Judging by the number of enquiries I’m getting via email and on my Twitter feed, there is growing interest among investors to get some exposure to African frontier markets. Most people ask me how they can do it via ETFs, or securities that are listed in Europe or North America.
I understand, for some, it’s a leap too far to open an account in, say, Tanzania, or to invest in the African Lions Fund. As many of you know, this is the fund I set up and began managing money for in October 2020. It focuses on buying high-quality, blue-chip companies in sub-Saharan Africa that have the potential to double their sales and profits on a 5- to 10-year view, and simultaneously have valuations so low that their valuations have the potential to at least double as well.
I won’t get all my stock selections right, but I figure that with the fast growth of the working-age populations in sub-Saharan African markets, and the possibility that this region will once again at some point come in for more investment attention from money managers in the West, it is not a stretch to think that we can triple, or even quadruple our money in 5 to 10 years.
It is no doubt much easier to buy African ETFs that are available through your existing broker. Moreover, a smaller amount of capital is needed to do so than to invest in an unlisted fund. But there are not many ETFs that are focused on African frontier markets. And none that I have come across focus purely on the sub-Saharan region that African Lions Fund does. They are either single-country funds, or have heavy weightings toward South Africa, and/or North African markets.
This ETF has 21 of the “best” Nigerian stocks among its holdings, including Dangote Cement (majority owned by Aliko Dangote, the richest man in all of Africa), Nestle Nigeria, Zenith Bank (Nigeria’s largest bank and 6th in Africa), and MTN Nigeria (subsidiary of Africa’s biggest telecommunications company).
Arguably, Nigerian stocks are some of the most promising long-term investments in Africa. In fact, the governor of the Central Bank of Nigeria, Godwin Emefiele, was quoted last month during the Paris Peace Forum in saying:
“Nigeria has the largest economy and population in Africa, and it is being projected to be the third largest population in the world by 2050 — if you do think about investing in Africa — join us in developing Nigeria and Africa continent.”
For us, however, we have made a macro call that Nigeria is at risk of a large currency devaluation.
Nigeria’s capital account is partially shut at present due to its currency challenges. If one sells Nigerian stocks, one cannot repatriate the proceeds freely in US dollars. There is a wait of many months to obtain hard currency, in a “redemption queue” at the Central Bank. We see a significant devaluation in the Nigerian Naira looming.
It is for this reason that we have allocated just a small portion of the African Lions Fund portfolio to Nigeria (under 5%).
However, investors in NGE are already pricing in the likelihood of a large currency devaluation, just as I also expect. Right now, the fund sells at a significant discount of 37.6% in USD terms to the book value computed using the official exchange rate. NGE’s Net Asset Value (NAV) was most recently stated at $15.44, versus a share price of just $9.64.
If you’re a long-term investor comfortable with the risks, NGE may thus be worth considering.
AFK is designed to track Africa’s GDP-weighted index, so it provides more diversification in terms of the countries it has invested in. Its top 10 stocks are from Morocco, Kenya, Nigeria, a London-listed miner (with operations in Namibia, Botswana, South Africa, and Zimbabwe), and a Canadian-listed miner in Southern Africa.
Nothing wrong with that. The only downside for me is that this ETF is heavily weighted toward mining companies (26% of the portfolio is in the materials sector). That makes this ETF more closely correlated with global factors influencing demand and supply for those commodities than with Africa-specific economic and demographic trends.
And the price proves this. If you had bought exactly a year ago, you’d be down 2.4%. And if you had bought a position five years ago, you’d be just a tad short of breakeven. Nothing to write home about.
This one is probably the closest in character to the African Lions Fund. Its biggest investments are listed in northern and sub-Saharan Africa, and the portfolio has limited exposure to South Africa.
You can buy the shares via an Amsterdam listing, or you can invest in the underlying fund that the listed vehicle tracks. As the name implies, this fund is also good for those who like regular dividend income.
Lyxor tracks the SGI Pan Africa Index (EUR Net Total Return), which aims to capture the performance of the largest 30 African stocks or those with predominantly African assets. A third of Lyxor’s portfolio is in South Africa (its largest allocation), and almost 40% of its portfolio is in the materials sector, led by mining.
