DECEMBER 2011                                                                    Download PDF Version

Q&A with Kagiso Sedimo


Africa is one of Clarmond’s preferred thematic investment for 2012 and beyond. The favoured fund is the Fleming Africa Fund and below is a Q&A with the manager, Kagiso Sedimo.

Chris Andrew: What are the main trends you are investing in in Africa?

Kagiso Sedimo: Africa, having been an unlucky continent for many decades, is now enjoying a number of positive developments. Everyone knows about how rich Africa is in commodities and how China, in particular, has become a major investor in a large number of African countries. However, beyond just the commodities there are other pieces of good news. Specifically a growing number of countries are enjoying political stability and the governments are following better policies. This is showing up in the credit ratings - for instance Botswana, where I live, is rated A - and a large number of African countries have better ratings, inflation outlooks and government debt balances than other western or BRIC countries.

However, the strongest trend in which the fund invests is that of consumerism. The African consumer is starting to move up the value chain. This is not a consumption of luxury goods but a consumerism based on the basic staples of soap, cement and beer. Africa’s demographics are exploding and soon there will be more young people in Africa than anywhere else in the world. This is coupled with a move to cities and the continued rise of large centres of population. These will not just be the cities of South and North Africa but also cities such as Lagos, Luanda, Khartoum and Nairobi.

The coming African boom will be one of basic consumption.

CA: What areas do you tend to avoid?

KS: Of course Africa has over 50 countries and less than half of these could be classed as ‘investable’. We currently have a list of about 20 countries that we would consider investing in if we could find a suitable company; currently there are 10 countries represented in the portfolio. It is fairly self-evident that we cannot invest in countries where there is conflict, massive political instability and little or no regard for the rule of law.

In relation to sectors it might surprise you to know that we avoid the resource sector entirely. Although companies in this sector dominate the market cap of the African stock markets we do not feel we can add any value by buying these companies. Ultimately the price of gold, copper, silver and so on, is not set in Africa but in London or Chicago; we could have found the best management team and company but suffer due to  events outside our control. Also, if an investor wants general commodity exposure they should get this in a pure way rather than by mixing it with an ‘African play’; our investment case is based on African consumerism not commodity prices.

CA: How would you describe your Due Diligence process?

KS: Due diligence in Africa entails alot of travel, alot of shoe leather and alot of reading hard copies of accounts! Information on African companies is not, as is the case in the rest of the world, easily available on Bloomberg or the internet. Certainly the information exists, however, in order to receive it, it most often means going to the headquarters of the company in question, meeting with the Financial Director and being physically handed the information.

Company visits are very important, and frequently I will receive much better forecasts and updates direct from the horse’s mouth. Also I receive excellent information from the larger brokerage firms, who not only can point in the direction of successful companies, but can also confirm the validity of information I have received. However, this is a time-consuming process and is more similar to making a private equity investment in the western world. Luckily I am also supported by a team of excellent analysts in Botswana.

I will try to meet the management of every company we invest in and make regular visits to specific African regions.

CA: Can you describe the current portfolio both in terms of geographical breakdown and sectoral breakdown?

KS: As I mentioned we are currently invested in 10 African countries. The five largest positions are in South Africa, Nigeria, Kenya, Zambia and Ghana. The fund is not allowed to have more than 20% in any one country and not more than 7% in any one individual stock.

Sectorally 70% of the portfolio is invested in consumer stocks, financials and telecoms. We see these three sectors as all being a play on the increasing consumerim. The financials stocks on Africa are not like banks and insurance companies in Europe, they are very boring deposit takers which are only tentatively starting down the road of credit creation. Credit creation, increased consumption and the use of mobile telephony all go hand in hand.

CA: What are the main risks of investing in Africa and how do you mitigate these in the fund?

KS: The first risk that comes to investors’ mind is political risk. For a number this hurdle is too high to jump, however, as I have mentioned before political stability and democracy have been creeping over Africa over the last decade. For every DRC there are a greater number of success stories, it is just that the success stories do not make such good copy for newspapers.

I would suggest that our due diligence process ensures investors are only invested in prudently run companies in politically stable countries. However, on a technical basis there is a risk committee that sits over the fund and ensures that the fund is sticking to its mandate. On a quarterly basis the fund is also obliged to ensure it meets its maximum exposure levels of 7% for a stock and 20% for a country.

The risk that we concentrate the most on is the liquidity risk. African markets have traditionally been very thinly traded and therefore, for even the larger stocks it can be difficult to build positions. We monitor this in two ways. First, the fund offers weekly liquidity with 30 days notice, and so we constantly monitor the liquidity of our underlying holdings to ensure that over a 30 day period we would be able to liquidate over 85% of the portfolio. This in turn means that our fund can only grow to a limited size; our current figure for this is that the fund could grown to a maximum of $150m. Secondly we monitor the stocks that other Africa funds are buying and are invested in. We have little overlap with the majority of the holdings in other funds, however, by keeping an eye on this it means we can assess the effects on the market should any of these funds have to liquidate a large position.

