Portfolio Manager Perspectives

Jeff Benjamin

Why investors should be into Africa

Ignored by most, the huge continent offers true diversification and growth, says fund manager Larry Seruma

May 3, 2012 @ 2:24 pm

In a world of fast-growing economies in the emerging world, it might be easy to overlook Africa, which represents just 4% of global gross domestic product. Such an oversight would be a mistake, according to Larry Seruma, fund manager for Nile Funds.

“Most investors still don't have any exposure to Africa,” he said. “Investors are still risk-averse and are pulling money out of emerging markets in favor of developed markets.”

By avoiding some of the lower-profile economies and markets that can be found among the 54 countries and 29 operational stock exchanges on the continent, investors are missing out on a true play for growth and diversification, he said.

Mr. Seruma, who has managed the Nile Pan Africa Fund Ticker:(NAFAX) fund since it was launched two years ago, has zeroed in on three main themes of investment opportunity in Africa: consumer growth, natural resources and infrastructure development.

On the consumer side, which includes a steady expansion of the middle class, he pointed out that Africa's population is expected to double to two billion by 2040, making it the most populous continent on the planet. “Consumers are becoming a big and powerful story, and big consumer-oriented companies are starting to pay attention to Africa,” Mr. Seruma said.

The natural resources theme can be summed up by the fact that Africa represents half of the world's gold production and iron ore reserves, as well as 15% of proven oil reserves. “Africa is still seen as a major supplier of natural resources to the rest of the world,” Mr. Seruma said.

The infrastructure growth theme essentially is an extension of the other two themes. The continent is primed for an expansion of power generation facilities, shipping ports and roads, as well as cellular and communication towers.

On a sector basis, the fund is most heavily weighted in natural resource-related companies (20%). “It's primarily about oil and natural gas, and we really like the exploration companies,” Mr. Seruma said.

The strength of the financial services sector, which makes up 19% of the portfolio, is best illustrated by the valuations of Nigerian banks, he said.

“For the most part, the Nigerian banks trade at a price-to-book value of one, the price-to-earnings ratios are in single digits, they've got 9% dividend yields, and the earnings growth over the last three years has averaged around 28%,” he said.

The fund has gained nearly 29% from the start of the year, while the MSCI EAFA Index has gained 7.9% and the emerging- markets fund category, as tracked by Morningstar Inc., is up 12.9%.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives .

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