ANNUAL REPORT ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED TABLE OF CONTENTS 1 ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED STRATEGY 9 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO 4 SCHEDULE OF NET ASSETS HOLDERS OF REDEEMABLE SHARES 5 APPROVAL OF THE ANNUAL FINANCIAL 10 STATEMENT OF CASH FLOWS STATEMENTS 11 NOTES TO THE ANNUAL FINANCIAL STATEMENTS 6 INDEPENDENT AUDITORS’ REPORT 29 IMPORTANT NOTES FOR INVESTORS 7 STATEMENT OF FINANCIAL POSITION 32 CHARACTERISTICS AND DIRECTORY 8 STATEMENT OF COMPREHENSIVE INCOME ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED STRATEGY as at 31 December 2016 PORTFOLIO MANAGER and 41% respectively, while the standout performer was Morocco, returning 26%. Kenya, the other large, Andrew Lapping, Nick Ndiritu liquid market, fell 9%. FUND DESCRIPTION AND SUMMARY OF After trying to plug the dyke for over a year, the INVESTMENT POLICY Egyptian authorities finally let the pound float The Allan Gray Africa ex-SA Equity Fund Limited (the in early November. The magnitude of the move ’Fund’) invests in a focused portfolio of companies surprised most; including us (we were using a rate with significant business interests in Africa regardless of EGP13.20/US$ to value the portfolio just before of the location of the stock exchange listing (excluding the devaluation). The Egyptian pound lost 52% of its South Africa). The Fund price is reported in US value in eight weeks, moving from EGP8.88/US$ to dollars, but the underlying holdings are denominated EGP18.52/US$. The local equity market rallied 37% in various currencies. Returns are likely to be volatile. over the same period, for a net US$ loss of 35% for equity investors. FUND OBJECTIVE AND BENCHMARK Close observers of the Fund’s price series would have The Fund aims to outperform African equity markets seen little price movement from the above volatility (excluding South Africa) over the long term without as by November we had already devalued the taking on greater risk of loss. The Fund’s benchmark Egyptian pound rate used to value the Fund assets, is the Standard Bank Africa Total Return Index. so the subsequent stock market and currency moves The Fund does not seek to mirror the benchmark more-or-less offset one another. but instead may deviate meaningfully from this performance benchmark in pursuit of superior We think the Egyptian pound is undervalued returns. To the extent that its investments differ from and may well recover somewhat, especially if the those in the benchmark, the Fund faces the risk of government adopts some sensible policies and cuts underperforming the benchmark. back on money printing. We are not net buyers of Egyptian equities, as there is less value after the rally. SUITABLE FOR THOSE INVESTORS WHO Our preferred exposure is still Eastern Tobacco. The • Seek exposure to African (excluding South African) Egyptian opportunity currently appears to be in local equities currency, fixed interest and cheap holidays. • Are comfortable with stock market and currency fluctuations The Fund is a buyer of Nigerian banks, as these • Are prepared to take on the risk of capital loss businesses look undervalued despite substantial • Typically have an investment horizon of more than risks. The Nigerian bank investments detracted 8.9% five years from returns over the past year. Nigerian consumer businesses are beginning to move into our valuation COMMENTARY range, but we are not yet substantial buyers. Most African equity markets had a difficult 2016, It would have been nice if rather than investing in generating negative dollar returns. The worst Nigerian banks the Fund had the equivalent sum performers were Egypt and Nigeria, which fell 47% invested in Moroccan equities – unfortunately this 1 ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED STRATEGY as at 31 December 2016 was not the case. We had zero exposure to Morocco PERFORMANCE IN US$ NET OF ALL FEES AND over the year and, despite lots of looking, we have not EXPENSES found any businesses