For long-term investors there are some structural growth stories that are difficult to ignore. The most significant is undoubtedly China, but anyone looking a few decades into the future should also be considering the value of exposure to India and Africa.
These are the regions where the demographics are most in favour of growth. They are also focal points of infrastructure spending and rapidly increasing consumer demand.
It has, however, not always been easy for investors to access these markets as there are not many products offering exposure to them, and there are concerns around issues like liquidity. However, this week sees an initial public offering (IPO) on the JSE that introduces a new option for investors who want to add some African exposure into their portfolios.
The IPO is a world first – an exchange-traded fund (ETF) offering exposure to a pan-African index, excluding South Africa. New product provider Cloud Atlas is launching the AMI Big 50 ex-SA ETF, which has a broadly diversified portfolio of larger stocks across 15 different African exchanges.
“We have a focus on Africa to allow Africans to participate in Africa’s growth,” says Maurice Madiba, the CEO of Cloud Atlas. “We wanted to create a vehicle that people can use to own companies listed on the continent’s stock markets and thereby participate in the growth of those stock markets.”
The index has been constructed to ensure diversification, as most African equity index products tend to have high country and sector concentrations. Most notably Nigerian banking stocks and Egyptian construction stocks have historically dominated.
The AMI Big 50 ex-SA Index has therefore been put together so that the largest constituent from each sector on each eligible exchange is included. This means that there can be only one Nigerian bank and one Egyptian construction company in the index, which also includes stocks listed in countries such as Morocco, Tunisia, Kenya, Tanzania, Zambia and Mauritius.
“It’s easy to fall into the trap of doing something mechanically and which therefore ends up being concentrated in one country or sector,” says Nerina Visser of etfSA. “But this index chooses the largest, most liquid companies per exchange, per sector. It says there is no need to have 10 Nigerian banks just because they have the largest market caps. It’s better to look in other countries and other sectors and get that diversification. That is the thing that makes it unique.
Madiba concedes that the structure of African exchanges means that you will however still have overweight exposure to certain sectors, most noticeably financials.
“This is because there is at least one listed bank in every country, whereas there won’t be a listed healthcare company in every country for example,” he explains. “But even then we have ensured that there is a mix of country exposures.”
While the AMI Big 50 ex-SA is the first ETF product to offer broad African exposure, it does compete with the Standard Bank Africa Index exchange-traded note (ETN). Where they differ is that the Standard Bank ETN does not physically hold the underlying shares. It is rather a debt product that pays a return related to the performance of the index it references.
Therefore pension funds that cannot invest in ETNs and investors that prefer knowing that they own the underlying companies will prefer the new product. It also offers some comfort on the question of liquidity.
“This is really a product for institutions and investors that want to participate in Africa’s long-term growth,” says Madiba. “A lot of people do worry about the liquidity risk, but being an ETF means that there is a secondary market on the JSE, which does allow investors in smaller quantities to trade exposure in and out of Africa.”
This is not, however, a product one would expect to be trading on a daily basis. It is specifically designed as a long-term investment.
“It gives you exposure not just to these stock exchanges, but the African growth story,” says Visser. “And for me, like other relatively new, riskier investments it is definitely long term. For any pension fund or anyone with at least a 10 year horizon, this is one of those exposures that you can’t afford not to have.”
Madiba says that for this reason, the reaction to the product has generally been positive.
“A lot of people are excited and are willing to adopt something new, although we’ve also found that that’s where the real challenge has been,” he says. “Some investors are saying that they would rather take a bite of Apple, and they have their reasons, but they are really missing out on participating in the world’s last frontier.”