While the stock markets climbed to new record highs in the first half of the year, the first central banks also initiated a turnaround in monetary policy by cutting interest rates. Will the environment remain positive?

In the Funds exclusive series, the fund managers of selected funds look back on developments in the first half of 2024 and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance).

"We expect the performance to remain positive for the rest of the year."

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 in the first half of the year?

ERSTE RESPONSIBLE MICROFINANCE maintained its positive and stable performance in the first half of 2024, when it posted gains of 1.4%. The fund has suffered outflows since 2023, so investments in the fund have been reduced proportionately and the allocation to umbrella funds has been kept very high. Virtually all of the fund's assets are invested in 17 microfinance funds.

Volatility over the last 36 months has been very low at 0.66%, with more than 80% of months yielding a positive performance. The fund therefore also managed to achieve its goal of stable, positive performance amid low fluctuations and a very low correlation with the equity and bond asset classes. How the micro loan 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.

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?

Microfinance is a global topic: ERSTE RESPONSIBLE MICROFINANCE holds investments across 95 countries and in well over 400 individual microfinance institutions. Regionally, Central Asia, East/South-East Asia, and Latin America are the most important ones. There is certainly also great potential in Africa, but many countries are not yet sufficiently positioned in terms of the regulatory framework and unfortunately also the political situation.

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. 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 is currently quite stable at around the 4.5% mark; however, 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 better repayment behaviour. This may also be due to their sense of responsibility for their families and their children's education.

The risk of over-indebtedness at several microfinance institutions has been minimised by the installation of credit bureaus in the individual countries, which monitor the leverage of borrowers. While many loans had to be deferred or restructured in cooperation with the loan officers of the microfinance institutions during the Covid-19 crisis, the majority of these were subsequently repaid in full. It is important that borrowers recognise that microfinance is not a donation, but a way of helping people to help themselves.

In addition to current interest income, which has increased with a lagged effect in recent quarters, investments in microfinance institutions, which account for around 6.5% of the fund’s assets under management, also contributed positively. Lending in local currencies, most of which appreciated against the EUR and USD, delivered varying but overall clearly positive contributions. 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 rest of the year?

We expect the performance to remain positive for the rest of the year and see the annual result within a range of 2.5% to 4%. We continue to expect dynamic growth in the global microfinance market, which could be in the double-digit percentage range.

We see great potential, particularly in populous countries such as India, Indonesia, Vietnam, the Philippines, Central Asian countries, and the African continent. The elevated interest rate level in USD and EUR should also be reflected in ERSTE RESPONSIBLE MICROFINANCE with a certain delay, as many microfinance institutions will have to refinance at higher interest rates, or alternatively, interest rate adjustments will be made upwards for variable-rate loans to said institutions.

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.