that we think are substantially % Returns Fund Benchmark1 undervalued. Cumulative: Since inception -4.6 -29.0 The Fund’s exposure to Kenyan equities is fairly Annualised: modest despite the financial companies trading on Since inception -0.9 -6.6 depressed valuations. The Kenyan shilling is cause Latest 5 years -0.9 -6.6 for concern. The shilling traded in a remarkably tight Latest 3 years -16.5 -16.2 range around KES101/US$ over the past 18 months, Latest 2 years -20.5 -16.0 despite a rapidly increasing fiscal deficit (now 10% Latest 1 year -6.4 3.5 of GDP) and a current account deficit of 6% of GDP. Risk measures (since inception, based on month-end prices) Private sector credit expansion has slowed recently, Maximum drawdown2 -51.7 -51.8 but a pegged currency and large twin deficits do not Percentage positive months3 53.3 50.0 usually end well. Annualised monthly volatility4 18.1 19.6 Highest annual return5 41.0 24.6 Unfortunately, the reason for the sharp rally in Lowest annual return5 -38.6 -43.4 Zimbabwean equites over the past six months was not an improving economic situation, but rather a Relative to benchmark return required to reach high watermark: 22.0%. deteriorating one. The government has introduced so 1. Standard Bank Africa Total Return Index (source: Standard Bank), performance as calculated by Allan Gray as at 31 December 2016. called “bond notes” in an attempt to solve the chronic Calculation based on the latest available data as supplied by third parties. dollar shortage, which could be the harbinger of 2. M aximum percentage decline over any period. The maximum drawdown another bout of money printing. It is very difficult to occurred from August 2014 to July 2016 and maximum benchmark drawdown occurred from July 2014 to January 2016. Drawdown is get dollars out of Zimbabwe, so investors with cash calculated on the total return of the Fund/benchmark (i.e. including income). balances are looking to buy real assets, driving 3. The percentage of calendar months in which the Fund produced a positive up equity valuations. In pricing the Fund, we have monthly return since inception. devalued the Zimbabwean securities by 20% to 4. The standard deviation of the Fund’s monthly return. This is a measure of how much an investment’s return varies from its average over time. reflect this anomaly. 5. This is the highest or lowest rolling 12-month return the Fund has experienced since inception. The Fund’s highest annual return occurred during the 12 The Fund is still not charging a fee as we work on months ended 31 May 2013 and the benchmark’s occurred during the 12 months ended 30 June 2014. The Fund’s lowest annual return occurred improving the fee structure. Falling African equity during the 12 months ended 31 August 2015 and the benchmark’s occurred during the 12 months ended 31 August 2015. All rolling 12-month prices and valuations over the past 30 months have figures for the Fund and the benchmark are available from the Allan Gray laid the groundwork for better returns ahead. The Service Team on request. Fund owns a collection of undervalued equities that should reward long-term investors with pleasing real returns in the years to come. Commentary contributed by Andrew Lapping ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 2 ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED STRATEGY as at 31 December 2016 INCOME DISTRIBUTION FOR THE LAST 12 MONTHS COUNTRY OF PRIMARY LISTING AS AT 31 DECEMBER 2016 To the extent that income earned in the form of dividends and interest exceeds Country % of Equities Benchmark1 31 Dec 2016 expenses in the Fund, the Fund will Nigeria 27.8 16.5 distribute any surplus. Zimbabwe 23.5 1.0 Dollars per unit 4.4719 Egypt 12.5 11.6 United Kingdom 7.5 13.8 TOTAL EXPENSE RATIO (’TER’) AND TRANSACTION Kenya 7.0 14.2 COSTS BRVM 3.9 2.2 The annual management fee charged is included in Australia 3.5 0.3 the TER. The TER is a measure of the actual expenses Uganda 3.4 0.2 incurred by the Fund over a 3-year period (annualised). France 