Has the time finally come for Africa’s ‘frontier markets’? Three pension funds - Switzerland’s AHV/AVS Fonds, Denmark’s PensionDanmark and France’s UMR Corem - share their views.

Christoph Zimmermann, senior manager of external investments at AHV/AVS Fonds, Switzerland
• Swiss Federal Social Security Funds
• Invested assets: CHF40bn (€32.3bn) (Sept 2011)
• Responsible for the central management of funds and assets
• Pays all state pension and disability benefits
• Date established: 1948

We currently have no investments in frontier markets but did so in the past. From 2007 until 2009, we were invested in a tailor-made Africa equity fund that covered all African countries except South Africa. We invested in this fund through a specialist manager with experience in money management in Africa. We did not use consultants for this mandate - instead we used IPE Quest and published the search on our website.

At the same time we were investing in more standard emerging markets. We wanted to have global diversification and in order to be better diversified we added the allocation to frontier markets to our investment mix. Overall, there are three basic risks to investments in frontier markets: liquidity, governance and political risk. And, in essence, we wanted to extract an illiquidity premium.

Two years after starting the investment though, we divested. We made the decision to move out of frontier markets because the illiquidity premium of our investment was not high enough or, at times, even negative. In addition, the investment was highly illiquid in absolute terms.

Of course, the situation was made worse with the timing of the investment. After the financial crisis in 2008, all markets lost a lot of value but these types of funds performed particularly poorly.

At present, we have no plans to go back to investing in frontier markets. However, it is still a possibility in the distant future.

We also do not have any allocations to private equity at the moment and do not intend to undertake any such investments in emerging or frontier markets either. We believe that if liquidity is already poor in listed equity, it will be even worse in private equity. And as an investor you need to have a lot of time and resources in order to undertake private equity investments in such markets.

As of 30 September 2011, our asset allocation of the market portfolios for the three funds, AVS, AI and APG consisted of 9.5% Swiss loans to cantons and municipalities, 20.6% Swiss fixed income, 33.2% foreign currency bonds, 19.2% equity, 5.6% real estate, 3.8% commodities and 8.1% tactical investments.

The split of the old fund format into the three-tier model allocation at the start of 2011 did not change our asset allocation. What did change is that all three funds are now invested in two portfolios - the market (investments) portfolio and the base (cash) portfolio.


Torben Möger Pedersen, chief executive at PensionDanmark, Denmark
• Invested assets: DKK116bn (€15.6bn)
• Members: 622,000
• Industry-wide DC scheme
• Companies insured: 22,000
• Date established: early 1990s

We made our first investment in frontier markets, in Sub-Saharan equities, in September 2010. As of today, we have invested DKK150m (€20m) in publicly traded companies in 10 Central African countries and DKK230m in publicly traded companies in South Africa. PensionDanmark has made additional commitments of DKK52m to renewable energy projects in East Africa and a further DKK320m commitment to investments in African farmland.

We have an increasing focus on investments in Africa because it is on track to become one of the next major growth regions of the world. The last decade has seen overall high growth in the region and the IMF expects Sub-Saharan Africa to expand by 5.75% in 2012. As the World Bank put it: ‘Africa could be on the brink of an economic take-off, much like China was 30 years ago and India 20 years ago.’

Our listed equities give us exposure to Kenya, Cote D’Ivoire, Mauritius, Nigeria, Botswana, Senegal, Zambia, Ghana, Malawi, Uganda and Namibia. The farmland investment will focus on agricultural production in Tanzania, Zambia, Malawi, Uganda and Mozambique, while the renewable energy projects will take place in Uganda, Kenya, Tanzania, Mozambique and Zambia.

Our frontier market exposure is primarily undertaken through funds. It is a good way to get started because it can give an investor a broad exposure to the different asset classes. We have been very diligent in choosing the funds we have invested with. As with all other investments, we have also made sure that the size of the investment fits the risk profile.

It is too early to tell whether we will be rewarded with a premium for our frontier market investments. Our overall approach is long-term and therefore the rewards are expected to come only gradually and over time. But we are very confident that they will materialise in an attractive risk-adjusted return on the investments.

We do not yet have the capacity to explore private equity investments in frontier or emerging markets but they will certainly be on our agenda in the coming years. We made some unlisted investments in farmland and in some renewable energy projects in developed markets and so maybe one of the next steps would be to look at private equity funds operating in frontier markets.

PensionDanmark has a large frontier markets investments commitments and the ability to take on the risks associated with such investments.


Vincent Ribuot, CIO at UMR Corem, France
• UMR manages four different funds, the largest of which is the Corem fund
• Invested assets of Corem: €5.7bn
• Members of UMR Corem: 390,000 - members of the Corem fund: 315,000
• Hybrid of DB and DC - members buy points whose acquisition value is calculated with a discount rate
• Date established: as a legal entity in 2002 but inherited an old teachers fund from 1949

We have been investing in frontier markets since 2008-09 through equity funds with asset managers specialised in each individual market.

Until recently, we invested in a pure multi-manager BRIC fund, which has individual asset managers for Brazil, Russia, India and China respectively. In November 2011, however, we added an asset manager specialised in Africa, which makes up our latest frontier equity investment. The fund has now been rebranded as a BRICA fund and is available to all four of UMR Corem’s individual pension plans - Corem, Corem Co, R1 and R3. The Africa part gives us exposure to Tunisia, Morocco, Egypt and the Gulf countries.

Prior to this we have had some exposure to frontier markets through two equity fund of funds managed by us and advised by specialised asset managers, the UMR Select Europe and UMR Select OECD funds. Around 1.6% of the OECD fund is allocated to frontier markets.

Instead of consultants, we have used the help of asset managers specialised in selecting asset managers to find the right investment vehicle for us.

Our main reasons for investing in frontier markets are diversification and the pursuit of growth and yield assets. It is a long-term view - we simply have to be linked to those markets.

Every time we see good opportunities around the world we try to capture them. Although we do not have a presence in frontier markets, they form part of our investment universe after investments in Brazil, India, Russia, China and South America.

At present, we invest around €1bn in equities, of which €450m are invested outside Europe. The BRICA funds makes up 5.3% or €30m of this, or 2.5% of our overall equity allocation.

We have additional emerging market investments through bonds and other debt products but deem these products to risky for frontier markets. We have also invested in A shares of the Chinese stock exchanges.

For liquidity and risk management purposes, we do not invest in private equity, infrastructure or real estate in emerging or frontier markets.

The main challenges of investments in frontier markets are political instability and the returns being too small - but nowadays similar risks apply to European government bonds.

 These interviews first appeared in the January issue of IPE magazine.