11. Oktober 2019
The Impact of LC Investing on the Fund
Performance of Microfinance Investment
Vehicles - An empirical Analysis
Master Thesis
Florentine Arend
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
1. Conducting Research
2. Real World and Research Question
3. Data
4. Methodology
5. Results
6. Interpretation
7. Reference List
Agenda
2
11. Oktober 2019
Real World Problem
TCX 8th Local Currency Lab, Florentine Arend
Concept + Theory
Hypothesis = Research Question
Methodology + Data
Testing Results
Interpretation
1. Conducting Research
3
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
2. Real World and Research Question
4
Currency-Induced
Credit RiskCurrency Risk
Is it better for MIVs’ portfolio performance to enable their borrowers to receive their investments in
LC instead of FC?
Possibility to free MIVs from both, Currency Risk and Currency-Induced Credit Risk
11. Oktober 2019
Data from the annual financial statements of 19 MIVs from 2011 to 2017:
15 from Europe, 4 from the USA
Variable Observations MeanStandard
DeviationMin Max
Fund Age [months] 88 69 46 4 231
Net Assets [USD million] 88 231.7 261.3 2.8 1,019.6
Portfolio Size [USD million] 88 227.3 296.1 4.5 1,131.6
LC Investing [%] 87 29.03 29.78 0.00 100.00
FC Investing [%] 87 70.97 29.78 0.00 100.00
Nr. of MFIs 86 41 34 1 149
Nr. of Countries 85 17 12 1 46
Net Income [USD million] 88 6.5 9.7 -6.9 34.6
Expenses [USD million] 88 12.6 23.2 0.1 149.6
TER [%] 88 6.81 7.60 0.25 31.06
Impairments [%] 74 2.25 4.02 0.00 20.01
TCX 8th Local Currency Lab, Florentine Arend
3. Data: Summary Statistics
5
Wide range in terms of age, size, portfolio composition, performance
11. Oktober 2019
Fund Attribute Symbiotics (2017)1 Sample Data 2016
Nr. of MIVs 93 19
Total Net Assets 12.6 USD billion 4.0 USD billion
Fund Types [% of assets] 75% fixed income
15% hybrid
11% equity
99.5% fixed income
0.5% hybrid
0% equity
Average Total Net Assets 136 USD million 208 USD million
Average Total Portfolio 103 USD million 194 USD million
Average Local Currency Debt 31% 29%
Average Country Distribution of
Portfolio
Latin America 34%
Asia 27%
Africa 10%
Europe 7%
MENA 4%
Latin America 24%
Asia 29%
Africa 22%
Europe 13%
MENA 9%
Average Portfolio Reach Women 70%
Rural clients 55%
Women 66%
Rural clients 54%
Average Management Fees 1.9% 1.9%
Average Total Expenses Ratio 3.1% 6.5%
TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison to Population
6
Nearly 30% of the population’s total
net assets
Very large MIVs included in the
sample
1Symbiotics (2017): “2017 SYMBIOTICS MIV SURVEY - Market Data & Peer Group Analysis”, 11th edition, [online],
http://symbioticsgroup.com/wpcontent/uploads/2017/09/Symbiotics-2017-MIV-Survey-Abstract.pdf (accessed 17.09.2018)
11. Oktober 2019
Fund Attribute Symbiotics (2017)1 Sample Data 2016
Nr. of MIVs 93 19
Total Net Assets 12.6 USD billion 4.0 USD billion
Fund Types [% of assets] 75% fixed income
15% hybrid
11% equity
99.5% fixed income
0.5% hybrid
0% equity
Average Total Net Assets 136 USD million 208 USD million
Average Total Portfolio 103 USD million 194 USD million
Average Local Currency Debt 31% 29%
Average Country Distribution of
Portfolio
Latin America 34%
Asia 27%
Africa 10%
Europe 7%
MENA 4%
Latin America 24%
Asia 29%
Africa 22%
Europe 13%
MENA 9%
Average Portfolio Reach Women 70%
Rural clients 55%
Women 66%
Rural clients 54%
Average Management Fees 1.9% 1.9%
Average Total Expenses Ratio 3.1% 6.5%
TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison to Population
7
18 fixed income MIVs, 1 hybrid MIV
Inferences only about fixed income
MIVs
11. Oktober 2019
Fund Attribute Symbiotics (2017)1 Sample Data 2016
Nr. of MIVs 93 19
Total Net Assets 12.6 USD billion 4.0 USD billion
Fund Types [% of assets] 75% fixed income
15% hybrid
11% equity
99.5% fixed income
0.5% hybrid
0% equity
Average Total Net Assets 136 USD million 208 USD million
Average Total Portfolio 103 USD million 194 USD million
Average Local Currency Debt 31% 29%
Average Country Distribution of
Portfolio
Latin America 34%
