* Africa equity funds expand nearly fivefold in last 6 years
* Investors include local pension and sovereign wealth funds
* Nigeria banking stocks among top picks
* High returns, low correlations attract funds
By Carolyn Cohn
LONDON, Feb 25 Turmoil in Tunisia? Conflict in
Mali? Fraught elections in Kenya? Investment in Africa is
African investment funds have grown nearly five times in
value in the past six years and are attracting new forms of
capital, from local pension money to sovereign wealth funds.
Conflicts are still making the news and corruption remains a
concern. Elections in Kenya next month and a probable vote in
Zimbabwe in July are also stoking unease.
But investors have worked out that economies and markets
vary widely in this large continent, and that businesses can
carry on through difficult political times.
They are also looking beyond the region's natural resources.
Favoured investment plays now include banking stocks,
particularly in Nigeria, with demand seen for financial services
from a growing middle class. Telecoms, pharmaceuticals and
breweries are also in demand, while mining stocks remain
attractive, though these are often listed outside Africa.
Investors have become more knowledgeable about Africa, and
focus more on how, rather than whether, they will commit funds.
"When I was in Europe a few weeks ago, I noticed that people
no longer ask so many questions about Africa but more about us,"
said Sven Richter, head of frontier markets at Renaissance Asset
Managers. "They have come to a realisation that Africa is not
one country - if you heard there was a problem in Slovenia,
would you worry about investments in France?"
Equity funds that badge themselves Africa or African held
assets of less than $1 billion in 2006, according to Lipper
data. That rose to over $3 billion by the end of 2011, and to
nearly $5 billion by the end of last year.
That is small compared with over $38 billion in funds
labelled Latin American at the end of 2012 but with a much
stronger growth -- a near five-fold increase in six years for
Africa funds, versus less than 40 percent growth for Latin
African equity funds include major names like Templeton and
Morgan Stanley as well as Africa specialists such as Investec
The sum covers funds bunching north Africa and the Middle
East or focused mainly on north or south, but excludes those
invested mainly in better developed South Africa and the Africa
component of many frontier funds.
The economies of Africa, the world's poorest continent, are
among the fastest-growing, though it's from a low base, at only
a few percent of the world's GDP.
The change is driven by youthful populations coupled with
improving mortality rates and an expanding middle class, as well
as by exports to richer economies.
Analysts point to economic reforms in many countries, even
when this does not go hand in hand with democratic reform.
"Countries are starting to enter into their second series of
free and fair elections, but to paint all of Africa as a
Switzerland is pushing it," said Gus Macfarlane, director of
political risk consultancy Maplecroft, who added that corruption
has not lessened significantly in recent years.
Nevertheless, economic reforms have allowed local pension
funds to set up, while intra-regional trade has also risen.
Sovereign wealth funds, particularly from the Middle East,
are increasingly enamoured of the high returns in the riskier
markets of Africa, compared with the developed world.
African stocks can be volatile, dropping 30
percent in 2011. But they have outperformed broader frontier
and emerging market indices since,
climbing 38 percent in 2012 and over 9 percent so far in 2013.
Some of the best-performing stocks in the past year have
been Nigerian banks like Guaranty Trust and Zenith
, as investors reckon financial services will catch
up with ballooning demand for mobile phones and consumer brands.
Big Pharma is also attracted by opportunities to treat
chronic diseases afflicting the new middle classes, rather than
just fire-fighting infection.
Private equity deals in Africa have attracted mainstream
houses like Carlyle, which last year set up offices in
Johannesburg and Lagos, and invested in a cashew nut trader in
Standard Chartered invested in Zimbabwe last year and said
this month it was looking for more deals there, while local bond
markets across the continent are also in the radar, alongside
several billion dollars of hard currency bonds.
African markets have avoided much of the lock-step trading
that has characterised bigger markets during the global crises
of the past few years, making them a useful diversification
They are neither closely correlated to the larger emerging
markets like those of the BRIC countries -- Brazil, Russia,
India and China, nor even to one another.
Kenyan stocks and Egyptian stocks have a
200-day correlation of only 0.1, for instance, where a reading
of 1 would signal perfect correlation.
There have been flashpoints across the continent over the
past few years, starting with the Arab Spring regime changes in
Tunisia and Egypt two years ago.
But that failed to deter veteran emerging market investor
Mark Mobius, who was in Cairo's Tahrir Square at a time of
protests late last year and kept Egypt holdings in his $1
billion frontier fund, while local stock Orascom Construction
has attracted the attention of Bill Gates.
In Mali, where French troops are among those trying to crush
rebels in the north, investors point to the distances in this
vast country, insulating southern-based mining companies.
Senegalese telecoms company Sonatel, which has 64
percent of the market share in Mali, beat 2012 profit forecasts.
But investors may grow more cautious ahead of the Kenyan
elections, after a vote in 2007 set off unexpected post-election
violence. And in Zimbabwe, a March 16 referendum on a proposed
new constitution should pave the way for presidential and
parliamentary elections in July in a country where violence
overshadowed disputed polls in 2008.
Low volumes also make getting in and out of trades difficult
and expensive, while governments may not always pay up - Ivory
Coast restructured debt in 2010, only to default on it less than
a year later, following civil war.
The continent is so complex that investors also complain the
level of analyst research on various markets is not always
sufficient, favouring specialist emerging market investors who
are able to carry out their own on-the-ground checks.
Local Africa-watchers say investors may not take into
account the fact that new-found wealth is not trickling across
the populations - in Nigeria, the gap between rich and poor is
rising, even though the country is expected to grow nearly 7
percent this year.
Investors may ignore these issues at their peril, as social
unrest can hinder investment.
It's a concern for Alquity Investment Management, which runs
an Africa equity fund on a sustainable model, taking into
account environmental, social and governance factors. Failing to
take account of those risks can destroy long-term shareholder
value, Alquity says.
David Mcilroy, chief investment officer of Alquity, says
Africa investors also have to take a longer term view and not be
afraid to ride out short-term turbulence.
"You have to roll with the punches," he said. "We are
long-term investors, we are not traders."