The super election year of 2024 lies behind us. In addition to another interest rate hike by the major central banks in the USA and Europe, it brought a potentially landmark election victory for Donald Trump in the US presidential election. What is in store for 2025?
In the Funds check series, the fund managers of selected funds look back on the developments of the past year and give their assessment of what to expect from the stock exchanges in 2025. (Please note: forecasts are no reliable indicator of future performance.)
(c) Photo: Stephan Huger
"In 2024, most developing and emerging countries experienced good economic development."
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: Please note that an investment in securities entails risks in addition to the opportunities described. Past performance is not a reliable indicator of future performance.
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 in 2024?
In 2024, the ERSTE RESPONSIBLE MICROFINANCE fund achieved a positive and stable performance of +2,4%, making this the 14th positive year in its 15-year history. Over the year, the net asset value of assets under management fell from EUR 95.8mn to EUR 85.5mn. This decline was mainly financed by regrouping out of the highly weighted fund components in the fund of funds. The fund is currently invested in 16 target funds, one of which is being drawn down. We kept the investment level in the fund very high; on average, the account balance was in the low single-digit percentage range.
Over the year 2024, there were eight positive and two neutral months in terms of performance. Since the launch of the fund, the average performance has been +1.9% p.a., while volatility over the past 36 months has been 0.64% (as of 31 December 2024). Over the past five years, despite difficult phases such as the Covid pandemic and wars, 83% of the months have been positive. Thus, in 2024, the fund managed to achieve its goal of a stable, positive performance at low volatility and a very low correlation with the asset classes of equities and bonds.
What sort of developments can you currently see as far as microfinance is concerned?
In 2024, most developing and emerging countries experienced good economic development. The uncertain demographic and political situation in some countries and regions, which is partly related to elections, has led to a close screening of which countries are granted loans. Weather-related risks such as typhoons or hurricanes can also affect some of the invested countries. The global economic environment shows a mixed picture, as inflation rates continue to decline. The major central banks of the industrialised nations and many emerging markets have started a cycle of interest rate cuts.
Microfinance is a global issue: the ERSTE RESPONSIBLE MICROFINANCE fund currently has investments in 88 countries and in well over 400 individual microfinance institutions. The most important regions are South and Southeast Asia, Central Asia, and Central and South America. Demand remains strong in countries such as Uzbekistan, Kyrgyzstan, and Mongolia, as well as in populous countries such as India, Vietnam, and Indonesia. We noticed a slowdown due to market saturation in Cambodia in 2024. There is still great potential in Africa, but many countries do not offer ideal conditions due to regulations and the political situation, although individual countries such as Kenya are also showing strong development.
The volume of the respective 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 ranges from EUR 3,000 to EUR 4,000. According to studies, global default rates are below 2% for microloans. We monitor various key figures such as PAR 30, which indicates the proportion of loans with repayment delays of 30 days or more. For the large microfinance institutions, this figure remains quite stable in a range of 4.5% to 5%. However, as a result of joint efforts to defer or restructure repayments, the actual default rates are significantly lower.
A calculated 66% of borrowers in the fund are female. Here, too, studies have shown that women as microcredit customers tend to display a better repayment behaviour. This may also be due to their sense of responsibility for their families and their children's education. In the past year, the majority of the investments added in local currency had a positive impact. Also, participations in microfinance institutions, which accounted for a calculated share of 6-7%, were performing well.
What do you expect for 2025?
Global demand for microfinance products – not only loans but also other financial services such as micro-insurance – remains very strong. We therefore expect the microfinance market to continue growing strongly and dynamically in 2025. Microfinance institutions that have to regularly present balance sheets in order to obtain financing are often well capitalised. Higher interest rates relative to 2023 were realised for loans extended by microfinance institutions during the year, and this effect is also reaching ERSTE RESPONSIBLE MICROFINANCE with a certain delay. (Please note: forecasts are no reliable indicator of future performance.)
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