Marcopolis Interview: Asset Management and Investment Advisory in Africa by Pius Muchiri

August 8, 2019

What is your assessment of the sector in Kenya? What are the latest trends? Is the market competitive?

The assets management sector is a sector where there are two kinds of players. There are the established players, the ones who have been there for 20 or more years. Then you have the emergent players, the ones who have come up in the last 5 to 7 years. For the established players, most of their AUMs are primarily pensions. For the emergent players, they have more non-pension, a lot of high-net worth retail kind of clients combined with institutions, especially in the insurance industry and other non-pension sectors. The established fund managers are facing a lot of pressure from their clients who want more value. Over time, they feel it has been going down. Today, it is not unusual to hear a client wanting to pay 12 business points, something that was not there 5 years ago. We have seen the average yield on assets under management coming down on the traditional clients. However, if you look at the other side, where emergent fund managers are focusing, on retail, and especially for ourselves, we focus on the high-net worth individuals and institutions, then you have high-yielding assets under management. The average yield on retail or ultra-high net worth products is 2%. For the non-pension, it is somewhere between 30 business points all the way to 1%. It is generally much more high yielding. Increasingly, as the emergent fund managers are establishing themselves, they are slowly nibbling on the established fund managers, getting the smaller clients with $1 million to $5 million. Over the next ten years, it will not be too far fetched that there might be a different ranking in terms of assets under management, especially given the fact that we are seeing clients demanding more. The pension schemes demand a lot of attention which could take a fund manager away from their core job of investing for one and a half to two months just on administrative matters. We are seeing more multinationals wanting to get boots on the ground. They prefer more smaller, nimble, agile fund managers like ourselves because they believe we are able to focus on the core job which is investing. Some other trends we are seeing- and we are at the forefront of this- we call “investing with purpose”, but globally, it is called “goal-based investing”. Clients are getting more familiar with goal-based investing. It is more intuitive than your typical return based or traditional risk return adjusted kind of investing. We work with clients who want to fulfill certain aspirations. This is something that is really new in this market. Nabo and maybe one other company do this kind of investing. The industry is headed this way globally. There is interest. This is something that we are really passionate about because it answers some key questions. For example, when people say that they are looking to achieve financial freedom, what does it really mean? We have come up with four types of portfolios that every family or individual should have to eventually get to financial freedom. The first is a lifestyle portfolio. From the moment you get your first job, it is a big opportunity. Your income is going to increase over a period of time. It is such a critical time because you are earning active income, you must go to work to get that money into your bank account. You need to start thinking about how you can transition that into passive income. The lifestyle portfolio is how to replace all your monthly expenses by funding it through a portfolio rather than a salary. If you start with $1,000 a month, then our goal is to match your $1,000 per month and over a period of time that eventually becomes a couple thousand dollars. It is about delinking a family or an individual from depending on their active income for their day to day livelihood. Eventually, that also becomes your retirement portfolio. The retirement portfolio on average is accessed at about 60 to 65 years. That is the average lifespan for many people. You are not really expected to enjoy your retirement portfolio. To our surprise, the biggest beneficiary of retirement portfolios is actually the government because they use a lot of that money to do infrastructure projects. A lifestyle portfolio helps you to start working on that immediately from your first job. The second is a security portfolio which is all about reinforcing your lifestyle portfolio. If you have a $1 million portfolio, that will take care of your lifestyle for the rest of your life. The biggest threat for that is medical. If you get yourself into a medical emergency, it could wipe out a substantial part of your portfolio. The number one cause for family bankruptcies in the US is medical bills. We do not have statistics here but we do see symptoms. Education is another thing that we invest in heavily as our children grow. Over a period of time, you find that the only thing you have invested in is education. Most of us tend to retire just when our kids are finishing school and that is when you really need to do something else to boost your comfort during retirement. A security portfolio comes in to build these other sub portfolios that take care of your education, medical emergencies, and home ownership. Once you achieve a lifestyle and security portfolio, we declare you as financially free. The person who came up with the phrase, “life begins at 40” had some revelation around this because it is from there that you really enjoy your life. These two types of portfolios really demand that you tighten the economic belt and live below your means. The third portfolio is an aspiration portfolio which is about upgrading your lifestyle: you move from one neighborhood to the neighborhood you have always desired; you upgrade from your Toyota to a German machine; you buy your second home or holiday home; you buy assets that come with association. The president of Kenya lives in a certain neighborhood and you want to be in that neighborhood. When they call for a neighborhood meeting you can almost do some business development. The aspirational portfolio is about enjoying your life. Again, there is only so much you need as an individual or a family, so it goes beyond that and we ask, “If you are not here, then who will else miss you?” After that, we start building a philanthropic portfolio, which is about leaving an impact in the society where you live. Here, it is more deliberate. You are clear. Some of our clients say that they are really passionate about helping young people to establish their own businesses and maybe they do not have money so we create a portfolio for $1 million dollars and all the return that would come from it we use to support their initiatives. They know they will lose some money, but one or two out of ten will really do well and that is where they get their satisfaction. The final portfolio is a legacy portfolio. This is all about as you spend all your life building this wealth, how does it go to future generations? The legacy portfolio helps you answer two questions. The first is, who will inherit you? The second is, how will they inherit you? Maybe this is from an African setup, but we always imagine that our children will inherit us. Everyone works hard to create this empire and children will come and take it over and drive it to greater heights. What we have discovered by interacting with our high net worth individuals is that it is not that obvious. There are always two situations. The first is that the parent does not believe that their children are capable, or second, the children are completely uninterested. Then, we have to find a way for that portfolio to transcend to multi-generations by setting it aside and only the economic benefits are passed on to those generations and we manage it professionally for them. When we set it up, we make sure to minimize the tax events that can reduce that portfolio.

