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EXCLUSIVE INTERVIEW: Delivering On Africa's Investment Promise With Bellevue Asset Management
Tom Burroughes
16 July 2015
A speaker at this publication’s 11 June Investment Strategy Summit, Malek Bou-Diab, portfolio manager, new markets at Switzerland-based , 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. 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.
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?
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 ( 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.