Mohammed Hanif, Insparo Asset Management: “The defining feature of our funds is the returns they have been able to generate in the toughest of conditions”
Mohammed Hanif (pictured), the founder, chief executive and chief investment officer of Insparo Asset Management, says the firm’s Africa and Middle East Fund has generated returns exceeding 30 per cent since launch in June 2008 through an innovative on multistrategy approach that has protected investors’ capital in stormy markets while generating outstanding absolute returns during periods of market strength.
GFM: What is the history and background of your company, principals and funds?
MH: Insparo Asset Management was founded in 2007 by a group of experienced emerging market investment professionals. Shareholders include Michael Spencer, the founder and chief executive of ICAP, Insparo’s management team and a US family office.
The aim of the company is to seek esoteric, deep-value investments within high-growth frontier markets. This requires deep experience and knowledge; the investment team I head has a combined 60 years of experience in emerging markets.
The Insparo Africa and Middle East Fund was launched in June 2008, targeting a 15 to 20 per cent annual return with minimal volatility and leverage, investing across asset classes in Africa (excluding South Africa) and the Middle East.
The multistrategy approach works to reduce volatility and enables us to target investments across the capital structure. We have the ability to hedge out risks and preserve capital, using for example, FX, indices, sovereign debt, commodities and derivatives. This enhances liquidity and our investment universe, as some countries have only one accessible asset class.
Insparo’s second offering, the Insparo Africa Equity Fund, was launched in February 2011 and invests predominantly in African listed equities.
GFM: What is the structure of your funds?
MH: The funds are structured as open-ended master-feeder funds, domiciled in the Cayman Islands. Insparo Asset Management is registered in the UK.
GFM: Who are your main service providers?
MH: The administrator of the funds is Quintillion, the auditor is KPMG, our legal counsel is Ogier in the Cayman Islands and Dechert in the UK, and the prime brokers and custodians are HSBC and Standard Bank.
GFM: What is your distribution strategy and targeted client base?
MH: We target institutional investors mainly in the US, Europe and the Middle East, as well as family offices and high net worth individuals, who constitute most of our existing investors.
GFM: What impact has the recent global financial crisis and economic downturn had on your business?
MH: The financial crisis has led to significant market volatility, and periodic increases in cross-asset correlations that make it harder to achieve the balanced diversification we seek in the portfolio. More positively, however, the resilience of economic activity in our focus markets of Africa and the Middle East has generated investment opportunities and growing interest from potential investors in our funds.
The launch of the Insparo Africa and Middle East Fund in June 2008 predated the intensification of the global financial crisis by only a few weeks, yet we have returned more than 30 per cent between launch and the end of March this year.
Over the same period, the MSCI Emerging and Frontier Market Africa Index (excluding South Africa) lost 54 per cent, while the Dow Jones MENA index lost 41 per cent. We believe this reflects the superiority of our active multistrategy investment process over a passive equity-only approach.
GFM: Please describe your investment process.
MH: The investment process is a collaborative one, with five investment professionals meeting formally twice a week, and in practice discussing the portfolio constantly on the desk. The process begins with a top-down view, assessing countries and sectors from a macro perspective with particular emphasis on growth potential, political environment, currency regime and legal framework.
We then take a bottom-up approach to asset selection by sector and individual position, performing proprietary modelling and analysis in line with our macro view including stress testing and correlation analysis where appropriate. We favour businesses with strong growth potential, and a proven management track record of delivery underpinned by hard asset valuations.
The investment team’s experience in dealing in an extensive range of financial instruments ensures that investments are made in the most efficient manner across the capital structure. We also monitor the resulting composition of the portfolio in terms of exposure to different asset classes, sectors and products, with a view to ensuring that the high-level capital allocation is consistent with our global macro view, and appropriately defensive or aggressive for global market positioning and the global economic cycle.
GFM: How do you generate ideas for your funds?
MH: From the global macro view, we drill down to regional, country and sector views, as an overlay for the bottom-up asset selection process. Fundamental macro and company-level research is therefore critical, and includes meetings with policymakers, company management and other research sources.
Once a potential investment has been identified, we conduct a preliminary review to identify further areas of research required. The investment team then researches the opportunity intensively, creating proprietary research, meeting with management, and reviewing all available third-party research. The breadth and depth of our investment team’s experience in emerging and frontier markets gives us unique insight.
GFM: What is your approach to managing risk?
MH: We maintain a high degree of diversification in our funds, believing this is particularly important in volatile and sometime illiquid frontier markets. The Insparo Africa and Middle East Fund invests mainly in listed securities comprising equities, hard currency fixed-income instruments and local currency fixed income, from Pakistan through the Middle East and North Africa to sub-Saharan Africa, but excluding South Africa (because that market is more mature and is highly correlated with broader emerging market risk).
The range of macro themes in play across this extensive geographical area gives us a natural diversification that helps to offset the challenge posed by occasionally illiquid markets, while the multistrategy approach means we can capture those macro themes even in countries that don’t have a functioning equity market, or where the best trade is to own local currency government debt.
The Insparo Africa Equity Fund has a slightly narrower mandate, targeting just the Africa growth story and focusing predominantly on equities, but here too we choose to deploy up to 20 per cent of the fund in fixed income or currency exposure, and also allow up to 20 per cent in South Africa, to broaden out the opportunity set. We believe that funds tracking an equity benchmark in the region are likely to run an unhealthy level of concentration risk.
GFM: How has your fund performed?
MH: The Africa and Middle East Fund has returned close to 6 per cent in the first quarter of 2012 and more than 30 per cent since June 2008. The Africa Equity Fund has returned more than 3 per cent in the first three months of 2012 but is down about 12 per cent since launch in February 2011.
