RESPONSABILITY MICRO AND SME FINANCE LEADERS* QUARTERLY REPORT Q3 2018 Market and Fund Review The reporting quarter saw an acceleration of pressure on the currencies of many emerging market (EM) economies. Markets were nervous due to rising interest rates in the US, uncertainty about trade wars and EM contagion. Despite this year s sell-off, the underlying GDP growth expectations of the International Monetary Fund (IMF) for EMs as a whole have remained relatively stable, and the IMF continues to forecast 2-3% stronger growth for EMs compared to developed markets over the coming years. The Turkish lira and the Argentine peso are two of the EM currencies that have been hit hardest and for varying reasons have lost around 40% and 55%, respectively, against the US dollar year to date (as at the end of September). India s currency has also struggled this year (losing 12% against the US dollar between January and September 2018) as tighter US monetary conditions and the recent weakening of investor appetite for EM assets have been major headwinds to capital inflows. These headwinds could not be offset by strong growth of 8.2% for the Indian economy in the previous quarter and measures by the Indian government to support its currency, the rupee. The Fund is generally hedged against currency risk but does take on currency exposure through targeted unhedged investments and unhedged coupon payments. While the Fund currently has no direct exposure to Argentina and only limited direct exposure to Turkey through a USD denominated debt instrument issued by a Turkish financial institution, its largest country-level exposure is India. The Fund has hedged the majority of this local currency position through its Indian investments, but aims to profit from a long-term carry trade by not hedging the coupon payments. This leaves the Fund exposed to reduced short-term movements but provides upside over the longer term. The largest disbursement by the Fund during the reporting quarter was a USD 2 million investment in an investee in Panama which represented 0.8% of the total Fund volume. The US dollar net return of the I (USD) share class amounted to +2.88% for the reporting quarter compared with +1.75% in the previous quarter and +0.81% in the third quarter of 2017. The net returns of the S (CHF) and S (EUR) share classes for the third quarter of 2018 were +2.11% and +2.18%, respectively. The hedging costs continue to hamper the performance of the CHF and EUR share classes as the relevant interest rate differentials between the US and the Eurozone/Switzerland, respectively, remain significant. A significant positive contribution of +2.05% to the quarterly Fund performance came from the positive valuation adjustments in the private equity portfolio. The main driver for this successful quarter was an investment in a holding company, with businesses mainly in India and Pakistan, which listed its subsidiary on the London Stock Exchange during the reporting quarter. The IPO has generated strong investor interest and the price of the listed shares increased substantially following the IPO. Therefore, the increased valuation of the investee reflects the current market price of its listed subsidiary, the updated management projections, and the strong to-date performances of its underlying businesses. In addition, the valuation of a leading microfinance institution in Kazakhstan saw a further uplift during the reporting quarter, reflecting its current outstanding financial result and solid outlook. *For qualified and professional investors only.
Similarly, the continued strong performance of a microfinance institution in Bolivia has led to a significant increase in the investment s valuation during the quarter. Performance (1) Q3 2018 Q3 2017 Quarterly return (USD-I class) 2.88% 0.81% 1 year return (USD-I class) 6.57% 2.58% 1 year average of 3mths USD LIBOR 2.06% 1.14% (1) Past performance is not a guarantee or indicator of current or future performance. This performance data is calculated net of all fees and commissions but it does not take into account the commissions and costs incurred on the issue and redemption of units. responsability Micro and SME Finance Leaders 2
Fund Activity and Performance Investment activity & portfolio Disbursements Portfolio as at end of composition during Q3 2018 Q3 2018 Number of institutions 9 227 Number of countries 8 74 Largest disbursement/exposure to single institution [in % of NAV] 0.8% 3.5% Average disbursement/exposure to single institution [in % of NAV] 0.3% 0.4% Average disbursement/exposure to single country [in % of NAV] 0.4% 1.2% Debt instruments with variable coupons [in % of disbursements/debt portfolio, respectively] 0.0% 46.8% Geographical allocation Disbursements during Q3 2018 [in million USD] Portfolio as at end of Q3 2018 [in % of investments] Asset classes Disbursements during Q3 2018 [in % of total disbursements] Portfolio as at end of Q3 2018 [in % of NAV] Asia Pacific 0.5 24.0% Senior Debt 100.0% 67.4% South America 0.0 17.5% Subordinated Debt 0.0% 6.3% Central Asia 0.0 17.4% Equity 0.0% 15.2% Central America 2.8 15.9% Equity Commitments 0.0% 0.7% Sub-Saharan Africa 0.0 9.7% Cash & cash equivalents* n/a 10.4% Eastern Europe 1.1 6.5% Middle East & North Africa 2.2 5.0% *Cash: Cash current accounts and money market 9.5% Other 0.9 4.0% Cash equivalents: Value of hedging contracts, collateral cash, Total 7.5 accrued interest investments, other assets and liabilities 0.9% Development of geographical allocation 100% 80% 60% 40% 20% Development of country allocation 14.00% 12.00% 10.00% 8.00% 6.00% 0% Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Asia Pacific Central Asia Middle East & North Africa South America Central America Eastern Europe Other Sub-Saharan Africa 4.00% 2.00% 0.00% Q3 2017 Q3 2018 Correlation with indices Benchmarking performance MSCI World Index 0.0386 Monthly return volatility since MSCI FM Frontier Markets (USD) 0.0419 inception (annualised) 6mths USD Libor 0.1961 Sharpe ratio (2) 1.89 Impact Indicators Micro, small and medium-sized enterprises (MSME) reached Total number of clients of financed MSME finance institutions 1.45% (2) calculated by taking into account the annualized monthly return volatility since inception and the average 6mth LIBOR USD rate (risk free) 121 921 Average loan disbursed in USD 2 641 % rural / urban clients 71 / 29 49 039 594 % female 83 responsability Micro and SME Finance Leaders 3
