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The top-performing Africa Frontier Equity Fund of 2022

Africa Global Funds, an industry magazine that covers African asset management, has released their January 2023 issue with updated performance figures for African-focussed investment funds. In it, you will find that African Lions Fund is just about the only Africa frontier equity fund to make money in 2022.

Based on their data, here’s a hypothetical chart showing what $25,000 invested on January 1, 2022 would look like at the end of the year:

Value of $25,000 invested on 01 January by end of 2022
* If invested 1 Jan 2022

To be perfectly clear, there are two funds from the league tables that were not included in this chart. Not because I’m cherry-picking, but because of the following reasons:

  1. EFG Hermes MENA Fund, which gained 20.57% in 2022 hence turning a $25,000 investment into a handsome $30,140. But it is not comparable to African Lions Fund. 75% of its investments are in the Middle East. That puts them on a par with the T.Rowe Price fund above, which has 61.9% of its assets allocated to the Middle East, and 24% in South Africa.
  2. Threadneedle Luxembourg – Stanlib Africa Equity, which is up 6% according to the Africa Global Funds table. However, this is misleading as it is a Euro-denominated Fund sitting 100% in cash, and appears to be closing down.

On the other hand, the worst performer from the chart, Fidelity Funds Emerging Europe, Middle East and Africa, has invested 35.68% of its portfolio in Africa—their biggest allocation—followed by Middle East investments, with 18.27%.  That makes it more closely comparable with our fund.

The “secret” behind African Lions Fund’s performance

If you were to examine the detailed league of tables from Africa Global Funds magazine further, you will see that our Fund is in fact one of a kind because it focuses on a niche market: Sub-Saharan Africa ex-South Africa.

It is also the only fund with a manager based permanently in a Frontier African Country, from what  I can tell.

As a result of being here on the ground full-time, I’ve thoroughly researched every single company in our portfolio, and its products. I bank with NMB, and I drink Tanzania Breweries’ Kilimanjaro beer. I drive over bridges made with Twiga Cement. I’ve also done regular company visits and rubbed elbows with the CEO and management at Twiga Cement, Tanzania Breweries, and NMB Bank.

Recently, one of my investors sent an important email enquiry regarding two things:

1.  Where we are invested.

Here is the chart showing the latest country breakdown:

BVRM (Bourse Régionale des Valeurs Mobilières SA) is the regional stock exchange for West Africa which gives us access to 8 Francophone countries: Benin, Burkina Faso, Côte d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and Togo.

Our small position in the UK is a company that builds and manages infrastructure in remote areas throughout Arica for governments, aid agencies, and companies.

I believe I have made the right call being most bullish on Tanzania. It is what has set us apart from other less successful funds in recent times.

2.  Allocation plans in 2023

For now, I don’t see any other country with potential as good as Tanzania has at this point.

Rwanda comes in as the next best place to put our money. Relative to its neighbours, it’s a stable country with an economy on the rise. But it is tiny. And there are very few listed equity investments we can make there.

I am on hold with Kenya. The FX situation means the current spread between putting more money in (at USDKES = 124) and taking it out (as high as USDKES = 134) is absurd.

The problem and root cause of this is the external debt. The government is desperate for hard currency to make an upcoming repayment on its Eurobonds. Everyone is hoarding dollars. The central bank has been trying to maintain a KESUSD exchange rate between 124 and 125. But the market clearing rate is higher, so it is throwing sand in the gears of the whole economy.

The recently elected Ruto government is also clearing house and installing its own people in many key positions, both in government and in the private sector.

I hope things become a bit more settled in Kenya by the second quarter. But we’ll have to wait and see.

Nigeria is a wildcard. There is a good chance that we may see a change to the current regime of de facto capital controls there . It all depends on how the election goes at the end of February. If the next person to come to power has the political will to tackle vested interests, we might see some positive developments there.

It is bullish to me that the most likely reformist candidate, Peter Obi, is leading in the polls. But, the Nigerian election system is quirky and to win outright will be an uphill battle for Obi. In a second-round run-off election, against the runner up, which appears likely, he may struggle.

As I’ve written before, there are many well run businesses in Nigeria which, if un-shackled from the macroeconomic chains holding them down, could really deliver excellent returns for shareholders.

