Amid the clamour of international investors for access to emerging markets such as Latin America, India and China over the past couple of years, Africa - South Africa excepted - has largely passed below their radar. In part this is down to difficulties in accessing many African markets and the liquidity issues that affect trading in the shares of all but a handful of the biggest companies.
The difficulties in finding reliable brokers in some markets and trading costs that range from 0.5 per cent in the most competitive market, South Africa, to 4 per cent in Zimbabwe can make it difficult to pursue a cost-effective active trading strategy. That's why when Scipion Capital decided to offer private and institutional investors access to the continent's largest and most liquid companies, it started with an index tracker fund.
The underlying basis of the Scipion African Opportunities Fund is Africa Investor's Ai40 index, which limits the number of constituents from bigger countries such as South Africa and Egypt to offer better regional diversification. Requirements for index membership include a minimum capitalisation of at least USD100m, a cap of seven companies per country, a free float exceeding 25 per cent and daily liquidity averaging at least USD100,000 over any 90-day period.
The Scipion African Opportunities Fund, the first and still the only investible index tracker covering Africa, currently offers access to eight markets: South Africa, Mauritius, Kenya, Nigeria, Abidjan (covering the French-speaking countries of West Africa), Morocco, Tunisia and Egypt. The fund replicates the Ai40 index and invests in its 40 constituents.
The index constituents are the continent's blue chips, many well known outside Africa, such Moroccan cement producer Lafarge Maroc from Morocco, and come from a broad range of sectors, including mining, brewing, telecoms and banking. The total market capitalisation of the Ai40 companies is USD250bn; three-quarters of index constituents have a market capitalisation exceeding USD1bn and the smallest is around USD200m.
As of December 7, the Ai40 index was up by 88.26 per cent since its launch at the beginning of 2006, and had gained 60.97 per cent so far in 2007. The fund itself produced returns exceeding 5 per cent in both September and October, and was flat in November while its main benchmarks, MSCI BRIC and MSCI EM, each fell by more than 6 per cent.
The pan-African market is not yet suitable for an exchange-traded fund because of technical and infrastructure limitations. With no derivatives market outside South Africa and to some extent Egypt, investing in the index requires purchasing the underlying stocks and finding brokers and custodians covering the various markets. The Scipion African Opportunities Fund uses three custodians in Mauritius, Geneva and Dakar.
While waiting for African stock markets to develop, Scipion Capital is launching two related index funds, including an Ai40 ex-South Africa fund aimed at investors that already have exposure to the country. The other, aimed at socially responsible investors, will repay dividends earned by the fund to the companies that paid them, to be used by their own social responsibility departments to carry out social development programmes in their local communities.
Quoted African companies outside South Africa tend to fund expansion by raising bank debt. Increased international interest in African stock markets may change that and encourage locally-quoted companies to raise equity instead, improving the liquidity of the market and attracting a broader range of investors to the continent.
Nicolas Clavel is chief investment officer of Scipion Capital