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Heart of the matter

Chris Salih looks at New Star’s heart of Africa fund and says that while the continent has grown in investment stature, advisers may not be completely sold on it

New Star’s heart of Africa fund will be the first pure UK onshore fund to invest across the continent of Africa but advisers are still unsure whether it is appropriate, even for their most affluent of investors.

Launching on October 22, the fund will be managed by Jamie Allsopp and invest in sub-Saharan Africa excluding South Africa.

Allsopp has experience of investing in Africa, with 10 per cent of his UK hidden value vehicle investing in the continent. He says the investment landscape has changed significantly, with Africa becoming a stronger investment opportunity, particularly as his investment process focuses around finding undervalued companies.

He says: “Strong economic growth, high levels of foreign direct investment, increasing political stability and the resultant improvement in corporate governance have created a compelling investment backdrop and it is no surprise that some of the best-performing markets in the world are situated in sub-Saharan Africa.”

As with many emerging markets, one of the biggest attractions to Africa is its vast reserves of natural resources such as gold and diamonds,.

Hargreaves Lansdown head of research Mark Dampier gives it the thumbs up himself but says it may be a struggle to persuade clients into what is literally a frontier market.

He says: “I would put no more than 1 or 2 per cent of a portfolio into the fund but as an idea it is fascinating as there are high returns on equities and good yields while Allsopp is experienced in the arena.”

Oil and gas reserves, along with various political machinations have also attracted foreign direct investment from the countries such as Russia, China and India into AfricaChelsea Financial Services managing director Darius McDermott sees it as the new emerging market, saying economies such as Brazil, China and India have already seen significant growth in recent years.

He says: “It is a massive resource play that is continuing the chain with the US consumer driving manufacturing in Asia, with Asia tapping into the natural resources of Africa.”

McDermott believes that a maximum of 5 per cent should be held by an aggressive investor in their portfolio because although the upside is there, the number of potential risks looms over them.

He says: “It is a clever launch as Africa is growing off the needs of emerging markets in particular. However, effects like political volatility is rife in the region while agricultural dependence can also have a negative impact with global warming and the potential for climate change,” he says.

While New Star is the first investment house to launch an onshore fund in UK that invests 100 per cent in Africa, others have dabbled in the area.

Investec offers two offshore vehicles in the shape of an African fund and pan-Africa. Fidelity has also launched its Europe, Middle East and Africa fund while Stanlib, the asset management subsidiary of South Africa’s Standard Bank, has launched two vehicles using the wider powers of Ucits III, one in South Africa and one covering the rest of the continent.

The International Monetary Fund also places a glowing light on Africa, having forecast GDP growth is 6.2 per cent for the continent in 2007. This compares with 4.9 per cent global growth and 2.5 per cent for developed nations.

One problem that New Star may face is the negative opinion of the continent, particularly as the media focus tends to be on human rights issues in Zimbabwe and civil unrest, such as in Darfur.

Dennehy Weller & Co IFA David Mitchell believes the argument holds no water and that Africa is much more stable than it once was.

He says: “We would certainly consider the fund for the appropriate investor. Of course there are some issues over stability but you will tend to find that most investors who are looking at this are already involved in the likes of China, India and Latin America.”

The heart of Africa fund will reside in the IMA specialist sector and will have a minimum investment of £12,500. Initial charge is set at 5.25 per cent while annual management charge weighs in at 1.75 per cent.

New Star has also announced plans to limit inflows into the fund once it reaches £100m although the decision to fully-cap or soft-close the vehicle has yet to be made.

Allsopp concedes that there is risk involved but having been to the continent and visited a raft of investment prospects he believes there is a huge upside for investors.

He says: “The fund will be heavily invested in the Nigerian Stock Exchange closely followed by those of Kenya, Botswana, Mauritius and Ghana. We chose to stay out of South Africa as it a more efficient market with far lower growth than the sub-Saharan sector of Africa.”

As for themes, Allsopp says he will look at consumer, telecoms, infrastructure and natural resources.

Allsopp says the fund also has the ability to go 100 per cent cash as well as investing in gilts, but says the risks will not deter him from making certain decisions.

He says: “This is a long-term investment strategy that looks to take advantage of one of the biggest economic tailwinds in the world.”

Informed Choice director Martin Bamford says it may be the perfect choice for the right client.

He says: “Considering the success of the emerging markets and Bric funds since their launches, it makes sense that investment in Africa is likely to grow. I wouldn’t expect many of our clients to invest in the New Star fund but for those looking at charities, have a high risk attitude or maybe even have a heritage in that region, it could be the ideal offering as the market continues to grow.”

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