Africa’s biggest bond fund Allan Gray gains from local debt

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Allan Gray’s Africa bond fund, Africa’s biggest bond fund based in Cape Town, managed to protect itself against the sell-off buffeting emerging markets, largely by buying local debt in Nigeria, Egypt and Ghana. The strategy helped the fund outperform its peers in 2018.

The $430 million Africa bond fund, which excludes South Africa, focuses on investments solely on the continent. The bond fund returned 2.8 percent throughout the first three quarters of 2018. The fund is benchmarked against JP Morgan’s government bond index, which recoded a loss of 8.2 percent.

Thinking that yields had fallen too low given the build-up of external debt by governments, Allan Gray began the year by cutting its exposure to African sovereign eurobonds. It focused on local-currency bonds, particularly those in Egypt, Nigeria and Ghana, where it could get yields of above 15 percent.

The bonds, denominated in nairas, cedis and Egyptian pounds accounted for 43 percent of the portfolio at the end of September 2018.

Recently, Allan Gray’s money managers have increased their exposure to eurobonds again as yields have become more attractive. The money managers also purchased the MTN dollar notes sold off following a multi-billion-dollar dispute with Nigerian authorities over taxes and dividend transfers out the country.

In a report for investors, money managers Nick Ndiritu and Mark Dunley-Owen noted that the MTN dispute now appears to be headed for an amicable resolution, but said “we took advantage of the uncertainty to increase our holdings to just more than 5 percent of the fund at about 7 percent yields”.

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