Carnegie Reporter, Vol. 3, No. 4 | Serving the Legacy of Andrew Carnegie: Investing for the Long Term, page 4

Of course, investing in Africa, Asia and Latin America is not without its risks. In 1998 the Corporation’s emerging markets investments (5 percent of the portfolio at the time) lost value after the collapse of the Russian ruble and the Long-Term Capital Management crisis. As a result, by 1999 the emerging markets allocation had fallen to 3 percent. Steeling themselves, Shuman and her staff responded by increasing their emerging markets allocation back to 5 percent through an exercise known as portfolio “rebalancing”—and were rewarded by a 78 percent gain on this portion of the portfolio in calendar 1999.

Although Carnegie Corporation’s early executives might have been surprised by the organization’s emerging markets investments, a lot has happened between then and now, including jet travel, the development of sophisticated global financial markets and the success of once impoverished countries such as South Korea. Many developing world countries, moreover, have growing domestic markets and increasingly diversified economies. Decades of Corporation involvement in studying and grantmaking in Africa and other far-flung regions of the globe also play a role. The foundation’s activities in this arena may have made it more receptive to the idea of investing in these markets. In some ways, then, it isn’t surprising that today, the Corporation is a leader among foundations in emerging markets investing.

Aside from the need to look further afield to achieve the returns necessary to support grantmaking, the reasons for investing in places like Africa were made plain in that conference room, when Carnegie Corporation’s investment committee and staff heard from Miles Morland and Obi Ogbunude of Blakeney Management. Based in London, Blakeney’s specialty is sub-Saharan Africa and the Middle East. Morland is the company’s English CEO. Ogbunude, a physician by training who later obtained an MBA from the London Business School, is Nigerian. Their presentation was an eye-opener.

With passion, humor and deep personal knowledge, they told the group that what most people think about Africa is wrong. Gross domestic product figures, for example, wildly understate economic activity on the continent, where bad government has driven so much commerce underground and off the books. This in turn implies much greater African purchasing power than is widely assumed. As a result, there is money to be made providing basic goods and services—such as banking, telecommunications and beer—to a growing African middle class. Many of the leading firms in these industries enjoy overwhelming market dominance, which makes them enormously profitable. Indeed, since the Corporation first invested with Blakeney in April of 2001, the firm’s average annual return has exceeded 30 percent.

“Nigeria is Africa writ large,” Ogbunude said, focusing on the continent’s biggest nation for a few minutes. It has Africa’s largest population, largest middle class and biggest oil production. It has also been arguably the continent’s most mismanaged country. From the mid 1960s to 1998, says Ogbunude, “it was a basket case.”

But since then Nigeria has made a transition to democratic rule, and in 2000 it embarked on economic liberalization as well, starting with telecommunications. At the outset, there were less than 600,000 phones in the country, and less than half of them worked. The assumption at the time, based on the nation’s low per capita GDP, was that the entire potential market was 10 million customers. But Nigerian consumers quickly proved these numbers wrong; one company started signing up 300,000 users a month. By now the country has 18 million telephone subscribers, and the most recent projection is for a market exceeding 40 million subscribers, representing almost a third of the population. Better and more extensive phone service has had a ripple effect on the Nigerian economy. Traffic in Lagos, for example, improved dramatically, Ogbunude reported, because all the new phones obviated so many car trips. Businesses have reported reduced costs and better supply chain coordination because of improved communications.

Investing in Africa isn’t easy, but the pickings can be rich. By emphasizing businesses that cater to growing domestic consumer demand, Morland and Ogbunude have been able to find booming markets often dominated by a few well-run companies, meaning Blakeney can buy shares in highly profitable businesses that do not face the kind of murderous competition that has driven down the price of so many goods in the
developed world.

“Blakeney’s focus on companies that benefit from bottom-up local consumer demand is consistent with the Corporation’s emerging markets investment thesis,” says Shuman. India is another country with a similar consumer growth story, experiencing real GDP growth of over 6% per annum over the last fifteen years, making it the second fastest growing major economy over that period. Arshad Zakaria, a former president of the Merrill Lynch Global Markets and Investment Banking Group, is now chief executive of the New Vernon India Fund, which he founded in 2004, and which invests in India for Carnegie Corporation and other investors.

The growth in consumer demand in India is enormous, he reported, and much of it is primary demand, meaning the purchase of a first cell phone, car or house. Indeed, the country has seen automobile sales grow at 25 percent annually for four years. Much of the demand is driven by social change as well as economic growth; younger Indians want to live on their own, separately from their families, just as younger people in Western societies do. And for investors, these changes mean opportunities. Zakaria noted that Indian savers tend to prefer deposits over equities, and that foreign reserves are heavily invested in U.S. Treasury securities, leaving the door open to foreign equity investors. Indian corporate governance, meanwhile, is good, a useful legacy (like the English language) of the country’s former British colonial overseers. “You can buy growth much cheaper there,” Zakaria declares. “Companies growing 20% to 25% per year can be purchased for 10 to 12 time earnings, an opportunity that is extremely difficult to find in developed markets. Despite the potential for short-term volatility, we think this a fantastic risk/reward propostion.” So does the Corporation, which invests for the long run.