Is JP Morgan's Africa fund using the wrong benchmark?

The Africa Equity Fund of US asset manager JP Morgan Asset Management is a reference among major Africa investment vehicles. Since its inception in 2008, co-managers Pandora Omaset and Oleg Biryulyov have accumulated an impressive USD 110.7 million in assets under management.

But the fund has lost 5.2% of its value so far this year and is underperforming its benchmark. That benchmark is the Dow Jones Africa Titans 50 index, which is down 4.3% since January. More troublingly for its investors, the JP Morgan fund has trailed its benchmark in the three years between 2019 and 2021.

The main reason for the fund’s chronic underperformance is its significant exposure to gold mine operators. For example, Canadian company B2Gold (ISIN: CA11777Q2099) is the fund’s biggest single position with a weighting of 5.7%. Unfortunately, B2Gold’s shares have lost 10% since the beginning of the year. Another major position is Ivanhoe Mines (ISIN: CA46579R1047) with a weighting of 5.1%. Ivanhoe is down even more, having lost 18.8%. Finally, the third Canadian gold mining company, First Quantum Minerals (ISIN: CA3359341052) makes up 4.4% of the fund’s assets but is down a whopping 30.2% since January.

It's clear to us that the fund is overexposed to gold mining and underexposed to sectors that will likely benefit from the African growth story. The latter includes consumer goods, health care and banks.

The fund managers’ huge exposure to the mining sector is understandable considering that its benchmark, the DJ Africa Titans 50 index, also has a big weighting (38.3%) there. The fund itself has 31% of assets in the sector overall. But perhaps fund managers Omaset and Biryulyov are not using the right benchmark? Consider that other indexes like the S&P Pan Africa BMI are closer to the African growth story: The S&P index is just 20.5% exposed to mining while its exposure to consumer goods is 27.9%. By comparison, consumer goods make up just 5.4% in the DJ Africa Titans 50 index.


A giant merger on the Egyptian Stock Exchange

The Egyptian Stock Exchange (EGX) is bracing itself for a huge merger. In the event, six real estate companies will be consolidated into one. This means that Egyptians for Housing and Development Company, or EHDR (ISIN: EGS65341C017), will subsume five peers, namely Emerald Real Estate Investment (ISIN: EGS659E1C017); Edge Development and Project Management; Emerald Development and Projects Management; Odin for Investment and Development; and finally, Odin for Investment and Real Estate. The capital for the newly formed EHDR will be distributed among the shareholders of all six companies.

Even before transaction was announced on 7 September, EHDR shares began to climb: On Monday, 5 September, its share price rose by 11.9% to EGP 0.509 (EUR 0.03). We do not know the reason for the premature hike, but should it be a result of insider trading. Such transactions would be illegal.

The driving force behind the merger is 81-year-old businessman Dr Ibrahim Fawzy Abdul Wahed Morsi. Morsi is a former Minister of Industry, Trade and Small Industries in Egypt and currently serves as chairman of EHDR, Odin Investments and Emerald Real Estate Investment. Prior to the announced merger, Odin Investments (ISIN: EGS67181C015) held 30% of EHDR’s shares.

For Odin Investments, the merger is not happening from a position of strength. In 2021, Odin had a net loss of EGP 1.03 billion (EUR 54 million). This compares with a loss of EGP 2.48 billion (EUR 130 million) the year before. The losses materialised despite a strong Egyptian real estate market in which other companies have remained profitable. Indeed, a report on Egyptian real estate from last week stated: “The most profitable listed real estate company was Emaar Misr for Development (ISIN: EGS673Y1C015). It averaged EGP 2.3 billion (EUR 120 million) in annual net profit since it was listed in 2015.”


Be careful on the BRVM in Abidjan

At first glance, it looks like the West African BRVM stock exchange in Abidjan is doing very well. But investors should be careful, as there are signs that West African equities have become vulnerable. One example is that stocks that are being sold off often have much larger trading volumes than those that are being bought.

Let’s take a closer look: Servair Abidjan CI (ISIN: CI0000000600), which specialises in airline catering, saw a 5% jump in its share price in just one trading day. However, only 68 shares were traded. This means that the hike was a result of very few trades and tells us nothing about what investors really think about the company.

On the same day, shares in palm oil and rubber producer Société Financière des Caoutchoucs, (ISIN: LU0027967834), also known as Socfin or by its former name SOGB, lost 4.5%. In this case more than 1000 shares were traded. This was an anomaly considering that on most trading days, Socfin shares do not change hands.

Therefore, investors should always pay close attention to trading volumes when they deal with stock markets in emerging or frontier markets. And we recommend that they always set an upper price limit for buy orders and a lower price limit for sell orders. This will help keep negative surprises to a minimum.


Despite good numbers, Mutandis’ upward trend is coming to an end

It was an impressive upward trend: Between mid-July and mid-August, the share price of Moroccan conglomerate Mutandis (ISIN: MA0000012395) went up by 20% to MAD 235 (EUR 22,26). But now its rally has come to a halt despite good results for the first half of 2022: Last week, Mutandis announced an increase in revenue of 48% to MAD 1,020 million (EUR 96.6 million) compared with the year before. Operating profit (Ebitda) and net income did not improve at the same pace but are also up. Ebitda was up 16% to MAD 116 million (EUR 11 million), while net income increased by 32%.

But the share price, currently at MAD 233 (EUR 22.07), seems to be stuck in a tiny corridor of between MAD 233 and MAD 222. Our guess is that in this market phase, investors are cautious about a company like Mutandis that is so widely diversified. The company is active in detergents, canned fish, plastic bottles, fruit juice and car sales.

Investors may be finding it difficult to assess which of Mutandis’ businesses is the main profit driver or, conversely, the greatest risk. As a result, Mutandis’ share may not be realising its full price potential.