Annual Highlights: December 2012

•  The Fund performed well in December to close the year on a positive note
•  Annual performance attribution led by gains in Nigeria, Kenya, Egypt and the Francophone region
•  Cautious optimism with respect to the earnings potential of our underlying portfolio holdings
•  UAC of Nigeria - Our Diversified Play on the Nigerian Consumer
•  Scangroup - Building Positive Brand Association across Africa
•  Commercial International Bank - Depressed Valuation given Egypt’s Challenging Operating Environment
•  Letshego - Positioned to Outperform amid Strong Credit Fundamentals and Compelling Valuation
•  Flour Mills Nigeria - Positioned to Outperform amid Increased Momentum from Low and Middle-Income Households

The Fund performed well in December to close the year on a positive note

As fundamental value-driven investors, we seek to develop and maintain a strong understanding of the industries in which our portfolio companies are operating in. Simply put, if we can be reasonably certain that a company’s earnings will materialize and express a high level of confidence around our forecasts of three-to-five year earnings growth, our portfolio will consistently deliver risk-adjusted absolute returns and outperform relevant benchmarks over time. Although our portfolio companies have yet to release 4Q12 results, we have thus far been rewarded for our efforts as 31 of the 35 holdings in our portfolio are expected to generate record revenue and/or earnings. Despite the fact that our holdings’ financial years expire over several different month-ends, our estimates through the first three quarters of FY12 have largely been met as average 9M12 revenue and profits have thus far achieved 74% and 77% of our respective full year forecasts. Looking ahead, we believe that our portfolio companies have not yet scratched the surface of their overall market potential. For example, CIB Egypt is one of the largest and most profitable financial institutions in Egypt (85 million individuals) yet with total assets of just USD 15.3bn, its balance sheet is roughly equivalent to that of a US regional small cap such as Susquehanna Bancshares or Bank of Hawaii. Nigerian Breweries, the largest beverage company in a country comprised of 170 million people, had turnover of USD 1.5bn last year - less than what parent company Heineken sells in the Netherlands, a nation consisting of merely 16.5 million individuals. Safaricom is the leading telecom operator in Kenya (43 million individuals) yet produced sales of only USD 1.2bn last year, roughly one-fifth the amount generated by Belgacom - the equivalent market leader in Belgium, a nation comprised of just 11 million people.

Annual performance attribution led by gains in Nigeria, Kenya, Egypt and the Francophone region

Most of this year’s positive attribution can be traced to our holdings in Nigeria, Kenya, Egypt and the Francophone region. It is no secret that we have held a strong affinity for the Nigerian banking sector given its attractive valuations, extraordinary earnings potential and improved asset quality. We were justly rewarded for our view as Nigerian banks generated roughly 521 basis points of positive attribution in FY12. The Francophone region was another strong performer as the ongoing recovery in Cote d’Ivoire fueled broad-based gains with each of our holdings contributing meaningfully to full-year performance. Negative attribution was led by weakness in Malawi where the long-anticipated Kwacha devaluation (-52.1%) weighed on overall performance. It should however be noted that the underlying share price of our lone Malawian holding actually posted a slight increase when viewed in local currency terms. In summary, of the 35 holdings in our portfolio, 29 were responsible for generating positive attribution in FY12. Looking ahead, we remain heavily allocated to West Africa, namely Nigeria, Ghana & the Francophone region. We have also increased our weighting in Zimbabwe which is reflective of our confidence in the underlying fundamentals of our two core holdings.

The banking sector stands out as this year’s star performer although performance was not entirely related to the rally in Nigeria as our holdings in Kenya, Egypt and Cote d’Ivoire also performed well. The food and beverage sector was another solid performer having generated 501 basis points of positive attribution on the year. On the whole, African consumer shares performed admirably and we were justly rewarded for this year’s positive performance. Negative attribution was weighed down by diversified conglomerates as our position in Malawi detracted 165 basis points from full-year performance due to the Kwacha devaluation.

