I have a unit trust that I track every day. One day it goes up R5.00 or more. The next day it’s lower. I fail to understand how that works. What makes the price change? Say I want to sell my units. What determines the price I will receive?
Sincerely,
Brenda from South Africa
Dear Ryan,
I have a unit trust that I track every day.
One day it goes up R5.00 or more. The next day it’s lower.
I fail to understand how that works. What makes the price change?
Say I want to sell my units. What determines the price I will receive?
Sincerely, Brenda from South Africa
Dear Brenda,
Unit trusts, which are commonly known as mutual funds outside South Africa, are a collection of shares of from many different companies. Every day the stock exchange is open, people buy and sell these shares.
If the news about a certain company is good, the price of its shares will typically rise because investors believe that the company is more valuable than they had previously thought, and demand for the shares increases. But if the news is bad, the price of the shares will often fall. Why? Because the company’s prospects may no longer be so bright, and demand drops as a result.
Owning shares of a company is a bit like owning a cow. If your neighbor sees that your cow is becoming very strong, healthy, and producing a lot of milk, he will probably be willing to pay you a handsome price for it. If, however, he sees that the cow is growing sick or thin, he won’t be willing to pay as much.
If a share of stock is like a cow, then a unit trust is like a herd of cattle. Each individual cow (or share) has its own characteristics. Some are fat. Some are lean. Some are young. Some are old. Some are very productive. Some are not.
Thus, each individual cow has its own unique value. To determine the value of the entire herd (or unit trust), you sum the values of all the individual members of the herd. And because investors’ perception of each share’s value changes on a daily basis, so does the value of the entire mutual fund (or herd).
Photo by ILRI/Stevie Mann
So, when you sell your units, you will be selling at the price that investors believe the underlying shares of your unit trust are worth on that particular day.
Passive vs. Active Management
Now, let’s stretch this analogy a bit further.
Just like a herd of cattle is overseen by a rancher, cowboy, or herdsman, every unit trust and mutual fund is overseen by a fund manager.
Some ranchers take a “hands off” approach to managing their herds, doing little more than sending them out to graze every day.
But others become much more intensively involved. They nurture the healthiest cows, cull unwanted members of the herd, and search for strong animals to add to the group.
Similarly, the manager of a “passive” fund will trade individual shares infrequently, perhaps re-balancing them once per year. So, the fund’s performance will largely be determined by how the overall market behaves. Some shares will do well, some will not.
An “active” manager, on the other hand, will closely watch all of the shares in the fund in an attempt to maximize performance. He or she will sell those stocks that look like they will perform poorly in the future and use the proceeds to buy shares that they believe will perform well.
Mutual Fund Fees
As you might expect, the fees associated with an actively-managed fund are much higher than the fees of a passively-managed one.
The total expense ratio measures a fund’s total fees as a percentage of total assets. Most of South Africa’s best-performing unit trusts have expense ratios that fall in the range of 1-3%. This means that for every R1000 you invest in one of these funds, you can expect to pay between R10-R30 worth of annual fees. Passive funds will tend to have lower expense ratios.
It’s important to note that actively-managed funds don’t necessarily outperform their passively-managed counterparts.
Why not?
One reason is that high fees are a big drag on performance. The other is that some managers simply don’t know when to leave well enough alone. Because they buy and sell shares frequently, active managers have lots of opportunity to make bad decisions that hurt investors’ returns.
Choosing a Mutual Fund or Unit Trust
How do you decide which unit trust or mutual fund to invest in? I suggest that you compare their performances over the long-term – the past 10 years or more. Look for those that have consistently posted market-beating returns. Consider their expense ratios, too. Why? Because those with lower fees will have an easier time outperforming in years ahead.
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 inception.
Here he explains his investment process and what led him to launch the fund.
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.
Robert Scharar, Lead Portfolio Manager of the Commonwealth Africa Fund
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.
Robert and Daphne Scharar in South Africa
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.
