GIVEN recent market turmoil, investors are looking for ways to diversify their portfolios, and a somewhat surprising location is gaining attention: Africa.
While the ongoing political and financial problems in Africa cannot be ignored, investors willing to take a risk could earn good returns by putting money into an area in the early stages of its economic development.
This is certainly not for inexperienced investors or those looking for somewhere to put their life savings. But for those with enough financial security to be able to risk losing at least some of their money, Africa could be an add-on to a portfolio.
Two separate initiatives to help private investors access Africa are worth considering. One is Africa Invest from Cru Investment Management, initially focusing on Malawi. The second is a new fund from New Star investment managers, which is the first UK open ended investment company (oeic) to access the "heart of Africa" - sub-Saharan Africa, excluding South Africa.
Since January 2005, Cru has been establishing Africa Invest, a commercial agricultural business in Malawi, to see if investment could generate a profit and help alleviate poverty. Total investment to date is £1.8 million, which is provided by Cru itself, not by the investment funds it runs.
Jon Maguire, chief executive of Cru, said: "Giving has failed Africa; investment will transform her. Money empowers people and has significant knock-on effects to the local and wider economy. We currently employ 2,400 people, providing them with wages three times higher than average and offering them a career path."
While the pilot scheme lost money in 2005 and again in 2006, steps have been taken to ensure a profitable 2007 season.
Maguire said: "These include the acquisition of more farms with profitable histories, expansion of the senior management team, providing for greater operational control of our farms, focusing crop selection on high-value export markets and a major expansion to our out-grower schemes.
"Forecast annual returns on capital for 2008 are between 35 per cent and 45 per cent. In terms of investment outlook, Africa Invest's two main profit drivers are land and food."
From next year Cru will open this programme to institutional and retail investors in a bid to raise £30m by May 2008.
A collective fund will allow high-
net-worth individuals, charities and institutions to invest. A structured product will be made available for UK private investors. This product will be capital guaranteed, with 70 per cent placed into an AAA-rated loan note to return capital after seven years and 30 per cent placed into the collective fund.
But not all financial advisers are sold on the idea of investing their clients' money in Africa.
Alan Dick of Forty Two Financial Planning said: "Africa still has a great many political issues affecting the stability of countries, which could easily spill over to affect investors. It is not inconceivable that a revolution or civil war could break out at any time in some of the countries that are currently open to investors. While it is fair to say there are potentially fantastic returns on offer, the market is akin to the Wild West gold rush. Some people will make fortunes but most will lose their shirts."
Turning to New Star, its Heart of Africa oeic opened this week for investors willing to put in a minimum of £12,500.
It is managed by Jamie Allsopp, who has a proven record from running New Star's Hidden Value Fund. The company is open about the fact that Heart of Africa is high risk and "only suitable for investors who are able to bear the loss of all or part of their capital investment".
It is designed to give those investors the "rare opportunity to harness the investment potential" of the region.
In terms of the attractions of sub- Saharan Africa, Allsopp said: "Inflation in the region, which used to be rampant, is under control. For example, in 2001 inflation in Ghana was 40 per cent and it is now 11 per cent. Fiscal policies have put economies on a more stable footing.
"The political environment is also improving dramatically. With the exception of Zimbabwe - a democracy out of control with inflation running at 7,000 per cent a year - you don't see any elected officials in military uniforms any more.
"The relationship between China and Africa is another driver. For example, in 2006, China gave Angola a $2 billion [£1bn] low-cost loan and sub-Saharan exports to China have increased by 40 per cent each year since 2002.
"Every single day there's big news coming out of the region. I visit all the time and the trickle effect of the investment is tangible.
"It is an unpredictable continent but I'm trying to balance the awards I expect to get out of the region with the risks of investing there."
New Star said it was aware of the liquidity constraints of investing in the region and will limit its Heart of Africa fund exposure once it reaches £100m and will restrict new investment for a minimum of two years thereafter.
Dick said: "One of the big problems - which New Star openly acknowledges - is that the trading volume in most of these markets is extremely low, which can cause severe liquidity problems for investors wanting to get their money back out. It is one thing to make millions on paper but if you can't actually convert it into hard cash it is pretty useless.
"Another issue facing low-liquidity markets is the lack of competition on trading costs, so dealing in shares can be prohibitively expensive."
He warns that the charges on the New Star fund are "pretty horrific". There is annual management charge of 1.75 per cent a year, plus additional costs involved in running the fund. And he says worse still is the 20 per cent fee levied where the fund outperforms its benchmark over a three-month period.
Barry O'Neill, director of Thomson Shepherd, a firm of independent financial advisers, said: "This one's a bit 'left field'. I'm not sure of a pressing need for most investors to access African stock-markets, which can prove to be both very illiquid and volatile."