Cautious optimism with respect to the earnings potential of our underlying portfolio holdings

Looking to 2013, we make no specific forecasts of fund performance as short-term price movements are the result of subjective buying and selling from individual market participants. Nevertheless, we are cautiously optimistic with respect to the earnings potential of our underlying portfolio companies as this drives business valuations over the long-term. We remain mindful of the risks associated with isolated instances of easy monetary policy and the potential for rising inflation across the region. As we move into the first quarter, we will continue to monitor the ongoing political transition in Egypt as well as upcoming elections in Kenya and Zimbabwe.

In the sections below, we summarize the performance of three investments in 2012, namely UAC Nigeria, Scangroup and Commercial International Bank of Egypt. These three companies comprise 9.4% of our current portfolio and are responsible for generating 267 basis points of positive attribution in FY12. We also share the outlook for two of our high conviction holdings entering 2013, namely Letshego and Flour Mills Nigeria. We believe these companies are well positioned to outperform given their attractive valuations, industry leadership and current market positioning.

UAC of Nigeria - Our Diversified Play on the Nigerian Consumer

UAC of Nigeria (UACN) is one of West Africa’s most diversified consumer companies with a number of leading brands, including: Gala, Supreme Ice Cream, Grand Cereals/Oils, Vital Feeds, SWAN Natural Spring Water and Gossy Spring Water. Its food & beverages division (UAC Foods) also includes franchised food brands such as Mr. Bigg’s, Creamy Inn, Chicken Inn, Pizza Inn, Dial-A-Delivery and Village Kitchen. While UAC Foods has historically accounted for over 60% of UACN’s total revenue, the company also offers exposure to industry-leading Nigerian businesses across the real estate (UAC Property Development Company), paints (Chemical & Allied Products), logistics (MDS) and commercial automobile (GM Nigeria) sectors. At the time of investment, we felt that UACN’s unique portfolio of industry-leading consumer brands had been overlooked by investors given the company’s broad and more highly diversified approach. Our initial investment in UACN dates back to February 2010, the company’s shares returned +40.0% in USD terms during FY12, and it remains a core holding within the fund.

Our investment thesis is grounded in Nigeria’s strong fundamentals as UACN’s vertically integrated business model enables the company to compete successfully at numerous different points along the value chain. Nigeria’s population is comprised of 170 million individuals of whom 67% are below 30 years of age. Per capita GDP has exhibited a compound annual growth rate of 13.3% over the past ten years as we continue to witness upward migration to more affluent segments. Nigeria’s upper middle class has nearly doubled since 1996 and Nigerian GDP growth has averaged 7.1% over the past five years as growth in non-oil sectors of the economy (i.e. public infrastructure, residential development, mobile telephony, et al) have led to the introduction of shopping malls around some of the major commercial centres throughout the country. Yet by and large, the Nigerian consumer market remains relatively immature with only limited categories and narrow choice. Such an environment is ideal for branded consumer companies with established manufacturing capacity as supply fuels demand.

The Nigerian retail marketplace is characterized by a generally circuitous route-to-market where manufacturers are forced to rely on third-party distributors and independent wholesalers as the typical consumer purchase occurs via a small grocery store or tabletop. Nigeria’s retail food sector is primarily comprised of traditional open air markets (65%) and convenience stores (34%) with supermarkets (1%) making up the balance. As such, Nigeria differs from more developed consumer markets where powerful retailers dictate less favourable payment terms. UACN is thus able to benefit from low working capital requirements while leveraging its industry-leading position in retail food distribution (UAC Restaurants) and logistics (MDS). In so doing, UACN has organically created a unique blend of brand loyalty and awareness for its portfolio of foods and beverages by forging strong links with retailers and consumers across Nigeria. UAC Restaurants, part of the UAC Foods division, maintains the largest chain of quick service restaurants in Nigeria with 155 restaurants in 32 cities making it more than double the size of its next two largest competitors combined (i.e. Big Treat, Tantalizers). Moreover, MDS Logistics is the unquestioned industry leader in supply chain solutions with over 50 blue chip clients, including: Nestle, Guinness, Glaxo SmithKline, Pfizer, Sanofi Aventis, MTN and Airtel, among others. Looking ahead, we are encouraged by UACN’s strategic partnership with Tiger Brands, South Africa’s largest FMCG company, as its 49% stake in UAC Foods will enable management to leverage Tiger’s complimentary product portfolio and technical expertise. We are also impressed with UACN’s inorganic growth strategy, as the company is well positioned to emerge as the industry leader in both paints and animal feeds.

