Jonathan Kruger, CFA, manages the Africa Equity Fund for Prescient Investment Management in Cape Town, South Africa. Here he explains why he’s passionate about African stock markets, his investment process, and where he sees the most value now.
Tell us a bit about yourself. How did you first become interested in Sub-Saharan Africa as an investment destination?
JK: I’m passionate about investing in Africa as I believe there is a strong connection between a functioning liquid stock market, the economy and development of the continent. There is a huge opportunity for investors to be rewarded for investing in the growth of frontier African economies. I first became interested in investing in Africa in 2008. It seemed like a natural opportunity to pursue given the immense potential of the continent and the limited number of Africa-focused investment products available. So, after much research, we launched the Africa Equity Fund in March 2011.
Is the Fund open to foreign investors? Is there a minimum investment amount?
JK: The Fund is a South African registered Unit Trust, similar to a US mutual fund. So, whether foreigners can access it depends on their home jurisdiction and associated regulations. The minimum investment is ZAR10,000 (approximately $1,200).
Do you find South African investors are generally receptive to investing elsewhere in Africa?
JK: It can be a tough sell although perceptions are improving. South African institutional investors tend to be cautious when investing elsewhere on the continent. But the pension regulator here in South Africa has made an additional offshore allowance of 5% to Africa, which will hopefully prompt more fund managers to consider increasing their exposure.
You employ a quantitative stock selection process called Equity Active Quant. Can you walk us through how this works?
JK: Equity Active Quant is an objective way of selecting stocks on fundamental value basis. Several key factors are considered from companies’ financial statements to determine a fair value of a stock. It follows a bottom up approach and invests in stocks that are showing value compared to the rest of the market. Financial statement numbers are carefully scrutinised and adjusted to reflect the true underlying value of the company before any comparisons are done. To compliment this value core process two additional strategies are used in the portfolio, which will select shares with growth characteristics which may appear expensive on a pure value basis. The process is conducted in a risk return framework. Political, economic and company specific risks are considered and managed.
What are the key indicators you look for in a winning stock?
The key indicators we look at are dividend yield, price to book value, trading profit yield and cash flow yield.
What has been the biggest challenge to running the Fund?
JK: I’d say the primary challenge is the high cost of investing in frontier markets. These costs come from multiple sources and include high brokerage, wide spreads on equity and currencies, illiquidity and high custody costs. I believe these costs will come down over time (they already have) as the markets become more sophisticated. But it will take cooperation from a number of parties to make this happen.
Do you have a favorite African market at the moment?
JK: On a bottom up basis we are seeing a lot of value in Kenya. After a very depressed 2011 ( the market was down 28%) most of the stocks were (and still are) showing a lot of value. We have been overweight in Kenya since the beginning of the year. The market has rallied 27% so far this year and is showing some good momentum, which is encouraging.
How about a few of your favorite stocks? Can you give us a tip?
JK: Safaricom (SAFCOM:KN), a very innovative telecom company in Kenya, is showing a lot of value on a fundamental basis and has been showing some momentum this year. This company has consistently shown its ability innovate and source new revenue streams in telecoms, and even the banking space with its mobile money (M-Pesa) offering. Nigerian banks, including Access (ACCESS:NL) and Zenith Bank (ZENITHBA:NL) are also showing value. Confidence in the Nigerian banking sector has returned as it was recapitalized after some troublesome years. The sector is set to benefit from the emerging middle class with its greater spending power.
To learn more about the Prescient Africa Equity Fund check out the Fund’s latest fact sheet.