Monday, October 11, 2010

Insparo: discovering the last frontier

By James Smith [The Financial Times Limited 2010] - Published: October 10 2010

Insparo’s African and Middle East fund passed its second anniversary in June, outperforming the emerging market universe by focusing on what the team calls the last frontier.

This covers the area from Pakistan to sub-Saharan Africa – excluding more developed countries such as Turkey and South Africa – playing various common demographic and macro-economic themes.

Insparo started life in 2007, founded by chief investment officer Mohammed Hanif, and also includes ex-New Star Heart of Africa manager Jamie Allsopp in the ranks.

Chief strategist Graham Stock says: “Our aim is to access the various long-term structural themes in the region, which include investment from China, the ongoing rise of middle-class consumers and commodities.” As a multi-strategy fund, Africa and Middle East can play these stories through equities, bonds and currencies, based on opportunities and valuations.

Over the past 12-18 months for example, the portfolio has been skewed towards credit in the Middle East, with the team picking up bonds from property companies and quasi-sovereign debt in the UAE on distressed valuations. They are looking to rotate out of this position into higher-beta exposure in areas such as African equities.

“We like Nigerian companies at present as there is a political risk premium priced into equities ahead of upcoming elections that we see as overdone,” says Mr Stock.

“Another attractive country is Kenya, with good economic growth expected now the referendum on the new constitution is behind us. The country is also benefiting from greater regional integration with neighbouring countries Uganda and Tanzania, meaning a much larger target market for companies such as banks and breweries.”

While there are different underlying themes at work in Africa and the Middle East, Mr Stock says young, growing populations are key. By 2015 for example, Africa will be the only continent where the working age percentage of the population is still growing.

This is continuing to drive mass urbanisation, with the 40 per cent of Africans living in cities expected to hit 50 per cent by 2030. By 2045, there will be 1.1bn Africans of working age, more than either China or India, and the number of households with earnings over $5,000 – considered a threshold for discretionary spending – will rise from 85m to 128m in the next decade.

“Penetration rates in areas like mobile telephony and mortgages are low and companies are working to tailor products and services to Africa,” adds Mr Stock.

“The Middle East also has a young population in countries such as Saudi Arabia but the key driver remains oil and how petrodollars are put to work. This has also influenced other sectors as governments look to diversify economies, with areas such as construction and petrochemicals performing well.”

Other positions currently in place on the fund are sovereign debt in the Ivory Coast, again bought at distressed levels but expected to continue solid performance after a long-awaited election in November.