Of course there other risks involved with the fund, but these are mainly to do with the operational risk of running a fund across a number of different African stock exchanges and currencies. We always have to keep a close eye on margins and spreads as these can always expand when you are not looking!

However, I never like to answer a question just on risk. Risk is one side of the coin, reward is the other - and so an investor must weigh up not just the risks but also the potential rewards. I think that investors into Africa now will be very well rewarded.

CA: What is your largest current position? And what is the story behind it?

KS: The top holding in the fund is a 5.5% position in the Produce Buying Company in Ghana (PBC:GN). PBC was privatised by the Ghanian government in 1999/2000, although they still retain a c.36% ownership. The company buys cocoa within Ghana and sells it to the Ghanian Cocoa Board at a set annual margin. In 2009 a new CEO took over the company and has aggressively grown PBC’s market share from 30% to c.40%. He has also taken the company into the shea butter market. The company also runs its own trucking and transport division which delivers their cocoa and shea butter, but which is run with a separate P&L and is independently valuable.

Over the last two years EPS has grown by 140%, however, the share price has certainly not started to reflect the fundamentals of this company. The market cap is relatively small, under $100m, but with a dividend yield of 3.5% we are happy to hold this company until its value it properly recognised.

CA: You have investments in Zimbabwe - what can you tell us about this exposure?

KS: Our investment in Zimbabwe is in Delta Corporation (DELTA:ZH). Delta is a subsidiary of SAB Miller and is therefore a pure play on the Zimbabwean consumer; SAB retains management control of this business.

We only have a 2% holding in this company and we treat this position more as a ‘trading position’. We monitor the political position in Zimbabwe very carefully and, in fact, we sold out of this position (for a profit!) over the summer when we thought the incidence of political violence was increasing. However, following an improvement in this situation and a correction in the stock during September we have now bought back into this position at our initial entry level. There is excellent liquidity in this stock and therefore we have never had any problem buying and selling in the required size.

The company reached its peak volumes in 1998 and has since fallen 40% from these levels. From 2009 and the dollarisation of Zimbabwe the company has been improving its volume and revenues by 30-40% p.a. The management is doing all the right things, they have been investing heavily in their plants and equipment and have been re-establishing old distribution channels. We will continue to own this company in relatively small size, although we are prepared to trade it occasionally as political risk in Zimbabwe ebbs and flows.

CA: How have the events of the ‘Arab Spring’ effected your portfolio?

KS: The Arab Spring was a very unique event. At that time Egypt was one of my larger allocations, with over 11%. It was not clear to me what the result of this revolution would be. Would democracy follow? Would property rights and normal banking procedures be adhered to? I was very happy with the various companies I owned in Egypt but these macro confusions made me very uneasy. I therefore decided to sell down my entire 11% position in Egypt. In this circumstance the Investment Committee asked me to formally present the case for these transactions, but they also agreed with my analysis. I have subsequently bought back into these positions at prices 20-25% below the February prices.

The Arab Spring, and the more recent fall of the Gaddafi regime in Libya is a very positive development for Africa as, once again, it is shows the spread of democratisation.

CA: What words of advice do you give investors currently looking at making an investment in Africa?

KS: I think the best advice is not to believe the hype! The continent is full of some of the fastest growing economies and companies in the world and, with the western world showing low growth and high inflation these african companies should be in part of your portfolio.

However, do not invest for a smooth ride, we will have lots of bumps along the way - but the general trajectory will be upward.

Africa as a continent is ready for a re-rating and this will occur at some point over the next 5 years and investors must be prepared for this.

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Fleming Africa Fund

The Fleming Africa Fund Ltd is managed by Fleming Asset Management (Cayman) Ltd. a wholly owned subsidiary of Fleming Asset Management Botswana ("FAMB"). The Fund was established in October 2010 and remains the only ‘product’ of FAMB.

Kagsiso Sedimo

Kagiso is the portfolio manager of the Fleming Africa Fund and has over 7 years experience in the African capital markets, specifically in analysing and valuing investments in Africa. Mr Sedimo is a Senior Investment Officer at Fleming Asset Management (Pty) Ltd since May 2010 and, prior to this, was an Investment Manager with the same company since December 2007. He worked as a Research Analyst and an Equity Dealer prior to joining Fleming Asset Management. He leads a team of analysts covering Botswana and African stocks and oversees offshore EM managers. Mr Sedimo holds a CFA charter.

Fleming Asset Management - Botswana

Fleming Asset Management was originally founded in 1994 as Ngamiland Asset Management. In 1999 Ngamiland A.M. entered into a JV with Robert Fleming and was rebranded Fleming Asset Management.

Chase Manhattan bought Robert Fleming in 2000; JPMorgan subsequently bought Chase Manhattan in 2001 and started closing down or selling the satellite operations. In 2002 the partners in Fleming Asset Management Botswana bought back the shares they did not own.

Fleming Asset Management is headquartered in Gaberone, Botswana, and is the only locally owned asset management company in Botswana. Fleming’s investor base is mainly comprises the Botswanian government, parastatals and multi-national corporations.Fleming has $1bn of AUM and has in excess of 25 investment professionals with branch offices in Canada and Australia.

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