Africa Investor Insight: Robert Scharar

Robert Scharar manages the Houston-based Commonwealth Africa Fund, a $1.9 million mutual fund. As of the end of April 2013, the fund had appreciated 3.7% since its November 2011 launch.

One of the more accessible Africa funds, it requires a minimum investment of just $200. Its largest holdings include Discovery Limited (DSY:SJ), Orascom Telecom (OTLD:LI), and Grindrod (GND:SJ).

Here, Robert explains his investment process and what led him to launch the fund.

Ryan Hoover: You launched one of the first Africa-focused mutual funds in the US, the Commonwealth Africa Fund (CAFRX). What intrigued you about Africa as an investment destination?

Robert Scharar: I have been doing business in Africa for over 20 years.  Over this time I have noticed a rapidly changing economic and social environment that in my opinion supports the thesis that Africa may not only be the last frontier but also one of the best investment opportunities in the next decade.

Africa is where the resources are. It’s got lots of crop land and huge, growing consumer markets. We also like African companies’ focus on dividend payments, which makes for some nice income opportunities.

How did you first get started in Africa?

RS: You might say I like traveling. It was luck to some extent. I live in Houston and, in the early 1990’s, I was doing some work for a company that conducted seismic studies for a gas pipeline in Senegal. The opportunities I saw there fascinated me. I was impressed by the education and skill level of the workforce. Then, a little while later, I had the chance to visit Zimbabwe and came away similarly impressed. Things just ballooned from there, and I ultimately decided to launch a fund that would be accessible to US retail investors. I now travel regularly to the continent, especially to Malawi where I sit on the board of a local, publicly-traded company, NICO Holdings.

How has the fund been received?

RS: We believe that the Fund has been received quite positively to those willing to hear our story and the potential opportunities the continent of Africa has to offer.  As a small fund family we have not been able to get our story out to as many people as we would have liked.  However, this is against a backdrop of net outflows across equity funds in general, coupled with a recently strong US dollar leading people to underestimate the potential benefits from international investing.

Have you noticed a change in US investors’ receptiveness to the idea of investing in African stocks?

RS: It seems to be happening very slowly.  We are spending much of our time trying to educate American investors about the continent of Africa.  Everyone seems to know about the tragedies such as famine, or displacement of ethnic populations because of conflicts or health issues such as AIDS.  What they don’t know is that there are many countries where these are not the norms that there is a rapidly growing educated working group class able to consume beyond subsidence that governments are changing peacefully through democratic elections and the continent possesses a wealth of resources to grow food, produce power and manufacture more goods for local consumption.

What are the key indicators you look for in a winning African stock?

RS: Based on thirty-five years of allocating investments to global markets, we believe the ability to get to “know” the nation is paramount.  It is important to understand the basic government platform on which the economy functions. Thereafter, a review of obvious corporate economic freedoms, tax policies and required reporting standards give us a true sense of the economic environment in which companies operate. With these facts accepted, sensing that capital is available for expansion initiate the individual investment/analysis process.

From there, we seek to “know the people” by gauging their quality of life, experiencing their creative nature and stability, understanding integral statistics reflecting underlying demographics…and through this we see needs to be met by the production of goods and services.

As we follow the creation, production, sale and transportation of these products, we seek to observe the companies involved along this “pathway of progress” and will invest in those we feel to be of interest.

In sum, we want to own real companies with real products and real financials that we can understand.

What’s been the biggest challenge in running the Commonwealth Africa Fund?

RS: While there is research available on many companies you need to approach investing in Africa similar to building a portfolio of non-large-cap US stocks.  You just can’t follow the heard and you need to have a longer term view applied to your selection process.

Which African markets do you like the most right now?

RS: The focus for most foreign investors is on the larger and more liquid markets such as South Africa and Nigeria.  However, investing in companies doing business only in those two countries leaves out what we view as much of the future potential growth story.  We like many of the countries in the SADC region.

To learn more about the Commonwealth Africa Fund, take a look at its website.