Asia 27%
Africa 10%
Europe 7%
MENA 4%
Latin America 24%
Asia 29%
Africa 22%
Europe 13%
MENA 9%
Average Portfolio Reach Women 70%
Rural clients 55%
Women 66%
Rural clients 54%
Average Management Fees 1.9% 1.9%
Average Total Expenses Ratio 3.1% 6.5%
TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison to Population
8
Other attributes quite comparable
My sample: large fixed income MIVs
11. Oktober 2019
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison of LC and FC sample MIVs
9
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
10
Symbiotics (2017): In 2016 on average only 31% of MIVs’ underlying assets in LC
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
11
• LC on average more than one year younger than FC investing MIVs
• Oldest LC investing MIV in the sample not even eight years old, the FC up to 19 years old
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison of LC and FC sample MIVs
12
Mean of LC Investing of sample MIVs over time:
• Less observations of LC MIVs
• LC MIVs younger
> Trend towards LC?
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
13
• Size: FC MIVs on average around 4.5 x LC MIVs
• Diversification: Similar numbers of MIFs and countries in the portfolio
LC MIVs well diversified and LC investments are smaller
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
14
Net Income: FC MIVs on average around 4.5 x LC MIVs (same as size)
Size could matter for net income
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
15
Expenses: FC MIVs on average 3 x that of LC MIVs
➢ Not consistent with the differences in size and net income (4.5 x)
➢ Indicates that expenses do not increase proportionally to fund size
On average smaller LC MIVs generate relatively high expenses
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
16
TER: LC MIVs on average 2 x that of FC MIVs
• LC investments costlier?
• Economies of scale?
• Only few observations of LC MIVs?
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison of LC and FC sample MIVs
17
Total expense ratio of LC and FC investing sample MIVs
Distribution of TER is quite similar
between local and foreign currency
MIVs
Graph does not indicate that LC
MIVs have on average higher TER
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
18
Impairments:
• LC MIVs on average 2 x that of FC MIVs
• LC MIVs maximum 20.01% vs. FC MIVs maximum 11.97%
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
3. Data: Comparison of LC and FC sample MIVs
19
Impairments of LC and FC investing sample MIVs
• Maximum of 20.01% of LC MIVs is
an outlier
• Distribution of TER is quite similar
between local and foreign currency
MIVs
Graph does not indicate that LC
MIVs have on average higher
impairments
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Local Currency Investing MIVs Foreign Currency Investing MIVs
Variable Obs. Mean Std. Dev. Min Max Obs. Mean Std. Dev. Min Max
LC Investing [%] 15 84.64 12.02 66.35 100 65 14.18 13.02 0 39.80
Fund Age [months] 15 60 17 32 92 65 73 51 4 231
Net Assets [USD million] 15 64.2 47.3 4.2 143.6 65 288.9 281.2 11.1 1,019.6
Portfolio Size [USD million] 15 57.6 39.5 16.59 113.2 65 284.9 324.9 4.5 1,131.6
Nr. of Local Currencies 14 14 7 5 25 65 5 5 0 19
Nr. of MFIs 15 36 17 7 58 63 44 37 1 149
Nr. Countries 15 16 6 7 24 62 18 13 1 46
Net Invest Income [USD million] 15 1.7 3.6 -5.4 8.8 65 8.0 10.7 -6.9 34.6
Expenses [USD million] 15 5.3 7.6 0.8 27.4 65 15.0 26.2 0.1 149.6
Total Expense Ratio [%] 15 10.99 11.32 2.05 31.06 65 5.31 5.66 0.25 27.85
Impairments [%] 15 3.65 5.71 0 20.01 52 1.72 3.11 0 11.97
3. Data: Comparison of LC and FC sample MIVs
20
• Many more observations from FC MIVs
• LC MIVs much younger and smaller > could be connected
• LC MIVs better diversification, smaller investments
• Portfolio quality comparable
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
4. Methodology: Portfolio Performance and Investment Strategy
21
Is it better for MIVs’ portfolio performance to enable their borrowers to receive their investments in
LC instead of FC?
