From Reuters

It only took a look at the financial statements of the world’s largest maker of spirits to convince Larry Seruma that Africa was the place to go.

Seruma was then running a long-short hedge fund and had a position in Diageo Plc, the company behind the Johnnie Walker, Guinness and Captain Morgan brands. While African alcohol consumption lagged Europe or the Americas, Diageo’s rapid expansion on the continent was such that, by 2013, the region accounted for 13 percent of global revenue.

“Africa accounted for its most profitable business lines and a high-growth, high-return opportunity,” Seruma said.

With that in mind, Seruma wound down his hedge fund and launched the Nile Pan Africa Fund in November 2010.

Nile Pan Africa, which invests in companies from Cairo to Cape Town, has returned an average of more than 9 percent a year during the last three years through March 19, putting it in the top five percent of emerging markets funds tracked by Lipper. And it made those gains with a lower overall risk than its peers, helping it win a 2014 U.S. Lipper Fund Award for emerging markets funds, according to Jeff Tjornehoj, head of Americas Research at Lipper.

Seruma’s $43.5 million fund doesn’t buy the Diageos and other multinationals that are expanding into Africa. Instead, he focuses on small to mid-cap African companies such as New Mauritius Hotels Ltd, Dangote Cement Plc and causal dining company Famous Brands Ltd that are poised to benefit from growth on the continent.

It’s an approach that is almost the inverse of the benchmark MSCI Frontier Market index, which has a 43 percent weight in large companies and is made up chiefly of financial firms.

Seruma, by comparison, has 46 percent of his portfolio in small companies, and another 15 percent in micro-caps, the smallest of all publicly traded stocks. Only about 12 percent of the fund is invested in financials.

“We want to buy the local star,” said Seruma, who grew up in Uganda and now spends about half of the year in Africa and the rest at his headquarters in Princeton, New Jersey.

These stocks, he adds, are the least likely to be owned by exchange-traded and large index funds, making it more likely that the companies are mispriced.

Written by David Randall/Read more at Reuters