Mauritius'  rise  as  an  offshore  financial  hub  while  laudable  remains largely constrained to the back office arena where fees are measured in basis points , not percentage points.   There is nothing wrong in that of  course,   for  we  have  created  thousands  of  jobs  from  an  industry that  remains  largely  profitable  and  efficient,  but  we  cannot  seem  to gain  momentum  when  it  comes  to  adding  alpha.  The fund management industry in Mauritius remains stuck in mono while other related sectors have continued to progress.   We have a small local stock market with few companies,   and their quarterly abridged accounts hide more important information than they can ever give,   while foreign investments are largely fund of funds driven.  More importantly, we  lack  the  critical  mass,  the  shareholder  drive and  vision  to  become  more  than  what  we  are  today   despite our hidden potential. 

The first problem the  asset  management  industry  faces  in Mauritius is perhaps its biggest hurdle, the Mauritian  investor himself.  Financial  literacy  remains  quite  low  as  showcased by the recent Ponzi  scheme with most Mauritians expecting zero  risk  and  high  returns  whenever  they  think  about  an investment.  It is very difficult for  an  asset  management company to compete against the increasing desire of a Mauritian to save less and when it comes to savings, to compete with insurance products and bank deposits. Over the past decade, the hot real  estate  market  has  been  able  to  take  the  lion  share  of  asset  rotation  from  deposits  as  real interest rates fell .  

Basically,  it  remains  very  difficult  for  the  fund  manager  to  raise  funds.  The danger of  course  is that many times some in the industry have resorted to selling fictitious stories by promising high returns without properly explaining the risks to the naïve investor. For example, some have been selling  investment  products  that  in  turn  invest  in  trading  strategies  readily  employed  by professional  prop  traders.  Such  strategies  are  in  most  countries  reserved  for  sophisticated investors  and  very  high  net  worth  individuals, but  in  Mauritius  such  funds   can  give  the  largely honest industry a bad name.  

The second problem faced by   the industry is one of skills shortage. Mauritius is a country which is blessed by having many accountants but very few analysts.   The local stock market is too small, and the policy of allowing companies to continuously release abridged accounts which hide more than they show does not exactly help to breed good analysts.   Besides,   with few liquid stocks to choose from, there is no need to rotate from one stock to   the next as is done elsewhere.  

Scalability is key to the development of the asset management industry
With  scale  and  skills  not  part  of  the  game  plan,  some  brave  hearts  have  tried  to  reach  new frontiers.   Historically when it came to international investments, fund managers in Mauritius along with  their  counterparts  in  the  pension  fund  industry  have  preferred  the  fund  of  funds  approach where a double layer of fees can be charged when making an investor put  his money into foreign funds.   Very often these fund managers will make deals with a select group of international fund houses and gain something called a trail fee, a nice word for commission for a sale. 

To get a trail fee of course, you must bring volume, and since Mauritius is a small place with few willing investors for the reasons explained above, some fund managers are forced to restrict their external fund manager list   to a few, even to one or two.  This simply means that fund manager or best of breed selection is not the priority, the sale is. Local fund managers become salesmen, and big brand names are sold within a fund of funds setup. 

Yes,  there  are  of  course  exceptions  to  the  rule,   and  some  brave  hearts  have  tried  to  make  a difference.  Few people know this but Mauritius is home to one of the best performing genuinely locally  managed  African  equity  funds  on  the  planet  over  the  past  three  and  a  half  years  at least. The African Market Leaders Fund, managed by some of the most competent people I know of  in  this  country  today,   has  not  only  done  well  on  the  upside  when  even  moneys  can  make money  but  when  African equities,  especially  Nigerian  and  Kenyan  equities  were collapsing  just two years ago.   To beat the market for a few months can be a fluke,  but to beat the market and most  peers,   which  are  by  far  larger  and  have  more  resources  at  their  disposal  in  terms  of research,  is laudable.  Yet nobody talks about it in Mauritius. 

We often dream about the day when the platform that is Mauritius can add value,   but yet ignore the existing alpha generators.   Ciel's  soon  to  be  launched  Kibo  2  Private  Equity  Africa  focused fund recently obtained  capital commitments worth USD  12.5 million  from the African Development Bank, but would it be able to obtain a similar amount from here so easily?  

For  years  now,  I  have  talked  about  the  need  to  set  up  a  well- funded  Africa  Consortium  which would involve key players in both the private and public sectors where money would be pooled together  and  where  our  best  minds  would  come  together  to  truly  create  a  sustainable  Africa focused  investment  platform. The  private  sector  and  the  few  families  which  control  it  need  to come  together  and  find  scale  while  the  government  needs  to  not  just  talk  about  Africa  but  put money where its  mouth is. 

I am afraid that while encouraging, 500 million rupees with a 10%  equity  stake  limit  spread  over  5  years  for  all  types  of small- scale  ventures  into  Africa  do  not  really  cut  it.  Our largest groups in the private sector are heavily indebted, and while  many  subsidiaries  are  badly  managed,  some  of  them hold  much  promise  if  they  receive  the  necessary  seed capital  that  can  in  turn  provide  them  with  critical  mass  to then  raise  more  funds  abroad. A 10%  equity  capital  limit may make sense in the United  States, but in a small country like Mauritius, we   need to think out of the box. 

Besides, investment  funds  do  not  need  equity  capital,  what  they  need  are  investors  who genuinely believe in   the African investment thesis .   It is very difficult these days for a   local  group to raise  500  to  600  million  rupees  all  by  itself  within  an  investment  vehicle  and  invest  this  in Africa.   We  simply  do  not  have  the  money,  and  USD  20  million  is  nothing  really. Now  suppose policy  makers  cannot  invest  more  than  10%  of  this  initial  seed  capital  with  you  for  the  fear  that they will own more than a certain percentage of a fund, then really the project will never be able to take off.   We need more flexibility, for this is not the US.  

Today there are a few Mauritian firms that have the present capabilities or potential to launch or manage African equity funds, East Africa focused private equity funds and African fixed income funds.  We  can  take  the  asset  management  industry  of  today  from  literally  nothing  to  something big  in  just  a  few  years  simply  if  we  all  come  together  and  provide  those  ideas  or  current  funds with  the  critical  mass that  they  so  desperately  need.   We sadly all too often get impressed by foreign brands.  

When  we  want  to  talk  about  the  capital  markets  of  Africa,  our  associations  will  call  up  foreign asset  managers  when  some  locals  have  actually  beaten  them  fair  and  square  in  terms  of performance  in  Africa  for  years!   We  need  to  shed  our  inferiority  complex  and  start  believing  in ourselves.   The  biggest  disservice  that  we  can  do  to  this  country  is  to  allow  our  talents  to  go  to waste.   It is high time for policy makers to meet and learn more about their local players who for a change  are  not  asking  for  currency  depreciation  or  cheap  loans  to  remain  viable.  They are already competitive, they just need seed cap!  

By Sameer Sharma

The author is a chartered alternative investment analyst and a certified financial risk manager. This article reflects solely the personal views of the author.  Courtesy: Conjoncture.