OREANDA-NEWS. Renaissance Asset Managers (RAM), the leading emerging and frontier markets investment manager, announces that it has soft-closed[1] its Sub-Saharan Fund at USD 150 million of client assets, a sign that investors are favouring its bottom-up, stock-picking strategies to capture the potential of African markets. The Fund has attracted USD 40 million of fund inflows since the start of 2013, largely from UK and European investors, and more than doubled in size last year.

Expected capacity in the Sub-Saharan Fund is around USD 200 million. Adrian Harris, Head of Distribution and Investor Relations, said:

“We have soft-closed the Sub-Saharan Fund to look after the best interests of our existing investors. We believe that tightly-managed capacity allows our institutional investors to access the best investment opportunities without sacrificing liquidity. We continue to see strong demand for our African capabilities which can be accessed via our Sub-Saharan and Pan-African Funds and which are run using the same disciplined approach led by Sven Richter.”

There is a real scramble for Africa. Attracted by Nigeria and Kenya’s +45% 12-month equity returns, international investors are rushing to the once-neglected continent, putting the region centre stage. This increased attention, whilst reflecting some of the continent’s strengths, can also undermine certain issues such as liquidity, rising valuations or investment managers’ lack of geographical expertise.

In order to avoid the herds, investors are increasingly selective in their African exposure. The soft-closure of Renaissance’s Sub-Saharan Fund comes as the portfolio has achieved a 31.4% return for investors in 2012[1]. The Fund and the Pan-African Fund are the two best-performing African equity funds so far this year in Morningstar’s African Equity category.[2] Like the Sub-Saharan Fund, the Pan-African Fund adopts a consistent, bottom-up approach to identify companies with strong upside potential but which may be under-valued in the market. The Pan-African Fund, with a broader geographic remit provides access to more liquid markets and therefore has greater fund capacity than Sub-Sahara.

Sven Richter, RAM’s Head of Africa and Frontier Markets, with 18 years’ experience in the region and who leads the on-the-ground team which manages RAM’s African funds, commented:

“Africa is Asia 15 years ago. Anybody who doesn’t have an allocation to Africa is missing something. But investors need to be cautious – certain valuations are getting rich, especially those backed by European names as they are preferred by managers with limited experience in the region. Africa offers excellent opportunities – but these are developing markets that still require strong and experienced guidance.”

Johannesburg-based Richter applies an in-depth, disciplined approach that screens quality, risk and valuation in a universe of c.400 companies, of which 150 are multinationals with high exposure to Africa. After assessing criteria such as sales and profit growth, margins, debt and liquidity, Richter’s team meets corporate management to evaluate the long-term sustainability of any investment.

This method identified Flour Mills of Nigeria, the country’s biggest miller, whose plans to expand its main production site have helped the stock leap 47% since the start of last year. First Bank of Nigeria has been another success story in the challenged Nigerian banking sector, given its large branch network and efficient management. RAM’s model also selected Telecom Egypt – a profitable investment in a country that other managers would have ruled out because of the political situation.

This time-tested process is becoming more important as global asset correlations have fallen and company valuations reflect corporate fundamentals more accurately. Intelligent investors are favouring proven, hands-on investment approaches delivered in transparent and well-regulated vehicles, with daily liquidity. In the case of RAM’s Sub-Saharan and Pan-African UCITS, shareholders also avoid the performance fees which may be charged by some boutique managers.

Selecting the right strategy will be paramount to benefit from the strong tailwinds that are pushing Africa towards development. According to Richter, some of the continent’s favourable investment themes include:

Demographics: Africa is set to double its population to 2 billion by 2050, offering great opportunity to companies willing to employ an expanded and increasingly educated workforce. Some manufacturing has already started to move from Asia to Africa.

Economic growth: Six of the fastest 10 growth countries this decade are in Africa. Annual GDP growth is forecast to average c.6% for the next decade, while inflation in sub-Saharan Africa has fallen to an average of less than 8%. Sovereign debt levels (32% in sub-Saharan Africa) are substantially lower than in developed markets.

New economic model: Africa has been transformed by higher education, improving infrastructure and the wealth and progress derived from a decade of rising commodity prices. A growing middle class is making the African economy more consumption-based and less dependent on public investment or foreign aid. The most compelling investment opportunities are expected in the consumer, retail and service sectors.

Attractive valuations: Certain valuations have not reached their targets yet. The MSCI EFM AFRICA ex ZA Index trades at about 10x forward earnings, well below the MSCI WORLD index, which trades at more than 14 times.

Undiscovered markets: Despite increasing levels of Foreign Direct Investment (FDI), Africa remains mostly untapped by international investors: the continent accounts for 3% of the world’s GDP[3] and receives 2.8% of FDI inflows[4]– a ratio of 0.9. Latin America, instead, accounts for 6.8% of global output, but attracts 14.2% of FDI inflows – a ratio of 2.1. Asia’s ratio is also higher than Africa’s, at 1.4.

[1] Source: Bloomberg, A (retail share class) percentage change in NAV, net of fees, charges and expenses.

[2] Source: morningstar.co.uk as of 19 February 2013. According to morningstar.co.uk fund prices are updated every week day after the close of trading and before 11 p.m. wherever possible. Performance figures are presented in British Sterling (GBP). Fund returns are based upon Nav to Nav or Bid to Bid income reinvested basis for Morningstar’s African Equity Fund universe. UK-domiciled funds report after-tax dividends. Non-UK-domiciled funds report gross dividends. Past performance is not a guide to future returns.

[3] World Bank, 2010

[4] Data from UNCTAD (United Nations Conference on Trade and Development), 2011