Frontier markets are maturing at a steady pace, but investors should continue to opt for the safe option and invest in the subsidiaries of multinational firms.
In his half-year report, Leger, who is the fifth-strongest performer on a three-year basis in the Equity – Emerging Markets Other sector, said his outperformance has been propelled by global companies.
‘Typically we would be willing to pay a higher price earnings multiple for a subsidiary of a multi-national than we would for a similar local company as we believe that the benefits, most of which are softer non-financial in nature, usual translate into better financial returns,’ he said.
While some of Leger’s peers have launched dedicated country funds to tap individual frontier market opportunities, he said he is far more comfortable tying his hopes to subsidiaries of established businesses.
‘The African continent is filled with wonderful businesses that have a majority shareholder in the form of a global recognised company.
‘Whether it’s Nestlé, British American Tobacco, Lafarge, Barclays, Heineken or Vodafone, these African businesses exist across a multitude of industries and geographies,’ he said.
Not without pitfalls
While Leger said these companies, as well as the likes of Standard Bank, Tiger Brands and SABMiller, are currently among his favoured stocks, it is not all plain sailing.
He pointed to the conflict between majority and minority shareholders that can occur when multinational companies are involved. Leger pointed to the example of GlaxoSmithKline, which is held in the fund.
‘Last year, GSK Plc made an offer to minority shareholders to buy half of their holdings at a price that we believed was well below the fair value of the Nigerian subsidiary.
‘Given the immaturity of the regulations in Nigeria, GSK Plc were legally permitted to vote their majority shareholding and force the deal through.’
Leger said the fund opted to engage in minority shareholder activism. This move, he said, ultimately led to SEC prohibiting GSK Plc from using their voting shares and the proposed takeover offer was withdrawn.
While instances like this may occur, Leger said, the better level of corporate governance and stronger balance sheets makes multinationals a more attractive way to invest in the frontier.
At present, Leger has 30.3% of the fund exposed to the consumer discretionary sector, as well as 20.3% in financials. At a country level, Nigeria (26%) marks the largest geographic bet at present.
The Coronation Africa Frontiers A has returned 42.8% in US dollars over the three years to the end of June 2014. This compares with a rise of 14.85% by its Citywire benchmark, the Dow Jones Africa Titans 50 TR, over the same period.