After a difficult year of 2022 on the markets, many asset classes saw rebounding performances in 2023. While the central banks' turnaround on interest rates ensured a “return to normality” on the bond market, the focus on the equity market was primarily on technology companies. In the Funds exclusive series, the fund managers of selected funds look back on developments of the previous year and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance.)

"Due to the high need of many millions of people to gain access to financial services, the market could continue to grow dynamically in 2024 and the following years."

Martin Cech, fund manager ERSTE RESPONSIBLE MICROFINANCE

Fund & Performance

The ERSTE RESPONSIBLE MICROFINANCE fund is a fund of funds that invests in microfinance funds, bonds on microfinance instruments and funds, and up to 10% in the shares of companies and microfinance institutions. Foreign currencies are usually hedged. A measurable positive impact on the environment and society is paramount in the investment decision making.

Note: Past performance is not a reliable indicator of future performance.

Performance since start of the fund. The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation.

Commentary by fund manager Martin Cech

How did the fund perform last year?

ERSTE RESPONSIBLE MICROFINANCE recorded a stable, positive performance in 2023. Having reached a volume of EUR 100mn at the beginning of the year, the fund was affected by minor outflows this year. The investment ratio remained very high, with practically all of the fund's assets invested in 17 microfinance funds and a thematically matching bond.

With the exception of two months with slightly negative performance of -0.03% each, all other months this year have been positive. The fund therefore managed to accomplish its goal of a stable, positive performance with low fluctuations and a very low correlation with the equity and bond asset classes.

Note: Please note, that an investment in securities entails risks in addition to the opportunities described.

 

What developments do you currently see in the field of microfinance?

How the micro-borrower in a developing or emerging country fares with their business and whether they can repay the loan instalments as agreed is very much decoupled from the development of the global economy.

Microfinance is a global issue: ERSTE RESPONSIBLE MICROFINANCE holds investments in 94 countries and well over 400 individual microfinance institutions. Nevertheless, we can see strong potential in East/South-East Asia. Central Asia and Latin America have also established themselves as strong microfinance markets. There is certainly also great potential in Africa, but many countries are not yet ready in terms of the regulatory framework and unfortunately also the political situation. The amount of the different microloans varies greatly around the world, as loans to small and medium-sized enterprises have increasingly been added in recent years. The average loan amount is between EUR 3,000 and EUR 4,000.

Studies show that the default rate for microloans worldwide is less than 2%. We monitor various indicators such as PAR 30, which shows the percentage of loans with repayment delays of 30 days or more. For the major microfinance institutions, this figure is currently fairly stable between 4.5% and 5%. Due to joint efforts to defer or restructure repayments, the effective default rates are significantly lower.

A calculated 67% of borrowers in the fund are female. Here too, studies have shown that women as microcredit customers tend to display a more reliable repayment behaviour. This may also be due to the sense of responsibility for families and the education of children.

The risk of over-indebtedness at several MFIs has been minimised by the establishment of credit bureaus in the individual countries, which monitor the debt situation of borrowers. While many loans had to be deferred or restructured in cooperation with the loan officers of the MFIs during the Covid-19 crisis, the majority of these were subsequently repaid in full. It is important for borrowers to recognise that microfinance is no charity, but a way of helping people to help themselves.

 

What are your expectations for the coming year?

In the past year, the addition of assets in local currencies had a largely positive impact. Also, investments in microfinance institutions, which are limited to an average of 10% of assets under management, were performing well.

Due to the high need of many millions of people to gain access to financial services, the market couls continue to grow dynamically in 2024 and the following years, which could result in a double-digit percentage growth. We see great potential in populous countries such as India, Indonesia, Vietnam, the Philippines, and the African continent in particular. The higher interest rate level in USD and EUR should also be reflected in ERSTE RESPONSIBLE MICROFINANCE with a certain delay, as many MFIs will have to refinance at higher interest rates, or interest rates will be have to be adjusted upwards for variable-rate loans to MFIs.

Note: Prognoses are not a reliable indicator for future performance.

ERSTE RESPONSIBLE MICROFINANCE

Disclaimer

This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to Art  21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to Art  21 AIFMG, and the Key Information Document can be viewed in their latest versions at the website www.erste-am.com within the section mandatory publications  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 Information Document is available, and any additional locations where the documents can be obtained can be viewed on the website www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to Art 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

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.