Institutional Investor's Alpha Magazine - September 2008 - (Page 45)

“If you can be a contrarian and patient investor and are willing to make a commitment and invest in the right assets, there’s a lot of opportunity,” says Harry Krensky, a principal and founder of $275 million hedge fund ﬁrm Atlas Capital Management in White Plains, New York. Krensky, a former Deutsche Bank and Bear Stearns Cos. emerging-markets specialist, was also a co-founder of South Norwalk, Connecticut–based Discovery Capital Management. Several hedge fund managers cite Nigeria’s fast-growing banking sector as a perfect example of a frontier opportunity. Before 2004 the Nigerian banking industry was known for its inefﬁciency and corruption, but that year the newly appointed governor of the Central Bank of Nigeria, Charles Chukwuma Soludo, began cleaning up the mess. Soludo raised the minimum capital requirements to 25 billion naira ($195 million) from 2 billion naira, setting off a spate of mergers and buyouts that cut the number of banks in Nigeria from 89 to 25. Standards rose too, which puts the ﬁ nancial sector on a ﬁrmer footing and should enable it to weather political changes better. FrontPoint’s Weiner says he likes Nigerian banks because of their momentum and because there’s so much room for growth: Deposits have jumped ﬁvefold, to $56 billion, since 2003, and half of all Nigerians still have never used a bank. DB Advisors’ Gray compares Nigeria’s and Zambia’s current situations to that of South Korea in 1984 in terms of economic development. “People forget that South Korea was a dictatorship and [the stock exchange] had very little liquidity,” he says. In 1984 the average daily trading volume on the Korean Stock Exchange was less than $10 million; today it exceeds $5.5 billion. For Gray the Middle East and North Africa nations and the sub-Saharan region represent the next leg up in the successful expansion of market economies across the globe. “We’re at that early stage, where the economy develops, companies come to market and investors reward those companies as they deliver on their potential,” he explains. “Last year ﬁve of the ten fastest-growing economies in the world were in Africa.” Gray attributes the growth to several factors: modernization and expansion in manufacturing and service industries, the region’s young population and — above all — declining political risk, particularly in North Africa, where there has been widespread turmoil for much of the past decade. As an example of an A frican success story, he points to Zambeef Products, a Zambian agricultural enterprise that has grown from modest beginnings as a feedlot business into a producer of poultry, cattle, grain and dairy products. Gray says Zambeef, which is also moving into retail in Zambia and Nigeria through a broad line of products (including Zamchick, Zammilk, Zamleather and Zamﬂour), has great potential; for the past few years, earnings have grown by 25 to 30 percent annually. Photo by Ian Phillips McLaren for Alpha D espite the obvious appeal of the Middle East and North Africa from a pure investment perspective, the regions are underowned and underresearched, says Gray. His team at DB Advisors is spending much of its time lately on such countries as Kuwait, Nigeria, Qatar and Zambia, which have beneﬁted from the huge spike in oil prices during the past 12 months. “While people’s opinions may ﬂuctuate as to whether the price of oil is going to be $150 or $125 a barrel, most of these countries have the price of oil projected at $60 or $75 in their budgets,” says Gray. “And so they’re just printing money.” The high price of oil is freeing up MENA countries to invest more heavily than ever in diversifying their economies. In fact, some of the world’s biggest development projects are under way in the region, notes Bruce Fenton, managing director of Norwell, Massachusetts–based Atlantic Financial, an asset management company that specializes in emerging markets. Fenton’s U.S.-Arab Gateway Fund (Atlantic is the investment manager and general partner), a hedge fund that invests in MENA, has had an average annual return of 24 percent over the past eight years. It invests in large, fast-growing, highly liquid public companies with low price-earnings ratios like Emaar Properties, a Dubai-based real estate and construction company, and conglomerate Saudi Basic Industries Corp. in Emergent Asset Management’s Susan Payne: “Food security will be one of the driving themes over the next few decades.” SEPTEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 45

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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