Investing in Africa funds heavily lends itself to people who understand what the offering can add to a portfolio. It is also well suited to those still trying to understand the world of investing but willing to start small and build on their knowledge and investments. Regulation 28 of the Prudential Investment Regulations allows pension fund investors to invest up to ten percent (10%) of their assets in Africa. This is in addition to other foreign assets. To this end, we had the pleasure of hosting the Absa Asset Management (Pty)Ltd Pan-Africa franchise at our most recent monthly External Distribution Channels (EDC) lunches. The franchise is headed up by Godfrey Mwanza and Roy Motooni, as co-manager. Both individuals have extensive experience in African markets and have an inordinate amount of passion for not only the African continent but also for investments in African entities.

Godfrey set the scene by explaining that South Africans are currently underinvested when it comes to African investments. He argued that “Its an avenue where one can get diversification and most advisors want to know if it makes sense for their clients.” He further stated that there are many misconceptions about Africa. Most people view the continent as one where there is mismanagement of economies, and instability. The reality is actually that the continent, like others around the world, has a handful of controversial leaders, however, there are some great examples of success stories and everything in between. African growth is strong, especially when South Africa and Nigeria are removed. Investors can benefit significantly from the bulk of African economies, as GDP rates average over five percent (5%). Some examples of success stories on the continent are countries such as Egypt, Ethiopia, Morocco Rwanda and Tanzania as shown below.

Source: World Bank, Absa (September 2018)

The team most importantly highlighted the correlation of different indices and how adding Africa to one's portfolio of investments would actually add diversification. Godfrey stated that “When people talk about using their twenty-five percent (25%) offshore allocation to get diversification, they do not actually get diversification on an asset level or stock level, they actually only get diversification on a currency level.”

A clear example of this is shown in the table below. The table displays the correlation between the South African stock markets, using the JSE All-share index (JALSH) to global and African indices. The JALSH has a very strong correlation to the S&P500 at 0.74, 0.82 to the MSCI World, and an even stronger correlation to the GEM index at 0.87. Conversely, one sees the correlation of JALSH to African indices is extremely low, with the Nigeria stock market the lowest at 0.03, showing almost no correlation.

Source: ABAM (September 2018)

Godfrey suggests that one can achieve asset and currency diversification, which can add more value to one's portfolio, specifically in volatile times such as during the 2018 technical recession. The Absa Africa equity fund can be used as a building block and when combined with South African equities, for instance, give much-needed diversification.

When asked if African countries will ever get it right, Roy stated that “progress happens but its slow, some places have stepped changes, a great example is Kenya as 2001-2003 changed their trajectory completely.” Growth moved from around one percent (1%) to average five percent (5%), in a short space of time. Roy also explained some case studies regarding strong companies the team has either invested in or stayed away from and the reasons behind each case. He further stated that “there are good companies, great opportunities, and if packaged well in a portfolio, one can make money” he also argued that “we try to put together a portfolio that maximizes on the best opportunities, we are cognizant of volatility, but believe that over time those opportunities give excess returns.”

The Absa Africa equity feeder fund has delivered just under twenty-five percent (25%) return year-to-date (YTD) to 31 August 2018. The fund was started in 2014, and is outperforming its peer group since inception as shown below.

The team delivers these stellar returns on the back of a sound investment philosophy, a robust investment process and the solid experience of the two portfolio managers. Portfolio construction is mainly bottom up, but the top down approach comes in after the stocks have been screened using multiple tools. The duo has a bias toward companies in countries that have strong fundamentals where the governments demonstrate that they are doing the right things over the long term. The ability to invest and liquidity is high on the list of checks and balances. This franchise really gives investors a viable investment thesis and the fact that this promotes investment on the continent is an added bonus.

Tsitsi Hatendi-Matika is Head: Retail Investment Specialist at Absa’s Wealth and Investment Management unit.