I’m planning to visit Lagos shortly after the elections are all over, most likely in early April now. I’ve been cautiously bullish on this country, despite all the negative press it’s rightfully getting now. That said, we are well-positioned and ready to pounce on some opportunities once we see a change in the country’s policies.

Ghana is struggling to get out of its debt problems. And its currency, the Ghanaian Cedi, which started with a bounce-back from a near death spiral this year, is now again at over 12 to the US dollar.

Frankly, African Lions Fund’s 2022 performance would have been so much better if not for Ghana’s woes.

I am a big believer in owning up to one’s mistakes. In the case of Ghana, the government’s finances were in much worse shape than I had thought, and in recent months, all the government’s recurring revenue was going to service interest and pay back debt.

That was obviously completely unsustainable and in the end the government had no alternative but to throw its hands in the air – both on its internal debts, which it is rescheduling, and its foreign debt, which it defaulted on.

The companies we invested in are performing well, running their businesses and still churning out profits. However, this was not enough to overcome macroeconomic and political risks that are clearly out of our hands.

African Lions Fund’s Deliberate, Outsized Allocation to Tanzania is working well for investors

Tanzania remains the best place to invest in Frontier African markets in 2023, in my view. In the banking sector, the two dominant players, NMB Bank, in which we have a core holding, as well as its rival CRBD Bank, have both been compounding their earnings per share at more than 30% per annum since 2018. They made more money combined in 2022 than the ENTIRE banking sector did in 2021.

And yet, their share prices are not building in any valuation premium for this extraordinary performance. They continue to languish on trading multiples of 3.5x to 4x last year’s earnings, and below book value. Dividend yields are in the high single digits and may even reach double digits this year, when the pay-outs come in May or June.

Twiga Cement just reported 2022 results and sales were up 10%, and net profits were also up 10% versus the record 2021 numbers. In the fourth quarter, net profits grew by a hefty 21%, as the price hikes the company implemented in June had their full effect. At a similar run-rate to that seen in the fourth quarter of 2022, Twiga could see net profit grow a further 11% in 2023 by my estimation. And yet the shares still sell for only 7.3x earnings. Hopefully this is the year that valuations also follow earnings higher.

“Africa is the place to invest.”

Things have started more positively for stock markets globally in 2023. I expect this to be a boon for our positions in Africa.

African Lions Fund now has $19.5mn under management. The fund continues getting more interest from investors. But the number of people that are truly noticing the potential in Africa is a drop in the bucket.

Yes, the continent continues to have plenty of problems. But each day, things get a little bit better. Small positive changes begin to snowball over time, and I think the outlook is rosy.

African Development Bank (AfDB) forecasts the region’s economic growth to outpace the world’s in the next couple of years. This analysis was based on the continent’s resiliency in the face of economic slowdown during the pandemic. Over the course of the pandemic, 53 out of 54 African countries still posted growth.

You might say, there is a home-bias there with Africa cheering on Africa. But here’s an impartial opinion: Jeffrey Sachs, a prominent economist from Columbia University and advocate for the United Nations’ Sustainable Development Goals agrees, saying “What we’ll see, building on the resiliency we see in this report, is a real acceleration of Africa’s sustainable development so that Africa will be the fast-growing part of the world economy. Africa is the place to invest.”  

For now, valuations remain low, and the returns on investment companies generate in their businesses remain high.

While I’m not one for self-promotion, I think there’s a lot more gains where the 36.55% gain African Lions Fund has already enjoyed came from. The more capital we are able to invest at this early stage, the greater the potential long-term returns. Waiting to get on board may reduce risks, but it will also lower returns.

I am not claiming we’ll get it right 100% of the time. Of the 19 companies we have currently invested in, we have 12 winners and 7 losers. But the loss the fund has incurred is minimal compared to the gains.

Whether you’d like to do-it-yourself or choose from the African funds in the chart above, if you have an amount of risk capital at your disposal, you could do worse than to at least give Africa a look. The combination of strong growth in the working age population, the further widespread adoption of mobile broadband internet technology and solar power, among other trends, are all pointing Africa’s economies in the right direction over the coming decades.

I’ve been writing about this for several years now. More than 125 people have backed my vision and invested in the African Lions Fund. But I still think it’s early days, and not too late to join them.

Until next time,

Good Investing!

Tim Staermose
Founder, Global Value Hunter
& African Lions Fund Ltd.

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