Credit

Microfinance investment vehicles – Asset growth, performance and investment outlook

With 154 million customers worldwide, microfinance is one of the growth markets in financial services. According to microfinance rating agency MicroRate Incorporated and the Consultative Group to Assist the Poor, there are around 100 active private microfinance investment vehicles (MIVs) worldwide, managing $7 billion. But with a total of 1.5 billion potential customers, microfinance funding is far from its peak: Industry analysts see a potential funding gap of $265 billion.

MIV asset growth and composition through 2010

Assets managed by MIVs grew 12% in 2010, marking a significant slowdown from previous growth levels (+22% in 2009 and +50% annually from 2005 to 2008).

One of the main reasons for this slowdown in asset growth was the crowding-out of foreign capital by low-priced, domestic funding in key countries.

Geographic distribution of microfinance investments

The majority of microfinance investments (73%) went to Latin America, the Caribbean, Europe and Central Asia in 2010. While investments in South Asia remained at 2008 levels, the East Asia & Pacific region experienced a large growth rate of 30%, led by strong demand in the Philippines and Cambodia.

Investment outlook

MicroRate sees the slowdown experienced in 2009 and 2010 as a result of the financial crisis, which also helped investors to get a more realistic view of the returns and risks in microfinance and the effect of regulatory interventions.

MIV managers believe that the growth rate will rise to 30% – 35% again; however, a potential oversupply of capital in some markets could lead to strong competition with the known negative consequences in credit markets, like falling interest rates and rising default rates.

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Fixed-Income Investments

Permanent interest bearing shares (PIBS) – A return / risk analysis
Permanent interest bearing shares, or “PIBS”, are a niche segment of fixed-income investments, providing potential investors with a number of interesting and favorable properties, but also bearing very specific risks investors should be aware of.

PIBS are securities issued by building societies (financial institutions structured as mutual organizations, which are predominantly active in mortgage lending), usually at fixed, in some cases at floating interest rates. PIBS are classified as a form of risk capital, ranking below subordinated debt. For building societies, which cannot raise capital on the markets by issuing ordinary shares, PIBS are used in a way public limited companies would use preferred shares.

Although a particular issue of PIBS is callable early, all PIBS are generally permanent.

The PIBS market
In the UK (the most important market), 47 building societies hold assets of approximately £311 billion. There are around 20 million investing members and 2.5 million borrowing members.

Advantages
• Fixed coupon providing a yield higher than that of other corporate bonds.
• Voting right
• Diversification benefits in bond / fixed-income portfolios
• Special tax provisions

Risks
• Business risk
• Duration of issues
• Credit risk
• Callability
• Duration risk
• Liquidity risk
• Correlation
• Lack of a hedge

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Collectibles

Collectibles recap 2011 – A good year for art, a bad year for Bordeaux wines
Looking back at 2011, you will hardly find an equity investment strategy that delivered positive returns above inflation. In a financial year dominated by macro themes, most equity and hedge fund strategy indexes are down through November.

Time to look at how prices of the two most important collectibles categories art and fine wine developed this year. Indexes show mixed results and some surprises.

Art
The Mei Moses Art Index series, developed and calculated by Beautiful Asset Advisors LLC, tracks repeat sales auction prices. Results show that 2011 was a very good year for art investors.

The All Art Index was up 10.2% in 2011, clearly outperforming equities: The MSCI World Index lost 6% over the last twelve months, and the S&P 500 was nearly flat in the same period.

Fine wine
In contrast, the fine wine markets showed mixed results last year. Auction price indexes provided by London-based wine exchange Liv-Ex started a sharp decline in the second half of the year after steady gains in H1.

Autographs
Autographs are one of the more niche collectibles markets, and little is known about the investment potential of that niche. Paul Fraser Collectibles has recently launched an index listing the values of the 40 most regularly traded autographs.

The index gained 5.2% over the last year. Since 2000, the index is up 358%, or 14.84% per year, and performance ranged between +1182.1% and 95.5% for signed photos.

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SRI

Are SRI strategies (still) able to outperform the market?
Numerous investment managers are offering responsible investment products nowadays, claiming that a focus on SRI equity at least doesn’t harm financial performance, or that the strategy is even able to outperform non-SRI peers.

However, some questions remain: Were the strong stock returns actually caused by the companies’ responsibility standards, or by other underlyings or sources of risk that happen to be correlated with CSR factors? And if the causality assumption is true, why was the importance of CSR factors overlooked by the market in the past? Gabriel A Huppé’s paper “Alpha’s Tale: The Economic Value of CSR” (Source) tries to answer these questions.

Here is a summary of his results:

Causality vs. correlation with other performance drivers
CSR leaders (CSR+) produced significant 4.32% annualized alpha between 1992 and 2005, and negative, insignificant alpha afterwards, while CSR laggards (CSR-) produced negligible alpha during all periods.

Improved market efficiency
The author also identifies a learning process, as the analyst forecast error declines over the analyzed period.

Implications
The market’s improved pricing of CSR information will make it more difficult, if not impossible in the future to outperform with a long-only or long/short equity strategy based merely on CSR criteria. The paper suggests that in the future, SRI strategies will move away from security selection towards new approaches to asset allocation, like impact investing and a more important focus on corporate engagement.

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Collectibles

Research – Analysis of the factors determining fine wine price fluctuations
Although fine wine is known to be an interesting asset class, previous research has also shown that the broad market seems to be heavily affected by macroeconomic factors, resulting in strong swings of most wine indexes.

Earlier this year, IMF economists Serhan Cevik and Tahsin Saadi Sedik published a working paper designed to investigate the causes for the extreme fluctuations in commodity prices from 1990 to 2010.

The results can be summarized as:
• Impact of demand vs. supply on prices: Two-third of the price fluctuation in both commodities between 1998 and 2010 can be explained by changes in demand.

• Aggregate demand in advanced vs. emerging market economies: The results show that the impact of industrial output on fine wine prices is not only highly significant, but also five times higher in emerging economies than in advanced economies.

• Impact of global liquidity: The authors point out that this increase of excess liquidity in combination with low real interest rates likely magnified the price pressure stemming from supply / demand imbalances.

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