How we helped our client invest in microfinance

The background

Our pension scheme client came to us with a desire to set up an investment that offered:

• an attractive return, with good diversification from credit markets; and
• a socially responsible angle.

Microfinance was considered to be a suitable option to meet these requirements. Microfinance involves providing loans to bank-like financial institutions, often in frontier and emerging markets. These financial institutions use these loans to provide small-scale personal, entrepreneurial and corporate credit to low-income groups. Due to the demographic of these groups, who often do not have access to the more mainstream financial system, microfinance has some strong socially responsible investing characteristics.

The client had an existing relationship with a manager that offered a microfinance investment fund, offering a low governance solution to accessing the asset class.

Our approach

Our specialist credit and ESG research teams met with the proposed manager, to get a deeper understanding of its approach to investing and form a view as to whether it was an appropriate fund for the client.

As part of this process, some of the factors we considered were whether the investment manager:

• had a robust process for assessing both the creditworthiness of the financial institutions, but also the social impact of the underlying loans made to the low-income groups;
• was suitably diversified by country and currency;
• had a comprehensive risk management and monitoring framework in place; and
• fully considered fraud risk, especially given that many of these investments are based in frontier markets with less regulation.

Following this process, we concluded that microfinance fund was appropriate to help the client achieve its financial and social objectives and had a suitable risk management process in place.

The outcome

Given the thorough research we conducted on this fund, and based on our resulting advice, the client was comfortable investing in the microfinance fund. The fund delivered a positive investment return over the first 12 months, and we continue to monitor it against its own, and the client’s, objectives.