The Exchanges

Q So Colin, you mentioned at the onset that you don't invest in Zimbabwe. Africa's made of lots of countries. How do you decide where you will invest or where you won't?

A We always think it's rather ironic that Africa, which has more countries than any other continent, is also the place that's usually seen as a single country. There are 54 countries in Africa. We can invest in about 20 of those. So 20 of those have stock exchanges That are big enough for us to invest in. South Africa is a very, very big part of that, about 60% in terms of number of names, as well as market cap. And then you've got a number of single stock countries, Ghana, Malawi, Botswana, where the, you know, the liquidity and the size of the opportunities mean there are not many. Out of the 20 countries that we look at, there are 16 currencies. And obviously, naturally, we're going to gravitate towards those countries where there are more opportunities. So In our case, South Africa, Egypt, Morocco, Nigeria, all quite big exchanges, and then the next tier down will be the likes of Kenya, and those are the sort of mainstays of our portfolio. In terms of picking countries, I mentioned we didn't invest in Zimbabwe at the moment, and that's really on the basis of liquidity. Because we're investing in listed markets, and we promise to give money back to our investors if they ask for it back, we need to be confident that we can take that money out of these markets. So You know, the availability of US dollars, the underlying liquidity, not just at the portfolio level, but the underly…

AI assessment note: “20 of those have stock exchanges That are big enough for us to invest in.”

Q How do you go about the process of executing trades?

A Well, we have an outstanding operations manager, Sondas Youssef, who also joined us from Blakeney, and she is a real whiz in this and does a lot of the heavy lifting on the, on the execution side of things. So Farouk and I make the decisions to invest in a company. So we have a target weight of 10% say in a particular company, we will then give that instruction to Saunders and she will go off and try to source the stocks. So that could be a quick conversation with one broker, or it could be a painful conversation with 10 brokers over many moons. Sometimes we have to get involved. Sometimes we have to call up the management team, you know, see if we can source some blocks from somewhere else. Sometimes we're speaking to other fund managers who may be Exiting or maybe buying alongside you and you're trying to sort of negotiate a better price or negotiate a bigger share of, of a block that's being sold. There's a lot of legwork that goes into it and very few of the trades are just as simple as going to your online account and plugging in a number and pressing go.

AI assessment note: “we will then give that instruction to Saunders and she will go off and try”

Q You mentioned the importance of liquidity. I'd love to get a sense of what does a liquid stock look like in one of the countries in Africa? And what is something that is too illiquid to trade?

A There is a very, very big spectrum. What we mean by liquidity is we need to have reasonable confidence that we can get out of a position within six months. So obviously we've got a growing fund and, you know, it's very helpful to have a growing fund at the moment. And so we look at things like ADTV, We look at block trades. Block trades are really important in some of our markets, and that obviously doesn't appear in the ADTV figures. And we try to estimate, really, whether we are confident that looking back over the last year or a different period, if we think it's appropriate, that we can be confident that if we needed to exit this position, we could. Who are the other shareholders? Can we speak to management to find out if there are other buyers? All those sort of factors come into play. We also know that liquidity is ephemeral and usually least available when you most want it, and We have to take all of these numbers with a pinch of salt, and it's not a perfect science, but really the finding of liquidity is such an important part of our job, and it's something that many other markets don't have. So if we decide today that we want to invest ten million dollars into equity group in Kenya, actually we may have to think about where that ten million dollars is gonna go. Where are we gonna find the stock, and who are we buying it from, and why are they selling it, and Do we need…

AI assessment note: “we need to have reasonable confidence that we can get out of a position within six months”

Q What's different about the diligence process with a company in Africa than someone who's doing this in developed markets?

A The really, really big difference is that these companies are not covered by research houses, by sell side. Out of our opportunity set, a third has zero analyst coverage whatsoever. And many of the companies just have one or two names that are covering them. And maybe those people might update their recommendation on this company once a year or something. And, you know, often it'll be junior people that do it. And so that's the really, really big difference. Yes, we can get full bells and whistles, public reporting by the companies, which is generally excellent. We can get access to management, which is obviously very, very important. When we're running a concentrated portfolio, we really want to know the companies. We really want to understand the businesses. We want to understand the people. And so in the absence of lots of other people doing research, we get out there and do it ourselves. So far this year, even with all of the restrictions and thankfully the world now opening up again, but we've already been to South Africa, we've been to Ghana, we've been to Egypt, and we're probably going to go other places as well before the end of the year, just to get on the ground, speak to companies, speak to competitors. When we invest in supermarkets, you walk around the supermarket, you know, what does it feel like? Go and meet the telecoms regulator. What do they think about the c…

AI assessment note: “The really, really big difference is that these companies are not covered by research houses”

Q I'm really keen to dive into what you're doing in Africa. Before we start, why don't we get into your backgrounds and what got you here?