Jan Schalkwijk is a Portfolio Manager with Africa Capital Group, an asset management firm that specializes in African stocks. The following is an account of his recent trip to Kenya and Burundi.
As the plane began its descent into Nairobi the evening of March 5th, I struck up a conversation with the KLM flight attendant. I always enjoy the opportunity to speak a little Dutch, which is not a daily occurrence for me these days.
As part of the usual small talk, I asked her where in Nairobi the flight crew was staying. She replied that KLM security had advised them to stay at the airport this time in light of security concerns surrounding the elections that had been held the day prior.
It was then that I mentally connected the news articles I had been reading about the Kenyan elections with the reality of being there, at ground zero of what could either be a repeat of the 2007 election violence or something more hopeful: a watershed moment for Kenya — a peaceful transition of power.
Jan Schalkwijk is a Portfolio Manager with Africa Capital Group, an asset management firm that specializes in African stocks. The following is an account of his recent trip to Kenya and Burundi.
As the plane began its descent into Nairobi the evening of March 5th, I struck up a conversation with the KLM flight attendant. I always enjoy the opportunity to speak a little Dutch, which is not a daily occurrence for me these days.
As part of the usual small talk, I asked her where in Nairobi the flight crew was staying. She replied that KLM security had advised them to stay at the airport this time in light of security concerns surrounding the elections that had been held the day prior.
It was then that I mentally connected the news articles I had been reading about the Kenyan elections with the reality of being there, at ground zero of what could either be a repeat of the 2007 election violence or something more hopeful: a watershed moment for Kenya — a peaceful transition of power.
Was I foolish or naive to be here at this moment? Perhaps. Yet, I felt a strong desire to be in Kenya now, not later, to get an on-the-ground sense of the forces of change, the reactionary headwinds, the energy of the economy, and the level of optimism of the Kenyan people.
Yes, I was glad to be in Kenya.
An Uncharacteristically Quiet Nairobi
Once I had identified my driver, we were off to Nairobi. In a city usually consumed by grueling traffic jams into the late hours of the night, I was struck by how quiet it was. In fact, I was wishing it was a little busier, so my driver would have to slow down a bit and tone down the joyride experience.
He was equally surprised, and said he had never seen it this quiet. Because of the elections people had left town in great numbers, to vote in the towns and villages from where they had migrated, or just to be in the safe confines of their communities of origin. Of those who remained in Nairobi, many had taken time off from work to see what the next few days would hold.
Jan Schalkwijk, Portfolio Manager at Africa Capital Group
We arrived in New Muthaiga, a wooded, residential neighborhood west of town, sprinkled with embassies, and the home base for UN personnel, with their SUVs and red license plates. I had booked a stay in a private residence I had found through AirBnB.com, which I use frequently when abroad. Besides the obvious benefit of saving 75% off the price of a nice hotel room, I like to travel in this manner, as it affords me the opportunity to share meals with my hosts and to see the region from the local perspective.
Open for Business
Once day broke I was eager to tackle the assignment at hand: to visit a number of publicly traded Kenyan companies and to get a sense of the economy and the way forward post-election.
The broker that was taking me around to meet with the various companies was Kestrel Capital. Though most brokers can deliver a meeting or two, the quality and number of meetings they were able to arrange and their hospitality made a very good impression.
Furthermore, traffic was still light and continued to be so for the remainder of the week, making the otherwise taxing effort of shuttling between meetings a breeze. The only hassle was the increased security, which I was told has been in place ever since the Kenyan army entered Somalia.
Despite the stepped up security presence, it didn’t feel tense, and the security guards were generally friendly and not too worried to see me show up at their gates. So once I was re-adjusted to the sight of AK-47s – ubiquitous throughout much of Africa – and proficient with the procedure of taking out my laptop and recording the serial number on the sign-in sheet, it was business as usual.
