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Microfinance, generally understood to mean the provision
of financial services (particularly microloans)
to poor people in developing economies, is increasingly
attracting international institutional investor attention
as an alternative asset investment opportunity, particularly
as a socially responsible and financially attractive way to
promote human well-being. The California State Teachers’
Retirement System’s (CalSTRS) proposal to include microfinance
as an eligible asset in its alternative assets allocation
is just one recent example of this trend. 1
Yet there has been no consistent measure of performance
of equity invested in the providers of microfinance. This article
outlines the growing need for such measures and the approach
used to create the first indexes for this new asset category—the
WSAS Microfinance Institutions Shareholder Value Indexes.
The Evolution Of Microfinance Institutions 2
Specialized financial institutions that provide microfinance
services, generically called ”microfinance institutions”
(MFIs), arose from humanitarian efforts to meet the financial
needs—principally the credit needs—of very poor people in
developing economies. Grameen Bank in Bangladesh is one
widely recognized name in this regard.
MFIs take many possible legal forms, including nonprofit,
nongovernmental organizations (NGOs); member-owned
cooperatives/credit unions; nonbank financial institutions;
and licensed, deposit-taking banks, with the latter two forms
most commonly being shareholder-owned.
Experience has shown that MFIs, to be truly effective in
the long term in meeting the needs of their communities,
need to be financially self-sustaining; that is, they need to
produce a financial surplus to their operating and funding
costs. And to truly scale up operations, they need to tap commercial
sources of funding; in particular, equity finance.
Equity Investment In MFIs 3
While there were several far-sighted institutional equity
investors in MFIs before 1995, the period since 2004 has
seen the start of a boom of equity investment in MFIs that
shows signs of only accelerating.
Investments in specialized funds and investment vehicles
are the principal channels for this. A survey of the microfinance
funds industry by the MFI rating and information
services company MicroRate, using 2008 data for 68 microfinance
investment vehicles (MIVs) 4 —which invest the pooled
assets of multiple investors with MFIs—found that such MIVs
had about $490 million in equity investments, compared with
about $78 million in equity from specialized MIVs in 2005.
The Consultative Group to Assist the Poor (CGAP), using
different definitions of MIVs/investors (including development
finance institutions not covered by MicroRate), found
about $1.5 billion invested by the end of 2008. This compares
with CGAP’s findings of $370 million at the end of 2006.
There are a number of reasons for this trend, including:
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(ROE) performance of high-profile MFIs—top-quartile performers
turning in annual ROE of around 20 percent; 5
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and “Bottom of the Pyramid” business opportunities
in developing economies, such as the UN’s Year of
Microcredit (2005), the awarding of the Nobel Peace
Prize to Dr. Muhammad Yunus and Grameen Bank
(2006), and the favorable feature articles on MFI results
in Forbes magazine (2007); 6
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as Compartamos Banco and Financiera Independencia
(Mexico, 2007); and
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ones grow, new ones are launched, and nonprofits are
“transformed” into shareholder types), resulting in
larger investment opportunities.
Further, studies have indicated that the recent financial
results of MFIs’ operations tend to be largely insulated from
domestic economic downturns. Moreover, their financial
results have been largely uncorrelated to traditional asset
classes, suggesting MFI equity investments can help diversify
the sources of risk and return for broad-based portfolios. 7
The microfinance-specific trends have been supported by
broader trends in the capital markets. Microfinance opportunities
exist as a bridge of two traditional asset classes—
emerging markets and private equity—and both of those
market segments have been performing very well recently.
In short, it seems equity investors could “do well while
doing good” by investing in carefully selected MFIs—or
simply do well financially, if doing good wasn’t an investment
requirement. Their experiences in emerging markets
public and private equity make them willing to dip their
toes in the MFI equity pool.
Yet the performance of funds—particularly when active
investment decisions are involved—presents some problems if
you are looking to use the data as a way to measure an asset category’s
performance or to make asset allocation decisions. Fund
performance reflects the impacts of effects like fund manager
selection risk, “cash drag” and funds closing to new investment.
Also, with microfinance equity investing in particular, there is
a very small set of funds with very short operating histories.
Microfinance equity investment needs a benchmark of the performance
of the ultimate source of fund performance; in other
words, indexes of MFI equity performance.
Benchmarking MFIs’
‘Shareholder Value’ Performance
The Wall’s Street Advisor Services MFI Shareholder Value
Indexes (WSAS MFI SVIX) are the first sample-consistent
measures of changes over time in the value of shareholders’
investments in the equity of a broad sample of microfinance
institutions. No other such measures exist.
The WSAS MFI SVIX consist of a series of annual “Vintage
Indexes” that measure changes to shareholders’ value by
year of inception of their investment in a set of MFIs), and a
Composite Index that blends investment results across the
annual Vintage Indexes.
The MFIs selected for inclusion in the indexes are
screened for investor equity investment activity, financial
transparency and geographic spread, all characteristics of
interest to investors.
www.journalofindexes.com January / February 2011
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