A number of asset managers offer single-region Africa funds which can be used to diversify emerging market exposure but are they too risky for some retail investors?
Popular Africa funds include the £233.6m JP Morgan Africa equity, £93m Alquity Africa, £63.2m Investec Africa and £11.8m Neptune Africa funds.
Last week, Franklin Templeton announced it is launching an offshore Africa fund for Templeton Emerging Markets Group executive chairman Mark Mobius next month.
Many advisers will remember when New Star wound up its Heart of Africa fund in February 2009 due to reduced liquidity in sub-Saharan Africa. In 2008, market conditions and investor redemptions saw the fund shrink from £86m in August to £29m when the fund was suspended in December.
The fund’s assets were sold in 2009 to London-based alternative asset manager Duet Group, which has only institutional clients.
Hargreaves Lansdown senior analyst Meera Patel says some investors will be reluctant to invest in Africa with the wind-up of the New Star fund still fresh in their minds.
She says: “There are big question marks around how successful Africa funds will be in the retail world. There is a gap in the market for the funds since there are not many out there but it is an ultra-specialist area and so it is not for every investor.
“A lot of investors bought into the Africa story when New Star launched its Africa fund in November 2007, which eventually left a bitter taste in investors’ mouths.”
Mobius says Africa offers an opportunity for global investors in terms of its growth potential.
He says: “Demographically, Africa’s growth should benefit from a relatively young population with rising purchasing power. As global demand for hard and soft commodities continues to grow, Africa is in an enviable position with its vast natural resources.
“Africa’s GDP is expected to grow by more than 7 per cent annually over the next 20 years.”
Investment Quorum chief investment Peter Lowman says Africa should be a long-term bet for investors, over a 10 to 15- year investment horizon.
He says: “One of the most important risks of investing in Africa is geopolitical risk. You have got areas like Zimbabwe where it is not safe to invest but if you look at Africa in 20 years time, democracy, governance and infrastructure is likely to have improved, people will be richer and there will be a compelling consumer story.”
JP Morgan client portfolio manager Claire Peck, who works in the emerging markets team that runs the JP Morgan Africa equity fund, says the team sold its exposure to Egypt due to increasing political tensions in the country.
The fund had a 10 per cent exposure in January 2011, which was gradually reduced to zero over the course of the year as political tensions in Egypt had an impact on liquidity.
Peck says: “Given recent geopolitical events in Egypt, the liquidity in the market has dropped.”
Alquity Investment Management chief executive Paul Robinson does not see liquidity as an issue that investors need to be wary of.
He says: “There is around £930m traded daily on African markets which means plenty of liquidity unless you are in the biggest funds.
“Smaller and medium-sized funds have an advantage as they can look at some of the less traded stocks without compromising their liquidity.”
Robinson says the average market cap of the top 10 holdings in the Alquity Africa fund is over £1.9bn and these companies have an average daily turnover of between £620,200 and £68.2m.
Robinson says investors can use these funds to access specific industries that are more developed in Africa.
He says: “Mobile telecoms is a example of where Africa is ahead. Safaricom in Kenya has M-Pesa, which is a mobile payment service that has amassed over 14 million users in five years. This is well ahead of the systems we have in the West.”