| NEW YORK, March 21
NEW YORK, March 21 It only took a look at the
financial statements of the world's largest maker of spirits to
convince Larry Seruma that Africa was the place to go.
Seruma was then running a long-short hedge fund and had a
position in Diageo Plc, the company behind the Johnnie
Walker, Guinness and Captain Morgan brands. While African
alcohol consumption lagged Europe or the Americas, Diageo's
rapid expansion on the continent was such that, by 2013, the
region accounted for 13 percent of global revenue.
"Africa accounted for its most profitable business lines and
a high-growth, high-return opportunity," Seruma said.
With that in mind, Seruma wound down his hedge fund and
launched the Nile Pan Africa Fund in November 2010.
Nile Pan Africa, which invests in companies from Cairo to
Cape Town, has returned an average of more than 9 percent a year
during the last three years through March 19, putting it in the
top five percent of emerging markets funds tracked by Lipper.
And it made those gains with a lower overall risk than its
peers, helping it win a 2014 U.S. Lipper Fund Award for emerging
markets funds, according to Jeff Tjornehoj, head of Americas
Research at Lipper.
Seruma's $43.5 million fund doesn't buy the Diageos and
other multinationals that are expanding into Africa. Instead, he
focuses on small to mid-cap African companies such as New
Mauritius Hotels Ltd, Dangote Cement Plc
and causal dining company Famous Brands Ltd that are
poised to benefit from growth on the continent.
It's an approach that is almost the inverse of the benchmark
MSCI Frontier Market index, which has a 43 percent weight in
large companies and is made up chiefly of financial firms.
Seruma, by comparison, has 46 percent of his portfolio in
small companies, and another 15 percent in micro-caps, the
smallest of all publicly traded stocks. Only about 12 percent of
the fund is invested in financials.
"We want to buy the local star," said Seruma, who grew up in
Uganda and now spends about half of the year in Africa and the
rest at his headquarters in Princeton, New Jersey.
These stocks, he adds, are the least likely to be owned by
exchange-traded and large index funds, making it more likely
that the companies are mispriced.
INFRASTRUCTURE AND CONSUMERS
Seruma has about a third of the portfolio in consumer
companies, a third in infrastructure and a third in natural
resources. He typically holds companies in 21 of Africa's 28
stock markets, avoiding places such as South Sudan that are
marked by instability. He focuses on countries such as Nigeria,
whose population is expected to double by 2040, and on South
Africa-based companies expanding in the sub-Sahara region.
Seruma follows a value-investing approach that looks for
companies trading below their intrinsic price. He's most
interested in companies with a declining cost of capital, which
should further their ability to expand. As many African
businesses have high rates of family ownership, most stocks pay
a dividend. He aims to hold each company for 5 to 7 years.
Lately, Seruma has been buying more infrastructure and
energy companies because consumer companies look expensive. His
largest holding is Portuguese builder Mota Engil SGPS SA
. The company announced in November that it will spin
off its African operations, which account for some 60 percent of
its pending orders in 2014. Mota-Engil stockholders will get a
shareholding in the new company once it begins trading.
"This is going to give a pure play exposure to Africa" at a
time when the continent is rapidly expanding highways, dams and
bridges, Seruma said.
He also recently added Africa Oil Corp, a
Canadian-based company that explores for oil and gas in Kenya
and Ethiopia. In February, the company announced plans to
explore 20 new wells in the region and continue to test new
wells in the South Lokichar basin.
"This company is still far from reaching its full
potential," Seruma said.
To target consumers, Seruma holds 4.5 percent of his
portfolio - his second largest position - in Uac of Nigeria Plc
, a conglomerate whose businesses range from bottled
water to paint to car dealerships. Although Uac shares are up 44
percent over the last 12 months, Sermua said the company is
"trading at relatively cheap valuation for where its potential
can be" given the consumer expansion in West Africa.
Investors who want to broaden their portfolios to include
Africa should expect high fees. Seruma's fund imposes an annual
expense charge of $2.50 per $100 invested for its class A
shares, which also come with a 5.75 percent load. The fund pays
a dividend yield of 2.8 percent.
(Reporting by David Randall. Editing by Lauren Young and Andre