3.2 3.1 Since Fund returns are quoted after deduction of these Rwanda 2.4 - expenses, the TER should not be deducted from the Malawi 1.6 - published returns. Transaction costs are disclosed Netherlands 1.2 - separately. Zambia 1.2 - TER and Transaction costs breakdown for Canada 0.8 23.3 the 3-year period ending % 31 December 2016 Tanzania 0.6 0.8 Total expense ratio 2.94 Ghana - - Fixed fee 0.90 Morocco - 6.8 Performance fees 1.35 Tunisia - 3.0 Custody fees 0.30 Mauritius - 2.7 Other costs excluding transaction costs 0.07 Botswana - 0.3 VAT 0.32 United States - 0.3 Transaction costs (including VAT) 0.49 Total6 100.0 100.0 Total investment charge 3.43 SECTOR ALLOCATION AS AT 31 DECEMBER 2016 6. T here may be slight discrepancies in the totals due to rounding. Sector % of Equities Benchmark1 Financials 31.9 36.8 Consumer goods 24.3 9.1 Telecommunications 15.6 11.5 Oil & gas 14.4 13.0 Basic materials 7.6 27.5 Utilities 3.5 0.2 Consumer services 2.5 0.3 Industrials 0.2 1.6 Total6 100.0 100.0 3 ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 SCHEDULE OF NET ASSETS as at 31 December 2016 MARKET VALUE STANDARD BANK AFRICA NUMBER HELD INSTRUMENT (RANKED BY SECTOR) US$ % OF FUND TOTAL RETURN INDEX (%) FINANCIALS 70 134 063 31.7% 36.7% 804 239 101 Access Bank 15 493 546 7.0% 270 935 553 Zenith Bank 13 115 522 5.9% 28 356 802 Kenya Commercial Bank 7 956 066 3.6% 563 016 310 First Bank of Nigeria Holdings 6 190 038 2.8% 67 427 670 Guaranty Trust Bank 5 465 912 2.5% 19 157 200 Bank of Kigali 5 358 329 2.4% 1 784 503 Credit Agricole Egypt 3 570 975 1.6% 58 660 796 Stanbic IBTC 2 887 798 1.3% 28 662 300 Barclays Bank of Kenya 2 545 398 1.1% 769 132 834 Diamond Bank 2 221 322 1.0% Positions less than 1% 5 329 157 2.5% CONSUMER GOODS 53 407 473 24.1% 9.1% 27 036 995 Delta Corporation 19 142 192 8.6% 1 183 985 Eastern Tobacco 18 147 035 8.2% 17 286 705 Innscor Africa 6 638 095 3.0% 10 747 Soc Ivoirienne Des Tabacs 2 563 204 1.2% 1 951 442 National Breweries PLC 2 556 045 1.2% 7 914 Societe de Limonaderies et Brasseries 2 231 994 1.0% Positions less than 1% 2 128 908 0.9% TELECOMMUNICATIONS 34 328 616 15.5% 11.5% 79 030 782 Econet Wireless Zimbabwe 18 967 388 8.6% 96 257 Sonatel 3 826 282 1.7% 9 747 968 Global Telecom 5 545 344 2.5% 16 802 000 Safaricom 3 140 024 1.4% 3 790 256 Press Corporation 2 849 578 1.3% OIL & GAS 31 663 883 14.3% 13.0% 15 493 710 Seplat Petroleum Development Co 14 161 194 6.4% 1 188 255 Maurel et Prom 5 274 684 2.4% 1 305 228 Tullow Oil 5 029 771 2.3% 12 141 503 Lekoil 3 927 677 1.8% Positions less than 1% 3 270 557 1.4% BASIC MATERIALS 16 757 660 7.6% 27.5% 1 771 573 Zimplats 7 670 204 3.5% 5 534 500 Caledonia Mining 5 669 469 2.6% 149 632 OCI N.V. 2 609 656 1.2% Positions less than 1% 808 330 0.3% UTILITIES 7 734 038 3.5% 0.2% 57 055 990 Umeme 7 734 038 3.5% CONSUMER SERVICES 5 497 451 2.5% 0.3% 24 664 196 Simbisa Brands 3 157 017 1.4% Positions less than 1% 2 340 434 1.1% INDUSTRIALS 566 624 0.3% 1.6% Positions less than 1% 566 624 0.3% CASH AND ACCRUALS 1 401 609 0.6% 0.3% NET ASSETS 221 491 417 100.0% ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 4 APPROVAL OF THE ANNUAL FINANCIAL STATEMENTS The directors of the Fund are responsible for the preparation of the annual financial statements and related financial information included in this report. The annual financial statements, which comprise the financial position as at 31 December 2016 and its financial performance and cash flows for the year ended 31 December 2016, are set out on pages 7 to 28 and have been approved by the board of directors of the Fund and are signed on its behalf by: John CR Collis Craig Bodenstab Director Director 15 March 2017 15 March 2017 5 ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 INDEPENDENT AUDITORS’ REPORT TO THE BOARD OF DIRECTORS AND MEMBERS OF An audit involves performing procedures to obtain ALLAN GRAY AFRICA EX-SA EQUITY FUND LIMITED audit evidence about the amounts and disclosures (THE ’FUND’) in the financial statements. The procedures