The Middle East and North Africa (Mena) region has not been without volatility in recent years, yet using a ‘growth at a reasonable price’ (Garp) approach has paid off for the team behind the $14.4m (£8.6m) Baring MENA fund, having outperformed the MSCI Arabian Markets ex Saudi Arabia index since launch.
Manager Ghadir Abu Leil-Cooper says the idea behind the fund, launched in 2010, is to build a portfolio in the region that provides unrecognised growth at reasonable valuations.
She adds: “We’re avoiding value investments because they are almost invariably value traps – they work sometimes but that’s not why you buy emerging and why you buy frontiers. You also want to completely avoid growth stocks where everything is priced in and it is very vulnerable to any negative growth surprise.”
Aside from the Garp approach, the team also have five factors they look at when identifying potential holdings, which the manager calls the “lynchpin” of investing in emerging and frontier markets”.
These are growth, liquidity, currency, management – of both economies and companies – and also valuations. These are then assessed to come up with the “best high conviction portfolio with the right risks”.
This process has remained unchanged, although Ms Leil-Cooper explains that one thing that has changed is the underlying markets.
“Even in the life time of the fund, which is roughly four years, a couple of these markets are about to graduate from frontiers to emerging [Qatar and UAE].”
Macroeconomic factors do play a part in the portfolio, as the region has seen a lot of turmoil, but the manager points out: “Macroeconomic factors affect everywhere, regardless of whether they’re Mena or not – it is part of the M for management side.”
Since launch the fund has produced a return of 44.97 per cent to April 3 2014, which compares favourably with the 21.52 per cent return from the MSCI Arabian Markets ex Saudi Arabia index, according to FE Analytics.
In addition the fund has outperformed the index across a three-year time period, and for the year-to-date has delivered a return of 15.03 per cent. The manager notes that while the fund had a tough year in 2011 – “but it was tough for almost everyone” – the consistent outperformance can be attributed to a combination of asset allocation and stock selection.
She notes: “What attracts you to a region like this, which is clearly a frontier and where you are taking a lot of risk, are a few very clear investment drivers.
“First, we have a very young population that is growing very fast. It tells you that we have got years of growth to come with that population entering the consumption side. The second theme is for infrastructure.”
Ms Leil-Cooper highlights that for a long time much of the Mena region has been governed by very autocratic regimes, and not enough infrastructure has been implemented to help the rest of the population, such as access to water and education.
“That [issue] is now very well understood, particularly by Gulf governments who have embarked on infrastructure projects in the past couple of years.”
Meanwhile the third driver is the commitment, particularly by Gulf states, to provide high-quality healthcare, mainly through the private sector, which allows for opportunities in healthcare providers and drug companies.
Ms Leil-Cooper adds: “The portfolio is very actively managed, so there will always be changes in the portfolio. As at the end of February, we were out of Egypt completely and we were not so much in the rest of North Africa either. The concentration has been much more in GCC (Gulf Cooperation Council) countries, as that is where we feel the opportunities are.”
Jon Beckett fund analyst, chartered institute for securities and investments:
Verdict
“Short track record, small assets and a concentrated portfolio puts this fund firmly near the top of the risk spectrum and it is perhaps best suited to professional discretionary buyers. If Africa exposure is your goal then you also have better options over this fund. If what you actively seek is more Middle East exposure, then you will find it here in spades. Its sector risk in financials is noteworthy but if you are happy to take that risk, then this could be a useful satellite proposal.”
