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Figure 6 Figure 7 WSAS MFI SVIX - Levels, 2004-2008 WSAS MFI SVIX - Value Changes % By Year 450 400 350 300 250 200 150 100 50 2004 2005 2006 2007 2008 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% 2005 2006 2007 2008 N SVIX 2005 N SVIX 2006 N SVIX Composite N SVIX 2005 N SVIX 2006 N SVIX Composite Source: Wall’s Street Advisor Services Source: Wall's Street Advisor Services 2005’s book values at the end of 2008, Latin America/ Caribbean held 44 percent; East Europe/Central Asia held 25 percent; Africa had 19 percent; and Asia 15 percent. MFI SVIX 2006 Highlights VËËÔË ÄË wÁË ¤Ë WÖÍÁjÄË ÝjÁjË ÜÜjaË ®Ô¤Ë ÄË selected for coverage based on 2006 data, and eight wÁË ÍjË ÔååyË Ë .jjWÍË MjW?ÖÄjË ÍjßË ?aË jÝË ÜjÄÍÁË7Í?~jÄËwÁjaËaÖÁ~ËÔååy¯Ç VËËÔÉËwËÍjËÜjÄÍÁË7Í?~jÄË¬ÁaÖWjaË¬ÄÍÜjËÁjÍÖÁÄ^Ë ÍÖ~ËÄÞË¬ÁaÖWjaËÍÁjjßj?ÁËWÖÖ?ÍÜjËWÁj?ÄjÄËË shareholder values of under 10 percent; VËË0jË Ä~j?Á~jÄÍË WÁj?ÄjË Ë 7åÉË Ü?ÖjË Ý?ÄË wÁË ..Ë WÁw?WjË Ía±Ë ®a?¯q?Ë ÄÍ?~~jÁ~Ë ÍÁjjßj?ÁË WÖÖ?ÍÜjË WÁj?ÄjË wË Ô^yÉÉË ¬jÁWjÍË ®¤Ë ¬jÁWjÍË -¯±ËWajÍ?ß^Ë..Ë WÁw?WjËÄË¬?~Ë?Ë+#Ë Ëa?ËÄjÍjËËÖßËÔå¤åÇ VËË.?ÁjajÁË7?ÖjÄËajWÁj?ÄjaËÜjÁËÍjË¬jÁaËwÁË-j¬Ë ?Ë®jß?¯ËMßËÔÉË¬jÁWjÍ^ËwÁË0?jjÁË WÁw?WjË ?Ë®+?ÄÍ?¯ËMßËÏÔË¬jÁWjÍ^Ë?aËwÁËÍjËjÝË7åÉËwË +!Ë WÁw?WjË®+?¬Ö?Ë!jÝËÖj?¯ËMßËÉÉË¬jÁWjÍÇË VËË0jË Ä~j?Á~jÄÍË 7ÔååÉË Ë ÍjË Ë .79Ë ÔååÉË Ý?ÄË wÁË?WjÁ?Ëaj¬jajW?Ë® jÞW¯^Ë?ÍËÏåË¬jÁWjÍË of the index’s shareholder value at the start of the series in 2005, and it produced a cumulative 214 percent WÁj?ÄjËË7ÔååÉËÄ?ÁjajÁËÜ?Öj^ËaÖjË?Á~jßËÍËÍjË ÄjÖÍË ¬ÁWjjaÄË Áj?ãjaË aÖÁ~Ë Ôååo±Ë 0ÄË ÄjÖÍË ÁjÜjÄË jÞW?Ë Áj¬ÁjÄjÍ?ÍË wÁË ÍjË Ë .79Ë ÔååÉËwÁËÔååËwÁÝ?ÁaÇË?a VËË0ÝËÍjÁË Ë.79ËÔååÉËWÄÍÍÖjÍÄËÄ?ÝËÍjÁË7åÉË ÜjÄÍÁÄËÄjËÖÍËaÖÁ~ËÔååoq+jÁÖ¾ÄË ?WËajË0Á?M?Ë ®Ü?Ë?ËÍÁ?ajËÄjËÍË.WÍ?M?^Ë¬ÁaÖW~Ë?ËÍÁjjßj?ÁË WÁj?ÄjË wË Ô¤åË ¬jÁWjÍ¯^Ë ?aË 2~?a?Ë WÁw?WjË Ía±Ë®Ü?Ë?ËÍÁ?ajËÄ?jËÍËÖÍßË ?Ëjß?^Ë¬ÁaÖW~Ë?Ë ÍÁjjßj?ÁËWÁj?ÄjËwËÏÏyË¬jÁWjÍ¯± MFI SVIX Composite Highlights 0jÄjË ~~ÍÄË ?ÁjË MÁjw^Ë ÄWjË ÍjÄjË Áj¬ÁjÄjÍË ?Ë a?Á Ýj~ÍjaËMjaËwËÍjË?Ö?Ë Ë.79ËÄjÁjÄ¾ËÁjÄÖÍÄ±Ë0ÁÖ~ÖÍË ÍjË¬jÁa^Ë Ë.79ËÔååyËÁj¬ÁjÄjÍÄË?ÁÖaËÈyË¬jÁWjÍËwËÍjË ¬ÄÍj¾ÄË .?ÁjajÁË 7?ÖjÇË a?Ë ?aË ÍjË ?Á~jÄÍË ÖMjÁË wË Ë ÜjÄÍÁË 7Í?~jÄË Áj¬ÁjÄjÍjaË ®j~Í¯^Ë wÝjaË MßË +jÁÖË ®ÄjÜj¯^Ë?Ma?Ë®wÖÁ¯Ë?aË jÞWË®ÍÁjj¯^ËÝjËÄjÜjËWÖ- ÍÁjÄË?aËÍÝË7ÄËÁj¬ÁjÄjÍja^Ë?~ËyËÜjÄÍÁË7Í?~jÄËwÁË y¤Ë Ä±Ë ßËÍjËjaËwËÔååo^ËÍjËWMjaËMËÜ?ÖjÄËwËÍjË ¬ÄÍj¾ÄË yË 7ÄË Áj¬ÁjÄjÍjaË ?MÖÍË g¤±Ï|Ë M^Ë Ö¬Ë wÁË Ôååy¾ÄËWMjaËMËÜ?ÖjÄËwËgå±É¤ËM± .WjË¬jÁajaËMËÜ?ÖjËÁj¬ÁjÄjÍÄËjßËÄÍËÜjÄÍjaËËÍjË Ä^ËÍËÄË?Ëj?ÄÖÁjËwË»jßË?ÍËÁÄ^¼Ë?aËÍËÄËÍjË MjÄÍËj?ÄÖÁjËwËajÞËaÜjÁÄwW?Í±Ë0jËÍ¬ËwÜjËWÖÍÁjÄË ËÍÄËÁj~?ÁaË?ÍËÍjËjaËwËÔååoËÝjÁjË jÞWË®¤oË¬jÁWjÍ¯^Ë jß?Ë®¤|Ë¬jÁWjÍ¯^Ë+jÁÖË®¤åË¬jÁWjÍ¯^Ë?Ma?Ë®ÈË¬jÁWjÍ¯Ë ?aË Ö~?Á?Ë®yË¬jÁWjÍ¯^ËwÁË?ËWMjaËy|Ë¬jÁWjÍËÄ?ÁjËwË MËÜ?Öj±Ë0ÄËÝ?ÄËÜjÁßËÄ?ÁËÍËÔååy¾ÄËyÉË¬jÁWjÍËÄ?ÁjËMßË ÍjËÄ?jËwÜjËWÖÍÁjÄ^ËÍÖ~ËÝj~ÍÄËÄwÍjaËÄ~wW?ÍßËË ÄjËW?ÄjÄË®jß?ËÖ¬ËwÁË|±yË¬jÁWjÍËÍË¤|Ë¬jÁWjÍ^Ë jÞWË aÝËwÁËÔÉË¬jÁWjÍËÍË¤oË¬jÁWjÍ^ËwÁËÄÍ?Wj¯± ?ÄÍß^Ëa?Ë ÄË¬ÁaÖWjaËÄjËÄ¬jWÍ?WÖ?ÁË~?ÄËwÁË ÜjÄÍÁÄËwËÔååyË?aËÔååÉË®?Á~jßËwÁËW?¬Í?ËjÞ¬?ÄÄË ?ÍË ~Ë ÖÍ¬jÄË ÍË MË Ü?ÖjÄ¯^Ë MÖÍË Íß¬W?ßË wÁË ÝË 2±.±Ëa?ÁËÄÍ?ÁÍ~Ë¬ÍÄ±Ë Closing Comments WÁw?WjË ÄË WÁj?Ä~ßË ?ÍÍÁ?WÍ~Ë ÍjË ÍjÁjÄÍË ?aË ÜjÄÍjÍËwËÄÍÍÖÍ?