Helping people to help themselves

Helping people to help themselves
Helping people to help themselves
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Martin Cech

 

Microfinance investments help improving lives and facilitate stable returns

There are investments that create a better world. Microloans give people in the Third World a chance to a better life and facilitate a stable yield for domestic investors.

Martin Cech, fund manager of ERSTE RESPONSIBLE MICROFINANCE, the only mutual fund of its kind in Austria, answered some questions.

What is a microfinance investment?

The previous UN Secretary-General, Kofi Annan, put it in a nutshell: “Microfinance is not a donation. It is a way to provide low-income households with the same services that others have also access to.” Basically, our ERSTE RESPONSIBLE MICROFINANCE invests in microfinance institutes. These institutes are based on a remarkably simple idea: small, direct loans are given to people in developing countries to fight poverty. The so-called microloans facilitate the creation of small trade while at the same time securing the subsistence of the recipients of said loans. The trades involved may be tailors, potteries, tourist arts and craft, or wood-processing businesses, to name but a few. The average loan amount is EUR 4,817 (as of March 2018).

You are no credit institution. What is the connection between microloans and investment?

This is a justified question. The microfinance institutions serve as a bridge between investors and loan recipients. They are based locally in emerging and developing countries and scrutinise the circumstances of a potential micro loan recipient before a loan is granted. We do not have that sort of know-how of the small local banks. Therefore, we do not invest directly in specific projects, but indirectly via funds. Also, the administrative efforts of direct lending by the fund to thousands of microloan recipients is not practicable. That being said, as lender we sometimes do make a point of looking more closely at some projects and their effects in the various countries. I take care of this personally. Most recently, I was in Georgia and Armenia in 2012 and 2014 to have a look at several microloan clients, and I managed to obtain precious information about the business processes and their cooperation with the local microfinance institutes.

What impact does the invested capital have?

More than 500mn people have been given access to microloans via microfinance institutes. ERSTE RESPONSIBLE MICROFINANCE alone reaches 15,000 loan recipients. But that is by far not enough. There are still more than a billion people worldwide who live in abject poverty. They have less than EUR 2 a day at their disposal. This makes it impossible to set up a business. Without access to loans, these people are left to their own devices. Microfinance thus provides new perspectives and prevents child labour.

Let’s talk about the fund. How is ERSTE RESPONSIBLE MICROFINACE structured? What focus does it have?

ERSTE RESPONSIBLE MICROFINANCE is a fund of funds*. The portfolio is broadly diversified: at the moment, we invest in a total of 400 different microfinance institutions and 42 fair trade institutions. Two thirds of the clients are female. The majority of loans are investment loans, while consumer loans make up only a small portion. The share of loans that have been due for 30 or more days is currently 5%. But this does not mean that these loans will actually be non-performing. We try to keep the cash reserve as small as possible. A reserve for possible pay-outs is necessary. No investment exceeds 3% of assets under management, and we invest a maximum of 10% in one country. Every country is subject to separate evaluation, and that includes its political stability.

*A fund of funds is an investment fund that does not invest its assets in individual securities but in several individual open-end funds (sub-funds or target funds).

How successful is an investment in ERSTE RESPONSIBLE MICROFINANCE? What downsides does this investment come with?

ERSTE RESPONSIBLE MICROFINANCE is a so-called alternative investment. As such, its correlation with traditional equity and bond markets is low. Therefore, it is suitable as complementary investment in an existing equity and bond portfolio. The fund has so far fulfilled this function rather well. Since the launch of the fund, it has gained 2.2%, with volatility below that of bond funds.

Performance of ERSTE RESPONSIBLE MICROFINANCE since launch

(indexed, 4 January 2010 = 100)

Source: FMP, Erste Asset Management
Note: Past performance is not indicative of future development.

 

The lack of fungibility is a downside that has to be taken into account when investing in the fund. Due to the specific features of this fund, there can be a time lag until the capital is invested or available for withdrawal again (please refer to the information at https://www.erste-am.at/en/private-investors/funds/erste-responsible-microfinance/AT0000A0G249). We recommend a holding period of at least five years.

ERSTE RESPONSIBLE MICROFINANCE

Distributing share (A): AT0000A0G249
Accumulating share (T): AT0000A0G256

 

Advantages for the investor

  • Support of global microcredit lending, particularly to individuals in emerging markets.
  • Correlation with other asset classes is low.
  • Chance for an attractive long-tern return.

 

Risks to be considered

  • Regading the issuance and redemption of share certificates please pay attention to the Key Investor Information Document and § 21 AIFMG, Point 10.
  • Investment is done in Alternative Investments, which pose higher liquidity risk.
  • Due to investments denominated in foreign currencies, the net asset value of the fund can be negatively impacted by currency fluctuations.
  • Capital loss is possible.

 

Risk notes according to 2011 Austrian Investment Fund Act

ERSTE RESPONSIBLE MICROFINANCE may make significant investments in investment funds (UCITS, UCI) pursuant to section 71 of the 2011 Austrian Investment Fund Act.
The Austrian Financial Market Authority (FMA) hereby warns: In accordance with section 166, para. 1, point 3 of the 2011 Austrian Investment Fund Act, ERSTE RESPONSIBLE MICROFINANCE solely invests in alternative investments that might bear higher investment risks compared with traditional investments. These investments in particular may incur losses up to the total amount of the invested capital.

 

Legal note:

Prognoses are no reliable indicator for future Performance.

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Legal disclaimer

This document is an advertisement. All data is sourced from ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. unless indicated otherwise. Our languages of communication are German and English. The prospectus for UCITS (including any amendments) is published in Amtsblatt zur Wiener Zeitung in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by ERSTE-SPARINVEST Kapitalanlagegesellschaft m.b.H., Erste Asset Management GmbH and for ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. pursuant to the provisions of the AIFMG in connection with the InvFG 2011 and regarding ERSTE Immobilien Kapitalanlagegesellschaft m.b.H. published in Amtsblatt zur Wiener Zeitung or at the web site www.ersteimmobilien.at. The fund prospectus, Information for Investors pursuant to § 21 AIFMG and the key investor document/KID can be viewed in their latest versions at the web site www.erste-am.com or www.ersteimmobilien.at or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the key investor document/KID is available, and any additional locations where the documents can be obtained can be viewed on the web site www.erste-am.com or www.ersteimmobilien.at. This document serves as additional information for our investors and is based on the knowledge of the staff responsible for preparing it at the time of preparation. Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.