Selling emerging markets to institutional investors is a daunting task.
Last year saw emerging markets indexes fall as much as 28%. Some pension funds are questioning their commitment to emerging markets, or the best way to invest in the variety of countries and regions comprising them.
Aware of the challenge to combat that perception, a two-man team of U.S. marketers argued their case in mid-November for investing in South Africa. The two, Oliver Franklin and Sam Folin, president and managing director, respectively, of Philadelphia-based Reinvest in South Africa, a marketer and client service agent for a South African investment manager, met with officials from a dozen Northeast pension funds, university endowments and consultants. Accompanying them on their road show was a group of four investment professionals from their partner, the Cape Town-based African Harvest Ltd.
Many funds already have exposure to South Africa through emerging markets portfolios. It's not enough, Mr. Franklin argues: the typical active emerging markets money manager holds between 3% and 9% of his or her portfolio in South Africa. The Morgan Stanley Capital International Emerging Markets Free index currently weights South Africa at 11%, he noted.
The executives from African Harvest are investors acutely conscious of their country's history. They hope the power of the market can spur social change.
"We are going to be investing in what we call the new South African companies," said Leon Campher, chief operating officer at African Harvest. "When we talk about new South African companies, we specifically don't want to talk about the traditional blue chips, because a lot of them are old South Africa and some are going to disappear."
Some of the white-controlled commodity companies and conglomerates fit this profile, he said.
But that isn't the only vanishing breed of company Mr. Campher sees in South Africa's market. "We don't want to talk about `black chips' because we think that's something in due course that is also going to disappear."
"Black chips," which came to life after Nelson Mandela was elected president in 1994, are companies that have at least 34% of shares owned by black South Africans.
"We prefer to talk about `new chips,' which are companies we believe are in tune with and represent what the new South Africa represents."
Their criteria is a mix of bedrock corporate governance principals such as transparency along with a company's desire for social change.
On the Johannesburg Stock Exchange, the "number of companies that has significant black ownership is 100 out of 800, and we're focusing on those companies, especially the companies with really competent black ownership," said Denzil Newman, African Harvest's chief investment officer. The African Harvest portfolio has about 30 small-cap and midcap stocks with superior growth rates. It holds primarily financial service companies like Real Africa Investments -- which has stakes in life insurance companies, manages pension assets and sells certificates of deposit -- and information technology companies, non-cyclicals and producers of consumer goods such as furniture.
African Harvest has about 3 billion rand ($500 million) under management. Among its major clients are the Namibian Pension Fund and a number of local trade unions.
So far, Mr. Franklin says RISA is close to announcing the signing of a pension fund.
The investment team for a $10.2 billion public pension fund has approved a $10 million commitment to the fund, he said. The fund's board will vote on the investment in February.
But some of the funds that met with Mr. Franklin and the team from African Harvest are not ready to buy. Some of these funds are moving away from regional or country-specific managers.
Officials at the New York City Employees' Retirement System found RISA's case "compelling," said spokeswoman Nicole Lise. But she added, "It's not the right time for us to invest there."
Executives with the Philadelphia Municipal Employees Retirement System also found RISA's presentation compelling, said Sandra Parker, chief investment officer of the $3.4 billion fund. She said the fund was "interested in South Africa because we were one of the first funds to divest" in the mid-1980s, she said.
Montgomery Asset Management and City of London manage emerging markets equity accounts totaling about 5% of the fund's assets, Ms. Parker said. And officials are "looking at" the fund's use of regional and country mandates vs. broader international mandates. If the fund is going to invest further in South Africa, Ms. Parker asks, "Why South Africa as opposed to any other country?"
Investors like Ms. Parker don't dispute the good that can come from African Harvest's style of investing. But, they stress the difference in the goal and the best way to manage money.
When asked, Mr. Franklin ticks off the pros of investing in South Africa: "Interest rates are down, and capital reserves are up; there's a strong banking system, a strong regulatory system."
But others offer a bleaker sketch of the South African economy. Like markets around the world, South Africa's was hit in August in the wake of Russia's default, said Nandu Narayanan, portfolio manager with Trident Investment Management LLC in New York. He cites figures showing South Africa's weak economic growth of 1.7% and 0.8% in 1997 and 1998. Inflation, although it dropped to 7% in 1998 from 8.6% in 1997, is expected to rise again in 1999.
But compared with many companies in Asia's emerging markets, South African companies have less debt on their balance sheets, he said.
African Harvest is not the only South African investment manager stressing socially responsible investing.
According to consultants and other investors, other South African black empowerment firms include: Alliance-Odyssey Capital Management; Infinity Asset Management; Real Africa Asset Management; TriLinear Asset Management; and Zamani Asset Management.
The recent change in black South Africa's level of investment in the market is staggering. Black South Africans now own 9.1% of the shares traded on the Johannesburg Stock Exchange, according to African Harvest. In 1995, they owned 0.3%.