A Maybe I'll start. So, uh, I was born and raised in Zimbabwe. I came really to the UK as a teenager because I was good at going backwards down, uh, rivers. So my single claim to fame is that I'm an Olympic silver medalist in, in rowing. And that was the reason why I left Zimbabwe as a teenager and went to the UK and Been fascinated by stock markets for as long as I can remember watching gold and tobacco prices on the screen in Zimbabwe as a kid and not really understanding what any of that meant, but, but knowing that I was fascinated by it. And, you know, when I finally hung up my oars and set off into the real world, um, I started off first in a stock market gaming business and then went into traditional equity analysis roles and finally ended up just focused on, on Africa from 2016 onwards. So that's the short version of how I ended up here.

AI assessment note: “So that's the short version of how I ended up here.”

Q What's happened with some of the other institutional owners in this period of time over the last seven or eight years that have been very tough in the markets?

A Well, there's a lot of, a lot of players have stepped out of the market and the African markets didn't perform particularly well really since 2015, 20 15 through 19. The African markets in general underperformed the rest of the world and in particular the U.S. And, you know, that always creates problems for money managers because not only are they dealing with markets that are falling, but they're also dealing with redemptions as people redeploy that cash elsewhere and for an already small opportunity set that creates problems for the economics of these firms. Some of the, uh, players that are involved, you know, we've got what we think are three of the most outstanding senior advisors in the business, you know, Miles with his connection to Blakeney and DPI, John Niepold with his connection to SQM, which is another billion dollar Africa firm, and, uh, Torko McAlpine, who was the director of the Araseg Africa Fund, and obviously a co-founder of Araseg Asia. I'm sure these guys don't mind me saying that they're all at or near retirement age and, uh, They were around for a long time, and a lot of these small boutique firms don't survive their founders moving on. So I think in the, the annals of history, you know, all of these firms did a terrific job over a sustained period, particularly Blakeney, came to a natural end at an appropriate time.

AI assessment note: “a lot of players have stepped out of the market”

Q So Colin, you take a step back and hear about a silver medal in the Olympics, and it sounds like the super impressive thing, but when we watch live sports, you always think about the winner. So I just have to ask, what was that experience like for you coming in second?

A Well, it's a great question. And, uh, you know, sometimes when people say to me, well, wow, you've got an Olympic medal. I remind them, look, you know, I came second just to manage expectations, you know, but you know, it was a really weird moment for us being on the podium in Beijing in 2008, because we wanted to win. We set out to win the race. And in that moment, we were incredibly disappointed not to have won. And I think it was a fair result to be clear. You know, I didn't think we're going to spend the rest of our lives Beating ourselves up about it, but we set out to win and we came second. And in the moment that was incredibly disappointing, but it was also an incredibly proud moment. Obviously, you know, you're achieving something really special. So I say to people who look for about five days of the year, it really, really annoys me that we came second. And for the other 360, I'm sort of delighted with the achievement. And I think it's one of the coolest things I've ever been able to do.

AI assessment note: “in that moment, we were incredibly disappointed not to have won”

Q So if I have you guys back on the show, say three years from now, and something has gone badly wrong, what do you think it would be?

A Maybe we get wrong on one of the big countries or something like that, or maybe the dollar strength continues to be what it is. We think that probably that will unwind at some point, and I would assume it will unwind in less than three years, but it may not. If that weren't to unwind, that would continue to be a very significant headwind for our countries, particularly the commodity importers, the oil importers, who obviously, as well as oil price being high at the moment, they're also struggling with the very high dollar that it's denominated in. Which is a bit of a double whammy. So I think, you know, that a very strong dollar for many years to come, I think, would be problematic for our markets.

AI assessment note: “maybe the dollar strength continues to be what it is”

Q When you have 10 to 20 stocks in your portfolio, how do you think about portfolio construction?

