Any publicity is NOT good publicity. Ask Texan fund manager Robert Scharar

Some believe any publicity is good publicity. In financial services that can be a misnomer. As one of our guests on CNBC Africa's Power Lunch discovered today. Robert Scharar runs a $2.5m Africa-focused unit trust from Houston, Texas. His fund has a gross fee of over 6%. And its performance since inception has been around a third of what was achieved by the Dow Jones African Titans Index. If he'd asked, I'd have advised him to stay far away from the spotlight until he'd grown a far better record. But he listened, instead, to his marketing guys. Here's the result. – AH  

GUGULETHU MFUPHI:  Robert Scharar, President and Chief Executive of FCA Corp in Texas and the second person in the US to develop an exclusive Africa Fund, so that Americans could have a vehicle to take part in Africa's growth, joins us now to give us more insight in investing on Africa. Thank you so much for joining us today, Robert. It's good to have you with us. Let's touch on your Fund. I understand you've been investing on the continent for the last 20 years. Your $2.5m Fund: has it managed to achieve much success?

ROBERT SCHARAR: That Fund is fairly new. We started it to invest in public companies, traded on African Stock Exchanges. Our original investments were more in private funds, although they were in public companies. For example, we're involved in Malawi in NICO Holdings, which is an insurance group in five countries. However, the current fund is really focused on a Pan-Africa perspective of publicly traded African countries.

ALEC HOGG: Eighty percent invested in South Africa. I see Discovery and Grindrod are some of your favourite holdings. Did you see Grindrod's results yesterday?

ROBERT SCHARAR: Yes, I did.

ALEC HOGG: And your thoughts…are you happy to be there?

ROBERT SCHARAR: Yes, we are. Our strategy for being in South Africa is that many South African companies are really engaged in Africa itself, and we're looking for opportunities to use an established market, like the South African…

ALEC HOGG: But your performance has been pretty poor. One-third, roughly, of the Wall Street African Titans Index (3.3% since inception vs 9.4%). Why is that? Why are you so far behind?

ROBERT SCHARAR: Well, we have a different approach to all of this. If you look, Americans can buy index shares and those are going to give them exposure to, largely, the mining companies and some of the large financial institutions. We really believe the story in Africa is a consumer story and we want to be in a broader base of companies, so you'll see we're really underweighted for example, in the mining industries etcetera. We try to reach out to other businesses.

ALEC HOGG: But your biggest shareholding is in Discovery?

ROBERT SCHARAR: Well, we like the financial service group – the insurance groups. We're seeing remarkable things happen across the continent.

ALEC HOGG: My point being that Discovery doesn't have any exposure to the Africa story. Discovery is more China, UK and South Africa as well – very 'first world', rather than the Africa Story.

ROBERT SCHARAR: However, it is a company that's traded here and we are allowed to do that in our portfolios, so we try to have a variety of holdings.

ALEC HOGG: Robert, I'll tell you: the thing that really bothered me was your expense ratio. We can buy Satrix 40 at 0.8%. Your gross expense ratio 6.34%. It's very high.

ROBERT SCHARAR: Actually, what happened is because we have a lot of regulatory costs in the United States, if the Fund were to bear all the expenses, that's absolutely correct. However, as the Fund advisor, you'd note in the financial statements that for the first year-and-a-half, we absorbed most of the Fund expenses, so the shareholders did not actually pay that. We now have a voluntary cap on expenses, so that our expenses will not exceed 2%.

GUGULETHU MFUPHI:  I want to follow up on your lack of exposure into resources. Why not? Many people still consider Africa as a resource space?

ROBERT SCHARAR: Well, we think the longer story is a consumer space and while resource companies will be a big part of the African story, we think there are other opportunities. My own experience of over 20 years, leads me to believe that we want to be in companies that provide goods and services to the growing consumer class in Africa.

ALEC HOGG: But the Fund's size at just $2.5m – you wouldn't even make the Top 500 in South Africa if you were a unit trust here. I'm just trying to see why: is it hard marketing it or is it because your performance is so poor?

ROBERT SCHARAR: There's still not a lot of buy-in to the Africa story. We're an open-ended Mutual Fund. Anyone can buy. It's on the platforms of some of the big brokers, but it's really been getting an Africa story and I think there is some push-back on that. We've had longer experience here and we really think it's a good investment story to be in the African continent. That's what we're trying to give Americans exposure to.

ALEC HOGG: But there's already a huge asset management industry in this country.

ROBERT SCHARAR: Well, for American investors, those would be difficult to access. The American investor's main options would be to either buy the index share (as you mentioned before) or they would buy a few of the ADR shares, and so they're not really going to be able to buy a lot of the smaller cap stocks we'd get in some of the other markets in Africa. We're really trying to give them a broader exposure. We use the same strategy with our Australia/New Zealand Fund, which was established in 1991 – to start out very small. Over the years it grew and we were able to have a decent performance by focusing outside of the norm of what people would get, who really are buying in the global markets.

GUGULETHU MFUPHI:  You mentioned that very few Americans are apprehensive about moving into the African story. What story do you tell them about Africa and your experience here?

ROBERT SCHARAR: Well, I tell them the real story I've had in Africa. Having come here over 20 years ago, I've seen tremendous change and what I'm seeing is more transparency. I'm seeing more cross-border trade – more inter-Africa trade. As the consumer class grows, you'll hear a lot about the African middle-class. I think that's a little bit of a misnomer because while there is a middle-class expanding and the numbers are encouraging, in many countries, it's a very small part of the population, but there's a consumer class. We had first-hand experience in Malawi during the last decade, when we built a shopping centre and we put a South African store in there. Everyone said it would never work and yet, once there were quality goods and services, those consumers came.

GUGULETHU MFUPHI:  What store was this?

ROBERT SCHARAR: Shoprite.

ALEC HOGG: I just looked at the portfolio. Seventy-eight percent in South Africa, six percent in Nigeria, six percent in Egypt, and five percent in the UK. I'm finding it hard to reconcile this Africa story you're giving me here.

ROBERT SCHARAR: Well, the UK would obviously include SABMiller, which interestingly, because of its restructure is no longer purely an Africa story. I think that South African Breweries, from a lot of direction, clearly has other operations.

ALEC HOGG: SAB has maybe ten percent in the Africa story, if that.

ROBERT SCHARAR: I know, but I think that it is identified with that prospect. If you look at companies like Clientele or Capitec, they're really seeking a different market. The Capitec story is a very interesting one to deal with – people trying to bank what traditionally may have been the unbanked. We're seeing, in terms of micro-lending activities, micro-insurance where it really is amazing to me how technology has leapfrogged many things (even in the States), what's happened here.

ALEC HOGG: Did you have any exposure to Abil (African Bank)?

ROBERT SCHARAR: Yes, we did, unfortunately.

ALEC HOGG: How big a part?

ROBERT SCHARAR: Probably under one percent.

ALEC HOGG: Under one percent. Okay, so you suffered with the rest of South Africa, unfortunately, on that one.

ROBERT SCHARAR: Yes, we were more in mining than we realised…….