Investment Strategies
EXCLUSIVE INTERVIEW: Delivering On Africa's Investment Promise With Bellevue Asset Management

Africa's economic and investment potential has been alluring for many years but hasn't always lived up to the billing. As the continent develops, there are specialists determined to capture the benefits. We recently spoke to one of the players in this terrain.
A speaker at this publication’s 11 June Investment Strategy
Summit, Malek Bou-Diab, portfolio manager, new markets at
Switzerland-based Bellevue
Asset Management, enlightened the audience with an outline of
why Africa is an important continent for investors. He has 12
years’ investment experience and holds a PhD in theoretical
physics from ETH Zurich and also studied at the Lycée National in
Beirut. Before joining Bellevue, he was lead portfolio manager of
JB Northern Africa Fund and Nikko Africa Fund at Julius Baer
Asset Management, in Zurich, and has also worked as a risk
analyst for Deutsche Bank in London. With that breadth of
investment and risk expertise, and the grounding of a theoretical
physics education, he has an interesting perspective on how
investors should approach Africa. This publication recently
interviewed Bou-Diab in more detail about his views.
What is Bellevue doing regarding investment in Africa?
Does it only have one fund? Is there any sort of performance
track record for this that you disclose?
The only fund we have focusing on Africa is the BB African
Opportunities Fund. It is an open-ended fund incorporated in
Luxembourg. Over the year to date (source: June factsheet from
Bellevue), the fund is up 8.3 per cent, against the DJ Africa
Titans 50 benchmark of 9.8 per cent; since inception, the fund is
up 75.4 per cent, against 49.6 per cent.
Are you the main manager of BB African Opportunities? How
long have you worked on that fund?
I am the lead portfolio manager of the fund meaning that I am
responsible for all investment decisions. I am working on that
fund since its inception in June 2009. Prior to that, I managed
the Julius Baer Northern Africa Fund.
What is the philosophy of the fund - is it
top-down/bottom-up, or a blend of the two? Does it have a
value/growth bias? Other?
In our view, Africa offers substantial growth potential due to
the low development of nearly all economic sectors. However, the
catalysts for that growth potential to materialise are
economic/regulatory reforms to fix the issues/environment that
have hindered the development of these sectors in the past.
Given this analysis, the philosophy of the fund is to target
countries/sectors going through reforms and finding well managed
companies that can tap the arising growth opportunities and
generate attractive returns for shareholders. As such our
investment process consists of both a top-down approach (monitor
macro, reforms and other financial markets) and a bottom-up/stock
picking approach (focus on transparency, resilience and growth).
The bias is rather towards growth.
How concentrated is the fund's portfolio? What is your
approach to diversification? Is this a closed-ended
vehicle?
The fund is an open-ended vehicle domiciled in Luxembourg.
(According to its latest factsheet, 37.1 per cent of the
portfolio is in financials; 12.9 per cent in consumer staples;
11.3 per cent in materials; 10.4 per cent in industrials; 8.6 per
cent in consumer discretionary; 6.3 per cent in telecommunication
services; 4.9 per cent in energy; 1.5 per cent in information
technology; 1.0 per cent in health care, and 2.1 per cent in
“other”. There is a 4.0 per cent holding in cash. Egypt, at 39.5
per cent, is by far the largest country holding, while Nigeria is
lowest, at 2.7 per cent.)
Given the philosophy of the fund highlighted above we gain
exposure to idiosyncratic risk factors very specific to
countries/sectors. We tend to minimize the exposure to global
risk factors so we avoid sectors such as commodities (dependent
on global growth in particular China) and limit our exposure to
South Africa given that its economy is largely integrated in the
global economy and its financial markets already well penetrated
by international investors (we only invest in South African
companies growing their investments/exposure to Africa ex-SA).
Furthermore, we avoid the themes/countries overbought by
international investors and tend to be contrarian. We follow also
the Luxembourg regulation imposed restrictions on maximal
exposures.
What sort of investors do you think should consider
investing in this fund? Is it particularly well suited to the
wealth management community, and if so, why?
We currently advise clients with emerging market exposure to
allocate 1-5 per cent of their emerging market allocation to
Africa. The BB Africa Opportunities fund, given its focus on
idiosyncratic risk factors (low exposure to natural resources and
South Africa, an established EM), introduces from a risk/return
and diversification perspective an attractive complementary
exposure. The idea is to start with a small allocation and
gradually increase it over the years as the sustainability of
Africa’s positive economic development is confirmed.
Can you set out a bit of your current views on the Africa
economy? Where are there opportunities/challenges?
During the last decade, Africa benefitted from strong global
economic tailwinds in particular high commodity prices and more
affordable cost of capital (capital hunting growth prior to 2008
and hunting yield afterwards). At the same time, a process of
economic reforms was engaged to fix issues hampering the
development of the economy which led to solid “internally
generated” economic growth (development of telecoms, increasing
penetration of financial services, etc.).
Lately, the global tailwinds turned into headwinds, particularly
with the fall of commodity prices, which will cause an
economic slowdown in the short-term. There is ample room for
“internally generated” growth to increase and by accelerating the
process of economic reforms and the short-term pressures might
well provide the right political incentive for that. While it
might take some time and patience, we believe that some African
countries will come out of this phase of structural adjustments
within one to two years with more sustainable and solid growth
trajectories.
What sort of approach to investment risk do you have in
Africa? How closely do you need to be to the action? Do you have
lots of visits to the countries concerned? How labour-intensive
is it to run this sort of frontier market portfolio?
On the ground visits to the countries, institutions and
corporates are a must to invest in Africa, as economic data
and classic sell side research is generally less reliable than in
other more developed financial markets. We tend to visit each
country we invest in and visit the management of each
company we invest in at least once a year and more in case of
volatile conditions.
We favour countries that are engaged in economic reforms as
status-quo in our view bears too many risks. We don’t invest in
companies lacking transparency and with management teams we don’t
trust. We look for companies with the necessary resilience to
face the occasional and unavoidable economic and political crises
([which] will happen even if long-term developments are
positive). A minimal level of liquidity is essential to allow
prompt adjustments in the portfolio.
What sort of forecasts would you make about Africa's
economy and markets over the next five years? Is there a
particular country that you really are keen
on?
One of the biggest hurdles we see in many African countries for a
sustainable economic development is the lack and generally poor
state of infrastructure. For too long governments favoured
recurrent spending on wages and subsidies at the expense of capex
spending allocated to infrastructure and education, for example.
African economies are imbalanced as the share of consumption in
GDP substantially outweighs the share of investments. African
countries that will succeed in shifting more resources to
investments and effectively address the problem of infrastructure
will experience strong and sustainable economic growth, which
will drive financial markets in a multi-years rally. On the other
hand, trouble will accumulate for countries which fail and their
prospects might depend on external factors (recovery of
commodities, etc.). From that perspective we particularly like
Egypt, Kenya, Rwanda, the Ivory Coast and Morocco.
In conclusion, how do you sum up Africa as an investment
market?
Offers very attractive opportunities for early stage and
long-term investors but differentiation and careful selection of
risks are critical.