by Rahwa Asmerom
Newsweek notably proclaimed that Africa is becoming the new Asia. It’s quite a statement yet one that aligns with recent findings that many African countries are boasting competitive GDPs and outperforming many emerging markets in the midst of the global recession. This, however, is nothing new to Ryan Shen-Hoover who has for some time now financially backed his belief that the continent offers a diverse array of strong markets and opportunities for investors. While working in Lesotho for a human rights organization, Ryan began to question the issue of aid and the nature of aid dependency. He then gave thought to other ways to creatively circumvent that ultimately harmful approach and decided that the most mutually beneficial solution was to invest in the economies and businesses directly. He ultimately co-founded Kivuno Capital Management, an early-stage asset manager focused on African equities and the Kivuno Africa fund, which specializes in small-cap and closely-held stocks. Investing in everything from tea in Kenya to ice cream in Ghana, the fund’s performance has generated stellar returns and continues to confirm the promise of frontier markets like those in Africa. We caught up with Ryan to discuss how he got into the game, how amateur investors can access African stocks and and which countries and industries he’s feeling bullish about right now.
What are your reasons for investing in the African Stock Market?
The most important reason is that I believe that it has some of the biggest bargains anywhere in the world. There is a lot of value there and [people don’t realize that] because, especially here in the U.S., the perception of the risks of investing in Africa is much greater than the actual risk. The media portrayal of Africa is one of a dangerous volatile place where only fools would send their money and hope to get a return. In our experience and looking at the numbers, it’s actually, on a risk-adjusted basis, a great place to invest. You have economies that are growing five to six percent annually and it’s common to find stocks that are trading for five to six times earnings which is unheard of in the U.S. market where the economy is growing at a much slower rate. You can often find banks that are trading for less than book value. There are a lot of hidden gems there.
So the perception of risk is essentially keeping people from investing?
15 of the 18 African stock exchanges have outperformed the S&P 500 over the past three years in U.S. dollar terms. That’s something I like to point out to people that question the level of risk involved in investing in Africa. Where is the real risk? This past year the Johannesburg stock exchange is up 92 percent in U.S. dollar terms and I think the S&P 500 has only been up 27 percent. There are definite returns to be had in these markets and it’s something that I think investors should take a close look at.
How did you come to start investing yourself?
I had lived in Lesotho for a number of years. There were definitely problems there and other countries I was visiting but the markets were still functioning and business was still being done in spite of the political problems. That’s what sparked my interest. I was a volunteer working with a human rights organization and I started to become disillusioned with the aid industry and it led me to wonder ‘What is the most appropriate role for an outsider in Africa?’ I was getting more and more uncomfortable with the idea of aid creating dependency and crowding out local entrepreneurial initiatives. After I returned to the United States and as I was investing my own portfolio in the U.S. markets, I got to thinking about how I could try to put my money to work there. There wasn’t a whole lot of resources online telling you how you can invest in these markets. I saw that there were stock markets but didn’t know foreigners could invest and how they could go about it. I started sending emails to local stock brokers and seeing what they would tell me about setting up an account and trying to ask them for references from other investing firms overseas and what their experience had been. As I started getting comfortable with it, I started sending my own money and, luckily, I had some success early on and I caught the bug.
You were at one point producing a newsletter called Investing in Africa – how did that come about?
I later decided to put my lessons in writing and thought that maybe other people would find them helpful as well. Through the process of writing the newsletter, some people said ‘you know this is great, it looks like some good returns can be generated from investing in these markets.’ Africa is lumped into one big place and it is a disservice – there are 20 different stock exchanges in Africa and each one is very different. You have everything from the South African market where there are hundreds of stocks and local brokers and you can basically trade online like you can in the States and then you have some markets like in Mozambique and Rwanda that are just starting up and where they only have one stock listed. Some markets are open for only one hour a day. There is a whole range of markets which range in sophistication, size and liquidity.
After an amateur investor has done his basic research and decided what market he’d like to invest in, what are his next steps in getting started?
You would first find a reputable broker. Most of them have websites. You can send them an email and ask them for info on how to set up an account. They generally require a short form and a copy of a passport. There is a leap of faith in giving someone in another continent some personal information about yourself but if that’s something that you’re okay with, it can really open up a lot of markets for you.
Where’s a good place to start? Where’s the ideal market for beginners?
Generally, I recommend starting in a place like South Africa because the experience is very similar to opening up a brokerage account here in the States. As someone gets more comfortable with making wire transfers from their banks to the brokerages accounts in South Africa, maybe they’ll feel comfortable going to a place like Botswana or Kenya or some of the other more developed markets next.
What is your fund, the Kivuno Fund, investing in?
Right now, we have a large holding in Kenya and we’ve been investing in tea. Kenya is one of the world’s largest producers of black tea and there is actually a shortage of tea at the moment. There are a few listed companies on the Nairobi stock exchange. Although their output is down this year, the price of tea has gone up so much at market that they’re producing some great earnings. We are also looking at the Ghana stock exchange which has been hit hard in the past year but which we think is prime for a rebound. We like certain stocks in Botswana and Zambia. We just bought a position in a bank in Uganda. We are pretty well diversified.
So Ghana is a potentially great place to invest in now considering you think it’s going to reap the benefits of an economic rebound?
I really do like Ghana right now. It has a stable political environment and there is the prospect of oil coming in, which comes with a lot of risk for corruption but the government is taking that risk seriously and trying to put in mechanisms that will make sure those oil revenues benefit the whole country and not just a few elite. The prospect of that oil will prop up the currency and allow the government to invest in a lot of infrastructure and education. I like the direction that Ghana is going politically and I think its market is hugely undervalued. A lot of their banks are trading for less than book value, which is always a great sign for me as an investor. When I’m buying a bank for 75 cents on a dollar in a growing economy, it really makes me feel very bullish on the market.
What investments do you currently have in Ghana?
We’re invested in a company called Sand Milk. They’re the largest ice cream and frozen yogurt producer in Ghana. It’s a very well run company, has no debt on its books and it trades for six times earnings. There are a lot of very well-managed businesses in Ghana. The down side is that the markets tend to be illiquid. When you start looking at frontier markets, you tend to see that word a lot. It basically means only a few shares trade on a daily basis. This is a reason that U.S. banks don’t invest in Africa because they need to trade to make it worth their while. They need to trade shares at a million dollars each and a lot of African stocks, especially in Ghana, only trade $10,000 dollars a day if that at all. It’s a great advantage for a small-time investor because you are competing with other small-time investors and you’re not competing with big banks that have inside contacts with companies. It’s a more level playing field and it’s one reason that you can find a lot of bargains. The markets are under-researched so if you could find a good advisor who knows the markets well, they can point you in the right direction
How has the Kivuno Fund performed?
We launched in September 2008 when everything was crashing here. We’ve actually outperformed the indexes by a large margin since inception.
What are other ways that U.S. based investors can go about exposing their portfolios to African stocks?
One vehicle that would be the simplest way to get some exposure to Africa in your portfolio would be to invest in the Market Vectors Africa Index ETF. If you had a TD Ameritrade account, you can invest in it easily through that. The ticker symbol is AFK and what they do is invest in some of the largest African companies. I think they have about 50 different companies in the ETF and through it, you’ll be getting a lot of exposure to Egypt, South Africa and a bit of Nigeria. It is the most accessible vehicle for U.S. investors to African markets.
