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Dubaibeat notes that Hossam Shobokshi (pictured), the Saudi-national and ex-MENA Head of Private Equity at Standard Chartered Bank, recently launched the Alef MENA Value Fund as Chairman of Alef Capital, a Cayman Island-based investment manager. Commented Shobokshi:
“The MENA markets offer some of the most interesting value investment opportunities in the world today. There are a good number of well managed and positioned companies trading at good discounts of the possible range of their fair values.”
Per Shobokshi, Alef Capital’s principal investment ideology is rooted in “the well proven method of value investing” in lieu of top down, macro or even technical anlysis:
“Alef Capital keeps things simple. The focus is solely on two things and only on two things–quality of the company and the price we pay for it. Recently for instance, we are experiencing what we call ‘the GCC Shopping Festival’. We are actively buying securities of several well managed and well positioned businesses in the UAE and other GCC countries that are trading at substantial discounts. The abundance of value opportunities in the GCC is a relatively recent phenomenon as in the past couple of years good value opportunities in the MENA region were only available in the North Africa and Levant markets.”
Interestingly, Mr. Shobokshi laid out the essentials to value investing over on his Alef Group site. They provide a window into his methodology.
1. Strong Barrier To Entry – such as strong brand names, licenses, and unique real estate.
2. Cash Profits – Alef Group cares NOT for growth without cash or fancy accounting.
3. Good Price – Alef Group HAS to buy significantly below the Intrinsic Value of the company.
4. Successful and friendly Managers/Partners – Alef Group believes in being low key and in management acting for the benefit of all partners.
5. Out of Favor – Alef Group likes to help people – to quote a legendary investor – “When people are selling, selling, selling and rushing out”, Alef Group helps them and buys. When a country, industry, and/or company is out of favor, Alef Group digs deeper and we often discover jewels beneath the rubble.
6. Solid Balance Sheets – Alef Group prefers low debt companies that can survive in down markets, buy other weak competitors, or become targets for acquisition.
7. Superior Returns on Capital – Again, Alef Group prefers good management as exhibited among other aspects by above industry ROE (Return On Equity) and ROA (Return On Assets).
8. Low Cost Provider – Good management is able to produce the product/service repeatedly at a lower cost than the competition – relentlessly allocating the capital and spending the owner’s funds smartly. Again, in bad times this low cost proposition enables them to survive and exhibit superior growth when the economy recovers with full force.
9. A Product/Service Becoming Close to A Need – Examples are mobile licenses and utilities and even well loved brands comes close to this level with the customer enabling the company to defend and even enhance margins and thus creating future cash profits for the owners.
Euromoney reports the launch of London-based Alcantara Asset Management’s Russia and CIS Fixed Income Opportunities Fund, which will reportedly focus on relative value and long-only opportunities in the fixed income markets in Russia, Ukraine and Kazakhstan, and which will be lead by the firm’s founders, former JPMorganers Sergey Grechishkin and Andrei Taskin. “Relative value”, a strategy which aims to take advantage of temporary mispricings between two related and often correlated securities, came to into question during the latest economic crisis, as “Black Swan” events in practice tend to exacerbate rather than minimize such pricing anamolies between assets. However, the dual-strategy fits the current economic climate nicely, explained Grechishkin, which had trended higher for months but is on the cusp of what many feel is an imminent correction: “Our actively-managed long strategies take advantage of trending markets when associated with economic recovery, as well as market positioning. Our relative value strategies generally benefit from a high-volatility environment, when the relative mispricing between instruments is at its highest,” he said.
Interesingly enough, neither Grechishkin and Taskin seems partiuclarly bullish in the short term on the three economies driving their fund. They express “cautiousness and scepticism about the end of the recession,” and say that “for now, we are staying away from Kazakhstan, and are sceptical about prospects for the Ukrainian economy in the longer term. We are actively managing our short-maturity positions in high-quality credits from Ukraine, the majority being foreign- or sovereign-owned, more than half of which will redeem within three months, and from Russia, where the majority of exposure is to well-performing and highly-liquid leading banks.”
