As asset managers reconsider their tactical allocations to emerging markets, more are turning their attention to the growth potential of the world’s frontier markets, especially Africa.
HSBC Global Asset Management recently highlighted the merits of the under-researched frontiers on valuation terms, singling out Nigeria as a favourite.
Moreover, US private equity firm Carlyle is reportedly seeking to raise a $750 million fund to invest in Africa and is building bases in Johannesburg, Zimbabwe and Nigeria.
“We believe there is significant opportunity in sub-Saharan Africa and are exploring establishing a team there,” Washington DC-based Carlyle spokesman Chris Ullman tells AsianInvestor. “Because of regulatory restrictions, we cannot comment on rumours related to fundraising. We expect to have more details on this effort in the coming weeks.”
So AsianInvestor took the chance to catch up with Paul Freer of Alquity Investment Management as he paid a flying visit to distributors in Hong Kong to promote the firm’s Africa fund – its sole direct-investment fund so far.
Alquity IM was launched in 2009 as part of the Alquity Group, which was established in 1999 as Smoothed Growth Investment Management and now has $115 million in AUM. Even now it runs a range of multi-asset funds under the SGI brand.
Freer has been on the company’s board since 2006 and started as Alquity CEO full-time in 2009, when the name change occurred. He says he and co-founder Paul Robinson wanted to focus on emerging markets and that “smoothed growth” was not representative of their plans.
Both founders have an affinity with Africa; Freer having spent five years there, several as managing director of Barclays’s corporate banking operations across the continent, while Robinson has done charitable work in Africa.
Together they launched Alquity’s Africa fund on June 28 last year to invest in listed equities in about 10 countries across the continent. It is set up as a Ucits III fund domiciled in Luxembourg and was approved for retail sale in Hong Kong by the Securities & Futures Commission just before Christmas.
Getting the marketing side of the fund working in Hong Kong as a gateway to Asia has been a priority, confirms Freer. The company has distribution in Japan and Malaysia, with Singapore next on the list.
Alquity IM is regulated by the UK’s Financial Services Authority. The fund’s investment manager is David McIlroy and its analyst is Bhavna Bhana, who are both London-based and have experience of managing funds in Africa. Between them they travel to Africa frequently and have also set up a local brokerage.
“As our first fund in the Alquity range, we are very keen to ensure this remains pan-Africa and pan-sector, so there is a good spread of companies from banks and financial services to oil and gas and food retailing,” says Freer.
“On several layers the fund gives country and economic diversification: Zambia is copper based, Botswana is diamonds based, South Africa is platinum based and Nigeria is oil based. If you invest in one country, you are taking one set of economic risks, so we invest across them.”
He says the fund focuses on three investment themes: land and resources; infrastructure development; and the growing wealth of African people. Nine of its top 10 stocks have a market cap of more than $1 billion.
Alquity also invests in stocks outside of the continent that derive at least 50% of their revenue or profit from it, such as UK-listed Tullow Oil, 80% of whose profit comes from Ghana.
Important to the founders was to ensure their investments were socially responsible, so it has signed up to the UN principles on responsible investment. It also donates a minimum of 25% of the fund’s management fees (leaving performance untouched) through its charitable partner The One Foundation to create jobs in Africa.
The foundation’s partners on the ground include Opportunity International Bank of Malawi, which boasts branches across the continent providing microfinance.
“Our donation becomes their funding to provide that microfinance,” says Freer, “which is then lent out to people in Africa to run their own business. As an ex-banker, the beauty of this is that the money gets repaid and can then be recycled and lent out, so there’s a sustainable element.”
Alquity has also invested in socially responsible analysis available on African stocks through a company called Risk Metrics, now part of MSCI.
For retail investors, the Africa fund has a 1.9% management fee. There is also a fee linked to performance. The minimum investment is $2,000. For institutional investors there is a 1.4% management fee and a minimum $1 million investment.
The firm announced on Friday that it has successfully set up a monthly savings plan via Friends Provident International. It comes after a series of introductory meetings held last month to tell Hong Kong financial intermediaries, insurers and wealth managers about the Africa fund. A second round of meetings with further introductions is planned for this week.
Alquity aims to double the fund’s value every 4-5 years, with a growth rate of up to 16% per annum. Since inception it has achieved growth of 5.3%.
As the fund grows in size, Freer says Alquity will launch more emerging market funds. “Once this fund gets to a reasonable size, say $30 million, we will launch a second, a third and a fourth fund based on what the market is demanding from the opportunities we see,” he adds. “We will hire other investment managers and teams to manage those funds as appropriate.”