Adventurous Investor

April 19, 2013 6:35 pm

Why Nigeria is my preferred African play

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New ETF offers direct exposure

Readers of this column will know that I am a long-term Africa bull. I think that any adventurous investor worth their salt should have some exposure to equities in one of the world’s most optimistic continents.

I won’t bother rehearsing the arguments in detail again – I’ve been over them many times before and they were reiterated in an FT Money cover feature earlier this year. Suffice to say that sub-saharan Africa is the place to be, and that the most exciting investments are those companies serving the fast-growing consumer marketplace or helping build out the continent’s infrastructure.

How to get access to this market is the big practical issue. Because of the precarious and volatile nature of the continent’s politics, and all the other risks, I’ve generally favoured a fund as the best option – though that hasn’t stopped me talking about the odd specialised company, such as African agriculture play Agriterra.

Unfortunately, the choice of funds, at least for UK-based investors, is very limited. There are mainstream offerings from the likes of Templeton, JPMorgan, Neptune and Renaissance. Many tend to be overweight in South Africa, because it’s by far the most liquid market and open-ended funds in particular need daily liquidity.

But my preferred play is a small, but well-regarded Aim-traded outfit called the Africa Opportunities Fund (AOF) managed by Francis Daniels. This trades at a 20 per cent discount to net asset value and invests in both African equities – key holdings include the big continent-wide retailer Shoprite and west African mobile phone network Sonatel – and government bonds. Unlike many other funds, South Africa is only a small part of the portfolio.

A much bigger chunk – 18 per cent, as at the end of 2012 – is in Nigeria. If I had to make a choice and pick one equity market that I think could be a dominant player over the next decade, it would have to be this one. A huge wave of western capital has flooded into this country over the past year – foreign direct investment totalled $8.9bn in 2012 but that’s a tiny number compared with the obvious potential.

Adventurous types will know all the arguments deployed by Nigeria bulls (oil, lots of young people, vast consumer markets, growing middle class) and bears (Islamic insurgencies, systemic corruption, terrible corporate governance). I’m with the bulls, and I’d note that Nigeria’s banks seem to be the default mechanism for playing the story.

The theory is that local banks will effectively serve as a transmission mechanism for redistributing all that growth. As the economy grows, their balance sheets will grow, and profits will hopefully keep up, provided that bad debts are managed carefully.

So far, all has gone to plan; the Nigerian Stock Exchange and its main All Share index is up 20 per cent so far this year, while over the past 12 months it is up 65 per cent, although that’s still 45 per cent down from its 2008 peak.

Getting exposure at an individual country level is even more tricky. There is no Nigerian-focused fund, either active or passive, available to UK investors. And apart from the Nigerian operations of PZ Cussons, a UK personal goods company, there’s also no direct company exposure I am aware of via the London stock market.

But the good news is that there is now an easy-to-access US exchange traded fund that offers direct exposure. It’s the Global Index Nigeria Index ETF (NGE), and it launched a couple of weeks ago on the New York Arca exchange.

It uses a purpose-made index called the Solactive Nigeria Index, which is an attempt to build something that can be easily tracked by a western fund manager at a sensible cost. The ETF still offers access to the main companies in the local market – financial institutions comprise 41 per cent of the Solactive index, followed by energy stocks and consumer companies, both at 24 per cent of the index. Big companies in the index include Guaranty Trust Bank at 8.5 per cent, First Bank of Nigeria at 7.8 per cent and Nigerian Breweries at 5 per cent. Nestlé Nigeria, a locally listed offshoot of the Swiss giant, is also present, at 4 per cent.

The total expense ratio is 0.68 per cent. Obviously, an active fund manager might choose a different bunch of stocks – maybe less banking exposure and more consumer stocks – but no one is currently offering UK based investors that choice. Right now, this looks the best way to get simple and low-cost access to Nigeria, and is definitely one for my adventurous portfolio.

To comment on this article, please visit www.ft.com/money or email adventurous@ft.com

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