In addition to its Frontier Markets Blog, Silk Invest, managers of both the African Lions and Arab Falcons funds, now offers a ‘Silk Invest Updates’ blog complete with pertinent market commentary. A recent posting nicely sums up the mantra behind frontier investing at the moment:
“It is pretty obvious that the fundamentals of many African and MENA [Middle East and North African] economies are now the things that Europe and the U.S. only can dream of having right now; low levels of debt and/or high levels of reserves. Add to this a vibrant population growth and the prospect of an improvement of lifestyle for this growing population which could lead to even more economic growth.”
A month or so ago the firm posted the following graph (“African External Debt, USD terms and as a % of GDP” from 2000-2009) which highlights the continent’s debt story. Compare and contrast with any developed market of your choice.
Imara Holdings, the Botswana-listed, Pan-African investment bank and asset management group, recently launched a niche fund focused on small-to-medium-sized mining and other companies that often remain unnoticed by global funds that typically allocate resources towards more prominent resource firms. Imara, which among other vehicles offers a Zimbabwe Fund, a Nigeria Fund, an East Africa Fund, and a long-only Opportunities Fund that covers a range of countries and sectors, has $135 million in assets under management, and $750m under administration.
The timing of the fund, whose commodity exposure includes gold, platinum group metals, coal, ferrous metals, chrome oil and gas, could hardly be more ideal, explains its manager Bruce Williamson, who has 25 years of experience as a mining analyst. Williamson argues that the year’s commodity rebound is more secular, rather than cyclical based. [Commodities are] not a temporary phenomenon. The long-term fundamentals are strongly positive. [And] the big, long-term upside is among juniors and mid-tier miners,” he explained.
An interesting piece from Morningstar (“The PIMCO Approach to Avoiding ‘Black Swan’ events”) left me wondering how frontier market oriented funds can best mitigate against the rare-yet-troublingly-frequent “fat tail” distributions that have left a mounting plethora of portfolio managers in its wake?
PIMCO’s Vineer Bhansali, who runs the firm’s open-ended Global Multi-Asset mutual fund along with Mohamed El-Erian and Curtis Mewbourne, states that hedging against improbable albeit systematic shocks will add roughly 25-50 basis points to a given fund’s expenses. Moreover:
“Protection [can] be acquired through a variety of methods, such as by purchasing short-term Treasuries or Eurodollar futures. Both tend to rally during market crises, as capital seeks a flight to quality. Similarly, certain currencies, such as the U.S. dollar, Japanese yen, and Swiss franc, have traditionally been seen as safe havens.
Moreover, the fund will also use optionlike approaches on credit indexes, using deeply out-of-the-money segments of the CDX and iTraxx. Or it will use managed-futures-styled strategies. Beyond these approaches to hedging risk, the managers will simply dial down the portfolio’s level of risk when they think that the market isn’t offering attractive valuations or adequate compensation for risks.”
In addition to global calamities, frontier funds also tend to have the built-in additional drawback of country-specific risk. For example, concurrent with their generally relative low level of liquidity, most if not all frontier markets have a higher probability of political uprising, corruption, currency devaluation, and hyperinflation. In fact, it is precisely due to the higher chance of such events occurring that the risk premia is so great for such investments, making them an attractive choice for foreign institutions in particular who simply can’t find an equal risk/reward elsewhere in which to spread smaller segments of its cash. But is it high enough that investors can not also expect, and managers should not also embrace, further tail-risk strategies designed to smooth returns?
Interesting tidbit in CityWire regarding the Advance Frontier Markets Fund (AFMF) managed by Progressive, a fund of funds specialist that focuses on underdeveloped markets.
“Launched in 2007, AFMF initially withstood the onset of the credit crunch. However, the intensification of the crisis last summer led to a sudden withdrawal of liquidity from frontier markets, and AFMF’s net asset value dropped sharply. The share price decline was aggravated by the loss of its premium rating and move to a large discount.
AFMF’s portfolio is comprised of investments in over 20 funds. While a few may be familiar to investors, such as the Investec Africa fund, most reflect the diligent work of the Progressive team in finding specialist managers working in the countries in which they are invested. For example, none but the most determined investor is likely to have discovered the Avaron Balkan fund or the IMARA Zimbabwe fund.”
