How should I go about investing in Africa?
23 July 2014
Ask an Expert: the continent is tipped as the next region to boom but how can investors take advantage?
There are several approaches. First, there are a handful of specialist funds. Alquity Africa, recommended by Darius McDermott of Chelsea Financial Services, the fund shop, is completely unconstrained and is a lot more diverse than most funds, which tend to have a large majority invested in South Africa and just small amounts in other African markets. This fund currently has 34pc in Nigeria, 20pc in South Africa and 19pc in Kenya.
Alternatives include Investec Pan Africa, Neptune Africa and JPM Africa Equity. If you want a fund with more geographical diversification but still extensive exposure to Africa, Mr McDermott tipped the Fidelity EMEA fund, which has 64pc of its money in Sub-Saharan Africa. The fund invests in 50 and 70 companies of all sizes. The manager sets target prices for each holding, which ensures that profits are taken regularly. The Templeton Frontier Mark ets fund has 14.5pc in Nigeria.
More emerging markets fund ideas
But there are strong arguments for choosing an investment trust when you want to buy into "frontier" markets. Unit trusts normally allow investors to put in or withdraw money every day, which requires the trust to buy or top up its holdings in response.
But this can be costly - or even impossible - in less developed markets. Investment trusts do not face this difficulty because they raise their money once, after which new investors can buy into the trust only by buying from an existing shareholder - the trust itself is not involved.
The BlackRock Frontiers investment trust has 9.1pc exposure to Nigeria and 1.1pc to Morocco, said Jason Hollands of Bestinvest, another fund shop. The Advance Frontier Markets investment trust has 36pc in Africa and "has a good track record", said Patrick Connolly of Chase de Vere, the advisory firm.
There are also some Aim-listed alternatives including the Africa Opportunity Fund and PME African Infrastructure. "To be clear, we don't recommend any of these," Mr Hollands said.
Other ways to gain exposure are through commodities funds, frontier market funds or simply to invest in some of the UK-listed resource companies operating in Africa, such as African Barrick Gold. The Aim market is littered with resources companies focused on African but these are extremely volatility, ultra high risk investments, advisers warned.
If you prefer tracker funds there is also the DB X-Trackers MSCI EFM Africa Top 50 Cap exchange-traded fund or ETF, which is denominated in dollars. It has 51pc of its money in South Africa, 28pc in Nigeria, 12pc in Egypt and 8pc in Morocco.
ETFs are traded on the stock market but unlike investment trusts do need to be able to trade in their holdings on a daily basis as investors add or withdraw money.
Mr Hollands said: "Investable opportunities in Africa are principally focused around resources and financial firms. The risks are very high and include poor standards of corporate governance, endemic corruption, political and social instability and currency risk."
Original article by Richard Evans