Africa is not always seen as the most obvious place for investors, but the returns of the $376.5m (£224.9m) JPMorgan Africa Equity fund would suggest otherwise, having outperformed its benchmark across both three- and five-year time periods since launch in 2008.
The investment objective of the fund is to provide long-term capital growth by investing in a portfolio of pan-African companies.
Sonal Tanna, lead manager on the fund, says: “Our investment approach and research can be characterised as fundamental and bottom-up. We identify businesses with above-average quality and growth prospects and build a high-conviction, long-term orientated portfolio.”
The portfolio has been managed the same way since its inception, using a fundamental research process that is based on understanding a business then valuing it. Macroeconomic factors have some importance in the process, but according to the manager it is more as a context or backdrop to the bottom-up stock selection.
Ms Tanna explains: “The fund takes a benchmark agnostic approach. We divide the portfolio approximately one-third each between the more established emerging African markets, for example South Africa, ‘frontier’ Africa – such as Nigeria and Kenya – and lastly, African natural-resource companies, which are typically listed in the UK, Canada and Australia. This portfolio positioning reflects our long-term conviction in where the opportunities lie in Africa.”
The five-year performance of the fund to April 1 2014 has been very strong with a return of 107.4 per cent, compared with 77.46 per cent from the benchmark MSCI Emerging and Frontier Markets (EFM) Africa index.
The investment case for Africa is based on three key things: demographics, natural resources and infrastructure spendingIt has also outperformed the index for the three years to April 1 with a return of 5.81 per cent against a benchmark loss of 1.21 per cent, although the 12-month figure has slipped slightly.
In terms of changes to the portfolio, Ms Tanna notes the team have recently reduced exposure to Nigeria as many of the stocks they like on a fundamental basis – such as consumer names – have re-rated, and consequently the upside has been reduced.
But she adds: “Overall this remains our largest positive active position given the positive long-term prospects. Our second largest overweight is in Kenya, where we have positions in a number of consumer staples businesses and financials.”
Other moves in the portfolio include initiating a position in a bank in Mauritius “on the back of a positive view from our dedicated Africa analyst and strong five-year expected returns,” which highlights the team’s research resources.
The manager adds: “While the index is heavily skewed by the weight of South Africa – the market is close to 90 per cent of the index – it is only 56 per cent of the fund, including natural resource companies. As such, this remains our largest underweight in the portfolio.”
In addition, the team “significantly reduced” its Egyptian exposure after the uprising on the basis the currency was unsustainably high in real terms and was likely to fall, reducing hard currency returns. “Today we have just one stock in Egypt,” says the manager.
Ms Tanna says stock selection in a number of countries and sectors has helped deliver the strong performance, with examples including Dangote Cement, Nigeria’s dominant cement producer, on the basis it has a dominant market share and appealing growth prospects in the rest of Africa.
Looking ahead, the manager says the investment case for Africa is based on three key things: demographics, natural resources and infrastructure spending.
She explains: “The way we capture this classic emerging market development cycle is through sectors that capture rising income and penetration of services. Additionally, we see natural resources as both a competitive advantage of Africa and the catalyst for economic development. We typically invest through internationally listed companies with the majority of their assets in Africa as long as they have high quality asset bases and production growth.”
EXPERT VIEW
Jon Beckett fund analyst, chartered institute for securities and investments:
Verdict
“You will get significantly more Africa exposure in this fund, but a lot of that exposure is actually in South Africa. Good valuation discipline underpins this strategy but the slowdown in the commodity story hurts the fund’s positioning overall and I expect that beta will continue to drag on fund returns in the short term. At least that choppy market may help find alpha through good valuation discipline and thus presents a better medium to long-term prospect.”