ËÍjÁ?Í?ËjÖÍßËÜjÄÍÁÄ^ËwÁË ÍÄË¬ÍjÍ?Ë?ÄË?ËÄW?ßËÁjÄ¬ÄMj^Ë?ÄÄjÍaÜjÁÄwß~Ë?aË ¬ÁwÍ?MjË?ÄÄjÍËW?Íj~Áß±Ë0jË8..Ë Ë.?ÁjajÁË7?ÖjË ajÞjÄ^ËÝWËÄËw?ÁËMj?ÁËÖÍËÍjË¬ÁwÍ?MjË?Ä¬jWÍËwËÍjË ?ÄÄjÍË W?Íj~Áß^Ë Áj¬ÁjÄjÍË ÍjË wÁÄÍË WÄÄÍjÍË j?ÄÖÁjÄË wË the financial value shareholders received over time across a MÁ?aßËaÜjÁÄwjaËÄjÍËwË Ä± ÍË ÄË ¬ÁÍ?ÍË ÍË ÁjW~ãjË Í?ÍË ÍjË j?ÄÖÁjjÍÄË wË W?~jÄËË» Ë.?ÁjajÁË7?Öj¼Ë?ÁjËjWjÄÄ?ÁßË?¬¬ÁÞ- ?Íj±Ë0jÁjË?ÁjË?ßË~aËÁj?ÄÄËwÁËÍÄqÍjË?MÄjWjËwË complete information about shareholder actions, the neces- ÄÍßËwËÄjË?ÄÄÖ¬ÍÄË?MÖÍËÍ~ËwËÍÁ?Ä?WÍÄ^ËÍjË www.journalofindexes.com January / February 2011 47
aggregation and resultant “smoothing” of individual transactions, and the use of exchange rates to translate inputs and results into U.S. dollars that may not have occurred in reality are principal among these. That’s the nature of any private equity investment, and microfinance investments at this point are largely private transactions. But the series does provide benchmarks of MFI shareholder value performance whose results will approximate what investors achieved in the past across a fairly representative and diversified set of MFIs , and provide the basis for accumulating historical performance characteristics of the important and fast-growing niche asset category, MFI equity. As microfinance becomes a more widely practiced and commercially funded business activity, and as more annual indexes are added, the indexes will become increasingly important to investors looking to benchmark their portfolios’ performance, and to potential investors who want to know MFI equity’s performance characteristics. Endnotes 1 See Global Pensions, “CalSTRs explores microfinance,” April 6, 2010. http://www.globalpensions.com/global-pensions/news/1599783/calstrs-explores-microfinance 2 There is a huge and rapidly growing body of literature about the sources and evolution of microfinance and of MFIs. Interested readers can start at www.microfinancegateway.com. 3 Good starting points for this subject are “The Growth of Commercial Microfinance: 2004-2006” (September 2006) and “Characteristics of Equity Investments in Microfinance” (April 2004), by Elisabeth Rhyne & Brian Busch (2006), and by Rhyne and James Kaddaras (2004), respectively, for the Council of Microfinance Equity Funds. See http://www.cmef. com/Page.aspx?pid=1687 for access to these reports. 4 See MicroRate, “The State of Microfinance Investment” at http://microrate.com/wp-content/uploads/2009/08/2009_MIV_Survey_Presentation_Final.pdf . See also the series of survey reports released by CGAP, which show similar trends and volumes. Most recent was The CGAP 2009 MIV Survey http://www.cgap.org/gm/document-1.9.38774/CGAP%20MIV%20Survey%20-%20Results%20Presentation.pdf. 5 The Microfinance Information Exchange, Inc. (MIX) is the world’s leading source of data and research on MFIs. The MIX Market (www.mixmarket.org) and its research sister site www.themix.org are MIX’s dissemination points for its work. MIX Provider provides a great range of data and research products on MFI performance. See particularly MIX’s Trend Lines reports for time series’ data on the medians for top (75th) quartile, bottom (25th) quartile, and overall results. As for actual results, the latest available median RoE results in U.S. dollar terms for the top quartile performers of MFI Banks was 16.2 percent (2005), 20.0 percent (2006), 18.2 percent (2007 – latest available 6-30-2010). NBFIs achieved similar results. See www.themix.org/sites/default/files/MBB%2018%20-%20Before%20the%20Crisis.pdf for the most recent report. 