Phihlelo Matjekane and Craig French, Visio Fund Management
At the turn of the new millennium, The Economist magazine labelled Africa “The hopeless continent”. However, it was at this precise moment that Africa was becoming a continent of hope. Civil wars were coming to an end and more states were becoming democratic.
Africa as a continent has gone on to be one of the highest growth regions globally with a number of countries dominating the top 10 global growth rates alongside Asian countries. However, it is incorrect to speak of Africa as though it is a single homogenous region. To the contrary, Africa is made up of 54 independent countries, altogether with a landmass larger than the United States, China, India and Europe combined. It is home to +1.38 billion people, 17% of world’s population, who will over the coming decades need the same goods and services found in more developed countries.
The key attraction African countries have for investors is the high GDP growth rates off very low economic bases, which can in turn spur superior returns. This African growth story is supported by a youthful population. When compared to developed markets, sub-Saharan Africa (SSA) has a much younger population growing at a faster rate. Fifty percent of the population is under the age of 30.
According to the OECD, Africa is projected to have the fastest urban growth rate in the world. By 2050, Africa’s cities will be home to an additional 950 million people living in urban environments, with 60% of the people living in cities compared to 40% today. This urbanisation further supports economic growth and consumption.
Industrialisation is also gathering pace as cheaper electricity sources including gas, solar and geothermal energy quicken the pace of infrastructure build. At the same time, education levels continue to improve, driving more urbanisation, higher incomes and demand for goods and services, which most in developed countries take for granted. For example, only 25% of Egyptian adults have a bank card compared to South Africa at closer to 80%; this presents an enormous growth opportunity for well-placed banks and payments companies.
Visio believes that in order for investors to achieve superior returns, investors must conduct extensive research on the individual countries as well as specific company opportunities. As expected, some of the countries and companies will fail to capture the growth opportunity and will underperform as a result. In-country due diligence and research are paramount as there is no “free lunch’’. Africa holds vast opportunities for a fundamentally based active fund to generate alpha and far superior returns for investors. This is where our teams’ skillset lies, being led by a Zimbabwean born and educated CIO, Ronald Chabvonga, who is a chartered accountant with a background of having operated banks and having been involved in deal making in the resources sector in Africa.
Key markets where investors can access some of these opportunities are Egypt, Nigeria, Morocco and Kenya. Interestingly, all four of these markets have different growth profiles, risks and political systems. Egypt and Nigeria are now the continent’s two largest economies, ahead of South Africa in third position. The two larger economies are also growing at higher rates, with Egypt’s average growth over the past five years at +4.6% and Nigeria at +1.5% compared to South Africa’s -0.6% as per the IMF.
Visio Fund Management’s Metsi Fund was launched over 11 years ago, in June 2009, to provide investors with the opportunity to reap some of these returns. The fund has generated 8.21% annualised ZAR returns over five years compared to 1.1% annualised returns for the MSCI South Africa Index (ALSI). The MSCI EFM Africa ex-South Africa benchmark has, on the other hand, generated annualised returns of 6.24% over the same period. The Metsi Fund has also been managed with a lower volatility versus both the MSCI EFM Africa ex South Africa and MSCI EM Indices over the life of the fund.
The fund’s objective is to provide reasonable returns above the benchmark and peers over the medium to long term. As result, the investment team uses a fundamental research process to unearth opportunities. Africa strategy CIO Ronald Chabvonga, puts it as follows: “The 54 countries in Africa are each driven by different dynamics and issues. Our job is to identify where the opportunities and the risks are, and manage them so we generate positive returns for our investors over the medium to long term. We will not pursue potential short-term returns which could result in losses for our clients.”
Fund manager Phihlelo Matjekane states that “over a decade of experience of managing African equity portfolios has allowed the Visio team to run high-conviction, more concentrated portfolios” and that the “Metsi Fund held over 40 positions at inception, compared to closer to 20 holdings today. Key to this has been closely following company management over the period and measuring outcomes against historic guidance”. He also talks of how “school fees were paid” in the early years, which have led to a robust, well-considered investment process which the team follows today. Key to this process is the focus on investing in companies that allow them to sleep well at night.
In summary, Africa funds provide investors with portfolio diversification benefits in high growth frontier and emerging markets, together with a lower volatility of returns. The 10% rest of Africa offshore Regulation 28 limit also offers SA-based investors an additional offshore diversification allowance. Copyright. HedgeNews Africa – November 2021.
Phihlelo Matjekane and Craig French are from Visio Fund Management, which was formed in June 2003. The firm’s total assets under management are in excess of R36 billion ($2.4 billion), across equity long/short hedge funds, long only equity, multi-asset fixed income, balanced and flexible unti trusts, as well as property and Shari’ah mandates and Africa ex-SA funds. The firm’s clients are mainly institutional in nature. The team follows an investment approach premised upon fundamental research and analysis applied across a range of equity investment strategies depending on mandates.