Investors Welcome
Over the course of the next seven days, I met with a number of companies in industries ranging from telecom, banking, and infrastructure, to private equity and media. The meetings were always with senior management and always lasted until I started feeling guilty that 60 to 90 minutes had passed and no one had given any indication that the meeting needed to be wrapped up.
As I sat down with the CFO of Safaricom (SAFCOM:KN) for an hour plus, I realized how hard it would be to pull something similar off in New York with the CFO of Verizon (VZ:US). Any perceived informational disadvantage in the analysis of companies traded in Africa versus those in a mature and data rich markets like the US is mitigated by the access one gets to senior management, their willingness to talk to you, and generally the less complicated nature of their businesses.
Election graffiti in Nairobi
An Anxious Wait for an Election Outcome
As the days passed, people were getting more anxious about the pending election results. Why was it taking so long? Why did the electronic vote counting break down? Television screens in office buildings, shops, and restaurants were all tuned to continuous election coverage.
As I left for Burundi to visit my sister the Friday after Monday’s elections, the results still had not been declared. Watching the TV screens at the airport, it appeared that Uhuru Kenyatta, the son of Jomo Kenyatta, Kenya’s first elected president, seemed to have a slight margin over 50%, the share needed to avoid a run-off.
As the district results came in, it was hard to avoid noticing that in each district one candidate generally had 90-99% of the vote. That would suggest that Kenyans are still very much divided along ethnic lines and not voting based on issues. Hopefully the new constitution and the increased direct participation, will gradually lead politicians to substitute the politics of ideas and results for the politics of ethnicity.
Grounds for Optimism in Burundi
Whereas Kenya was humming with economic activity and building upward and outward, Burundi is more reminiscent of the Africa that is familiar from the Western media: poor, agrarian, and little infrastructure. One has to be careful for mosquitoes and food-borne illnesses, and running water and electricity are both a luxury and unreliable. But even here, one would be hard pressed to not see the optimism, the desire to create a better life.
The growing capital city, Bujumbura, boasts breathtaking views of Lake Tanganyika with the mountains of DR Congo as a backdrop, and lush hillsides and tea plantations just outside of the city. The economy feels like an NGO driven one, with every place we visited teeming with expats.
But at the same time, billboards with cellphone advertisements, banks, and restaurants are sprouting up left and right. The future holds great promise. It was during a car ride back from the cool mountain tops to the capital that I learned on Radio France Internationale that Kenyatta had been declared the winner in the Kenya elections.
Burundi
Post-Election Kenya Gets Back to Work
Once back in Kenya, Nairobi seemed to be at peace with the election results and eager to move on. The people I spoke to, granted they were likely Kenyatta supporters, felt that the Supreme Court challenge by his main rival Raila Odinga would run its course but was doomed to fail and that Kenya was ready to move on.
Whether the post-election era of Kenya is the dawn of a new era or a consolidation of power, time will tell. I could, however, empathize with the desire to move on and to not dwell on 2007 and the ghosts from years past.
I was also fortunate to get a chance to visit East Nairobi, which is usually not where the brokers will take you. I felt like I had been miniaturized and dropped off near a giant anthill. The scene was utterly chaotic, full of energy, and everyone was laboring at something. Welding pipes together, making a bed frame, selling building blocks, transporting car parts in a wheelbarrow, an endless road, with endless activity.
I met a local businessman there who runs a factory that makes personal care products such as disinfectants, creams, hand sanitizers, etc. It was nothing like I had in mind. In a vacant lot next to the building, a pig was sorting through heaps of garbage. As we descended into the basement where the factory was, a small team of workers was mixing, bottling, and labeling some sanitary product for shipment. In spite of the gritty surroundings, the bottles looked immaculate and my host was enthusiastically showing me around and sharing his vision for growth.
