Risks

Triodos Microfinance Fund has a relatively high risk profile, mainly due to its sector-specific focus. The main risks that have been identified are described in detail in the sub-fund’s particular of the prospectus of Triodos SICAV II. Some of the risks are highlighted below.

Currency risk

The reference currency for Triodos Microfinance Fund is the euro, whereas investments may be denominated either in euros or in foreign currencies. The fund may invest up to 90% of its total assets in non-euro denominated assets. Currency exchange rates may fluctuate significantly over time, which may, among other things, cause the fund’s total assets to fluctuate as well. Currency exposures in the loan portfolio are mostly hedged, whereas currency exposures due to the equity holdings are mainly unhedged. The currency risk is mitigated by imposing an upper limit of 60% of the total assets of the fund for investments in unhedged local currencies. In 2015, the global foreign exchange markets continued to be very volatile, resulting in higher hedging costs for the fund.

Hedged and unhedged positions
(% of fund’s total assets),
December 31, 2015

Hedged and unhedged positions (% of fund's total assets)

Allocation unhedged positions
(% of unhedged positions),
December 31, 2015

Allocation unhedged positions (% of unhedged positions)

Exposure by currency
(% of fund’s total assets), December 31, 2015

Download XLS

 

 

 

USD

47.2%

 

Source: Triodos Investment Management B.V.

Hedged

 

96.2%

Unhedged

 

3.8%

EUR

21.8%

 

Local currency

30.3%

 

Hedged

 

37.1%

Unhedged

 

62.9%

 

 

 

Liquidity risk

As Triodos Microfinance Fund is a semi open-end fund, it can in theory face large redemptions on each valuation day. If this should occur, investments need to be sold quickly in order to comply with the repayment obligation towards the redeeming shareholders. In general, the fund invests in non-listed assets that may take time to be converted into cash. The fund may therefore decide to temporarily close the fund for redemptions or subscriptions by means of suspension or restriction of purchase and issue of shares of the fund. The fund performs quarterly stress tests to assess this risk. To mitigate this risk, the fund aims to retain 10% of its nets assets in cash or cash equivalents or arrange sufficient other guarantees. On December 31, 2015, the fund held 22.5%1of its net assets in cash and cash equivalents. On a quarterly basis the fund receives repayments of loans maturing that represent on average 6.2% of the fund’s total assets thus ensuring liquidity in the fund. In addition, the fund receives interest and dividend income on a quarterly basis.

1 Investment restrictions are presented against total assets. The liquidity ratio is presented against net assets.

Country risk

Triodos Microfinance Fund invests in countries that may be subject to substantial political risks, countries that might be in an economic recession, with perhaps high and rapidly fluctuating inflation, countries that often have a poorly developed legal system and countries where the standards for financial auditing and reporting may not always be in line with internationally accepted standards. To limit the country and political risk, Triodos Microfinance Fund has set the upper limit for securities and financing instruments issued by or provided to entities that operate in the same country at 20% of its total assets. The country with the highest exposure is currently Cambodia, where 12.7% of the fund’s total assets per year-end are invested. This is slightly lower than in 2014, when Cambodia had the largest single country exposure with 13.0%. Country risks are mitigated by diversifying the geographical exposure across a larger number of countries. In 2015, Triodos Microfinance Fund added five new countries to the portfolio. The fund continued to notice a general increase in country risks in Azerbaijan and former Soviet republics in Central Asia due to the deterioration of the macroeconomic situation brought about by low oil prices and the contraction of the Russian economy. The fund is closely monitoring the situation and has adjusted its outlook and exposures for countries in this region. Please refer to the table below for more details about the diversification across different countries.

Country allocation (% of fund’s total assets), December 31, 2015

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Country

Percentage

 

 

Source: Triodos Investment Management B.V.

Cambodia

12.7%

India

7.0%

Kyrgyzstan

5.0%

Peru

4.8%

Ecuador

4.5%

Tajikistan

4.3%

Paraguay

4.1%

Georgia

3.5%

Mongolia

3.4%

Azerbaijan

2.8%

Bolivia

2.7%

Kazakhstan

2.0%

Tunisia

1.8%

Uzbekistan

1.7%

Sri Lanka

1.6%

Panama

1.5%

Dominican Republic

1.4%

Guatemala

1.4%

Nigeria

1.1%

Tanzania

0.9%

Ivory Coast

0.8%

Laos

0.8%

Uganda

0.8%

China

0.7%

Bangladesh

0.7%

Indonesia

0.6%

Colombia

0.5%

Senegal

0.5%

Jordan

0.5%

South Africa

0.4%

Ghana

0.4%

DR Congo

0.3%

Nicaragua

0.3%

Myanmar

0.2%

Bosnia Herzegovina

0.0%

Region: Worldwide

1.4%

 

 

 

 

Total

77.1%

 

 

Credit risk

The fixed income portfolio represented 58.0% of total assets in 2015 (2014: 65.9%). Triodos Microfinance Fund is therefore exposed to credit default and concentration risks. Portfolio-at-Risk (PAR) ratios (the percentage of non-performing loans in the total loan portfolio) of MFIs in the Triodos Microfinance Fund portfolio are a possible indicator of increased credit risks and are closely monitored on a continuous basis. The risk that an MFI will fail to meet its obligation to repay on maturity is mitigated by carefully selecting institutions and is further limited by closely managing the relationship. Concentration risk is mitigated by limiting the single obligor exposure to 15% of the total assets of the fund. The weighted average PAR over thirty days stood at 4.7% at year-end 2015, which was slightly higher than at year-end 2014. The fund noticed an increase in the PAR of financial institutions in Central Asia. Many of these institutions have large credit exposures in US dollars and were confronted with currency losses and increased repayment problems by end borrowers after a series of strong devaluations. Consequently, the fund has established provisions for part of its loans outstanding to two MFIs in Azerbaijan. The fund has reduced its exposure to the countries in the region in general.

Valuation risk

Valuation risk refers to the risk that the values of assets do not reflect the fair market value because valuations are based on infrequent market-based data, assumptions and peer group comparisons. As Triodos Microfinance Fund invests almost exclusively in assets that are not traded on a regulated market and are not listed on any stock exchange, its investments may not have readily available prices and may be difficult to value. In order to determine the value of these investments, the fund employs a consistent, transparent and appropriate valuation methodology, based on the International Private Equity and Venture Capital Valuation Guidelines (IPEV) as published by the IPEV Board and endorsed by the European Private Equity and Venture Capital Association (EVCA). To the extent that this methodology relies on periodic market-based data and peer group comparisons, the valuation of the assets may fluctuate with the variations in such data.

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