What are your competitive advantages? How do you distinguish yourself from the other companies in the sector?

If someone is investing in Africa, the first question they ask themselves is who will hold their hand. We are a five-generation investment firm and our history traces back to 1954. We have a long, rich history of partnering with multi-nationals and local partners. That always gives people a lot of comfort when they come to speak to us. Also, we are based here, we live here, and we have nowhere else to go so we have to make the best out of what is here. A lot of clients find it quite interesting to work with us. They get the same quality of service that you would get from New York or London, but still have boots on the ground when it comes to your fund manager. We find that that is a big thing that a lot of clients value. Some of them want to approach from a regional point of view. If you are based in East Africa, they want to give you their East African portfolio. If you are based in West Africa, they want to give you their West African portfolio. There are others who want to give their African portfolio. Another thing that we really pride ourselves in is our people. We pay our people well. We keep them for many years. There is not a lot of movement. It gives clients that stability and that predictability that if they come here for three years, they will still find the same people here doing the same jobs. Another point is our leanness. We are not a big company so we are quite agile. We can adapt to whatever the client wants. If you are a $2 billion business, that is quite difficult. We are able to respond to market movements. When Nigeria was experiencing their currency erosion, we were able to take out everything we had with minimal impact to our clients’ portfolio. Our clients really like that we are flexible.

What is your international reach? What is your percentage of local clientele to international?

About 60% is international. That speaks to our positioning. When we were setting up Nabo Capital, we were clear about two things. Firstly, our universe of investment was Africa. Any African country individually is too small to make any meaningful change in many people’s portfolios. Secondly, we were very clear that we were attracting capital globally, local and multinational. That is why the profile of our assets under management looks the way it does.

Kenya has attracted a lot of attention for investment. Is this still the case? Is it still an interesting country to come to?

When we started investing in the continent, even our own money, the pecking order was South Africa, Nigeria, Kenya. Over the last five years, we have seen a bit of a change. Nigeria is very oil dependent and the plunge of oil has helped Kenya to overtake them. South Africa, despite its scale and its ability to absorb huge sums of assets under management is growing slowly compared to the rest of the continent. Even though East Africa has its own challenges, we have found ourselves in a unique position where anyone who is looking to allocate to Africa, the first place they need to think about is East Africa. When they think about East Africa, the first place they need to think about is Kenya. I do not know how long it will be like this. Our biggest challenge as East Africa and Kenya is that even though we pride ourselves on our diversified economy, we have small and medium enterprises. We have a huge private sector, but it is very fragmented. That limits our ability to absorb huge sums of money. In terms of pecking order today, East Africa is truly at the top, North Africa is second, and Southern and West Africa are very commodity based and still going through a difficult period.

