Few mutual funds consistently beat the market because their fees tend to counteract any expertise that their managers bring to the table. But if consistent outperformance through active management is possible, it’s most likely to be possible in Africa.
Why? Because the continent is arguably home to the world’s most inefficient stock markets. As a whole, they tend to be illiquid, under-researched, and slow to react to events. That’s fertile ground for a skilled fund manager who can identify mispricings and then patiently wait for the market to catch up.
After launching one of North America’s first Africa-focused mutual funds, Larry Seruma and his team at Nile Capital Management are poised to exploit this opportunity.
Originally from Uganda and a former principal at Barclays Global Investors, Seruma has guided the Nile Pan Africa Fund [NAFAX] to a 13.9% annualized return since its inception at the end of April 2010. Over that same time frame the two pan-African ETFs -- the Market Vectors Africa Index (AFK) and the SPDR S&P Emerging Middle East and Africa Fund (GAF) -- returned 3.3% and 13.2% respectively.
Granted, this performance has not been adjusted for the fund’s 5.25% front-end load and 2.51% expense ratio, but the folks at Nile are off to a respectable start.
What's their strategy for beating the market? The composition of the fund's top five holdings as of March 31, 2011 gives us some clues.
- African Minerals - (PE Ratio: N/A, PB Ratio: 3.8, Div Yield: N/A) This London-listed company is in the early stages of developing an iron ore deposit and associated port and railway infrastructure in Sierra Leone.
- Afferro Mining - (PE Ratio: N/A, PB Ratio: 1.6, Div Yield: N/A) Another iron miner, Canada-based Affero plans to extract ore from deposits in Liberia and Cameroon.
- Flour Mills Nigeria - (PE Ratio: 16.1, PB Ratio: 3.0, Div Yield: 2.5%) Primarily a flour miller and thus sensitive to global wheat prices, this conglomerate also generates a large portion of its income from the sale of cement.
- Bellzone Mining - (PE Ratio: N/A, PB Ratio: 9.1, Div Yield: N/A) Yet another iron ore exploration company. This one’s main project is in Guinea.
- Zenith Bank - (PE Ratio: 11.8, PB Ratio: 1.2, Div Yield: 6.1%) A relatively new position for the fund, this bank has the highest market capitalization of any Nigerian financial firm.
As you can see, the fund is heavily weighted toward mining stocks (which represent nearly 45% of the portfolio) and on iron miners in particular. Iron exploration and development companies comprise over 22% of the fund.
Iron ore prices have quintupled over the past five years, driven by China's seemingly insatiable demand for steel. Nile is betting that this trend will continue. If it does, and the African ore deposits produce as advertised, their investors should see some nice gains.
The fund also has a large position in Nigerian equities, which represent more than 21% of the portfolio. We looked at the case for investing in Nigeria in last week's post. It's a diversifying economy of more than 150 million people that economists expect to grow at an 8.5% clip over the next two years.
Curiously, Nile doesn’t appear to be very active on the continent’s most inefficient stock exchanges. The majority of its assets are invested in stocks listed in Johannesburg, London, and Toronto. It would seem Seruma and company could better leverage their Africa expertise by searching for value in frontier markets like Ghana, Kenya, and Botswana.
That quibble aside, there’s a growing market for Africa-focused investment vehicles, and it’s nice to see a pioneer in the mutual fund niche.