MICROFINANCE PAPER WRAP-UP: Investing into Microfinance Investment Funds, by Karel Janda and Barbora Svárovská

Written by Karel Janda and Barbora Svárovská, published by the Institute of Economic Studies, Faculty of Social Sciences Charles University in Prague, 2009, 35 pages, available at:

http://www.microfinancegateway.org/gm/document-1.9.41460/Investing%20into%20Microfinance%20Investment%20Funds.pdf

This paper aims to measure the performance of microfinance investment vehicles (MIVs) in terms of risk and returns to investors. The study included eleven MIVs (in the form of mutual funds) and their sub-funds that publish data monthly. The authors describe the funds as “commercial MIVs that focus mainly on financial objectives while their social and development contribution is a sort of value added that sets these funds apart of traditional mutual funds.” The funds primarily invest in debt instruments with maturities of no more than five years and have more than half of their investments in the microfinance sector. The period for the study is January 2006 to March 2009, which notably includes a major portion of the global financial crisis.

The mean monthly return on assets (based on net asset values per share) for the MIVs was always modest but positive. The average mean monthly return for all of the MIVs was 0.36 percent. This compares favorably to the Morgan Stanley Capital International (MSCI) World Index, which measures the performance of developed country equity markets (-0.99 percent), and the MSCI Emerging Markets Diversified Financials Index, which measures equity performance in emerging markets (-0.40 percent). It also compares favorably to the J.P. Morgan Emerging Bond Index (EMBI+) (0.27 percent) and the 4-week U.S. Treasury Bill, an asset that is considered to be risk-free (0.26 percent). The MIVs, however, did not perform as well as the Markit iBoxx USD Overall Index, which consists of corporate bond issues and bonds issued by the U.S. government and government-sponsored agencies (0.41 percent). Lastly, it is important to remember that the global financial crisis had a great, negative effect on emerging and developed equity markets, as well as emerging bond markets. Though MIVs in this study saw increased annual returns each year from 2006 to 2008, the authors point out that these MIVs could suffer from the crisis further into 2009 and 2010.

The MIVs also compared favorably to the above-mentioned benchmarks in terms of risk. In terms of total risk, measured by standard deviation in monthly returns, the MIVs had a lower mean (0.32 percent) than all other indices except for the risk-free Treasury Bills (0.15 percent). There was increased volatility for the benchmarks in monthly returns starting in 2008 due to the financial crisis, but the MIVs did not seem to experience this, though the earlier warning about possible repercussions after March 2009 again applies. Additionally, the authors find that there is no positive correlation between mean MIV returns and either equity market index, indicating that MIV investments may serve well in portfolio diversification. The same cannot necessarily be said for the correlation with fixed-income indices, as there were not enough statistically significant results to make a conclusion in this regard.

Lastly, the authors compare MIV performance to the same indices using a risk-adjusted monthly return measurement. Including only statistically significant results, MIVs outperformed the other indices by 14-16 basis points. However, during times of positive global market sentiment (pre-financial crisis), MIVs lagged behind the MSCI World Index (other indices were not included in this regression).

By Christopher Maggio, Research Assistant

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