Are you looking to partner with other institutions?

Absolutely. We cannot succeed by ourselves. We are very clear that we are a pan-African institution. So, we are working with a few potential candidates for merger or acquisition. When we talk about Africa, we think about how to position ourselves from North Africa, West Africa, East Africa, and Southern Africa. Today, our Board is constituted of West Africans, East Africans, and Southern Africans. There is going to be a lot of those kinds of partnerships. We are also looking at where the industry is moving globally through goal-based investing. We will have a lot more partnerships with institutions that will help us to meet the aspirations of our clients. If it is home ownership, we will work with developers to help our clients to own homes. If it is education, we will work with schools to help our clients to be able to take their kids to the most competitive schools and be comfortable throughout the period when their children are in school. It is such a wide area that we will always be out there looking for partners.

What do you offer for investment advisory?

Investment advisory is a subtle offering that we give. We have four types of clients here. One we call the capitalists and they are primarily institutions. Their biggest problem is allocating capital. They sit somewhere like in New York and say that emerging markets are not looking good and they want to move their money to frontier or developed markets. The decisions they make are more location based. The other type of clients we have we call hunters. They always speak in the language of “show me the deal and I will give you the money”. They do not like black box. Even individuals or institutions will say they want to build their portfolio on an asset by asset basis. We have been very pleasantly surprised over time that there are clients, even internationally, that want us to show them special opportunities and they will be happy to put their money in with us. They are a very interesting lot and some of the most interesting guys to work with. They are very exposed to investment, very sophisticated, they want to get their hands dirty, and they want to be involved in determining what risk they take. Another type of client we have are called loyalists. We find most of them to be women. They really love the Nabo brand and everything we do, especially goal-based investing. They are very sophisticated, very well-exposed, very successful in whatever they do. But they go beyond just your typical analysis. They will look you in the eye and ask if they can really trust the guy who is running this ship. They are happy to meet you not to just talk about performance, but just to know that you are there and you are looking after their money. The last type are millionaires. They ask what the minimum investment is. They are middle level to senior managers in some of the big institutions in town and they are looking to build their portfolio. They have not succeeded in terms of doing big deals and making lots of money on one deal that gives them a lot of capital to start their portfolio. They are slowly building up their portfolios. They are executive managers in banks and some of the big consumer businesses around telcos, etc. but they want to build their portfolio slowly and carefully and they want to achieve that very elusive financial freedom. We found that the hunters are the ones that we have to work with on our investment advisory. We are always out there looking for the best opportunities. When we find the best opportunities, as we locate them, we are able to ask if they would be interested. They say yes, open my portfolio, asset number one, and they are waiting on the second one.

What is your medium-term vision? What do you want to achieve for the company in the next three years?

We have huge dreams. For our next five-year strategy which we just launched, we are anticipating that it will be closer to $1 billion in the next five years, maybe three quarters of $1 billion. It is not much to allocate but it still allows us to continue moving forward with our advantages like agility and actually to generate alpha above our peers. Besides that, what we really want is to bring something new to the industry. One of the things that really catches my attention is that today, they estimate about 200,000 clients are exposed to investment products out of a population of 50 million. When you talk about retail, we do not even need to go there because we have barely scratched the surface with our high net worth individuals. We want to democratize investment. We want to make investment something that is not just for institutions and the elite. We want to make investing what it is supposed to be. It is a means to an end, a means to your aspirations, a means to your children getting an education, a means to you achieving home ownership, a means to you getting financial freedom. What will really give me the greatest satisfaction would be to see our clients achieve their end goals, both institutions and ultra-high net worth individuals.