Outlook Part of the key to investing successfully in emerging markets (EM) is the ability to assess risk not only the investees individual credit risk, but also, and equally importantly, sector, interest rate and country risk. Our internal country and credit risk teams analyse a broad range of factors for their risk assessments on which investment decisions are based. Countries like Costa Rica and Cambodia, where the Fund is invested, represent some of the risks which are closely evaluated when deciding on renewing or undertaking new investments. Costa Rica has recently witnessed widespread anti-tax reform demonstrations and labour strikes. The situation has become more concerning as the country s large fiscal deficit keeps increasing, while a newly elected government faces strong opposition to any attempts to make even minor adjustments. Repercussions on the financial sector can be quite substantial, be it via banks direct exposure to sovereign assets, the government s lacking capacity to support banks in times of crisis, or depositors fear of their wealth being (partially) erased by some sort of special tax. We are currently comfortable with the Fund s underlying investments in this country. However, we will continue to monitor the situation closely and will review the Fund s exposure to Costa Rica. In Cambodia, the International Monetary Fund (IMF) has highlighted financial sector vulnerabilities, voicing concerns about credit quality, external funding, increasing concentration in the real estate sector and unregulated lending by real estate developers, high credit growth and the growing systemic importance of microfinance institutions. Strong credit growth has been a long-standing concern and the associated risks are reflected in the internal assessment of the country. Here the amount of renewals and new deals will depend on whether the Fund is adequately compensated for the risk it takes. In addition to reducing exposure to countries showing heightened risk, we actively source new investments in countries where we see improvements. These improvements are then reflected in better internal credit scores for the country and consequently institution, meaning that the Fund can offer reduced pricing or larger investments to investees. For instance, in Ecuador, we expect recent policy measures to reduce the fiscal deficit to 2.1% of GDP in 2019. Strengthening fiscal accounts remains a paramount task, given the pronounced uptrend in the debt-to-gdp ratio in recent years. Despite progress in the fiscal adjustment, market participants continue to speculate on whether the country will have to ask the IMF for support, particularly as it faces very high refinancing needs over the coming years. Key factors that we will watch going forward include reform progress and oil prices, with higher oil prices clearly a positive for Ecuador s oil-exporting economy. Mongolia is a country in which the Fund is currently invested only to a modest degree. However, the decision was made to allow longer tenors of up to three years, which would take such investments beyond the end of the IMF programme in May 2020. This reflects our view that the country is moving in the right direction and allows the Fund to consider investments with longer maturities. By the end of the IMF programme, the fiscal position will likely have improved further, and potentially offer a moderate buffer in case of a renewed downturn (unless a significant drop in the exchange rate increases foreign currency denominated debt in local currency terms). Broadly speaking, we expect to keep most country exposures relatively stable. Investment decisions will continue to depend on whether the Fund receives adequate compensation for the risk it accepts. responsability Micro and SME Finance Leaders 4
Risks: The risk and return profile of the fund does not reflect the risk under future conditions that are different from the situation in the past. Detailed description of the fund risks can be found in the prospectus. Legal disclaimer: This information material was produced by responsability Investments AG (hereinafter responsability ). This information material relates to responsability SICAV (Lux) Micro and SME Finance Leaders (further referred to as the Product ). The information contained in this information material (hereinafter information ) is based on sources considered to be reliable, but its accuracy and completeness are not guaranteed. The information is subject to change at any time and without obligation to notify the investors. Unless otherwise indicated, all figures are unaudited and are not guaranteed. Any action derived from this information is always at the investors own risk. 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Investors are expressly made aware of the risks described in the prospectus and the lower liquidity and greater difficulty in determining the value of the fund s investments (which are generally unlisted and not traded), and must also be prepared to accept substantial price losses including the entire loss of their investment. responsability and/or the members of its board of directors and employees may hold shares in the financial product (or any related investments) mentioned in this information material and may add to or sell these positions from time to time. Additionally, the members of the board of directors and employees of responsability may serve as members of boards of directors of the investments in which the financial product is invested. This information material is expressly not intended for persons who, due to their nationality or place of residence, are not permitted access to such information under applicable law. 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Custodian is Credit Suisse (Luxembourg) S.A. 5, rue Jean MonnetL-2180 Luxembourg and Distributor is Credit Suisse Fund Services (Luxembourg) S.A., 5, rue Jean Monnet, L-2180 Luxembourg. The Netherlands: The Product described herein is registered for distribution in the Netherlands to professional investors within the meaning of the Dutch Act on Financial Supervision and the interests in the Product described herein may therefore only be offered upon issue or thereafter, and whether directly or indirectly, to professional investor within the meaning of the Dutch Act on Financial Supervision. Norway: The Product is authorised for distribution to professional investors defined under the Section 10-2 of the Regulations to the Securities Trading Act in Norway and regulated by Finanstilsynet, the Financial Supervisory Authority of Norway. responsability Nordics AS is authorised in Norway and regulated by Finanstilsynet, the Financial Supervisory Authority of Norway. 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