6 See Forbes, “The World’s Top 50 Microfinance Institutions,” Dec. 20, 2007. http://www.forbes.com/2007/12/20/top-philanthropy-microfinance-biz-cz_1220land.html 7 See A. Gonzalez/MIX, “Resilience of Microfinance Institutions to National Macroeconomic Events: An Econometric Analysis of MFI Asset Quality,” http://www.themix.org/ publications/resilience-microfinance-institutions-macroeconomic-events; Krauss & Walter, “Can Microfinance Reduce Portfolio Volatility?” http://papers.ssrn.com/sol3/papers. cfm?abstract_id=943786 and also Galema et al. “International Diversification and Microfinance,” http://www.microfinancegateway.org/gm/document-1.9.34326/56904.pdf. 8 Much has been written recently about “The battle for the soul of microfinance,” and the topic promises to be a continuing debate. Interested readers can start with The Financial Times article, “The battle for the soul of microfinance” (Dec. 6, 2008). http://us.ft.com/ftgateway/superpage.ft?news_id=fto120520081936136455 . 9 The microfinance industry is working furiously through a stakeholder task force to develop “MFI social performance” standards, and to have the standards widely adopted and reported upon by MFIs. Check the Social Performance Task Force website (www.sptf.info) for more on this initiative, and the related MIX website that is accumulating MFI social performance reports – www.themix.org/standards/sp-reports. MIX also has applied its own measures of the “balanced scorecard” on MFI operations, in its series of MIX MFI Global 100 Composite rankings. These can be seen at www.themix.org/publications/2009-mix-global-100-composite. 10 For explanations and details about MIX’s “Diamonds for Disclosure” system, see www.mixmarket.org/faq/diamond-rankings. WSAS may seek financial statements from another public source, such as the MFI’s own website, if for some reason such information is not found in MIX Market. 11 WSAS compiles records of terms and amounts of publicly announced equity investments (and divestments) in MFIs, as well as records of FY year-end shareholdings in MFIs to “triangulate” information for use in determining MFI cohort results. 12 WSAS uses MIX’s acceptance of an institution as an MFI as sufficient to include it as an MFI in the WSAS MFI SVIX Indexes, assuming it meets the other index inclusion requirements. Roundtable continued from page 35 JOI: What makes a weighting methodology superior? Is it just performance? Woods: Performance, in the broadest sense: There will be periods when indices that use alternative weighting schemes do underperform, but equally there will be periods when they outperform their cap-weighted equivalents. Generally they have