Although our initial investment in UACN dates back to February 2010 when we were first attracted to the company’s strong portfolio of brands given attractive valuations and our forecasts for increased domestic consumption. At the time of investment, UACN was trading on 12.7x trailing 12mo earnings and EBITDA margins had exhibited consistent improvement over the preceding five years. We also saw the opportunity for improved efficiencies across each of the underlying businesses. We increased our position back in June 2012 given improved clarity on the company’s restructuring. At that point, the company’s shares traded on 14.6x trailing 12mo earnings with EBIT margins of 11.6%. Although the company’s restructuring has taken longer than initially expected, we are finally seeing the benefits of management’s reorganization with much of the perceived benefits flowing through in FY13. UACN continues to invest strongly in its brands and we believe that the company’s international joint ventures (i.e. Tiger, Azko Nobel, General Motors, etc.) will lead to continued product innovation and earnings growth. Shares of UACN are currently trading at 18.7x forward 12mo earnings and 6.3x forward 12mo EV/EBITDA. Given our blended target price, this implies 27% upside from current levels.

Scangroup - Building Positive Brand Association across Africa

Scangroup has positioned itself as the region’s pre-eminent marketing services group with approximately 330 clients and direct or indirect operations in 30 countries across Sub-Saharan Africa. The company’s multi-agency business model has been a key driver of its success as domestic agencies, strategic joint ventures and international partnerships are able to operate independently under Scangroup’s corporate umbrella. This allows the company to benefit from economic of scale via centralized buying of media and more attractive financing terms while mitigating inherent conflicts of interest by allocating competing clients to different agencies across the group. Scangroup clients also benefit from a number of key competitive advantages as they have access to a full suite of marketing, advertising and public relations services. Further, Scangroup offer its clients the ability to leverage significant cost savings from wholesale pricing and discounts while managing similar advertising campaigns across different regions and countries across the continent. With its strong African roots, Scangroup is able to deliver Afro-centric solutions to multinational clients looking to access the African consumer. We initiated our position back in April 2012, and the company’s shares returned +63.4% in USD terms on the year.

Our investment thesis was driven by rising competition within consumer-facing industries (i.e. retail, banking, foods, telecommunications, et al) across Africa. Increasingly, multinational and regional companies have looked to expand their footprint; as a result, the need for specialized services designed to build brand loyalty across Africa’s highly fragmented consumer markets, and emerging interest from multinational corporations looking to access Africa’s fast growing retail marketplace. Currently, Africa consists of roughly 1.1 billion individuals across 54 countries. Since 2000, real consumer spending has grown 3 - 5% per annum, and at present, more than 90% of all African households have at least some discretionary income. As a result, consumer-facing sectors are growing rapidly and manufactured goods (i.e. drugs, apparel, cosmetics, etc) are being successfully introduced throughout the continent with global brands such as Coca Cola, Proctor & Gamble, Reckitt Benckiser, Nestle, Diageo, SAB Miller and Unilever looking to take up a greater share of household spending. Such an environment is ideal for established advertising companies with strong working knowledge of local consumption patterns as demand for positive brand association is expected to fuel exceptional top-line revenue growth for the company.

Although advertising expenditure in Africa remains relatively low, spending is expected to grow at roughly 9% p.a. through FY16 - the fastest pace of any region across the globe. We believe Scangroup is positioned to capture the majority of future spending growth as it is the only media company with a real regional presence and multinationals prefer to use just one agency for all of its marketing, advertising and public relations solutions in an individual country. Spending on advertising across Africa is projected to total USD 15 billion in FY12 or roughly 3.1% of aggregate expenditure worldwide. In terms of medium, television represents the bulk of total expenditure and accounts for over 37% of the market. Looking ahead, expenditure on mobile internet is projected to generate top-line growth of 25 - 30% p.a. over the three year period through 2017. By leveraging the skill and expertise of management while also capitalizing on the company’s strategic relationship with WPP, the world leader in marketing communications services and the company’s largest shareholder, we expect the company’s shares to appreciate significantly in the months and years ahead.

