Issue: September/November 09

Home is where the money is

Favourable opportunities in Africa missed by locals

Only a few investors have ventured into markets in Africa outside South Africa. Curiously, those who have braved the continent's markets have been typically hailed from North America and Europe. South African Investors seem to have passed up their geographical advantage for the most part, preferring locations such as India, Brazil and Australia.

Meanwhile, fortune has favoured the brave few from afar handsomely.

Drowned from centre stage in the world media is the fact that African financial institutions, though not completely immune, have weathered the financial crisis commendably well, maintaining high levels of capitalisation, significant amounts of liquidity and, relatively, few non-performing loans, ail contributing toward a strong base for development. Large swathes of the African population do not operate bank accounts and have no or very little borrowings (corporates too) leaving room for banks to grow further still in, the medium to long term.

Though mobile phone subscribers have grown by more than 50% per annum from an estimated 25 million in 2001, more than half the continent's 970 million people still do not own a cellular phone. The landing of offshore fibre optic cables on the eastern, southern and later western coasts of the continent will go a long way to boost internet penetration from the current sub 5% levels. Millions of hectares of fertile farm land lie uncultivated, and below this are largely untapped deposits of mineral wealth. And of course, one cannot ignore the potential that a market of almost a billion people brings. Organised retail and service provisions still have a long way to go in order to cater to this African market.

Economic growth in many countries, through fanned by booming oil, gold, diamond and cocoa prices, is coming from more diverse sources that in previous years and is expected to remain positive in 2009 and 2010. Improved economic policy over the years has seen governments better manage their finances allowing them some cushion; handy in the current hard times besetting the globe. Central banks in many territories have a far better handle on inflation than they used to and we have seen interest rates trend downward, over the last ten years or so.

RMB Asset Management has assembled a family of investment funds that are designed to tap into these under exploited opportunities across Africa and offer outstanding value to the investor seeking to make a positive real return in the medium term.

The hands on approach

To understand the determinants of economic growth, we have travelled extensively (and continue to do so) to various locations across the continent and have established relationships with people and institutions in major African cities to ensure a constant supply of data to inform our investment views in the Africa universe. We focus particularly on listed equity opportunities and are involved in a diverse number of sectors through companies that we have invested in.

The RMB Asset Management approach involves fusing top down economic and strategic thinking with heavy emphasis on risk management, with bottom up company research used to identify Individual businesses that we feel will continue to earn high return on capital invested.

Our top-down view considers macroeconomic fundamentals and how they influence the investment environment. We consider the country’s monetary policy and its impact on inflation and the currency. A keen understanding of the political environment is also necessary to ensure that the country risk is properly understood and catered for in our models. Our chief strategist, Gordon Smith, who has extensive Africa experience, drives this purpose. Regional allocation decisions are guided by this practice. This has proved of great importance of capturing alpha and also in preserving capital as various shocks can affect one country but not another in the same magnitude, or indeed at all.

From a bottom up perspective, we look to find cheaply priced companies that can generate large amounts of free cash flow on a sustained basis and we leverage off the established research function already established within the RMB Asset Management structure to do this.

We search out companies that are market leaders in their chosen areas of operation. Monopolies and companies that command extensive market shares still operate in many African locations and these immediately draw our attention. With an experienced strategic partner or sometimes a well established foreign parent that can draw from experiences elsewhere, this sort of company has pricing power, which is important.

They are often well integrated up and down the value chain, ensuring supply of raw material and distribution of their products, reducing the uncertainties in what are often O'f4 f u t operating environments and capturing margin along the value chain. Low levels of gearing appeal to us as do experienced management teams that have been with the businesses through various operating cycles.

By combining these two processes, we have been able to design and maintain portfolios that we feel will deliver value over the value over the medium to long term while taking on relatively low levels of risk to achieve them. Through historic performance can never be a priced at glaringly low levels and common sense dictates that they be taken advantage of.

For more information about RMB Asset Management's investment opportunities in Africa please contact:

Fungai Tarirah
Portfolio Manager and Analyst
RMB Asset Management

Office: 011 505 1651