Portfolio Performance = Net Investment Income
Portfolio = LC Portfolio + FC Portfolio
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
4. Methodology: Portfolio Performance and Investment Strategy
22
Scatterplot of Net Investment Income and LC versus FC Portfolios
• LC Portfolios smaller
• But high Net Investment
Income with smaller LC
Portfolio
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Estimates relationship between variables:
Dependent Variable = a Function of independent Variables
4. Methodology: Regression Analysis
23
How does the value of the dependent variable change when any one of the independent variables
is changed, while the other independent variables are held fixed?
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
𝑁𝑒𝑡𝐼𝑛𝑐𝑜𝑚𝑒𝑖𝑡 = 𝑎 + 𝛽1𝐿𝐶𝑖𝑡 + 𝛽2𝐹𝐶𝑖𝑡 + 𝛽3𝑙𝑜𝑔𝐴𝑔𝑒𝑖𝑡 + 𝛽4𝑇𝐸𝑅𝑖𝑡 + 𝛽5𝑙𝑜𝑔𝑀𝐹𝐼𝑠𝑖𝑡 + 𝑢𝑖 + 𝑣𝑖𝑡
4. Methodology: Regression Analysis
24
Control Variables
Fund Age Total
Expense
Ratio
Nr. of MFIs in
the Portfolio
Error TermForeign
Currency
Lending
Local
Currency
Lending
Net
Investment
Income
Dependent Variable = a Function of independent Variables
Net Investment Income = (Portfolio Size + Fund Age + Efficiency + Portfolio Diversity)
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
5. Results: Regression Results
25
Results of control variables are in line with former research and
my theory.
Pooled OLS Random Effects Model
LC Investing 0.088*** 0.091***
(0.013) (0.013)
FC Investing 0.022*** 0.023***
(0.002) (0.003)
Fund Age (log) -2.151** -2.501**
(1.028) (1.153)
TER -5.748 -7.160
(6.043) (6.899)
Nr. of MFIs (log) 2.107** 1.455
(0.842) (0.948)
Constant 1.093 4.496
(2.641) (2.836)
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Increasing LC investing by USD 1 million is associated with an
increase of net income by USD 91 thousand, holding all other
variables constant.
Holding all other variables constant, an increase of FC investing
by USD 1 million is associated with an increase of net income by
USD 23 thousand.
11. Oktober 2019
Graphing the coefficients of LC and FC investing in added variable plots
TCX 8th Local Currency Lab, Florentine Arend
5. Results: Graphically comparing LC with FC
26
LC steeper
LC investing is associated with a higher
rise in net investment income than FC
investing.
Is it better for MIVs’ portfolio performance to enable
their borrowers to receive their investments in LC
instead of FC?
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
6. Interpretation: Impact Theory
27
Local Currency
Performance
Management
Borrower
Borrower
Borrower
Borrower
Borrower Borrower
Impairments
• More knowledge
• More information
• Stricter requirements
• Closer monitoring
Improved skills
• Smaller loans
• Large number of borrowers
• Large number of countries
Good diversification
No currency-induced
credit risk
Less impairments
Country A
Country B
Country C
Improvement through learning effect of
management
Improvement through portfolio
attributes
11. Oktober 2019
Thank You.
TCX 8th Local Currency Lab, Florentine Arend 28
11. Oktober 2019 TCX 8th Local Currency Lab, Florentine Arend
Symbiotics (2017): “2017 SYMBIOTICS MIV SURVEY - Market Data & Peer Group Analysis”, 11th
edition, [online], http://symbioticsgroup.com/wpcontent/uploads/2017/09/Symbiotics-2017-MIV-
Survey-Abstract.pdf (accessed 17.09.2018)
7. Reference List
29