Institutional investors are beginning to look at Africa as a source of unlikely alpha rather than a lost continent within portfolio management.
As part of an emerging markets and, increasingly, frontier markets strategy, Africa has been attracting asset inflows as investors turn away from lower-growth developed markets toward regions with higher potential for returns. The pace is still slow and largely confined to the world's biggest institutional investors. But as the economic infrastructure improves, the continent as a whole is expected to draw more institutional money in the coming years, according to consultants.
“If you're thinking about short-term gains and long-term gains, go to Africa,” said Cynthia Steer, managing director and chief research strategist at Rogerscasey Inc., Darien, Conn.
At the forefront of the movement are sovereign wealth funds. Some that recently increased their equity holdings in Africa — directly and indirectly — include the Abu Dhabi Investment Authority, which does not publish its total assets but has been estimated around $627 billion, Singapore's $247 billion Government Investment Corp. and the $30 billion Korea Investment Corp., according to sources familiar with the funds.
In China, the China-Africa Development Fund, which has about $1 billion in assets, was set up in 2007 specifically to target investment in Africa. As of year-end 2009, at least $400 million had been invested mostly through direct exposure to companies in energy and natural resources. The long-term investment target is about $5 billion, according to sources.
Large pension funds also are dipping their toes into Africa. Ms. Steer said Rogerscasey is advising on several institutional mandates between $25 million and $100 million, or about 0.5% to 1% of the clients' total assets. “The allocations (to Africa) will probably start on a small scale, then integrate into a broader frontier markets strategy,” Ms. Steer said.
“Africa is not about donations, it's about investments,” said Ms. Steer, who is also head of the firm's beta research group. “That's the most important recognition for institutional investors, and some are beginning to recognize that.”
Separately, officials from the 2.79 trillion ($451 billion) Norwegian kroner Government Pension Fund-Global, the Netherlands' e218 billion ($279 billion) Stichting Pensioenfonds ABP and the $206.7 billion California Public Employees' Retirement System said Africa has become a more attractive source of returns in recent years. Investment in Africa as part of the overall portfolio is still minuscule, they said, but officials are considering adding exposure.
Clark McKinley, spokesman for Sacramento-based CalPERS, said in an e-mailed response to questions: “Certainly emerging markets, including "frontiers' like Africa, are important for future investment in the light of projections that investment dollars may generate higher returns than in the U.S. and other developed markets. There's also an expectation of increasing consumer consumption by the growing middle class in frontier countries as they develop.”