African funds offer high risk and high potential

Africa isn't many people's first thought when considering investment opportunities, but there's a growing number of funds looking to tap into the potential of the sub-continent.

The latest to launch is Neptune Investment Management's Africa fund. According to Richard Green, Neptune's deputy managing director, the fund – which launched at the beginning of the month – hopes to benefit from Africa's "remarkable growth potential". The timing makes sense: the fund will be 50 per cent invested in South Africa, which is still expected to experience some economic benefits of hosting the World Cup this summer.

Other countries where the fund plans to invest include Nigeria, Egypt and Kenya. The biggest critics of African investments point to political uncertainty, corruption and poor infrastructure in the region. By choosing to invest in better-developed areas Neptune's fund presumably reduces regional risk to a degree, but the area is still an emerging market and economic growth is fragile. It means potential returns are likely to be far from guaranteed, leaving investors approaching the prospect of African investments with some trepidation.

"Africa was seen as the great new frontier before the credit crunch and is starting to resurface as investors look to other areas such as the new emerging markets," says Adrian Lowcock, senior investment adviser, Bestinvest. "However, investors should be aware of the risks involved in investing in such an area."

He points to the experience of the New Star Heart of Africa fund which launched with some fanfare in November 2007 but was wound up in early 2009 after its value collapsed during the credit crunch. "When there was a flight to safety, investors tried to sell out of high-risk regions and found there was no market for their shares," Lowcock points out. "The market is still very under-developed and quite small, so liquidity of assets remain a concern. The political stability of Africa and regulatory strength varies quite significantly from one country to another."

With such a high-profile failure as New Star's fund, Neptune has taken a much more softly-softly approach, aiming it at people "looking to diversify their portfolio overseas". In other words it's only really suitable for experienced investors who already have a decent portfolio, including low-risk assets, as well as more high-risk investments as an African fund is likely to be over the next few years.

There are several other African funds already on the market. "Africa is a high-risk market, but also one with high return potential," says Sonal Pandit, manager of the JPMorgan Africa Equity fund. In fact the fund manager believes Africa "is set to be one of the regions with the highest growth potential in the 21st century".

Why? "The same fundamental developments that occurred in more mainstream emerging markets in the 1980s and 1990s can now be seen taking place in Africa's frontier markets: growth is taking off, the private sector is becoming a greater driver of that growth, and financial markets are opening up," Pandit explains.

Nick Price manages Fidelity's Emerging Europe, Middle East and Africa fund. He believes Africa is an "extremely attractive region from an investment perspective" because of its diversity. "I look to take advantage of the upliftment of the economy through as broad a range of investments as possible. It's not all about oil or mining; it is about investing in consumer-relating industries and seeing the demand growth come through over a period of time," says Price.

From that point of view there is an extremely wide range of investment opportunities in the region. But investors need to have a strong stomach, says Andy Parsons, advice team manager at The Share Centre. "Neptune's Africa fund is suitable for investors prepared to accept a high degree of risk and volatility with a long-term investment horizon," he says.

Adrian Lowcock suggests that anyone interested in tapping into Africa's potential should instead consider a global fund. "A better way to get exposure is through a global emerging markets fund, which will not restrict the manager to just one region and give a more diversified exposure for investors," says Lowcock. His fund recommendations are First State Global Emerging Market Leaders and Aberdeen Emerging Markets.