selected depend on the auditors’ judgment, including the We have audited the accompanying financial assessment of the risks of material misstatement of statements of the Fund, which comprise the statement the financial statements, whether due to fraud or of financial position as at 31 December 2016 and the error. In making those risk assessments, the auditors statements of comprehensive income, changes in net consider internal controls relevant to the Fund’s assets attributable to holders of redeemable shares preparation and fair presentation of the financial and cash flows for the year ended 31 December statements in order to design audit procedures 2016, and a summary of significant accounting that are appropriate in the circumstances, but not policies and other explanatory information on pages for the purpose of expressing an opinion on the 7 to 28. effectiveness of the Fund’s internal control. An audit also includes evaluating the appropriateness of DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL accounting policies used and the reasonableness STATEMENTS of accounting estimates made by management, as well as evaluating the overall presentation of the The Fund’s directors are responsible for the financial statements. preparation and fair presentation of these financial statements in accordance with International We believe that the audit evidence we have obtained Financial Reporting Standards, and for such internal is sufficient and appropriate to provide a basis for control as management determines is necessary to our audit opinion. enable the preparation of financial statements that are free from material misstatement, whether due to OPINION fraud or error. In our opinion, the financial statements present AUDITORS’ RESPONSIBILITY fairly, in all material respects, the financial position of the Fund as at 31 December 2016 and its Our responsibility is to express an opinion on financial performance and its cash flows for the these financial statements based on our audit. We year ended 31 December 2016 in accordance with conducted our audit in accordance with Canadian International Financial Reporting Standards. generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. 15 March 2017 Toronto, Canada ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 6 STATEMENT OF FINANCIAL POSITION as at 31 December 2016 2016 2015 NOTE US$ US$ ASSETS Financial assets at fair value through profit or loss 2 220 089 808 189 936 611 Cash and cash equivalents 3 10 400 915 9 415 796 TOTAL ASSETS 230 490 723 199 352 407 LIABILITIES Trade and other payables 4 113 344 129 066 Distribution payable 7 8 885 962 6 776 900 TOTAL LIABILITIES, EXCLUDING NET ASSETS ATTRIBUTABLE TO HOLDERS 8 999 306 6 905 966 OF REDEEMABLE SHARES NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE SHARES 221 491 417 192 446 441 The above Statement of financial position should be read in conjuction with the accompanying notes. 7 ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2016 2016 2015 NOTE US$ US$ NET INVESTMENT LOSSES (9 128 424) (78 958 313) Dividends 10 641 670 11 448 457 Interest 81 65 468 Realised losses on disposal of investments (2 876 502) (6 472 867) Unrealised losses on investments (16 752 991) (84 115 516) Foreign exchange losses (696 810) (481 635) Other income 556 128 597 780 OPERATING EXPENSES (2 311 854) (5 337 717) Performance fees - (1 595 641) Management fees (540 412) (1 208 765) Audit fees (20 300) (26 000) Custodian fees (614 675) (638 740) Transaction fees (43 912) (49 087) Administration fees (69 066) (67 695) Withholding taxes (998 264) (1 692 654) Other expenses (25 225) (59 135) TOTAL COMPREHENSIVE LOSS BEFORE FINANCE COSTS (11 440 278) (84 296 030) Finance cost - distribution to holders of redeemable shares 7 (8 885 962) (6 776 900) TOTAL COMPREHENSIVE LOSS FOR THE YEAR (20 326 240) (91 072 930) The above Statement of comprehensive income should be read in conjuction with the accompanying notes. ALLAN GRAY AFRICA EX-SA EQUITY FUND ANNUAL REPORT 31 DECEMBER 2016 8