At the end this drifts a bit into EconDataGeek land, but bear with me. It’s pretty amazing stuff. Viewed through EconDataGeek lenses, Microfinance debt investments have proved to be surprisingly steady performers.
Invest in some stock or bond, and over time the value can rise or fall. But most investments don’t earn exactly the same rate all the time. Some years are worse than others; there’s volatility, meaning risk for investors.
So, with both returns and volatility in mind, take a look at this chart, from analysts at Symbiotics, a leading player in microfinance investment funds. It shows the changing value of investing $100 in five different types of investments over 10 years, 2003-2013. .
The blue line, the MSCI World Index–a portfolio of stocks from developing nations–had the best 10-year return on the chart. If you sold at the end of 2013, you get about 60% gain over those 10 years. But along the way the ride is a risky roller coaster. Had you needed to sell back in 2008, you’d have instead lost nearly 30%. With high volatility, high risk.
The investment type ending lowest, global hedge funds (in red), fluctuated too, but not as wildly, with lower downside risk. The tradeoff for the lower risk: a paltry 1% or so average gain per year. An even lower volatility, but also low return investment (in peach) was LIBOR, the jargon acronym for the rate banks pay each other for short term loans. Steady, low risk with very little fluctuation.
The problem was, once the Great Recession hit in 2008 those interbank rates essentially flatlined. Policymakers at the US Federal Reserve drove short term interest rates to near zero. Banks’ short term lending investments wouldn’t have lost money, but stopped making much return at all.
Now, compare (in black) the SMX index of microfinance bonds; i.e. loans by commercial investors to MFIs. Like the interbank LIBOR, commercial microfinance debt shows remarkably little volatility. It was very low risk.
Yet unlike the interbank index, microfinance debt investments climbed steadily, right through the Great Recession. Overall, the microfinance debt investment gained almost twice as much as the interbank LIBOR, and with hardly more risk. In fact, it performed almost as well (+46%) as the second highest-ending option, a basket of major non-U.S. bonds (+52%, in green), but with almost none of the latter’s volatility.
In fact, as we see in the following graph, across the 144 months from Jan 2003 – Dec. 2015, the microfinance debt index value rose nearly every single month, 141 of them, and only lost ground in 3 months. At 47 to 1, pretty good odds. And those dips were relatively small: down 9 cents on a $100 investment from April to May, 2010, down 33 cents March to April, 2011, and down 49 cents Jan-Feb., 2013. In all three cases the loss was recovered within a month or two.
Now the real EconDataGeek part. Wall Street has a metric, called the Sharpe Ratio. (Smart guy, Professor Sharpe. Professor at Stanford, he won a Nobel Prize in Economics back in 1990.) Basically, the Sharpe Ratio first finds how much higher the return on a particular investment was compared to a completely zero risk investment, like US government bonds. Then it divides that excess return by the volatility of the investment. What you get is more or less a measure of money made per unit of risk you take on. A higher ratio means better reward for a given level of riskiness.
Microfinace debt’s Sharpe ratio was 1.39. And that green line in the first graph that slightly outgained mirofinance debt? The index of global bonds’ higher volatility meant a much lower 0.43 Sharpe ratio.
In short, Microfinance debt earned its investors more than 3x the return per unit of risk taken than did other global bonds. At the same time, those investments went into organizations giving access to financial services to millions of the poorest people on the planet.
Well behaved, calm, and rewarding twice over. Guests like that are welcome anytime.