African Lions Fund does not invest in South Africa because the country is at a different developmental stage, and if we were to allocate capital based on the size of the various markets, South Africa would totally swamp all else.
This ETF is marketed as providing exposure to the top 50 blue-chip African stocks. However, note that the top 10 holdings are all listed in South Africa, which includes Naspers.
Naspers is the company I’ve written about before, that derives most of its value from an indirect investment, via a Dutch holding company, in Chinese internet behemoth Tencent. Most ETFs covering Africa, with an allocation to South Africa, will have Naspers in their portfolio, including Xtrackers. So, they are by definition not a pure play on Africa at all. With Naspers you get a not insignificant China exposure in the mix, which seems absurd.
This one is quite different from the rest. The fund is a joint venture between Canadian investor Prem Watsa’s Fairfax Financial Group, and Africa-focused Private Equity firm Helios Partners.
While it does own some listed company shares that trade in Africa (24% of the portfolio), the bulk of its investments are stakes in private equity ventures (41%).
This makes it somewhat more volatile, as the valuation of stakes in Private Equity Limited Partnerships (LPs) can bounce around quite a bit more than listed shares. You see this volatility in the HFPC-U price in the chart below.
Having identified all these “one-click” listed fund investments, I got curious about how their performances compare with the African Lions Fund. I wanted to see if I am indeed adding value to the investors in the fund. Here’s what a chart of all seven looks like:
The chart shows the value of a $25,000 initial investment in each of the listed funds and ETFs, and in the African Lions Fund when it started out. In short, the Fund has beaten them all, so far. Not only that, but our performance has also been less volatile, if you care about that, as many people do.
November, especially, was a pretty awful month for global stock markets, and as you can see, the ETFs I mentioned here were not spared from the decline. The African Lions Fund, on the other hand, lost a modest 0.2167%.
Investors in the African Lions Fund saw good gains on some of our individual investments of 20%, 14.47%, and 55.56% in November, which offset declines elsewhere.
Looking ahead, 2022 looks promising. For instance, one of our largest holdings is NMB Bank in Tanzania. The bank’s management held an investor call last week, and when I asked at the end of the call how the fourth quarter was looking, the CFO responded, “very, very strong.”
Eventually this fundamental performance should be recognized on the scoreboard. For now, NMB remains very cheap at TZS 2,000 per share. I project EPS of at least TZS 575, and a dividend of at least TZS 175 per share for 2021. If you haven’t read my prior articles on NMB, you can read them here and here.
So far, December has been another strong month for the Fund. Our biggest position, Tanzania Breweries Limited (TBL), has rallied. It is also paying a TZS 255 per share dividend for 2021 this month. It traded ex dividend on 18 December and pays on 24 December. So, I’m hopeful we will close 2021 on a strong note.
Another stock that’s been on a tear for us is Tanga Cement, the target of a takeover. I bought a small position for the Fund the day the takeover was announced at TZS 400. It closed Friday at TZS 1,200.
All up we currently own 18 different businesses in the Fund, diversified across industries from banking to construction materials, to telecommunications, beverages, tobacco, and reinsurance. We also own 5% of the Dar es Salaam Stock Exchange.
So far, we’ve invested in 9 different countries in sub-Saharan Africa. The fund is doing well, as you see on the chart above, with the net asset value after all fees and expenses rising 27.7% so far since October 1, 2020.
But I think we’re just getting warmed up. While the portfolio is up strongly already, the average, dollar-weighted Price to Earnings (P/E) ratio of the portfolio is just 6.8x and the dividend yield based on our historical cost is a healthy 8.6%.
In summary, I’m not saying you should not invest in the ETFs and exchange-listed securities I mentioned above. They may have made some investors good money. If you’re interested in investing in Africa directly, you may find one of them a good fit for your particular circumstances. But if a diversified portfolio of African Frontier market blue chip stocks on attractive multiples is of interest to you, African Lions Fund may be worth a look.
Until next time,
Global Value Hunter
African Lions Fund