GFM: Are you looking at any particularly attractive opportunities right now?
MH: We see a number of very attractive opportunities at the current time. Strong economic growth and falling inflation in sub-Saharan Africa should lead to continued expansion of the consumer-facing sectors and financial services.
We are particularly excited about the outlook for Nigeria, which should post growth of 7.5-8 per cent, and is experiencing an improvement in the economic policy framework under President Jonathan’s technocratically-oriented government. The country has a clean, lean banking system following remedial measures imposed by the Central Bank in the wake of the 2008-09 financial crisis.
The resource sector in our region will continue to benefit from sustained growth in demand from China and other buoyant emerging markets, and we are keeping a close eye on iron ore projects in West Africa as well as gold projects in the Arabian-Nubian shield.
Meanwhile, in the Middle East we like the equity markets of fast-growing energy exporters such as Qatar and Saudi Arabia, and also see opportunities for the better corporate credits in the UAE to distinguish themselves as the deleveraging process there continues.
GFM: What developments do you expect in your investment sector or industry field in the coming year?
MH: We expect frontier markets increasingly to move onto the radar screen of institutional investors as they despair of lacklustre growth rates in their home markets and other advanced economies. Their rapid growth, favourable demographics and relatively untapped resource endowment will attract increasing interest.
On the ground, the implications of the so-called Arab Spring will continue to echo around the region. Egypt’s transition from military rule to a more pluralistic system will be a key test, while it will still be some time before regime change in Libya, Yemen or even Syria gives rise to opportunities for portfolio investors.
GFM: How will these developments affect your firm and the performance of your funds?
MH: We welcome the growing interest in frontier markets, and believe that our performance since launch would justify our assets growing accordingly. We are well equipped to navigate our way through domestic political storms and economic setbacks in the region,
However, we remain concerned that the failure of policymakers to address the deleveraging challenges in Europe and the US threatens to revive the highly correlated performances of risk assets that dogged even frontier markets in periods of stress such as the second halves of 2008 and 2011.
GFM: What do investors currently expect from managers?
MH: When speaking to investors, the current macroeconomic picture is always a key issue and risk management is increasingly topical. Through our multistrategy stance, we have devised a strategy that has so far outperformed in rising markets while being able to protect capital in more volatile and challenging markets like 2008 and 2011.
GFM: What differentiates you from other managers in your sector?
MH: The defining feature of our funds is the returns they have been able to generate in the toughest of conditions. This is based on a number of factors key to the firm’s investment philosophy, including our rigorous institutional approach and the investment team’s outstanding first-hand knowledge of emerging and frontier markets.
For the Insparo Africa and Middle East Fund, the innovation of its multistrategy approach has enabled the fund to weather stormy markets by protecting its investors’ capital, while generating outstanding absolute returns during periods of market strength, and the breadth and depth of the team’s experience and diverse skill set would be truly difficult to replicate.
Despite being launched at the height of the financial crisis, the fund registered an overall return of 14 per cent by the end of 2009, testament to its versatility in dealing with the idiosyncrasies of frontier markets. Within the fund’s investment universe, there are very few efficient mechanisms to short whole equity markets or single stocks, so equity-only funds in the region tend to have a strong long-only bias.
In the past year, the returns of these funds have suffered heavily when markets dipped, whether through political turmoil or a downturn in equity markets. By comparison, the Insparo fund has shown a capacity for capital preservation during these periods, returning flat performance during falling markets, while capitalising fully on rising markets, returning more than 55 per cent over 2009-10.
GFM: How do you view the environment for fundraising over the coming 12 months?
MH: The fundraising environment for more dedicated strategies has been a difficult one, but we are speaking to targeted and sophisticated investors who are actively looking to capture the growth story in Africa and Middle East in the most efficient manner.
These regions contains some of the fastest-growing economies in the world, and our multistrategy approach has enabled us to capture these opportunities in the most efficient manner, increasing the pool of liquidity available to us and smoothing out our returns.
GFM: How do you expect your business to be affected by current and proposed regulatory changes?
MH: One of the main issues with regulation at the moment for anyone operating in financial services in developed markets, particularly in Europe and the US, is the lack of certainty. We have already seen swathes of regulatory change in a short space of time. Much of it has been a reaction to the 2008 crisis, resulting in rushed, globally unco-ordinated initiatives.
At Insparo, we are shielded from many of these regulatory changes by virtue of having Cayman-domiciled funds and operating strategies focused outside the EU and US. However, like any EU-based manager with a non-Ucits fund, we will be affected by some components of the Alternative Investment Fund Managers Directive.
The Fatca legislation in the US is another administrative burden we are keeping an eye on, and it will likely be a case of the devil being in the detail, but the lack of exposure to US income in the first place will minimise the impact.
We continue to stay on top of regulatory changes, but for the moment do not see anything that will materially impact our business other than marginally increasing the administrative burden and inevitably therefore the cost base.
GFM: Are you considering any mergers or acquisitions in the foreseeable future?
MH: We are opportunistic in our approach to growth, and would consider mergers or acquisitions of teams or businesses where they are highly rated, complement our current offering, allow us to diversify and grow our revenue stream and investor base, and represent a good team fit (both in terms of culture and information-sharing), and where we are confident that the overall deal enhances shareholder value. We have had various discussions in the past that did not reach a successful conclusion because not all our criteria were met.
GFM: Do you have any firm plans for further product launches?
MH: We are always looking into opportunities to grow the business, especially by launching new strategies that complement the existing business and team but preserve the Insparo culture and dynamic.
We have exciting plans to launch a third hedge fund this year, with more of a global theme and diversifying away from Africa and the Middle East. This will be done in conjunction with establishing a new overseas office and bringing a highly experienced portfolio manager into the team.
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