Biggest African bond fund snaps up MTN on back of Nigeria dispute
Allan Gray’s Africa bond fund has focused on local-currency bonds, particularly in Egypt, Nigeria and Ghana, where it could get yields of above 15%
Cape Town-based Allan Gray’s Africa bond fund has managed to outdo its peers this year and protect itself against the sell-off buffeting emerging markets, largely by buying local debt in Nigeria, Egypt and Ghana.
The $430m Africa, excluding-SA, bond fund, the biggest with a focus solely on the continent, returned 2.8% throughout the first three quarters of the year. This compares with an 8.2% loss for JP Morgan’s government bond index — emerging markets (GBI-EM) diversified index, against which the fund is benchmarked.
Allan Gray began the year by cutting its exposure to African sovereign eurobonds, the thinking being that yields had fallen too low given the build-up of external debt by governments. That strategy worked, with spreads widening about 200 basis points to 550 over US treasuries from the beginning of the year.
Instead, it focused on local-currency bonds, particularly those in Egypt, Nigeria and Ghana, where it could get yields of above 15%. Bonds denominated in nairas, cedis and Egyptian pounds accounted for 43% of the portfolio at the end of September.
More recently, Allan Gray’s money managers have increased their exposure to eurobonds again as yields have become more attractive. It also bought MTN’s dollar notes after they sold off following a multi-billion-dollar dispute with Nigerian authorities over taxes and dividend transfers out the country.
It “now appears to be headed for an amicable resolution”, money managers Nick Ndiritu and Mark Dunley-Owen said in a fund report for investors. “We took advantage of the uncertainty to increase our holdings to just more than 5% of the fund at about 7% yields.”