The Case for Investing in Africa

A frica may be the last great ground-floor international investment opportunity left on earth. Until just recently, however, the continent has remained beyond the consciousness of all but the most adventurous of investors. But now Africa is beginning to gain a wider audience in financial circles. Why? Because it has notched strong growth for the last decade and is likely still in the early stages of a powerful and transforming spurt of economic progress. The mature economies of the developed worldthe U.S., Europe and Japanmust contend with tepid growth, aging populations and painful fiscal retrenchment for years or even decades to come. But Africa is in precisely the opposite position. Having enacted economic and political reforms and shaken off its post-colonial torpor, Africa is on an impressive growth trajectory. The continents market-based ideals are solidifying, and it is simply a matter of time before its capital markets and economies become more developed, liquid and integrated with the global financial system. Today the continentsub-Saharan Africa in particularfeatures rapid growth, abundant natural resources and a large, young and increasingly educated workforce. Forward-thinking investors have the opportunity to get into Africa now, before the continent makes a one-time-in-history transformation from an impoverished agrarian subsistence economy to a modestly prosperous and more urban consumer-based economy. Nowhere is the adage the early bird gets the worm more applicable than in the field of investing. Whether pertaining to a company, country or continent, investors who perceive opportunity before othersand then act decisively on their perceptionsposition themselves to be rewarded with higher returns for longer periods. Africa, admittedly, continues to suffer from a serious image problem. While deserved in certain cases, the outside worlds perception of Africa as a place of poverty, hunger and incessant warfare has kept many investors away. The media in the developed world does Africa no favors

by focusing intently on its problems and paying minimal attention to its positive developments. But tough image or not, Africa is moving forward. Vibrant entrepreneurship and resourcefulness are in full display in much of Africa as people seek to build better lives for themselves and their families. While this progress may not show up on your nightly newscast, strong economic growth and a lengthening track record of solid equity market returns indicate that things are turning for the better. The continents present image creates an opportunity for todays smaller investor. Once the medias focus shifts to the positive change in Africa, institutional investors seeking a durable growth opportunity will come calling and investment bargains will become scarce. Just to note: the cover of The Economist Magazine on December 3, 2011 was entitled Africa Rising, whereas in May 2000 the same magazine dubbed Africa the hopeless continent.

Our Investment Thesis

Africa is the most complex continent on earth and defies simple descriptions. It has one billion of the worlds seven billion people and 20% of the worlds land mass. Behind Asia, it is both the second largest and second most populous continent. It has 54 countries with hundreds of ethnic groups speaking more than one thousand languages. One (mostly) common theme throughout the continent, however, is that the quality of life is improving. The following themes support our investment thesis for Africa: 1. 2. 3. 4. 5. Africa is growing rapidly Africa has immense natural wealth Africa has favorable demographics (for investors) Technology is accelerating change in Africa Africa is joining the global financial system

Growth Natural Wealth Demographics Technology Financial Integration GROWTH Around the year 2000, after two decades of tepid to non-existent growth during the postcolonial era, Africa began to stir. For the last decade, Africa has been on a steep trajectory higher. The International Monetary Fund (IMF) estimates that Africa grew at a rate of 6% per annum over the last decadea rate much faster than the developed world and twice as fast as Africa had been growing for the prior two decades. The IMF expects sub-Saharan Africa to grow 5.4% in 2013 and 5.7% in 2014.

To be sure, the continent is rising off a very low economic base. But this depressed starting point is an attractive attribute for early investors, as it sets Africa up for what could be years or even decades of rapid expansion. That Africa is growing off a low level is a reason for investors to be encouraged and is in fact a cornerstone of our investment thesis. Investors who focus not on the absolute level of the starting point but rather on the direction and rate of change will find that Africa scores highly on these later measures. As African economic growth kicked into high gear a decade ago, the continents equity markets responded. Africas largest stock market, South Africas, rose nearly 200% from 2001 to 2010 while U.S. market was essentially flat. Our expectation that Africa will continue to generate attractive returns for investors is thus not predicated on big changes occurring. We merely expect Africa to remain on its present course.

The Practicalities of Investing in Africa

There are 29 stock exchanges in Africa that represent the equity markets of 38 countries. (Two regional exchanges, one in West Africa (BRVM) and one in Central Africa (BVMAC), serve a total of 13 countries.) With the exceptions of South Africa, Egypt and Morocco, many of Africas capital markets are in early stages of development and characterized by a relatively small selection of individual issues and light trading volumes. At present the market capitalization of all of the stocks markets on the continent is approximately $1 trillion, about a tenth of the U.S. equity market. In coming years, we expect to see trading volumes increase as more companies come to the public markets.

