Sanlam Investments offers a strong case for investing in Africa
The story of Africa’s growth potential is brought to life by 1.2bn inhabitants and an urban population estimated to increase by 24m people annually.
With listed SA assets no longer offering attractive returns, and with a better understanding of how best to implement strategies on the broader continent, there’s a case for retirement funds to reallocate a portion of their traditional SA growth assets to pan-African mandates – a move encouraged by Regulation 28.
Learning from the past
A number of key themes have been evident in cases where investors have struggled to earn the returns they expected on the continent.
The first is that African frontier stock markets have exhibited elevated volatility, as they are often driven more by the whims of impatient and skittish foreign retail investors than by underlying economic growth.
The second arises from private-equity investors buying into what they believe is the next African entrepreneur success story, only to find it more challenging to positively affect businesses and to exit investments than in more developed markets.
Finally, local economies have found it difficult to weather currency volatility in areas where they are reliant on foreign investment.
Latest approaches to Africa
Skilled asset managers who have “paid their school fees” over the years and understand the idiosyncrasies of the various listed markets are better positioned to deliver value for investors. These managers recognise the need to cap the size of their funds and to manage funds with liquidity limits in place.
The market has evolved to better accommodate and affect private-market investment. Regulators are supporting structures which allow more flexibility for local and foreign investors to access assets. Fund managers have innovated to offer flexible regional and pan-African platforms and collaborated with local specialist partners to manage assets in-country.
Additional benefits of allocating to Africa
A significant benefit of allocating to Africa is that retirement funds can gain an additional 10% US dollar exposure (beyond the 30% which Regulation 28 allows to global assets).
Using the regulatory Africa allowance to reallocate between interest-bearing assets (as opposed to growth assets) is also gaining traction. In particular, African private credit (senior, secured credit) is a good fit for institutional portfolios.
This asset class has consistently delivered between 8% and 10% in US dollar terms, with volatility for SA investors almost entirely a function of the USD/ZAR exchange rate.
A commitment to Africa
Investing in Africa enables growth and economic development that is much needed across the continent and, when carefully considered in an investor’s portfolio, can offer strong returns with significant diversification benefits.
This article was paid for by Sanlam Investments.