Invest SA (Dec/Jan Issue 2014)
The 2008 market crash really demonstrated to investors that things can go badly wrong in mainstream assets classes like stocks and bonds, and that some of their time would be well spent in looking for diversified and alternative sources of income to help their portfolios withstand financial fallout.
What are alternative investments? They can include anything that is not stocks, bonds or cash – ranging from property, to art, and even wine or a stamp collection.
In the world of more formal asset management via the capital markets, other alternative investments include hedge funds, private equity, managed futures or commodities that offer diversification and a low correlation to traditional asset classes.
Alternative assets are premised on a different way of looking at certain markets and geographies. Yet even a portfolio that has diversified into dissimilar instruments can suffer if it is limited by geography. Portfolio managers in any asset class will battle if they are working in an environment where the broader outlook is constrained by negative factors such as limited GDP growth prospects or political and economic issues.
Perhaps then, an alternative asset worth considering is one that adopts a truly different approach to a truly different market place?
Fund managers are increasingly looking at the broader African markets, ex South Africa, where a young demographic, growing middle class and attractive GDP growth prospects make it seem one of the most attractive investment destinations in the world right now from a global, top-down perspective.
With the South African economy expected to crank out lacklustre growth numbers in the short to medium term, and its stock market hitting a tough patch after a multi-year rise, it may be an opportune time for investors here to consider looking north of Beitbridge to the multiple countries and economies that make up this vast continent.
True, market volatility makes investing in Africa seem like a risky business. In October, for example, the two biggest bourses ex South Africa took a severe beating. Nigeria’s All Share index tumbled -8.88% while Egypt’s EGX30 shed -7.09%.
Long-only allocations to the African marketplace certainly come with unpredictability, but much of it is to the upside. As at October 31, the EGX30 had increased an impressive 34.39% year to date having gained 24.17% in 2013. And although Nigeria’s All Share was down -9.14% for the year at the end of October, it gained 47.19% in 2013 on top of a 35.5% return in 2012.
African stock markets in general lack the sophistication of developed markets, of which South Africa is one, which offer instruments and tools to enable managers to implement alternative strategies and approaches in varying market conditions.
But there are ways to take an alternative approach to Africa. Private equity is one – with long-term investors taking a multi-year view on accessing specific opportunities they feel will come to fruition over time. Taking a more liquid approach via the capital markets – both on the ground in Africa and via Africa-focused companies and instruments listed on bigger global exchanges – offers investors an exciting and relatively untapped opportunity set across multiple high-growth economies.
Investors would do well to look for managers who have a different perspective on the Africa opportunity set and look to express it in alternative ways. Aside from long-only buy-and-hold managers investing in Africa, there are fund managers who use tactical approaches as well as derivatives and cash to deliver returns, with the aim of protecting capital while tapping into the upside.
This is just one example of an alternative approach in an alternative geography, which investors could – or should – consider for a variety of reasons.