In December, Laurium Capital launched an Africa bond fund, the Laurium Africa USD Bond Prescient Fund (“the Fund”). The aim of the fund is to offer relatively high dollar yields with moderate volatility by investing predominantly in USD denominated bonds issued by African governments. The fund offers South African investors an opportunity to easily invest their Rands into high yielding sovereign dollar assets. Furthermore, these assets fall into the extra 10% offshore “Africa” allowance classification as allowed by the SARB for Regulation 28 compliant funds.
The current Coronavirus pandemic, oil price war, and resultant economic shock has proved to be an early baptism of fire for the fund, with most global risk asset classes suffering large and sudden selloffs amidst a flight-to-quality. The fund has however held up remarkably well relative to the African Eurobond market and continues to offer very attractive USD yields.
Key reasons for the fund’s outperformance over the benchmark index include lower exposure to oil-related countries (e.g. Nigeria, Angola and Gabon) and lower credit duration than the index. The majority of the fund is in oil importing countries that are net beneficiaries of a low oil price. The fund offers a competitive USD yield currently and is invested in the dollar bonds across 7 diverse African (excluding South Africa) countries.
The investment universe of African (excluding South Africa) sovereign dollar bonds comprises of over 70 instruments valued at around USD100bn, spread across 20 countries. These bonds are very liquid relative to other frontier Africa assets, trade significantly more than Africa equity markets on a daily basis, and currently have an average USD yield-to-maturity of just under 11%. The last time we saw yields this high was during the Global Financial Crisis of 2008.
From the peak of the Global Financial Crisis - or bottom of the market – African sovereign dollar bonds returned 21% per annum in USD over the five years that followed, and 13.7% per annum over the ten years that followed. From the beginning of 2007 through to the end of March 2020, a period which includes both the Global Financial Crisis as well as the current COVID-19 crisis, African sovereign dollar bonds have returned 6.4% in USD per year compared to 0.4% per year in USD for the JSE All Share Total Return Index and 0.3% for the South Africa All Bond Total Return Index.
The table below (Source: Bloomberg, Laurium Capital) shows the current yield of Standard Bank Africa (ex SA) Bond Index relative to other fixed income investments in USD.
We don’t know when the market will bottom and when yields will peak but given the magnitude of the sell-off of African sovereign bonds and resultant high USD yields and spread over US Treasuries, we believe now is an attractive entry point into this asset class.
This is especially the case for those investors who have exhausted their 30% offshore allocation and would prefer to have more non-rand exposure, or secondly, to those who have offshore fixed income exposure but would like to switch into high yield with moderate risk and government backing.
Paul Robinson, Portfolio Manager, Laurium Capital