Triodos Microfinance Fund has a relatively high risk profile, mainly due to its sector-specific focus. The main risks that have been identified are described in detail in the fund’s prospectus. Some of the risks are highlighted below.
Country and political risk
Triodos Microfinance Fund invests in countries that may be subject to substantial political risks, countries that might be in an economic recession, with perhaps high and rapidly fluctuating inflation, countries that often have a poorly developed legal system and countries where the standards for financial auditing and reporting may not always be in line with internationally accepted standards.
To limit the country risk, Triodos Microfinance Fund has set the upper limit for investments in any country at 20% of its assets. The country with the highest exposure is currently Cambodia, where 13.6% of the fund´s assets are invested. This is less than in 2013, as a result of the partial exit of ACLEDA Bank. Country risks are mitigated by diversifying the geographical exposure across a larger number of countries. In 2014, Triodos Microfinance Fund added eight new countries to the portfolio. The fund noticed a general increase in country risk in the Caucasus and central Asia as a side effect of the Ukraine-Russia crisis. The politically heightened attention for the role of foreign human rights NGOs in Azerbaijan has led to an investigation and blocking of the accounts of one of the MFIs in the portfolio. The portfolio management team is following the situation closely and has adjusted the outlook and exposure limits for countries in the region.
Credit risk remains the most fundamental risk to which the lending industry in general and the microfinance industry in particular is exposed. Portfolio At Risk (PAR) ratios (the percentage of non-performing loans in the total loan portfolio) of MFIs in the Triodos Microfinance Fund portfolio are closely monitored on a continuous basis. At fund level, the weighted average PAR over thirty days stood at 3.5% at year-end 2014, the same as at year-end 2013.
Triodos Microfinance Fund invests in assets that are not listed on a stock exchange and that are relatively illiquid. In view of its open-end structure (enabling subscription and redemption of shares on a monthly basis), this could potentially lead to a situation in which the fund needs to temporarily close for redemptions. There is also the risk that at some point in time the fund may be unable to obtain sufficient resources to fulfill its financial obligations. This risk is mitigated by maintaining at least 10% of its capital in liquid assets or arrange sufficient other guarantees. The fund conducts regular analysis on the maturity of the debt portfolio. The graph below shows that on December 31, 2014, the 70.9% of the value of the outstanding loan portfolio will be due within 30 months.
Maturity of the funds' debt portfolio (as per December 31, 2014)
Triodos Microfinance Fund is exposed to possible losses as a result of fluctuations in the value of or income from assets denominated in foreign currencies. The fund may invest up to 90% of its total assets in non-EUR denominated investments with a maximum exposure of 60% in unhedged local currency investments (including the equity exposures). Triodos Microfinance Fund manages its currency exposure risk by hedging its net foreign currency exposure to the extent deemed appropriate and possible. As hedging is not always possible or cost-efficient, this implies a risk of additional volatility in case of large fluctuations on the international foreign exchange market. At year-end 2014, 31.7% (2013: 20.7%) of the fund’s net assets were invested in local currencies, while 17.0% (2013: 10.5%) of the fund’s net assets were exposed to open currency risk. The share classes denominated in sterling are hedged against the euro. In the last quarter of 2014, the US dollar and emerging market currencies were subject to sharp fluctuations that affected the fund’s performance. All major currencies that the fund has invested in appreciated against the euro in 2014. The exchange rate gains on the investment portfolio were largely nullified by the losses on hedging contracts.