Investors warm to microfinance

There’s plenty of ethical or socially responsible investor (SRI) funds around these days. Rarer are asset managers that invest in themes directly connected to developing countries. Theo Brouwers of SNS Asset Management speaks to Adrian Holliday


You can’t move for ethical investment funds these days. But there are profound differences between how such funds operate in the real world. SNS Asset Management (SNS AM) – a company with €42bn under management – has for some time pioneered an approach that directly invests in themes most important to developing countries.

“As a genuinely responsible investor, we want to take that responsibility further,” says SNS AM director Theo Brouwers. “We invest typically in three main themes – microfinance, water and agriculture – that are important to developing countries. Around these themes we have also developed strong relationships on both the financial and non-financial sides with NGOs and universities to get a very full understanding of the issues involved.”

After SNS AM selects an investment manager, they build the fund structure, being totally responsible for its administration and reporting. “The fund manager will come up with their investment proposals. This then goes back to the investment committee which consists of SNS AM staff. We then look at the proposal strongly from an institutional fund perspective on whether we get paid for the risk we have taken. Then we make our decision, to approve or not.”

The price is right
It’s all very well having a good investment idea. Putting it into practice, then buying into it at the right price is a different thing again. Typically investment managers will inevitably buy into a deal if they’ve spent two or three months working on the proposal – especially if they already have a mandate from the pension fund.

“But is the price right? Sometimes it isn’t,” says Theo Brouwers. “It might happen that the investment manager is eager to do the deal despite the price. Then we say: well, we understand why you like this company, but the world has changed and we now think the price is too high. If the deal is proposed as a local currency loan, that local currency may have appreciated. So it’s a matter of a second opinion, often, as well as a sanity check.”

Also, because of the infancy of a project – developments within the microfinance industry are often hindered by a general lack of liquidity – it might make it difficult to disperse investor cash. “In rare cases this means we will give the institutional investor back their cash,” says Brouwers. “That seldom happens. Often if you have a mandate, you execute whether the price is right or not. So we try to add a layer on, though without adding costs, where investors get an extra layer of security so that they know a deal done was the right thing at the time.”
Microfinancing boom
SNS is one of the leading players in microfinance institutional investment. Just a few years ago it was all about loans. Now it’s also about investment. The microfinance sector has grown fast and become significantly more professional – a positive step. “Increasingly the industry has a licence to attract savings. That means they’re no longer dependent on funding from foreign investors.”

However because the industry has boomed comparatively quickly, there is now a risk that the microfinance segment is at risk of over-heating. “That’s a matter of concern for us,” acknowledges Brouwers. “That too could bring with it the risk of weak governance, fraud, poor collection policies plus all the usual pressures of commercialisation. The social impact could also be affected.”

That means SNS is paying even closer attention to issues like social performance and social objectives to make sure all the investment metrics align.

How microfinance works
– The SNS’ Institutional Microfinance Fund works by lending cash to microfinance institutions and investing in their share capital. Money is made available through loans and equity shareholdings
– Convertible loans or subordinated loans with warrants are also offered
– Increasingly a holistic approach is used combining medical treatment, access to clean water and sanitation – something that SNS Asset Management is doing more often. This means that medical treatment and education is available at source, typically when a client goes to repay an instalment of a loan
– Microfinance has grown up. It is now a respected brand. It has also seen its fair share of failures and successes. Many lessons have been learnt. But there are concerns the industry may overheat
– Main ratings agencies are now rating microfinance transactions. For example, Morgan Stanley now issues a microfinance backed bond
– Microfinance is a response to third world poverty, helping people break out of their cycle of poverty.

Real ownership, real performance security
A good example of responsible investing tied to performance is the SNS’ African Agricultural Fund. It’s a fund that invests in equity related to farmland, agribusiness and agric-infrastructure. “It’s a fund that has exposure to around 40 agricultural assets related to real estate with corporation partners from the agri industry,” says Brouwers. “With this we invest in farmland that’s also combined to educate black farmers and communities so that they are ready to manage the farm themselves after 10 years.”

This is an arrangement facilitated by the South African government, which currently has the goal of ensuring that black farmers will own and manage at least 30 percent of the farmland by 2025. That percentage is currently less than five percent – so there’s a lot of work to do. “Many white farmers are now selling their land to the government or to the black community. We have introduced a training program developed with a specialised training company called the Open Learning Group. Next to that we co-operate with Care Cross, an organisation that gives education on health and also advises on health issues like HIV,” says Brouwers.

All these arrangements might sound well-meaning and positive. But there’s also a strong financial return integrated at the heart of it. The assets have a fixed inflation-linked return to them after 10 years. “This means, for institutional investors SNS has secured its exit for these kind of investments. The actual total net return for this fund is 12-21 percent net. That’s a very strong investment proposition. We expect to see a scarcity of both food and land during the next decade so we are expecting prices to go up.”

Share the knowledge
Meanwhile Brouwers says SNS is increasingly looking to attract US and South African investors, as well as widen its base of European investors. True to their democratic, egalitarian principles, SNS also regularly widens its knowledge base with other investors and NGOs. “We think it’s important for an asset manager to share their knowledge and experience about themes that aren’t yet that common. Hardly any portfolio managers heard about microfinance, so there’s a process of education to get to grips with too.”

Part of this education process is about inviting specialists to open investor meetings, paying for more university and think tank research. “Recently we went to Azerbaijan with some investors to look at the investing conditions there. In November we are making a trip to Kenya where we will have a programme to see what the difficulties and challenges are there – as well as the business opportunities.”

It’s all part and parcel of being an asset manager in an industry yet to mature; it’s part of the professionalisation process. “It also needs to be made stronger,” says Brouwers. “And this is also how we interact with clients.

There’s a lack of common experience about much of where and how we invest. Some people are experienced in these issues, but amongst institutional investors there’s a lack of experience and knowledge. We want to change that. We think we can do that by example, showing the way.”

SNS asset management – a brief history
SNS Asset Management (SNS AM) is a responsible asset manager, managing a total of €42bn (as of April 2010).

SNS Asset Management manages the assets of a range of institutional investors. These include pension funds, insurers, banks, social organisations, foundations, charities and religious institutions. It also manages SNS REAAL’s considerable portfolios (SNS REAAL, REAAL Insurances, SNS Bank, ASN Bank and Zwitserleven).

SNS Asset Management is a pioneer in the area of responsible institutional asset management of which investing in developing countries through microfinance is an important part.  SNS Asset Management was founded in 1997 following a merger between De Hollandse Koopmansbank and SNS Bank. As a manager of union funds, De Hollandse Koopmansbank had a long history in responsible global investment.

SNS principles
– Respect for basic human rights;
– No involvement in the most serious forms of child labour
– Abstaining from involvement in forced labour
– Abstaining from serious forms of corruption
– Abstaining from serious forms of environmental contamination
– No involvement in the production of weapon systems of which the effects are disproportionate and do not distinguish between military and civilian targets
– Respect for generally-accepted ethical principles that apply in a humane civilisation.

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