generally the largest and most liquid stocks in many African markets and dominate indices and our competitors portfolio’s – we prefer investing in companies that are exposed directly to the African consumer, so we have big investments in brewers, telco’s, cement, tobacco, etc.

Investment in Africa could be quite risky in comparison to the developed world as it is defined as a frontier market. What do you think is the optimal investment horizon for an investor seeking opportunities in Africa?

We estimate what we consider the fair value for a company and buy companies that trade substantially below this fair value. When shares in a company reach our fair value, we sell. Typically, we have a 3 – 5 year investment horizon, but if a company’s share price re-rates quickly, we may hold for a much shorter period.

As mentioned before Africa belongs to frontier markets suitable for investors with a lower risk aversion. Generally what are the main risks of investing in Africa?

Political risk is clearly higher than in developed markets. Democracy and the political process are still developing in Africa, as are stock markets. Regulation is not as good as it should be and neither is financial disclosure. One of the biggest risks however is liquidity. These are generally quite small markets and when crisis hits, liquidity can dry up very quickly, making disinvesting difficult.

Keeping in mind the investment horizon and the risks of this particular market what do you think is the optimal percentage allocation in any client´s portfolio?

We think African markets offer very good investment opportunities and are excited about the potential returns. However, these are frontier markets and they come with their own, very real, risks. Investing in Africa is not for the faint hearted and should probably not constitute a large part of a clients’ portfolio.

Latest developments on international markets haven’t left African markets untouched. How could you describe the impact on Africa?

African markets were hit by the global financial crisis, but there were marked differences across the continent. Nigeria was particularly hard hit and also suffered a banking crisis (but one of its own making, not related to the problems in the developed world). It is now recovering, but has some way to go. North African markets have generally bounced back quickly (in sync with the developed world) while some west and southern African markets have still not recovered.

Apart from what have already moved the markets each investor is still mostly concerned about the future. What is the potential for the future of the African markets?

Africa is coming off a very low base. Better governments, debt relief and strong commodity prices are all helping to push the continent along and this is filtering down to the man in the street. Technology is also having a big impact, with mobile phones fundamentally changing the landscape. As people escape utter poverty, they start consuming and we like to invest in companies that are servicing these emerging consumers.

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