A Well, it's sort of relatively simple with a 10 stock portfolio, right? In a sense, we don't have to think very much. You asked earlier about countries and how we think about countries. We don't tend to do a lot of thinking about the top down. We're much more sort of fundamental focus. But we do think about countries that are on an upswing. We prefer to look at things that have been a bit beaten up, a bit out of favor. We tend to have that sort of value bias. And the same is true of countries. So If you take South Africa and Nigeria at the moment, for example, both of those countries have been out of favor for different reasons over that 2015 to 19 period. Different reasons, but good reasons. We think both of those have very clear positive momentum and positive catalysts on the horizon. So we're going to spend a bit more time looking for opportunities in those countries than we would in places that have been good for a long time. That, to a certain extent, informs where we work day to day, and obviously If you're doing evaluation on company A, you're more likely to make a decision on it than the company that you're not doing any work on. So part of it is dictated by how we decide to allocate our time. But really what we're looking for is we want to get the highest conviction ideas into the portfolio. After that, we have a 30% country limit in the portfolio. When we look at the r…

AI assessment note: “we want to get the highest conviction ideas into the portfolio. After that, we have a 30% country limit”

Q How does the, those metrics of your portfolio compared to something, if somebody was buying an index, Africa index, what would that look like?

A The first thing is there aren't many appropriate Africa indexes. So they, they do exist, but they're often skewed by whether they include South Africa or not. And if they do include South Africa, what weighting is it? And does that include NASPers? But one of the metrics that we like to explain to people in quite a lot of detail is it's not a surprise that our portfolio trades at a discount to the rest of the world. Nobody would be surprised by that. The discount has widened since COVID, which is interesting. But to us, the most important aspect of the margin of safety is that these companies traded a discount to their own last ten-year valuations. So if you just look at the median valuations that these portfolio companies have traded at, either since they listed, if it's within the last 10 years, or going into the last 10 years, the discount is substantial. If our portfolio today, just re-rated to their own historic valuations, would be up over 50%. In dollar terms. So these things are really trading at crazy valuations, even by their own standards.

AI assessment note: “The first thing is there aren't many appropriate Africa indexes.”

Q What have you learned from comparing those decisions just on the All Africa list of companies you've added, ones you've excluded, and what's happened with their share price performance thereafter?

A One of the really key things we've learned is that the decision to pursue work on a particular company is usually done with an idea of what you think the valuation is before you've done the valuation. We're trying really, really hard not to make that mistake. We want to own companies where we're happy to put the chest of get in the drawer for five years if we have to and not really think about it. Transaction costs are high in many parts of Africa. These things can be volatile, all the liquidity issues that we've spoken about. We don't want to have to buy bad quality companies and get the timing right. We don't think we're smart enough for that. We don't think the markets are liquid enough for that. So we're trying really, really hard to not make subconscious and certainly not conscious decisions about valuation. When you see the PE, you see the market cap, you look at the stock price chart over the last year, and then you do your all Africa list work. No, like it's, it's definitely something different to that. I hope we have a lot of problems. In getting companies onto and off that list in future, because if we have a lot of problems, it means we have more quality companies than we thought we had before.

AI assessment note: “One of the really key things we've learned is that the decision to pursue work”

Q So you have all these metrics that are super exciting with underlying growth, classic empty room, right? People have left the building. What are the risks?

A Well, I suppose the risks are that if you don't buy it, you may miss out on the opportunity. Seriously, that's the risk. I think, you know, when we think of taking a step back, the broader opportunity in Africa, where else do you have this combination of growing economies, outstanding companies, and really inefficient markets, right? And when we say growing economies, like, it's not just one or two examples. If you look at the top 10 or top 20 fastest growing economies in the world, Africa always makes up Half of those, and has done for many years, and is expected to continue to do so. Today, Africa accounts for, what, 18, 20% of the global population. By the end of the century, that's going to be 40%. By the end of the century, four in every 10 people are going to be African, and the urbanization story that goes along with that is absolutely colossal. You know, obviously, we've spoken a little bit about FX risk. We know that many of these countries are young democracies, and that comes with sometimes less stable politics And then other places, but really hand on heart, if you look at the private sector, if you look at the way we're doing things, the growth is there. It's been proven over the last 20 years, and some just happens that in the last five or six years, the market caps have failed to keep pace with that. But we know, what do they say? You know, in the long run, it's …

AI assessment note: “the risks are that if you don't buy it, you may miss out”