Florentine Arend The Impact of LC Investing on the Fund ... · LC MIVs well diversified and LC investments are smaller. 11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend

11. Oktober 2019

The Impact of LC Investing on the Fund

Performance of Microfinance Investment

Vehicles - An empirical Analysis

Master Thesis

Florentine Arend

11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend

1. Conducting Research

2. Real World and Research Question

3. Data

4. Methodology

5. Results

6. Interpretation

7. Reference List

Agenda

2

11. Oktober 2019

Real World Problem

TCX 8th Local Currency Lab, Florentine Arend

Concept + Theory

Hypothesis = Research Question

Methodology + Data

Testing Results

Interpretation

1. Conducting Research

3


2. Real World and Research Question

4

Currency-Induced

Credit RiskCurrency Risk

Is it better for MIVs’ portfolio performance to enable their borrowers to receive their investments in

LC instead of FC?

Possibility to free MIVs from both, Currency Risk and Currency-Induced Credit Risk

11. Oktober 2019

Data from the annual financial statements of 19 MIVs from 2011 to 2017:

15 from Europe, 4 from the USA

Variable Observations MeanStandard

DeviationMin Max

Fund Age [months] 88 69 46 4 231

Net Assets [USD million] 88 231.7 261.3 2.8 1,019.6

Portfolio Size [USD million] 88 227.3 296.1 4.5 1,131.6

LC Investing [%] 87 29.03 29.78 0.00 100.00

FC Investing [%] 87 70.97 29.78 0.00 100.00

Nr. of MFIs 86 41 34 1 149

Nr. of Countries 85 17 12 1 46

Net Income [USD million] 88 6.5 9.7 -6.9 34.6

Expenses [USD million] 88 12.6 23.2 0.1 149.6

TER [%] 88 6.81 7.60 0.25 31.06

Impairments [%] 74 2.25 4.02 0.00 20.01


3. Data: Summary Statistics

5

Wide range in terms of age, size, portfolio composition, performance

11. Oktober 2019

Fund Attribute Symbiotics (2017)1 Sample Data 2016

Nr. of MIVs 93 19

Total Net Assets 12.6 USD billion 4.0 USD billion

Fund Types [% of assets] 75% fixed income

15% hybrid

11% equity

99.5% fixed income

0.5% hybrid

0% equity

Average Total Net Assets 136 USD million 208 USD million

Average Total Portfolio 103 USD million 194 USD million

Average Local Currency Debt 31% 29%

Average Country Distribution of

Portfolio

Latin America 34%

Asia 27%

Africa 10%

Europe 7%

MENA 4%

Latin America 24%

Asia 29%

Africa 22%

Europe 13%

MENA 9%

Average Portfolio Reach Women 70%

Rural clients 55%

Women 66%

Rural clients 54%

Average Management Fees 1.9% 1.9%

Average Total Expenses Ratio 3.1% 6.5%


3. Data: Comparison to Population

6

Nearly 30% of the population’s total

net assets

Very large MIVs included in the

sample

1Symbiotics (2017): “2017 SYMBIOTICS MIV SURVEY - Market Data & Peer Group Analysis”, 11th edition, [online],

http://symbioticsgroup.com/wpcontent/uploads/2017/09/Symbiotics-2017-MIV-Survey-Abstract.pdf (accessed 17.09.2018)

11. Oktober 2019


Nr. of MIVs 93 19



15% hybrid

11% equity

99.5% fixed income

0.5% hybrid

0% equity





Portfolio

Latin America 34%

Asia 27%

Africa 10%

Europe 7%

MENA 4%

Latin America 24%

Asia 29%

Africa 22%

Europe 13%

MENA 9%


Rural clients 55%

Women 66%

Rural clients 54%





7

18 fixed income MIVs, 1 hybrid MIV

Inferences only about fixed income

MIVs

11. Oktober 2019


Nr. of MIVs 93 19



15% hybrid

11% equity

99.5% fixed income

0.5% hybrid

0% equity





Portfolio

Latin America 34%

Asia 27%

Africa 10%

Europe 7%

MENA 4%

Latin America 24%

Asia 29%

Africa 22%

Europe 13%

MENA 9%


Rural clients 55%

Women 66%

Rural clients 54%





8

Other attributes quite comparable

My sample: large fixed income MIVs

11. Oktober 2019

Local Currency Investing MIVs Foreign Currency Investing MIVs

Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max

LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231

Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6

Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6

Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19

Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46

Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6

Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6

Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85

Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


3. Data: Comparison of LC and FC sample MIVs

9




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


10

Symbiotics (2017): In 2016 on average only 31% of MIVs’ underlying assets in LC




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


11

• LC on average more than one year younger than FC investing MIVs

• Oldest LC investing MIV in the sample not even eight years old, the FC up to 19 years old



12

Mean of LC Investing of sample MIVs over time:

• Less observations of LC MIVs

• LC MIVs younger

> Trend towards LC?




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


13

• Size: FC MIVs on average around 4.5 x LC MIVs

• Diversification: Similar numbers of MIFs and countries in the portfolio

LC MIVs well diversified and LC investments are smaller




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


14

Net Income: FC MIVs on average around 4.5 x LC MIVs (same as size)

Size could matter for net income




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


15

Expenses: FC MIVs on average 3 x that of LC MIVs

➢ Not consistent with the differences in size and net income (4.5 x)

➢ Indicates that expenses do not increase proportionally to fund size

On average smaller LC MIVs generate relatively high expenses




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


16

TER: LC MIVs on average 2 x that of FC MIVs

• LC investments costlier?