We initiated an investment in Scangroup in March 2012 as the company had consistently delivered a compound annual growth rate on gross profits of 32.0%, a consistent EBITDA margin in excess of 30.0% and average earnings growth of over 22.2% over the previous five years. It was trading on a P/E of 16.5x trailing 12mo earnings which is actually quite expensive relative to the other holdings in our portfolio. However, we believe that the company will benefit rapidly from its regional expansion strategy with contribution from new markets like Nigeria and Rwanda coming on line in FY13. In addition, we have grown increasingly optimistic surrounding our forecast of future advertising expenditure in the digital arena, an area where Scangroup have emerged as the unquestioned market leader.

Commercial International Bank - Depressed Valuation given Egypt’s Challenging Operating Environment

Commercial International Bank Egypt (CIB) is the top private sector commercial bank in Egypt and one of the nation’s most profitable financial institutions. CIB has emerged as the undisputed leader in Egyptian corporate banking and the bank’s emerging retail business has benefited from a broad geographic footprint consisting of 155 branches, 500 ATMs and 7,900 POS throughout the country. Despite the political overhang in Egypt, CIB’s brand is among the most venerable in North Africa as the bank has consistently delivered exceptional shareholder returns for over a decade. Looking ahead, we believe that CIB possesses a strong core institutional business with significant upside given the opportunity for retail expansion. We initiated our position back in April 2012, and the company’s shares returned +75.4% in USD terms on the year.

Our investment thesis was initially supported by the sector’s strong fundamentals and fueled by the bank’s structural advantages. Egypt possesses a large, under-banked population with extraordinary retail growth potential. Despite its status as the 3rd largest nation in Africa with over 85 million individuals, more than 50% of the population is under 30 years of age and less than 10% of the population has bank accounts. Although political turmoil in Egypt had initially been a deterrent, we eventually came to view the challenging operating environment as a unique opportunity for CIB to gain market share from structurally weak public sector banks given its superior infrastructure, management, asset quality and customer service. In addition, CIB maintains the lowest funding costs of any bank in Egypt as it benefits from an attractive deposit mix which is underweight costly time deposits and CDs. It should be noted that the Egyptian banking sector maintains a structurally superior deposit base where lending is nearly fully funded by domestic deposits given the relatively high level of remittances from citizens living abroad (7% of GDP). In the case of CIB, where deposits accounts for over 95% of total liabilities, we felt that the bank was uniquely positioned to expand net interest margins by leveraging its portfolio of attractively priced deposits. We initiated an investment in CIB on April 2012 as the bank’s shares traded on 7.6x trailing 12mo earnings and 1.5x trailing 12mo book value. Shares of CIB are trading at 7.8x forward 12mo earnings, 1.8x forward 12mo book value and FY13 RoE of 26.1%.

Letshego - Positioned to Outperform amid Strong Credit Fundamentals and Compelling Valuation

Letshego is the largest microfinance institution (MFI) in Botswana and one of the leading MFIs in Africa with operations in Mozambique, Namibia, Swaziland, Tanzania, Uganda and Zambia. The company employs a proven business model whereby unsecured personal loans are extended to formally employed individuals across the public and private sector with the ensuing repayments deducted at source. The company benefits from a rigorous collection system and wide distribution network with over 100 branches, 170,000 customers and over USD 375 million in high quality loans across eight African countries. Looking ahead, we are encouraged by Letshego’s geographic expansion and believe the company is well positioned to grow its loan book whilst reducing the impact of political uncertainty and asymmetric economic volatility arising from any one country. Further, we believe management will prove successful in its efforts to transform the lender into a true deposit-taking entity with a more attractive funding base and the ability to offer a wider array of financial services, including commercial banking and life insurance. We initiated our position back in September 2006, and the company’s shares returned +24.0% in USD terms on the year.

Sub-Saharan Africa (SSA) has a great diversity of financial service providers capable of serving low and middle-income households, including nonbank financial intermediaries (NBFIs), nongovernmental organizations (NGOs), financial cooperatives and commercial banks. Yet despite the growing number of MFIs and rising competition between lenders, SSA benefits from strengthening credit fundamentals as depositors outnumber borrowers by 3:1 and total deposits exceed gross loans by over 10% in aggregate. It should therefore come as no surprise that when compared to Asia, Latin America and Eastern Europe, SSA attracted the greatest number of cross-border funders in FY12. From a country perspective, growth rates have been most impressive in Cameroon, Ethiopia, Kenya, Nigeria and Uganda where the number of new borrowers has expanded by more than 20% per annum over the past three years. In Letshego’s case, we expect declining loan volumes in Botswana to be offset by continued growth from its existing subsidiaries (Namibia, Mozambique, Tanzania) and further supported by the company’s expansion into Kenya, Lesotho, Rwanda and South Sudan. Letshego is one of our most tenured positions in the Fund although we began adding to our position back in September 2012 as the lender’s shares traded on 4.9x trailing 12mo earnings and 1.2x trailing 12mo book value. Shares of Letshego are currently trading 3.2x forward 12mo earnings, 0.7x forward 12mo book value with FY13 RoE of 29.5%.

Flour Mills Nigeria - Positioned to Outperform amid Increased Momentum from Low and Middle-Income Households

Flour Mills Nigeria (FMN) has developed into one of the nation’s largest and most vertically integrated consumer companies with synergistic businesses across branded goods, flour milling, sugar refining, edible oils, livestock feeds, fertilizers, cement, packaging and logistics. The company’s agro-business is involved in a number of complimentary businesses, from domestic cultivation of sugarcane, soya, maize, rice and palm oil to processing of commodities such as cassava to edible oils to fertilizer blending and distribution. These businesses flow through into the production of both intermediate products (i.e. flour, sugar, edible oils, etc.) and branded consumer goods (i.e. noodles, rice, snacks, etc.), and are supported by various downstream businesses in the areas of packaging, transportation, port operations and power generation. Over the medium-term, we believe the company is well positioned to benefit from management’s focus on delivering food staples to low and middle-income consumers across Nigeria. In addition, the company has emerged as Nigeria’s largest fertilizer distributor with roughly 35% of overall market share. It should be noted that FMN’s vertically-integrated business model has proven beneficial in offsetting elevated input costs and rising distribution-related charges while leveraging improved operating efficiency, quality control and time-to-market. Among the company’s strategic holdings are the Apapa Bulk Terminal (ABT), Nigerian Bag Manufacturing Company (BAGCO) and Golden Transport. ABT is comprised of five dedicated berths with over 225,000MT in bulk storage capacity, BAGCO is the industry leader woven sacks and flexible packaging and Golden Transport consists of over 600 trucks and related vehicles. Combined, these three strategic holdings have strengthened FMN’s competitive edge as evidenced by improved supply chain management, enhanced branding and reduced distribution costs.

Led by the company’s Golden Penny product suite, FMN has generated compound annual growth in turnover of 31.0% as Nigerian pasta and noodles consumption evolves into a common diet amongst low and middle-income households. Given the company’s recent capacity gains, we believe the company’s foods division will benefit from rising turnover as per capita consumption remains well below the average exhibited in other emerging markets across the globe. Although FMN’s foods division represents the bulk of gross profit at 44.2%, we have witnessed growing contribution from the company’s fertilizer, feeds and packaging businesses as capacity expansion fuels a more highly diversified revenue base. Looking ahead, we see the upside potential to our medium-term forecasts amid continued growth in the company’s sugar, edible oils and cement businesses. Our initial investment in FMN dates back to November 2010, and we increased our position back in December 2012 as the company’s shares traded on 5.4x trailing 12mo EV/EBITDA. Shares of FMN are trading on 11.8x forward 12mo earnings and 4.9x forward 12mo EV/EBITDA.

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