Insparo Africa and Middle East Fund: Insparo Asset Management

Insparo's Africa and Middle East Fund recently celebrated its first birthday. Joanne Harris finds out how the fund survived the upheavals of 2008 and is positioning itself for the future.

Deciding to launch your inaugural fund just as a global financial crisis takes a turn for the worst might be seen as a bad idea in retrospect.

Insparo Asset Management's Africa and Middle East Fund, launched in June 2008, has ridden out the crisis and emerged buoyant and successful.

The fund was established on the back of its managers' belief that Africa and the Middle East together form a vast, untapped and under-researched source of investment. Co-portfolio managers Mohammed Hanif and Francis Beddington describe the region as a frontier market and believe the fund offers something different to "smart people" looking for investments.

Hanif says they were trying to take a long-term view of the situation, although the financial crisis moved a little more swiftly than they had expected.

"Of course we had no idea it was going to unwind as quickly as it did," he says. "But looking back, everybody was very pleased with the way we ran the risk and I think what came out was the low volatility of our approach to front-end frontier markets."

The Africa and Middle East Fund launched with $125 million of seed capital and now has assets under management of $140 million, generating positive returns for investors. The seed funding is tied in for two years.

Hanif says the fund's capacity could be as much as $1 billion, pointing to the continued positive gross domestic product (GDP) forecasts for the region.

He and Beddington provide examples of the way Africa in particular has been growing and developing in the past decade.

Beddington describes the pace of development as "skipping a generation", adding: "Unless you're planning to invest in Mars and the moon, it's the last place where an economic catch-up is happening."

Insparo's fund uses a multi-strategy approach with no leverage to take best advantage of the multitude of opportunities in the region, and the variation between different countries. While one nation might have a sophisticated equities climate, its neighbour might not have a stock exchange.

Across the region, both African and Middle Eastern corporate debt issues are on the rise, with billions of dollars issued during the past couple of months.

The fund invests in sectors including construction, telecoms and consumer markets through equities, syndicated loans and bonds.

Hanif and Beddington talk enthusiastically about the rapid growth in mobile phone ownership, especially in Africa. This has driven development in innovative technologies using mobile communications, such as simple money transfers between city breadwinners and rural dependents.

There is also a fair amount of cross-border development happening. Beddington points to South African energy company Sasol, which has joint ventures in Qatar and Nigeria as well as working in Mozambique and Gabon.

Insparo sees such development as a sign of continued growth, and indeed seeks out growth as an investment strategy.

"The way we approach our investments is not so much identifying sectors and looking for investment there; it's looking for stories about growth and then it's investing in those sectors," says Hanif.

"The multi-strategy approach came into its own (during the financial crisis) as we're not wedded to one type of risk," he adds.

Investment is also based on extensive research, using the skills both Hanif and Beddington built up in previous roles focusing on emerging markets and the African and Middle East region.

They both wanted the fund to be innovative and different and believe the research emphasis will be a significant factor.

At least once a month someone from the eight-person team managing the fund heads out to the region. Hanif says it is crucial to understand how business and wider society works in the markets the fund invests in. The only way to get this information and to understand the dynamics is to be present in the region to gain first-hand knowledge.

One thing Insparo has not done over the past year is to actively market the fund. Its managers say they are looking for experienced investors with whom they can build up a dialogue.

"We're also fully aware that it's not our money," says Beddington. However, more aggressive marketing of the fund is on the horizon.

"As the dust is settling, and credit is beginning to flow, now becomes the time to go out and market the opportunity to a wider audience," adds Hanif.

Both are seeking traditional and institutional investors. A future challenge will be to grow the fund's assets while keeping the conversation going between investors and managers.

Hanif says Insparo is discussing the possibility of another fund which would also be likely to invest in emerging markets - but only if the same level of focus and investor dialogue is maintained.

"We're having discussions and looking at other opportunities but we also recognise that the strength has been to maintain focus," notes Hanif.

Hanif and Beddington are confident the regions the fund invests in will keep growing. Hanif says the financial meltdown has possibly helped stave off a similar crisis in Africa and the Middle East, with some countries such as Nigeria moving to clean up their banking systems to avoid future problems.

Although the fund is young, it has shown it can survive in a volatile financial environment.

FUND FACTS: INSPARO AFRICA AND MIDDLE EAST FUND

Full name of fund: Insparo Africa and Middle East Fund

Name of portfolio managers: Mohammed Hanif and Francis Beddington

Name of investment/management company: Insparo Asset Management

Contact information: First Floor, Watson House, 54 Baker Street, London, W1U 7BU ([phone]; [e-mail])

Launch date: June 18, 2008

Assets under management: $140 million

Annualised return: 13.42% (at July 31, 2009)

Strategy: multi-strategy

Share classes: US dollar, sterling and South African rand

Administrator: Caledonian (Isle of Man)

Auditor: KPMG (Isle of Man)

Legal counsel: Ogier (Cayman)

Custodian: HSBC, the Standard Bank of South Africa

Domicile: Cayman

Management fee: 2%

Performance fee: 20%

Minimum investment: $1 million

Lock-in: two years

Redemption period: quarterly.