• Economies of scale?

• Only few observations of LC MIVs?



17

Total expense ratio of LC and FC investing sample MIVs

Distribution of TER is quite similar

between local and foreign currency

MIVs

Graph does not indicate that LC

MIVs have on average higher TER




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


18

Impairments:

• LC MIVs on average 2 x that of FC MIVs

• LC MIVs maximum 20.01% vs. FC MIVs maximum 11.97%



19

Impairments of LC and FC investing sample MIVs

• Maximum of 20.01% of LC MIVs is

an outlier

• Distribution of TER is quite similar

between local and foreign currency

MIVs

Graph does not indicate that LC

MIVs have on average higher

impairments




LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80

Fund Age [months] 15 60 17 32 92 65 73 51 4 231




Nr. of MFIs 15 36 17 7 58 63 44 37 1 149

Nr. Countries 15 16 6 7 24 62 18 13 1 46




Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97


20

• Many more observations from FC MIVs

• LC MIVs much younger and smaller > could be connected

• LC MIVs better diversification, smaller investments

• Portfolio quality comparable


4. Methodology: Portfolio Performance and Investment Strategy

21

Is it better for MIVs’ portfolio performance to enable their borrowers to receive their investments in

LC instead of FC?

Portfolio Performance = Net Investment Income

Portfolio = LC Portfolio + FC Portfolio


4. Methodology: Portfolio Performance and Investment Strategy

22

Scatterplot of Net Investment Income and LC versus FC Portfolios

• LC Portfolios smaller

• But high Net Investment

Income with smaller LC

Portfolio


Estimates relationship between variables:

Dependent Variable = a Function of independent Variables

4. Methodology: Regression Analysis

23

How does the value of the dependent variable change when any one of the independent variables

is changed, while the other independent variables are held fixed?


𝑁𝑒𝑡𝐼𝑛𝑐𝑜𝑚𝑒𝑖𝑡 = 𝑎 + 𝛽1𝐿𝐶𝑖𝑡 + 𝛽2𝐹𝐶𝑖𝑡 + 𝛽3𝑙𝑜𝑔𝐴𝑔𝑒𝑖𝑡 + 𝛽4𝑇𝐸𝑅𝑖𝑡 + 𝛽5𝑙𝑜𝑔𝑀𝐹𝐼𝑠𝑖𝑡 + 𝑢𝑖 + 𝑣𝑖𝑡

4. Methodology: Regression Analysis

24

Control Variables

Fund Age Total

Expense

Ratio

Nr. of MFIs in

the Portfolio

Error TermForeign

Currency

Lending

Local

Currency

Lending

Net

Investment

Income

Dependent Variable = a Function of independent Variables

Net Investment Income = (Portfolio Size + Fund Age + Efficiency + Portfolio Diversity)


5. Results: Regression Results

25

Results of control variables are in line with former research and

my theory.

Pooled OLS Random Effects Model

LC Investing 0.088*** 0.091***

(0.013) (0.013)

FC Investing 0.022*** 0.023***

(0.002) (0.003)

Fund Age (log) -2.151** -2.501**

(1.028) (1.153)

TER -5.748 -7.160

(6.043) (6.899)

Nr. of MFIs (log) 2.107** 1.455

(0.842) (0.948)

Constant 1.093 4.496

(2.641) (2.836)

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Increasing LC investing by USD 1 million is associated with an

increase of net income by USD 91 thousand, holding all other

variables constant.

Holding all other variables constant, an increase of FC investing

by USD 1 million is associated with an increase of net income by

USD 23 thousand.

11. Oktober 2019

Graphing the coefficients of LC and FC investing in added variable plots


5. Results: Graphically comparing LC with FC

26

LC steeper

LC investing is associated with a higher

rise in net investment income than FC

investing.

Is it better for MIVs’ portfolio performance to enable

their borrowers to receive their investments in LC

instead of FC?


6. Interpretation: Impact Theory

27

Local Currency

Performance

Management

Borrower

Borrower

Borrower

Borrower

Borrower Borrower

Impairments

• More knowledge

• More information

• Stricter requirements

• Closer monitoring

Improved skills

• Smaller loans

• Large number of borrowers

• Large number of countries

Good diversification

No currency-induced

credit risk

Less impairments

Country A

Country B

Country C

Improvement through learning effect of

management

Improvement through portfolio

attributes

11. Oktober 2019

Thank You.

TCX 8th Local Currency Lab, Florentine Arend 28


Symbiotics (2017): “2017 SYMBIOTICS MIV SURVEY - Market Data & Peer Group Analysis”, 11th

edition, [online], http://symbioticsgroup.com/wpcontent/uploads/2017/09/Symbiotics-2017-MIV-

Survey-Abstract.pdf (accessed 17.09.2018)

7. Reference List

29

Documents

Florentine Arend The Impact of LC Investing on the Fund ... · LC MIVs well diversified and LC investments are smaller. 11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend