Imara began as Edwards & Co in Zimbabwe in
1954. Robert Fleming UK then bought a stake in
1994. Following the purchase of Robert Fleming
UK by JP Morgan, an MBO in 2002 saw the creation
of Imara. This new company operates in much the
same mould as the old Flemings with three divisions:
asset management, stock broking and corporate
finance. Imara has been central to the financial
development of sub-Saharan Africa, having established
several of the regional stock exchanges over the
years. As well as running two open-ended funds,
Imara manages institutional money for regional
clients and offers a wealth management service
to private clients in South Africa. John Legat
is the lead fund manager on the Africa fund whilst
Jonathan Chew covers North and West Africa, as
well as marketing, from the UK.
Jonathan Chew was the CIO for Emerging Markets
at GT between 1989 and 1997 and was an active
investor in all the emerging markets - through
South East Asia, the Indian sub-continent, Latin
America, Turkey, Eastern Europe, the Middle East,
Southern Africa and Central Asia as they
opened to foreign investment. John Legat headed
up GT's investment team covering Eastern Europe,
Middle East and Africa throughout the 1990s. Between
them, they set up and managed GT's Africa Fund
in 1995, the first such mutual fund of its kind.
They both left GT in 1997, with John moving to
Zimbabwe. He then established Fleming Asset Management,
which is now the second largest local fund manager
after Old Mutual with over 90 institutional clients
and 800 private clients. He also helped establish
Fleming Asset Management in Botswana. He has travelled
extensively in the region, and has a long track
record of managing assets in Africa. At the same
time, Jon established what is now the Imara Global
- Could you briefly summarise your case
for investing in Africa? What do you identify
as the key regions for growth and why?
Change for the better: political and economic.
Markets reflect change at the margin, so the
fact that African governments are becoming
more accountable and that economies are restructuring
and growing faster, albeit from a low base,
is having a positive effect.
Partly because governments have become more
accountable and partly because of IMF
or closet IMF programmes, fiscal deficits
have come down over the past decade, inflation
and interest rates have fallen and currencies
are more stable.
There are over 50 countries in Africa, ranging
from the rich to the poor, from the well managed
to the unmanageable. There are four distinct
regions of growth, though several countries
have interesting investment stories and/or
North Africa: The biggest market is
Egypt, and the pace of industrialisation is
accelerating as a swathe of industrial and
financial reforms continue to deregulate what
is still a highly controlled economy. Valuations
in North Africa look destined to reflect those
in the Gulf as Gulf investors move offshore.
East Africa: Kenya dominates the region
and is now an important regional manufacturing
base and hub for tourism and horticulture.
The market has historically been sensitive
to change in political risk - which we would
characterise as two steps forward, one-step
West Africa: Nigeria is the largest
economy in the region, but thanks to a long
military dictatorship, is a largely de-industrialised,
cash economy dominated by the public sector.
Reducing the size of the public sector, import
substitution and industrialisation are a priority,
implying high productivity growth for many
years to come. The government recently introduced
a Chilean-style pension system.
Sub-Saharan Africa: This is a group
of resource-rich countries each driven by
different factors. Botswana is a diamond economy
with large structural inflows; recent financial
sector reforms should force the large domestic
pension fund industry and parastatals out
of the short end of the yield curve (dominated
by high yield sterilisation certificates)
either along the yield curve or into the equity
market. In Zambia, thanks to a large investment
programme, copper production will soon be
back to record levels following a decade of
mismanagement. The country is also close to
a region blessed with untold natural resource
wealth. Two outliers, Angola and Zimbabwe,
both possess large commodity resources.
In terms of markets performance, surprisingly,
the markets seem to ignore the many crises
brought to the world's attention by the media.
Last year, for example, the four countries
that outperformed the MSCI Emerging Markets
index in US dollar terms were Kenya (+46%)
drought, corruption; Malawi (+42%)
drought; Egypt (+156%) political
unrest; and Zambia (+125%) AIDS. Zimbabwe
was perhaps the most surprising; +14% in US
dollar terms with everything thrown at it.
A common theme across the former markets would
be solid earnings' growth; in the latter,
the market remains the best hedge against
inflation for the pension fund industry.
How does your recently launched fund,
Imara African Opportunities Fund, fit in with
the rest of Imara Asset Management's portfolio?
Although only recently launched, the fund
is really our flagship fund. Imara was born
in Africa following an MBO by employees in
the various Flemings' offices in sub-Saharan
Africa after the sale of Flemings to Chase
and JP Morgan. Our investment management footprint
is in Africa, so it makes sense to market
ourselves as African specialists. We also
manage a global fund, institutional mandates
in sub-Saharan Africa, including Zimbabwe,
and we provide a private client wealth service
in South Africa.
