Renaissance Sub-Saharan Fund soft closes

Renaissance Asset Managers (RAM) has soft-closed its Sub-Saharan Fund at $150m of client assets, following support from investors for its stock-picking strategy for African markets.

The fund has attracted $40m of fund inflows since the start of 2013, largely from UK and European investors, and more than doubled in size last year.

Expected capacity in the Sub-Saharan Fund is around $200m. Adrian Harris, Head of Distribution and Investor Relations, said the move was to protect the interests of existing investors.

“We believe that tightly-managed capacity allows our institutional investors to access the best investment opportunities without sacrificing liquidity. We continue to see strong demand for our African capabilities which can be accessed via our Sub-Saharan and Pan-African Funds and which are run using the same disciplined approach led by Sven Richter.”

The firm said there is a “real scramble for Africa”. Attracted by Nigeria and Kenya’s +45% 12-month equity returns, international investors are rushing to the continent.

But it noted that the increased attention, whilst reflecting some of the continent’s strengths, can also undermine certain issues such as liquidity, rising valuations or investment managers’ lack of geographical expertise. Investors are increasingly selective in their African exposure.

The soft-close comes as the portfolio has achieved a 31.4% return for investors in 2012. This fund and RAM’s Pan-African Fund are the two best-performing African equity funds so far this year in Morningstar’s African Equity category.

The Pan-African Fund, with a broader geographic remit provides access to more liquid markets and therefore has greater fund capacity than Sub-Sahara.

Sven Richter, RAM’s Head of Africa and Frontier Markets, commented: “Africa is Asia 15 years ago. Anybody who doesn’t have an allocation to Africa is missing something.

But investors need to be cautious – certain valuations are getting rich, especially those backed by European names as they are preferred by managers with limited experience in the region. Africa offers excellent opportunities – but these are developing markets that still require strong and experienced guidance.”

Johannesburg-based Richter screens quality, risk and valuation in a universe of around 400 companies, of which 150 are multinationals with high exposure to Africa.

After assessing criteria such as sales and profit growth, margins, debt and liquidity, his team meets corporate management to evaluate the long-term sustainability of any investment.

This method identified Flour Mills of Nigeria, the country’s biggest miller, whose plans to expand its main production site have helped the stock leap 47% since the start of last year.

First Bank of Nigeria has been another success story in the challenged Nigerian banking sector, given its large branch network and efficient management. RAM’s model also selected Telecom Egypt – a profitable investment in a country that other managers would have ruled out because of the political situation.

RAM said its process is becoming more important as global asset correlations have fallen and company valuations reflect corporate fundamentals more accurately.

“Intelligent investors are favouring proven, hands-on investment approaches delivered in transparent and well-regulated vehicles, with daily liquidity. In the case of RAM’s Sub-Saharan and Pan-African UCITS, shareholders also avoid the performance fees which may be charged by some boutique managers,” the firm said.

Selecting the right strategy will be critical to benefit from the factors behind Africa’s development.

According to Richter, some of the continent’s favourable investment themes include:

• Demographics: Africa is set to double its population to 2 billion by 2050, offering great opportunity to companies willing to employ an expanded and increasingly educated workforce. Some manufacturing has already started to move from Asia to Africa.

• Economic growth: Six of the fastest 10 growth countries this decade are in Africa. Annual GDP growth is forecast to average c.6% for the next decade, while inflation in sub-Saharan Africa has fallen to an average of less than 8%. Sovereign debt levels (32% in sub-Saharan Africa) are substantially lower than in developed markets.

• New economic model: Africa has been transformed by higher education, improving infrastructure and the wealth and progress derived from a decade of rising commodity prices. A growing middle class is making the African economy more consumption-based and less dependent on public investment or foreign aid. The most compelling investment opportunities are expected in the consumer, retail and service sectors.

• Attractive valuations: Certain valuations have not reached their targets yet. The MSCI EFM AFRICA ex ZA Index trades at about 10x forward earnings, well below the MSCI WORLD index, which trades at more than 14 times.

• Undiscovered markets: Despite increasing levels of Foreign Direct Investment (FDI), Africa remains mostly untapped by international investors: the continent accounts for 3% of the world’s GDP[4] and receives 2.8% of FDI inflows[5]- a ratio of 0.9. Latin America, instead, accounts for 6.8% of global output, but attracts 14.2% of FDI inflows – a ratio of 2.1. Asia’s ratio is also higher than Africa’s, at 1.4.

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