Given the tepid economic recovery and continuing lack of liquidity in most frontier economies, it will be interesting to see if fund of funds experience a relative boon given their ability to further spread risk for investors looking to gain at least some African, Asian and Gulf exposure while prices remain so unduly dampened.
Some interesting quotes in Monday’s Financial Times (“The lure of Africa’s long term story”) from Dr. Ayo Salami (right), head of the Duet Victoire Africa Index fund–which tracks a market cap-weighted index measuring the composite performance of large companies listed on stock exchanges in sub-Saharan Africa excluding South Africa–as well as of the newly launched Africa Opportunities fund (formerly New Star’s Heart of Africa fund), a long-only vehicle that also focuses on the sub-Saharan region.
While Dr. Salami’s index was down 40% last year, for instance, few investors have jumped ship. Moreover, he is not having any trouble securing new capital, at least from the Scandinavian and Benelux countries, [where] “the risk appetite is much higher than among Anglo-Saxon investors,” and from high net-worth individuals (as opposed to institutions) who may especially value extra alpha. To this extent, “there are some investors who get the long-term nature of [Africa’s] story.” And, he notes, companies in the index grew their earnings per share by 32%.
Dr. Salami predicts continuing growth in consumer demand as the underpinning for the continent’s imminent rise. “Africa has not seen demand destruction like in the developed world. For this reason, I like companies like brewers, cement [and] food companies.” Finally, he mentions that Duet may seek to add a private equity fund in the near future.
Three years after selling Brazilian investment bank Pactual to the Swiss-giant UBS, Andre Esteves (right) is buying it back for the same amount as part of his desire to expand BTG, a firm that he founded last year with former Pactual partners, into multiple emerging markets. BTG will have more than $20bn under management and equity of roughly $1.8bn. Last month, it took over Lentikia, a hedge fund manager Brocade, a global macro fund with $800m under management.
Financial Times noted today that while “the hedge fund industry continues to suffer outflows,” a report issued this week by Bank of New York Mellon and researcher Casey Quirk predicted that withdrawals (investors have redeemed nearly $103bn in the first quarter) will be reversed and hedge fund assets will reach $2,600bn by the end of 2013, nearly twice the estimates for global fund assets under management at the end of last year. Additionally, as prop desks shrink and cutbacks continue at investment banks, the talent pool for hedge funds is vastly expanding. For example, John Bates, former Head of Credit Research Africa at Renaissance Capital, recently joined Silk Invest Ltd as Head of Fixed income. Prior to Renaissance, Bates was a senior Emerging Market Credit Analyst at ABN Amro in London. According to Dr. Heinz Hockmann, Chairman of Silk Invest, “John is yet another high level hire that is in line with our policy of recruiting the best skill set in African and Arab markets.”
China, India and Brazil are emerging markets investment priorities for private equity firms now poised to capitalize on lower valuations, according to a survey conducted by the Emerging Markets Private Equity Association (EMPEA) and Coller Capital.
“Emerging market private equity funds may benefit from very ripe conditions going forward: asset valuations are finally becoming more reasonable, and there is also a strong appetite for private equity capital because companies have fewer financing options,” said Sarah Alexander, president of EMPEA.
Half of LPs surveyed already in emerging markets will commit additional funds to their investments—and, possibly, others—over the next 24 months. But certain emerging markets were not dubbed as hot as others; Russia, Central and Eastern Europe and Africa are believed to have an increase in risk recently, the study noted.
That said, Emerging Capital Partners just paid $47.7 million for a minority stake in African insurance group, La Nouvelle Societe Interafricaine d’Assurance Participations SA, or NSIA. The capital will provide NSIA with resources for organic growth and acquisitions as well as the equity strengthening of the company’s banking affiliate, Banque Internationale d’Afrique Occidentale, or BIAO, which was bought in 2006. The company has operations in Benin, Cameroon, Congo, Ivory Coast, Gabon, Guinea Bissau, Senegal and Togo.
JGW
Frontier Markets 