What is your estimate of the size
of the hedge fund industry in Africa? Which
countries are the main sources of capital
for these funds? Could you answer with reference
to your fund?
The hedge fund industry is really confined
to South Africa where markets are more liquid
and more efficient.
With the exceptions of northern Africa and
South Africa, African markets are not liquid
so hedging is not generally practical. Outside
of Egypt and South Africa, hedge funds have
largely focused on debt markets which will
likely remain the case for some time to come.
Our investors in the fund are local authority
pension funds, private client managers and
hedge fund managers for their personal account.
The latter seem most attracted by the non-correlated
nature of Africa and the scope for un-reformed
outliers to improve in the way that Latin
America did in the 1990s. It is because we
cannot know when these latter markets will
reform that we suggest investors take a 3-5
What would you say are the key performing
sectors in the region? What is the current
sector-wise breakdown of the fund's assets?
Does the fund actively pursue sector-wise
diversification as well?
We think buying anything above intrinsic
value is risky, so buying two negatively correlated
assets, if both trade above intrinsic value,
is risky. We would much rather buy two assets
at a discount to intrinsic value even if they
were in the same industry.
In practice, we look for sustainable business
models first - companies that can provide
their own free cash flow after capex. Because
the cost of capital in Africa is high and
capital is limited, Africa is about buying
companies that can generate free cash flow
- not investing in companies that are massive
users of capital such as mining.
It is stated in your investment presentation
that corporates with a sustainable business
model are often monopolies or duopolies in
Africa. How is this so?
When the rules-of-the-game can change quickly,
ie, where there is policy uncertainty, corporates
require a fast payback on investment. Payback
in 2-3 years implies a return on capital invested
of at least 33%. The cost of capital is also
high in this environment since banks also
have to factor in the risk of policy uncertainty.
Banks therefore rarely lend, except for working
capital. In turn, corporates have to provide
their own capital to fund investment through
surplus free cash flow. Only corporates with
a sustainable business model that can generate
free cash flow can invest to expand. The big
therefore gets bigger. Over the years, the
"reward" for a sustainable business
model is therefore often a monopoly or duopoly.
Many such companies in Africa are locally
listed subsidiaries of multinational companies.
The beer market in Africa, for example, is
a virtual duopoly.
One of the fund's stated objectives
is a 3-5 year investment horizon. Given the
high policy uncertainty in the region, how
frequently do you expect the portfolio to
be reviewed and re-allocated?
Each of the 15 or so investible countries
in Africa is different with different drivers.
In countries where the pace of industrialisation
and growth is high, earnings, dividends and
share prices seem to move hand-in-hand. Identifying
good business models, buying below fair value
then holding is the most sensible strategy.
In countries where financial sector reform
or political changes are driving events, it
is more important just to be in the market
In general, our objective is to hold about
30 stocks with sustainable business models.
Too many, and good ideas start to get diluted.
The fund employs a long-only absolute
return strategy. Could you elaborate on the
risk management practices in place?
There are many risks in Africa, and our response
to many of these is common sense. For example,
corruption risk is minimised by looking for
good multinational-run business models and
political risk is minimised by holding a reasonably
Currency risk is also hard to hedge directly,
but in general, if a country is doing well,
currencies will tend to firm. Asian demand
for commodities is also tending to apply an
upwards momentum to many African currencies.
One interesting aspect of Africa is that some
countries benefit from a rising US dollar,
whereas others, like the vast majority of
emerging markets, prefer a weak US dollar.
However, the risk of a sudden reversal of
capital flows by the investment community
is reasonably low; much of Africa is still
off the beaten track and does not appear in
Who do you perceive are your key competitors?
What edge does the fund have over them?
Our office footprint is sub-Saharan Africa,
and in sub-Saharan Africa ex-South Africa
we are a big fish in a small pond. A big fund
would naturally end up investing mainly in
North Africa and the Gulf or in South Africa,
thereby diluting some of the interesting regional
changes that are, or could, happen. As far
as we are aware, there are very few funds
of this kind.
What is your outlook for growth in
the region in the near term?
Growth rates vary throughout Africa, but
some countries are pitching in with Asian
levels of growth. Middle classes are starting
to emerge in some countries; consumer demand
is rising sharply in others. Many African
countries have been experiencing growth of
5% or more for a number of years, with low
inflation and stable exchange rates. Unfortunately,
the international media only focuses on a
few bad spots in Africa whilst overlooking
the good ones!
Imara Asset Management (UK) Ltd
+44 14 915 7723