The East Nairobi that I saw is the economy that hardly shows up in the official GDP tallies, that is not accounted for in the 40% unemployment number, but that definitely generates income, buys cellphones, real estate, food products, etc. One would be mistaken to assume the official economy is the sum total of Kenya’s economic activity. In fact, the East side feels rather powerful in that regard.
A Farewell Safari
With some time to spare on my last day, I paid a visit to the National Park. I imagine decades ago the city and the park were some distance from each other, but today, the city reaches to its gates. It makes for the interesting experience of seeing wildlife against the backdrop of a city skyline. No need to sign up for a safari; just ask your driver to take you there and drive into the park and if you have a hard time finding the animals, just follow the Jeeps from Kenya Wildlife Services (KWS).
The wildlife is best spotted at dawn and dusk. I was there in the middle of the day, yet was fortunate to spot plenty of giraffe, buffalo, gazelle, and even a hippo that surged out of a swampy body of water, just as I was contemplating getting out of the car (I subsequently changed my mind). My driver – I would guess in his mid-fifties – had never been inside the park, which struck me as odd and was the topic of some friendly laughter and joking around, during our drive.
As I thought more about it later, I realized that on a trip to Long Island years ago, I was stunned to learn during a business lunch that half my table had not been to New York City in over a year and some had never visited the Empire State building. Perhaps we are not that different after all.
The US investment community is waking up to the African growth story. As a result, an increasing number of mutual funds and ETFs now boast significant African stock holdings.
But Africa is not a country. It’s a diverse continent with a myriad of different cultures, leaders, resources, and economies.
So, I thought it might be helpful to dig into these US funds’ portfolios to determine where exactly they are placing their bets.
The US investment community is waking up to the African growth story. As a result, an increasing number of mutual funds and ETFs now boast significant African stock holdings.
But Africa is not a country. It’s a diverse continent with a myriad of different cultures, leaders, resources, and economies.
So, I thought it might be helpful to dig into these US funds’ portfolios to determine where exactly they are placing their bets.
Investing in the Sub-Sahara
The table below lists 11 funds ranked according to their degree of sub-Saharan African exposure.
To me, the Sub-Saharan weights of the Market Vectors Africa ETF (AFK) and T. Rowe Price’s TRAMX are the table’s biggest surprises.
How is it that these two Africa funds deploy only half of their assets to sub-Saharan stocks?
Photo by Weesam2010
Well, AFK invests heavily in North Africa and in companies that do business in Africa but which are domiciled in the US, Europe, or Australia. The same goes for TRAMX, but, unlike AFK, it also invests in Middle Eastern stocks.
Now, let’s check out the sectors that each fund invests in.
Screening Out the Mining and Oil Plays
I’ve often noted that I’m not a fan of mining and oil stocks. I see the most long-term, sustainable growth in sectors with more direct exposure to the African consumer — banking, retail, and construction.
The following chart measures the exposure of each fund to sub-Saharan listed stocks excluding those mining and oil companies.
Now we see some real separation between the funds that give their investors exposure to the rise of an African middle class (EZA, NAFAX, GAF) and those that bet heavily on natural resources (CAFRX) or other geographic regions (HLMOX).
But let’s dig still deeper.
Who’s Investing In Frontier Africa?
Clearly, many of these funds invest heavily in South African stocks. South Africa, with its relatively developed infrastructure, and slower economic growth rate may not offer the same ground floor investment opportunity that faster growing countries like Nigeria and Kenya do.
This next table screens out South African stocks from each fund’s portfolio to determine which one invests most heavily in rising incomes in the African frontier.
So, there you have it. If you are in the market for an Africa-focused mutual fund with significant exposure to frontier markets, then you should take a close look at the Nile Pan Africa Fund (NAFAX).
You might consider the Wasatch Frontier Emerging Countries Fund if you’re less biased toward Africa and more concerned about geographic diversification.
The bigger revelation for me, however, is that there appears to be an excellent opportunity to launch a frontier Africa fund.
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.
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). Jonathan Kruger of Prescient Investment Management 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.
