Portfolio managers

Andrew Lapping, Nick Ndiritu

Fund description and summary of investment policy

The Allan Gray Africa ex-SA Equity Fund Limited (the ’Fund’) invests in a focused portfolio of companies with significant business interests in Africa regardless of the location of the stock exchange listing (excluding South Africa). The Fund price is reported in US dollars but the underlying holdings are denominated in various currencies. Returns are likely to be volatile.

Fund objective and benchmark

The Fund aims to outperform African equity markets (excluding South Africa) over the long term without taking on greater risk of loss. The Fund’s benchmark is the Standard Bank Africa Total Return Index. The Fund does not seek to mirror the benchmark but instead may deviate meaningfully from this performance benchmark in pursuit of superior returns. To the extent that its investments differ from those in the benchmark the Fund faces the risk of underperforming the benchmark.

Suitable for those investors who

  • Seek exposure to African (excluding South African) equities
  • Are comfortable with stock market and currency fluctuations
  • Are prepared to take on the risk of capital loss
  • Typically have an investment horizon of more than five years


African equity markets bounced back strongly in 2017, yielding attractive dollar returns in key markets: Kenya 29%, Nigeria 27% and Egypt 20%. Zimbabwe’s stock market had double digit nominal gains, but real US dollar returns were harder to quantify. The Fund delivered a net return of 52.8% in 2017, compared to its benchmark return of 18.7%.

Intuitively, it is easy to grasp that occasional periods of negative market sentiment and gloomy economic forecasts often lay the foundation for finding attractive bargains and a subsequent market recovery. In practice, these periods can be excruciatingly long and uncomfortable – for investment managers and clients.

There is false comfort in trying to predict the timing of a market rebound. Rather, the best anchor during these periods is to focus on the intrinsic value of individual companies. Over time, equity prices gravitate towards intrinsic value.

Today’s most promising African equity markets were yesterday’s laggards. The Fund’s largest overweight positions in Zimbabwe and Nigeria are discussed in detail below. Both markets have experienced challenging periods in the recent past, but their fortunes are improving. Egypt is also a turnaround story, but the country’s promising prospects are broadly reflected in equity prices. The Fund’s large exposure to Eastern Tobacco has contributed meaningfully to the past year’s performance, but we have struggled to find similar attractively priced opportunities in that country. In early 2017, we increased the Fund’s exposure to Kenya’s top tier banks, premised on the market being overly pessimistic after the introduction of a law capping interest rates. We subsequently reduced this exposure after the banking stocks rallied.


Counterintuitively, Zimbabwe’s equity prices rose sharply as macro conditions worsened. The Zimbabwe stock exchange was up 268% over the year to 10 November 2017. This reflected fears of a return to hyperinflation as the government, shunned by international lenders, funded its growing fiscal deficits domestically by creating pseudo-US dollars. Robert Mugabe’s ouster was a welcome relief and the market has corrected by 38% since 10 November 2017. Using Old Mutual’s duallisted shares in Harare and London, the implied discount for a US dollar in Zimbabwe has sharply reduced to 44% from a peak of 83% before Mugabe’s exit. This suggests that the risk of monetary collapse has reduced, but a chronic shortage of US dollars persists.

We have steadily discounted our Zimbabwean assets since December 2016 and we are currently using a bottom-up approach to value each of the Fund’s Zimbabwean holdings. In aggregate, our carrying value on 31 December 2017 implies a 60% discount to market prices compared to the 44% discount implied by Old Mutual’s dual listing. Using the Old Mutual rate as a currency proxy is useful, but has its drawbacks since Old Mutual Zimbabwe shares are thinly traded with significant price volatility. In effect, it is one of multiple black market currency rates in Zimbabwe.

We do not have an edge in estimating the appropriate discount for a dollar in Zimbabwe – no more than we did three months ago. What we can predict is that patience will be handsomely rewarded as Zimbabwe’s risk premium unwinds over time. The pace of political and fiscal reforms will dictate the turnaround in US dollar liquidity shortages. We are encouraged by the new government’s focus on restoring fiscal discipline, which could be a harbinger for re-engagement with international institutions. Our best anchor today is that Econet and Delta, the Fund’s top holdings in that country, are cashgenerative businesses with dominant market shares. In a normal macro environment, the intrinsic values of these businesses are meaningfully above our carrying values.


Keen readers of our commentaries are familiar with our long held view that Nigerian banks are undervalued, despite the country’s macro risks. Nigeria’s economic challenges started dissipating in 2017. Relative stability in the Niger Delta has led to a recovery in oil production and oil prices have bounced back. The authorities effectively devalued the naira in April 2017 with the introduction of a new foreign exchange regime. Foreign investors, who had previously shunned Nigeria’s fixed income and equity markets, have trooped back gradually.  Domestic investors, who were underweight equities, are also waking up to the realisation that a high-yielding fixed income environment will not last forever.

An index of the top 10 Nigerian banks has returned 54% in US dollars over the past year.  Remarkably, despite this run, this same index is trading on 7.1x price-toearnings ratio and 0.9x price-to-book. On our estimates, there is still ample headroom for these banks to continue re-rating.


Over time, we aim to deliver substantial returns for patient investors, but market gains or losses in any single year are unpredictable. In spite of the recent gains in most African markets, the Fund is well positioned in attractively priced equities and we are continuously scouting for new bargains.

Commentary contributed by Nick Ndiritu

Performance in US$ net of all fees and expenses

Relative to benchmark return required to reach high watermark: 4.5%.

Note: The Fund’s returns shown above are all A class.

  1. Standard Bank Africa Total Return Index (source: Standard Bank) performance as calculated by Allan Gray as at 31 December 2017. Calculation based on the latest available data as supplied by third parties.
  2. Maximum percentage decline over any period. The maximum drawdown occurred from August 2014 to July 2016 and maximum benchmark drawdown occurred from July 2014 to January 2016. Drawdown is calculated on the total return of the Fund/benchmark (i.e. including income).
  3. The percentage of calendar months in which the Fund produced a positive monthly return since inception.
  4. The standard deviation of the Fund’s monthly return. This is a measure of how much an investment’s return varies from its average over time.
  5. This is the highest or lowest rolling 12-month return the Fund has experienced since inception. The Fund’s highest annual return occurred during the 12 months ended 31 December 2017 and the benchmark’s occurred during the 12 months ended 30 June 2014. The Fund’s lowest annual return occurred during the 12 months ended 31 August 2015 and the benchmark’s occurred during the 12 months ended 31 August 2015. All rolling 12-month figures for the Fund and the benchmark are available from the Allan Gray Service Team on request.

Income distributions for the last 12 months