Investing Out Of Africa

| About: Africa Opportunity (AROFF)

Africa Opportunity Fund (OTC:AROFF) is being added to our funds portfolio,a new position tipped by two expert stock pickers. One is a former contributor who is coming back on board and knows South Africa well. He cannot yet be named.

The other is "The Stock Gumshoe", Travis Johnson, who runs a lively daily blog of that namewhich reveals the 'secret' shares being promoted to lure people into subscribing to heavily marketed newsletters. We share a handful of savvy subscribers.

They both approve of AROFF, an UK investment trust incorporated in the Cayman Islands in mid-2007, the British equivalent of a closed-end fund. Some Europe-based readers may want to buy it in London as AOF, its London US$-denominated trading site, on the AIM. But we are buying the unsponsored ADR, traded as AROFF in the USA. Its ISIN is KYG012921048, if your broker asks for it. I put in an order this week with E-trade.

Its current net asset value is unknowable but it trades in US$ in both London and the US. On Friday it was $1.15 bid, $1.16 asked. Its net asset value at close November according to one of the fund's directors, Francis Daniels, was $1.223. It not updated weekly being a UK Investment Trust, unlike as for a US Closed End Fund.

The Telegraph, a British newspaper, reported in early September that AOF's net asset value (NYSE:NAV) had risen 17.1% in some period, presumably in a year, but I cannot find the article even in Reuters. With all caveats, the fund closed September with net asset value of $1.211 per share and the discount from NAV was 4.1% based on its appraised net asset value.

That was the last period for which it has reported appraised net asset value.

There are 42.63 million shares out. Its 52 week high is $1.18 and the low is 75 cents, so we are late to the party. AROFF cut its dividend at the start of this year to 8 10ths of a US cent per share based on the 3 month Libor rate at the start of the year, multiplied by its NAV at the close of the prior year. It is payable in 4 quarterly installments of 2/10ths of a US cent starting with Q2. In Q1 and Q2-4 2012 the payout was .0026 cents/sh but the Q1 payout in 2014 will be a final 0.002 cents/share. The dividend is off by a third from 2012.

As its name indicates, AROFF invests in Africa, and it is diversified, as no position canexceed 15% of the total under management. It can buy securities issued by non-African companies which conduct significant business in Africa.

AROFF is self-managed by investment advisor Africa Opportunity Partners Ltd. It invests "opportunistically" according to its statement, and can buy in a wide variety of vehicles:

real estate, equity, quasi-equity, and debt issued by African companies, governments, or hybrids (quangos). It invests where the asset managers think the price is at a material discount to the intrinsic asset value.

As of its last quarterly report, of September 30, AROFF was 25% in debt securities, 69% in equities, and the remainder in cash. By country, its largest stake was 28% in Ghana,headed by a 20.1% of net asset value stake in Enterprise Group Ltd., a P&C and life insurance firm with property assets. Its second largest country stake was 18% in Senegal where it had 12% of assets in Sonatel, the mobile phone company. Its Senegal holdings also include a non-local bond fromTizir Ltd, a mineral sands investor grouping Eramet (France), Mineral Deposits (Australia) and Tyssedal Titanium (Norway). Its 9% of 2017 accounts for 6% of holdings by the fund.

Third comes Zambia where 16% of assets were placed, without any company names given. South Africa is mysterious in the ranking, accounting for only 4% while two companies from there, Shoprite Hldgs, Old Mutual plc, and African Bank Investment Ltd (a troubled consumer finance firm) account for 9%, 3%, and 8.5% of total placements.

This reflects the fund's hedging strategy as explained by Mr. Francis Daniels. It is long Shoprite in Zambia, not South Africa, listed on the Lusaka stock exchange. Meanwhile it is short the Johannesburg Shoprite which

is more expensive because of what it says are "large global institutional investors on their share registers."

Similarly, AROFF is long Old Mutual shares not in their South African homeland, but on the terrifying Zimbabwe stock exchange. I am not sure what strategic use they have made of the 50% drop in ABI shares during the course of H1 after it overpaid for a furniture retailer and took hefty provisions and write-downs as Mr. Daniels didn't say. He has not said if the fund is also short Johannesburg Old Mutual or ABI shares.

South Africa net exposure is equal to that in two other countries: Zimbabwe and Nigeria, also at 4%. Ivory Coast was at 3% and Botswana at 2%. Others accounted for 21%.

I think the reason South Africa is so low is that opportunistic investors have to look beyond the most obvious and open African stock market which Mr. Daniels confirmes.

AROFF had 3.8% of its NAV in IAM Gold's (NYSE:IAG) 6.75% bond of October 1, 2020, from Canada. That would count as a multilateral placement because IAG has mines in several West African states and South Africa plus Quebec. That is the closest of its investments to the USA.

AROFF's top 10 produces a weighted average yield of 4.6% and a rolling price/earnings ratio of 8x earnings according to the managers as audited by Ernst & Young. Its return on assets on the top ten is 8% and its return on equity on them is 21%. These are very powerful metrics.

AROFF's top 10 positions in September accounted for 74.4% of its portfolio. It runs a concentrated portfolio of 10-15 positions. Bonds accounted for 17%.

In its September report AROFF also noted that Elemental Minerals which mines potash in the Republic of Congo got a takeover offer from a Hong Kong outfit which boosted return on investment of this position to 32%. So there are Merger & Acquisitions gains to be made.

The bad news is that some investments like ABI can go sour. Apart from our gang there are no analysts covering this stock. Its September report was filed with the UK regulators. It is of course not a member of the US Closed-End Funds Association.