Few ways into Africa

We are – as it were – back in Africa and lamenting the lack of ways that a retail investor can get access to the “last great investment frontier”. It is, of course, the possibility that Africa – or, more precisely, the sub-Saharan part of the continent – really will be the final frontier that makes it so alluring. Every investor wants to find the investment equivalent of Hong Kong in the 1960s and Japan in the early 1970s and here it is – Africa, your last chance.

True, the prospect appeals to the senses as much as it engages our rational thoughts. For an investor, that must be a concern. That said, Africa’s potential to grow is not in doubt; at least not if the main criterion is relative poverty. Per-capita national income in sub-Saharan Africa is $1,657 (£1,100), according to the World Bank. That’s a nation’s income divided by its population, so it is not the same as average earnings. Even so, it provides a basis for comparison and the equivalent amount is $6,560 for China, $9,536 for Latin America and $10,679 for the whole world. Potential indeed.

Whether it can be realised will depend on many factors, a major one of which is – forgive the expression – the state of the state. That is, a nation’s ability to grow depends heavily on the capacity of its state institutions to deliver goods and services satisfactorily. Crucial among these is the maintenance of law and order; the provision of a moderately-consistent legal system; the ability to raise taxes and spend the proceeds for the benefit of most (though not necessarily equally); the ability to project a national image based on enduring principles and – prosaic yet important – most likely a common language.

These factors – and others – come under the heading of ‘state building’, an activity that in sub-Saharan Africa remains far behind east Asia where, over the past 40 years, the transformation from poverty to – in some cases – real affluence has been astounding. True, China, Japan, Korea and even Vietnam started out with the real advantages of an established national identity and a long tradition of a capable – though not uncorrupted – civil service. By contrast, Africa still struggles with its colonial past, where national boundaries were often drawn for convenience; where colonisers did state building on the cheap; where state institutions, such as they were, tended to be exploitative anyway; and where national identities focused on the cult of the ‘big man’.

No country illustrates these failings better than Nigeria, whose name is synonymous with corruption and inequality. Nigeria has both Africa’s largest oil reserves (and the world’s 10th biggest) and its biggest annual oil production (and the world’s 13th). Yet its wealth is so unevenly distributed that two thirds of its population exist on $1 a day and the country is riven by the tensions between its grindingly poor – and Muslim – north and its richer and Christian south, which has its own gangsterdoms.

It’s even possible that Nigeria may become a failed state. With a population of 160m – Africa’s largest – that would be a prospect almost too horrible both for Nigeria’s fast-growing middle class and for investors who want to put some capital into Nigeria to profit from these nouveaux riches folk.

Too horrible to imagine, so we don’t. We set aside the tiny probability of that extreme event and seek to invest in sub-Saharan Africa – including Nigeria – anyway, which is okay because we will only commit capital that we can afford to lose. And this is where the paucity of choice comes in. I can’t say dogmatically that the three funds in the table comprise the sum total of routes into Africa via London-listed ETFs, but it looks that way. These also have a bias towards South Africa, which is unlikely to be the fastest-growing of the sub-Saharan countries.

The least bad option looks like the MSCI Africa TOP 50 (XMAF) fund run by db x-trackers. Via swap contracts, this has half its capital invested in South African companies, 22 per cent in Nigeria, 17 per cent in Egypt and 5 per cent in Kenya. By activity, its holdings are almost 50 per cent financials (mostly banks). But 20 per cent of its weighting is in consumer-goods companies and 5 per cent in healthcare, both of which should gain from growing middle-class spending power.

However, the index that lacks the ETF tracker is MSCI Frontier Markets Africa, which is exposed to Nigeria (47 per cent), Morocco (24 per cent), Kenya (23 per cent) plus Mauritius and Tunisia. Sure, it's high risk and super volatile, which helps explain why there is no ETF. But with just 35 constituents, even running a replicated fund should be feasible. I live in hope that it might materialise, but might have to make do with the Africa TOP 50 fund.

Limited Choice