Sub-Saharan Africa has traditionally been viewed by most investors as a region to avoid but New Star says that although high risks remain, Africa is a continent of undiscovered opportunity as it has high growth potential but is under-researched.
New Star believes Africa is starting to benefit from the economic restructuring of the 1990s, with strong economic growth, high levels of foreign investment, increasing political stability and improvement in corporate governance. It wants to access this growth potential at an early stage and has launched the fund now because it wanted to be sure that political change and increased foreign direct investment was not a false dawn and that the impact would trickle down into the broader economy.
The fund will be managed by Jamie Allsopp, who invests in Africa as part of the New Star hidden value fund. He will be looking at companies quoted on the region’s stock exchanges, including the locally-quoted affiliates of multi-national companies. He will also hold companies quoted outside sub-Saharan Africa that base part of their business in the region or derive income from it. These firms are easier to research and are likely to have higher corporate governance standards.
The fund will be thematic, initially focusing on companies that should benefit from broader economic wealth including; consumer staples, telecommunications, infrastructure, brewing, tourism, mining and financial services.
Allsop will look at factors such as profitability, pricing power and a high and rising return on invested capital to identify modestly priced companies with attractive growth prospects.
Allsop notes that sub-Saharan equity markets, returned 38.2 per cent during the first half of 2007 and were not effected by the corrections to emerging markets in February, March and August. He also says demand for resources, particularly from China, has had a positive effect, as Africa is rich in natural resources including diamonds, platinum, cobalt and gold. It also has significant oil and gas reserves. However, New Star says it is still early days and investors need to tread cautiously.
This is because many of the companies in which this fund invests are likely to be small, with low liquidity and high volatility, while political, social and economic instability are also potential risks