Our Investment Strategy

Our Africa Opportunity strategy seeks long-term total return from both income and capital appreciation through active investments in companies that we expect to enjoy profitable and sustainable growth in Africa. Opportunities in Africa span all economic sectors. Because most African economies are in early stages of development, many attractive investments can be found in basic consumer goods and services. We expect Africans disposable income to increase rapidly and therefore seek to invest in industries where that money will be spent. Personal communications, food and beverage, banks, health care and retail are all industries where we expect growing demand. As African infrastructure is being built out, there are also numerous opportunities in the agriculture, construction, telecommunications, energy and mining industries. While there are now many companies enjoying high profit margins in Africa that are suitable for investment, there is also a large list of companies that have yet to come public that will offer as much or more opportunity. Just as with early investors Asia and Latin America, we believe that investment pioneers in Africa are likely to find the journey challenging and often unpredictable, but ultimately very rewarding in the long run. NATURAL WEALTH

Africa has what the world needs. Many Africans are very poor, but the continent itself is incredibly rich in natural resources. It has huge untapped energy resources in the form of oil, natural gas and hydroelectric power. Africa also holds over half of the worlds gold reserves, 40% of the worlds platinum and 20% of the worlds uranium as well as vast deposits of diamonds, iron ore, copper, and cobalt. The true natural wealth of Africa is unknown, however, as less than half of its land has even been surveyed. On top of its mineral and energy wealth, Africa also has a huge swath of uncultivated arable land. According to the United Nations, only about 10% of Africas arable land is currently being cultivated and the continent holds more than 60% of the worlds uncultivated arable land. Over the next few decades, Africa will likely transition from a net food importer to a net food exporter. Foreign direct investment (FDI) is pouring into Africa as more developed countries notably Chinaseek to gain access to Africas resources. In 2010 FDI exceeded $55 billion, up 500% from the level a decade earlier. FDI not only brings extra cash into Africa, but also infrastructure development. Better ports, roads, rails and telecommunications systems are sorely needed to support further growth, and FDI is helping.

Demographics

While the populations of the U.S., Japan, Western Europe and China are aging rapidly, Africas one billion people are mostly young. In sub-Saharan Africa, up to 40% of the population is thought to be under the age of eighteen. The median age in Africa is about 20 versus 30 in Asia and 40 in Europe. Africa is the youngest continent on earth and as this big bulge of population moves into its most productive years it will create huge demand for a wide array of products. Even now companies in Africa are racing to fulfill huge unmet needs across all levels of society. As societies become more urbanized, their productivity tends to increase. In Africa now, a marked trend of urbanization is propelling growth as new inhabitants of African cities begin to contribute to the economy. Africas large, inexpensive, and increasingly educated labor force is poised to make a strong contribution to the global economy. TECHNOLOGY
Communications and computing technology is acting as an accelerant in Africa; the growth of mobile phones provides an instructive example. The GSM Association, a group of mobile phone operators, announced in November 2011 that Africa is the fastest-growing mobile phone market in the world, having increased its subscribership 20% or more in each of the last five years. African mobile subscribers are expected to reach 735 million by the end of 2012up from basically zero a decade prior. In 2001, Nigeria, a country of 160 million, had fewer than 500,000 phone lines in the whole country. Now it has in excess of 110 million subscribers. Africas rapidly developing communications infrastructure is a boon

to business, as it facilitates supply-chain management, demand forecasting and overall operating efficiency.

Financial Integration

Africa is beginning to integrate with the global financial system. Access for foreign investors, while still difficult, is improving. Friction costsspreads, custody, and trading costsare higher in Africa than in developed markets, but these costs will decrease over time as trading volumes build. Financial information about African companies is increasingly available outside of Africa as many companies offer their financial reports online and firms such as Bloomberg and ThomsonReuters begin to carry African trading data on their platforms. Global investors now have online access to corporate and government financial information that until just recently was very difficult and time-consuming to access. For the moment, however, limited liquidity for many smaller equity issues has effectively shut out large global institutions, thus providing smaller investors a clear window of opportunity. But as more companies come to market with public offerings and liquidity deepens, institutions will begin to move into Africa. In ten years many global institutions will be in Africa in some capacity. In twenty years they will all be there.

T he objective of our Africa investment strategy is long-term total return. We pursue this objective through both capital appreciation and investment income. We employ a bottom-up company-by-company approach to portfolio construction, taking into account such factors as competitive advantage, growth rate, valuation, profitability, management skill and accessibility, currency risk and political risk. We focus primarily on sub-Saharan Africa, where we believe the best opportunities are located. Specifically, we believe robust, well-run businesses exposed to the growth in South Africa, Ghana, Nigeria, Senegal, Kenya, Tanzania, Ethiopia, Botswana, Mozambique, Zambia, Namibia, Angola, and Cte dIvoire particularly warrant our investment consideration. Our Africa portfolios consist of a very select group of companies that are both wellpositioned for growth and are capitalizing on their demonstrated competitive advantages. We invest in any sector in which we find opportunity and we are unconstrained in terms of company size. Several sectors that we believe are particularly attractive for investment are:

Consumer Goods Financials Agriculture Infrastructure Health Care Telecommunications

We invest in stocks, funds, fixed income and other instruments that trade on stock exchanges and in over-the-counter (OTC) markets in countries including, but not limited to, South Africa, the United Kingdom, Canada, Australia and the United States. Africa-focused companies listed in these countries, broadly speaking, offer better liquidity, governance, disclosure and management access than most companies listed on local African stock exchanges. Our trading venues will likely grow in number as warranted by the alleviation of liquidity and custodial concerns to include other local African markets. We believe our strategy offers U.S.-based investors seeking exposure to Africa the best overall combination of cost-effectiveness, liquidity, security and transparency. To request more information, please contact us today.