Africa - the final investment frontier
Emerging market economies such as China, India and Latin America have rocketed in recent years. Thousands of UK investors have cashed in by buying into funds that buy shares in those countries.
For instance, the Jupiter China fund has doubled investors' money in the past year while the Invesco Perpetual Latin American fund has returned 44% in the past year, according to fund analyst Trustnet.
Now, after decades of languishing economic growth, some experts predict Africa may be the next region to pay dividends to investors.
A measure of the interest is the fact New Star, one of the City's more innovative fund managers, is to launch the Heart of Africa fund this week.
The New Star fund is one of only a handful of Africa portfolios available and will invest in the sub-Sahara region excluding South Africa.
Africa's history of economic woes and the political instability has meant it has previously been labelled the 'hopeless continent'. Despite harbouring some 30% of the world's gold and almost half of its diamonds and platinum it has consistently failed to cash in on its enormous wealth of natural resources.
But the fund manager Jamie Allsopp, who also runs the New Star Hidden Value fund, which itself has investments in Africa believes a 'wind of change' is sweeping through the region, which is presenting investment opportunities in what is still a very undeveloped market.
However potential investors should be cautious, as in New Star's own words, 'this fund is high risk and therefore only suitable for investors who are able to bear the loss of all or part of their capital investment'.
So what's changing? Peace in the Democratic Republic of Congo, northern Uganda and southern Sudan is creating big trade opportunities.
The establishment of the East African Customs Union (EAC) has led to a rapid increase in trade between Uganda and Kenya, with goods worth £211m exported to Kenya last year, compared with £174m in 2004. Both Rwanda and Burundi joined the union this year and as a result the EAC will have a combined economy of more than £21bn with a total population of about 120m.
New Star says recent changes in the region have presented high-risk investors with an opportunity. The group points to the dependence of rapidly growing Asian economies and decreasing political risk - the number of democracies has risen from 10 in 1980 to 33 today while the debt burden has fallen from more than 100% to around 20% of gross domestic product since 2005.
Economic Growth in the Sub-Sahara region is forecast to be 6.7% this year, moving up to 7.5% in 2008 – the appetite for its raw materials, from the soaring economies of emerging markets such as India and China, is fuelling a boom in prices. This boom has stimulated widespread developments in transport, infrastructure and telecommunications.
Allsopp says: 'The investment landscape has changed significantly in Africa. Strong economic growth, high levels of foreign direct investment, increasing political stability and the resultant improvement in corporate governance have created a compelling investment backdrop and it is no surprise that some of the best performing markets in the world are situated in sub-Saharan Africa.'
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The largest sector in the Sub-Sahara region is finance in Nigeria, and over the past two years it has enjoyed a good run. However Allsopp's fund will be looking more to consumer staples, for example food and drug retailers as well as infrastructure and telecommunications.
Allsopp likes power generation group Mag Industries, which is involved in metals, minerals, energy and forestry. Allsopp also favours First Quantum, which is involved in copper and cobalt projects in Zambia, Mali and the Democratic Republic of Congo. There are a number of London-listed resources companies, typically uranium miners, operating in Africa but also listed are Petra Diamonds and Jubilee Platinum while London listed firm, which focuses on infrastructure is Lonrho.
One irritant for private investors is that historically it has been very difficult, if not impossible, to gain access to investment opportunities in Africa. Fidelity's Emerging Europe, Middle East and Africa (EMEA) fund, launched in June, offers partial exposure to Africa.
Pure Africa funds available include the Magna Africa from Charlemagne Capital and the Africa Opportunity fund and two Guernsey-based Pan Africa funds from Investec. However, as with the New Star portfolio, minimum investments are high for these funds - £12,500 on New Star and similar barriers on the Investec funds. Investec, however, is planning to launch an African investment trust that will allow access for smaller amounts.
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Hargreaves Lansdown, one of the UK's largest IFAs, is using its buying power to bulk buy the funds and will accept minimum investments of £1,000 on the New Star fund. However, new customers need to invest £3,000 minimum with the group, of which £1,000 can be put into the New Star fund.
The New Star fund will levy complicated and expensive fees. It will apply a 20% charge of any out-performance of its chosen target. That target is the three-month sterling Libor rate - a money market lending rate - plus 3%. In other words, the current money market lending rate is around 6.25%. Add on the 3% and New Star will charge 20% on any returns it delivers above 9.25% a year.
The fund also carries an annual fee of 1.75% and an upfront fee of 5.25%, although using a fund supermarket will dramatically reduce these costs - Hargreaves discounts the inital charge to 0.5% and the annual amount to 1.65%.
Mark Dampier of Hargreaves Lansdown says the fund is only for high-risk investors. 'The minimum investment is too high at £12,500 and I am not a fan of performance fees but I still quite like it,' he says. 'I believe in the mass industrialisation going on around the world, which Africa will be a beneficiary. It reminds me of Russia a decade ago, where nobody would invest. But this fund is just for a very small part of an investor's portfolio, it is a high-risk vehicle.'
For his part Gavin Haynes of Whitechurch Securities is disappointed that there isn't a regular savings option for investors but like Dampier he believes it still has the potential to do very well.
He says: 'There is massive growth potential for areas like infrastructure and natural resources, it is a fund we might use in some of our discretionary aggressive portfolios but in regards recommending it generally, we will wait until 12 months down the line to see how it has performed.'
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