Q&A with Nile Capital Management’s
Chief Investment Officer Larry Seruma
Q. For which type of investor do you believe Nile Pan Africa Fund can be a good portfolio fit?
A. We think this fund can work well for investors who are already participating in emerging markets and have some familiarity with emerging markets. Our fund will enable them to make a larger allocation to Africa within the total emerging markets asset class. We realize that this fund may not be an easy first step into emerging markets for most individuals. But once investors have had some experience in other emerging markets, Africa can become a logical extension of that thinking and investing.
Q. Why do you think the time is right to offer a Pan Africa mutual fund?
A. The huge growth in emerging markets investing over the past decade has helped to lay the foundation for this fund, and we believe Africa is generating impressive economic momentum in its own right. This is most clearly visible in the development of its vast natural resources including precious and strategic metals, industrial metals, chemicals, oil and gas. This catalyst of growth is now generating other investable opportunities which are continuously emerging on the continent, in industries such as communications, consumer goods and infrastructure. Additionally, Africa offers opportunities to further diversify a portfolio, because its correlations have been fairly low with developed equity markets. We think today’s investment opportunities in Africa are similar to those that existed in the emerging Asia economies 10-15 years ago, and historically growth-oriented investors have the potential to be well rewarded for recognizing trends ahead of the crowd.
Q. Many investors feel they understand emerging markets – but they are less familiar with frontier markets. Most of the markets in Africa, except South Africa, Morocco, and Egypt, are considered frontier markets. What is different about investing in frontier markets?
A. One of the biggest differences is that the cost of capital is very high, because capital is relatively scarce. This has several consequences for investors. For example, you do not see a lot of leveraged speculating or short-selling in African markets, because the cost of borrowing is too high. High cost of capital also can translate into higher rates of inflation and nominal economic growth. Frontier markets require fairly specialized research expertise, because there is a wide difference in the strength and integrity of their governments, economic policies, currencies and infrastructure. Because these factors can change quickly, for example, you probably would not want to own a fixed basket or ETF of frontier market stocks. The active management we offer in Nile Pan Africa Fund represents a full-time focus on these markets.
Q. Is your fund designed to appeal to “socially-conscious” investors who want to see Africans lift their standards of living?
A. No, we don’t call our fund socially-conscious or socially-responsible, because those terms convey different ideas, depending on the values and ethics of the investor. Clearly, capital that is invested productively into African economies can be a key to reducing poverty, creating jobs and increasing standards of living. The field of investing that sees such objectives as important is called “impact investing.” We believe our fund can appeal to investors and institutions that want a combination of attractive returns and positive economic impact.
Q. For African exposure, some investors would prefer to stick to South Africa, which has the biggest stock market and GDP on the continent. Why should they think about other parts of Africa?
A. In all of Africa, there currently are about 1,500 publicly traded companies. Only 400 of those are in South Africa, so that leaves another 1,100 or so companies that you would be ignoring by focusing only on South Africa. There are 53 countries in Africa, and clearly not all of them offer liquid stock markets and strong public companies. To identify the frontier markets that offer the best current growth opportunities, we have developed a proprietary macroeconomic data base and ranking system. This helps us focus on those frontier economies with stable governments, steady growth, progressive policies and reliable markets. We then use the best available fundamental research, proprietary and external, to uncover what we believe are the best companies in these markets.
Q. Are there enough good sources of fundamental investment research in Africa?
A. Yes, but it is fragmented. You won’t find it all in one place. There are regional broker-dealers who cover regional markets, and some local firms cover their own local markets. To access the research and use it productively, you need a network of on-the-ground contacts and resources in Africa. One of the core investment advantages of the Nile Funds is our access to a wide variety of information and sources in these fragmented markets. We know Africa.
Q. Aside from natural resources, are you finding any compelling themes in Africa that might be of interest to investors?
A. Yes, infrastructure development in emerging and frontier markets is a huge theme all over the world, and Africa is playing a role in it, in several ways. Globally, the BRIC countries – Brazil, Russia, India and China -- are really developing their own infrastructure at a fast pace. As a result, they are demanding vast amounts of natural resources that Africa is supplying.
Domestically, African countries need to build their own infrastructure, from power generation to roads to telecom. So far, telecom infrastructure has perhaps been the easiest to tackle and it has become one of Africa’s biggest growth drivers. Part of it is due to the development of so much recent innovation in telecom technology. For example, local land lines are no longer necessary to develop a frontier economy’s telephone infrastructure. Everything is wireless or Internet. So the information age is reaching the frontier economies of Africa even faster in their development curve than it came to Asia. Even so, the cell phone penetration per capita in Africa is fairly low, so there is huge room for more phone connections and the economic growth they will create.
Q. Can you point to any particular frontier region or economy that represents huge investment opportunity?
A. Yes, I would point to West Africa in general and Nigeria in particular. It is the country with the largest population in Africa, about 150 million people. In general, West African countries have huge natural resources potential, including oil. So far, Nigeria has developed its natural resources the fastest of any country in the region, and I would put Ghana and Ivory Coast right behind. Those are becoming the three anchor economies in the region, and their stock markets are reflecting it. For example, 10 years ago the total stock market capitalization of Nigeria was $4 billion, and now it’s grown to more than $30 billion.
Q. If investors have a choice among different ways to invest in Africa, or different funds or portfolio managers, why should they consider Nile Pan Africa Fund and Larry Seruma?
A. The investment team at Nile consists of seasoned investment professionals with solid on-the-ground experience in Africa. Personally, I have been in the investment management business for 19 years, have a proven, long-term track record as a portfolio manager. The style in which I’ve managed money in the past is basically driving this fund, and it is well suited to this fund. Maybe just as important, I’ve spent a lot of time in Africa visiting these countries and developing personal contacts and connections there. I was born in Africa. To be a successful money manager in Africa, you really need to know it from the inside out, and that’s what I’ve done and will keep doing.