Gavin Vorwerg, co-founder and portfolio manager of Laurium Capital, talks to Africa FM about the regionalisation of the African investment market and its opportunities.
Often disregarded because of its political risk and economical instability, Africa is offering more and more opportunities for investors, and often in the most improbable of countries, like Zimbabwe.
According to Gavin Vorwerg, cofounder and portfolio manager of Laurium Capital, it is an exciting time to invest in Africa. Not only have the economic policies and political leadership improved, but there have been increased trade-flows through the regionalisation of the continent and the involvement of Asian countries, mostly China and India. This, in turn, has led to the emergence of a new middle class, which, when combined with higher urbanisation, has driven a greater demand for consumer goods. A rapidly rising population and improving incomes have also contributed to consumption-driven economic growth. “Investors can benefit from higher returns due to higher perceived risk and market inefficiencies, as well as a low correlation with world markets,” said Vorwerg.
South Africa, the African hub, is the largest market for hedge funds, but, according to Vorwerg, the local industry is “fairly small”, with only about $5bn in AuM managed by South African hedge fund managers. Vorwerg believes that given the relatively small size of South African hedge funds, there are good opportunities for alpha, especially for those seeking niche investments. “Being quite liquid, the South African market is very sophisticated,” he said. “The market for stock borrowing is well developed and liquid, as is the country’s derivatives market, including options, so the toolkit that we can use is well developed and the liquidity that we can access is ample, which we think helps us to maximise the alpha opportunity set.”
In 2008, Vorwerg and Murray Winckler, both from Deutsche Bank formed Laurium Capital: an alternative investment manager, based in Johannesburg, running funds investing in South Africa and Sub-Saharan Africa. “We have over 85 years’ aggregate investment experience between eight professionals,” Vorwerg said. “We manage or advise four funds: a ZAR long short equity hedge fund; a ZAR market neutral fund; The Sub- Sahara Fund, a US$ based long short fund focussing mainly on Sub Saharan African equities; and The Zambezi Fund, a US$ fund investing mainly in equities listed on the Zimbabwe Stock Exchange.”
According to Vorwerg, the large international emerging market players focus predominantly on the top 20 market caps, and the bank trading desks have generally trimmed their principal trading activities. Thus, very few players are concentrating on the space where South African hedge funds focus. “The country also offers investors a robust financial system and strong operational and risk management.”
“We have steadily raised assets to our current firm AuM of ZAR1.2bn ($160m),” says Vorwerg, “which has been pleasing, considering the tough fundraising environment. We continue to see interest from investors and we are optimistic about fundraising going forward, too.”
South African and sub-Saharan Africa securities markets are less efficient than those of developed economies, but effective stock picking and appropriate fund management can produce attractive investment returns. “We seek to capitalise on all investment opportunities across all sectors,” Vorwerg adds. “The firm’s investment policy is based on the belief that fundamental, stock-based re-search should drive the construction of a concentrated portfolio and will lead to alpha generation.”
South Africa is not Laurium’s only focus. The investment manager is also present across sub-Sahara and hopes to increase its exposure in the region in the coming years. The company’s investment strategy follows the current transformation of the African markets and the increase in regional trade. “Instead of each African country trading back and forth with European countries, they are actually trading much more cross border with one another,” says Vorwerg. “This is stimulating growth quite significantly.”
Vorwerg notes the continued development of the East Africa Development Community, the Southern Africa Development Community and the Economic Community of West African States (ECOWAS). It has become more common in the last few years, he says, for companies based in the likes of Zimbabwe and Nigeria to talk about their regional strategy as much as their country strategy.
In sub-Saharan Africa, Nigeria and Ghana have become the target markets of Asian players, as well as African companies, but Laurium has found more opportunities in a more unexpected destination: Zimbabwe. “Two years ago, we launched our Zambezi Fund, which at the end of November 2011 had returned 29.3% (net of fees) since inception versus the widely quoted ZSE Industrial Index return of -3.1%. This index comprises 97% of the total ZSE market cap,” Vorwerg explains. “We had seen in Zimbabwe the African country with the most opportunities in the coming years, and we still believe that it is the case.”
The Zimbabwean economy is beginning to recover from a decade of economic decline, during which the country fell off most international investors’ radars. Between 1999 and 2008 Zimbabwe’s economy almost halved. Had the country grown in line with its regional peers then GDP would have been more than three times more than what it was by 2008.
Many of the underlying demographic and resource trends that propelled growth in the rest of Africa are relevant to Zimbabwe and Laurium is confident the country can play catch up over the coming years.
The decade-long decline in the economy and resultant lack of new investment coincided with the global boom in commodity prices and mining development. So Zimbabwe, which is rich in natural resources, is coming off a very low base with regards to mineral exploration and mine development.
Even with the headwinds of a delicate political environment, chronic lack of liquidity and virtually non-existent foreign investment or donor aid, the country grew its economy at 8%in 2010 and is on course to grow at more than 9% in 2011 and 2012.
As well as its natural resources, the country has abundant fertile land, relatively intact infrastructure, and boasting adult literacy rates in excess of 90%, excellent human capital. Zimbabwe also has relatively well developed capital markets. The ZSE trades at an average of more than $1.5m per day, which makes it, alongside Mauritius, the third most liquid market in sub-Saharan Africa. Perhaps surprisingly, the ZSE often trades more in a day than Botswana, Ghana, Malawi, Namibia, Tanzania, Uganda and Zambia combined.
“There are many well-managed companies on compelling valuations and that are liquid enough to buy,” says Vorwerg. For example, the mobile telecom company, Econet, which has a market cap of $700m and market share of 70% in Zimbabwe, is trading at a forward PE of just over 4X and a forecast dividend yield of over 7% in US$ – making it by far the cheapest telecom stock in Africa.
Vorwerg believes that in Zimbabwe there is a lesson to be learnt for investors, which applies for the rest of the continent. “While we are seeing the infancy of a strong recovery in Zimbabwe, it, like the rest of the continent, still rarely enjoys positive press, and most investors haven’t yet looked seriously at the country. Great returns can only happen if one gets in early.”