very respectable performance over extended time periods. They are less susceptible to bubbles, and most are designed to have a broader representation of stocks than their cap-weighted equivalents. JOI: In an era of rising correlations, can diversifying your weighting methodology have any beneficial effect on portfolio performance statistics? Woods: I would say diversifying your weighting methodology is a good thing. Certainly not converting completely to an alternative weighting scheme, but an allocation to it will likely improve portfolio performance. But I’m not sure that the rising correlations are the connection there. Just for the sake of illustration, one of the reasons these indices can outperform even in sideways markets is that they rebalance more frequently and, in effect, because they’ll be rebalancing to fixed weights, they’ll sell stocks that have gone up and buy stocks that have gone down, so they’re capturing the volatility in markets. People call that volatility pumping. You get an increase in performance from capturing that volatility, and you partly detract from that with the extra transaction cost you’re incurring. But that’s not due to rising correlations; it’s just another reason why these indices in certain market regimes will outperform cap-weighted equivalents. We certainly know they don’t outperform in all market regimes. 48 January / February 2011
Page 1 and 2: Improved Beta? Noël Amenc, Felix G
Page 3 and 4: Contributors Noël Amenc Noël Amen
Page 5 and 6: FREE SUBSCRIPTION OFFER! The Journa
Page 7 and 8: David Smith Publisher dsmith@fa-mag
Page 9 and 10: Editor’s Note Considering Alterna
Page 11 and 12: Improved Beta? A comparison of inde
Page 13 and 14: volatility and correlation (for min
Page 15 and 16: Figure 2 Risk/Reward Difference Com
Page 17 and 18: show marginal statistical significa
Page 19 and 20: Figure 5 Appendix: Risk/Reward Diff
Page 21 and 22: The Evolution Of Equal Weighting Ad
Page 23 and 24: Figure 3 1 0.8 0.6 0.4 0.2 0 Figure
Page 25 and 26: Russell’s sector equal-weighted i
Page 27 and 28: structures in the U.S. large- and s
Page 29 and 30: negative alpha is observed for both
Page 31 and 32: The Weight Debate A roundtable 30 J
Page 33 and 34: for perceived growth is constantly
Page 35 and 36: isks and active risks in active str
Page 37 and 38: Core Vs. Blend Index investing in t
Page 39 and 40: that given size range. In contrast,
Page 41 and 42: Benchmarking Microfinance Equity In
Page 43 and 44: Figure 1 Illustration: Determining
Page 45 and 46: Figure 3 Establishing MFI SVIX Annu
Page 47: Figure 5 WSAS MFI SVIX Series - Bas
Page 51 and 52: Talking Indexes Sorting And Digging
Page 53 and 54: News Indexes Regain Edge Over Activ
Page 55: News version of it, which excludes
Page 58 and 59: policies won’t change, Guggenheim
Page 60 and 61: Global Index Data Selected Major In
Page 62 and 63: Morningstar U.S. Style Overview Jan
Page 64 and 65: Exchange-Traded Funds Corner Larges
Page 66 and 67: INVESTING IN THE FUTURE OF THE U.S.
Page 68: RYDEX EQUAL WEIGHT ETFs Find out wh

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