Dr. Ayo Salami, CIO of the Duet Victoria Africa Index Fund (part of Duet Asset Management, a London-based alternative asset manager) that launched in January 2008 is a longtime investor in the Sub-Sahara African (SSA) region. Dr. Salami was featured as part of the “Investing in Frontier Markets” conference held in London last November. In particular, I found his views on Sub-Saharan Africa and the strategy he advocates for investors seeking exposure there to be enlightening. Commenting on the economic changes in Africa over the past decade, Dr. Salami noted:
“In the past, there were many companies trading in single P/Es but none above $1m per day. Now the situation reversed, and there are larger companies available to invest in but some P/Es are in double digits.” Dr. Salami is an advocate for indexing the stocks currently in the SSA rather than actively managing a portfolio, given that there are only approximately 40 companies in the “over $1bn market cap” area (mostly companies located in Nigeria and Kenya, and predominantly banks), which draw most of the attention anyway. “Why pay a higher fee for an active portfolio manager that has approximately the same options to invest in?” he asked.
Duet’s Africa Index fund tracks the sub-Saharan Africa Large Companies Index which is composed of companies listed on the stock exchanges of Botswana, Ghana, Kenya, Malawi, Mauritius, Nigeria, Tanzania, Uganda and Zambia (it excludes South Africa). “It is actually difficult for actively managed funds to generate alpha in Africa. By the time a stock will meet the minimum liquidity and size constraints that most active fund managers apply, the stock is not likely to be under-valued,” said Dr Salami. “An active manager who wants to generate alpha has to look at the second line stocks, where liquidity is still low and the companies are truly undervalued. However these smaller fast growing companies are usually too small and illiquid for sizeable investment.”