How Berkshire is reducing volatility in African investments

Schemes have been put off investing in the continent due to concerns over political instability, lack of expertise and responsible investment, according to investment consultants.

We actually haven’t done any investment in agriculture because there is a huge potential for reputational risk

The local authority scheme, which has invested in Africa for five years, now has investments in around 15 African countries, with plans to expand into five more.

Berkshire has focused on countries on the west and east coasts and southern parts of the continent, avoiding the central countries.

“If I map where we have potential interest through our managers then there is a big gap in… central Africa but that’s partly because there’s a different legal structure in lots of those countries, more of the Napoleonic code, which makes our lives more difficult,” said Nick Greenwood, pension fund manager at the Berkshire fund.

“[Political instability] is a concern, but you get round that by diversifying – you don’t put all your eggs in one basket, you don’t put all your money into one country,” he added. This is part of a wider approach to including global emerging markets in the scheme’s portfolio.

A limited listed equity market across the continent has led the fund to focus most on private equity and assets such as infrastructure. 

"One of the things that we’ve been very cautious [about] and we actually haven’t done any investment in is agriculture, because there is a huge potential for reputational risk if you’re involved with a farming contractor who is seizing tribal lands or abusing the local population to get them off the land. The risk outweighs the potential rewards,” he said.

Evaluating the risks

Investment consultants are split about the risks and rewards on offer in Africa. Consultancy KPMG has recently evaluated its place among frontier markets.

“We looked at the returns which in some cases were very high but in other cases were very low, they’re hugely volatile,” said Simeon Willis principal consultant at KPMG.

“We concluded that really, at the moment, we wouldn’t recommend making a substantial allocation to it, on the basis that it’s highly correlated to emerging markets, and so the diversification benefit is not as great as you might expect.”

But Andrew Slater, managing director at consultancy RisCura, a specialist in African investment, said people need to move on from older stereotypes of the continent.

“Where Africa is today, well it’s certainly not risk free, but neither is Europe, neither is America given certain political goings-on over recent years,” he said. “You’d expect to get volatile returns, as you’d expect from any recent emerging market, 20 per cent volatility, that sort of number.”

Slater cited Kenya and Uganda as examples of the “big buzz” surrounding the market, adding: “Investment is all about timing. You don’t want to arrive too late at the party and right now valuations are attractive.”

Charitable organisations have expressed their concerns over responsible investment in Africa. Kirtana Chandrasekaran, food campaigner at Friends of the Earth, warned that investors need to perform more thorough screening before investing in agriculture, as many companies, despite “fantastic credentials” are operating unethically on the ground.

Investors as well as local communities will lose out, Chandrasekaran warned. She cited that unsustainable poor environmental practises are often used in large-scale intensive farming environments, ultimately resulting in land degradation and a “dead investment”.