Energy, Agriculture, Finance

Investing in a multi-currency environment

Development Investments

Markus Beeler

Markus Beeler is Head of Product Management at responsAbility. He has many years of experience in the area of asset management at large international financial institutions and has been responsible for product design at responsAbility Investments since 2011.

responsAbility selects the U.S. dollar as the fund currency for most of its investment vehicles, but makes investments in 35 additional local currencies – and this number is continually expanding. Markus Beeler, Head of Product Management at responsAbility, explains how an asset manager specializing in development investments can handle exchange-rate fluctuations and foreign currency potential.

Mr. Beeler, responsAbility invests in 36 different currencies through its investment vehicles. How do you deal with exchange-rate fluctuations?
Basically, we hedge foreign currency risks against the U.S. dollar fund currency. To do this, we use forward exchange or swap transactions. What determines this approach is our aim to achieve stable yields with our investment vehicles. This is exactly what the vast majority of our clients is looking for, so we minimize the foreign currency risk as much as possible.

Is it really possible to hedge currencies as exotic as the Kyrgyzstani som at all?
That is a reasonable question. Many “exotic” currencies that are used in developing countries cannot be traded on the normal foreign exchange market. As specialists for development investments, we collaborate with dedicated institutions in this area. Their services ensure that international investors and local providers of microfinance solutions have the opportunity to hedge currency risks in cross-border transactions in developing countries where no other commercial hedging opportunities are available – which is already in itself a contribution to these countries’ economic development. We use this relatively new market infrastructure to offer financing to our target customers in their domestic currencies and at the same time hedge against the currency risk.

How do the financing recipients benefit from receiving financing in their domestic currency?
Our financing recipients have their own obligations in their domestic currency. By taking out financing in the same currency, they incur no additional currency risk. If they don’t have to keep an eye on this, they can devote themselves completely to their real business objective and invest their energies in covering the basic needs of people with very low incomes.

Do some investors also want to participate in the foreign currency potential?
There is that too. Certain clients, first and foremost institutional investors, are explicitly looking for investments with this additional yield potential. They have a fundamentally higher risk tolerance.

So is it worthwhile taking this type of foreign currency risk?
That depends heavily on the investor’s temporal investment horizon. We typically invest in developing and emerging countries with high growth potential. All the fundamental factors usually consolidate in the course of long-term economic development, for example the formation of the financial sector, consumption – and of course the currency too. That could enable currency profits to be made in the long term from investments in developing countries too – but not overnight, however, and not without substantial fluctuations either, triggered by crises and price corrections. 

Do you also offer investment vehicles that tap into this currency potential?
Stock investments whose foreign currency risks are deliberately not hedged are particularly suitable for this type of risk-return profile. We offer this through equity capital investments. Here too, however, an appropriately long-term investment horizon is necessary to participate in the companies’ appreciation potential. Then, if the currency also shows any positive development, these investments can be highly attractive. 

Are there also other cases where you forego hedging a currency in foreign capital financing?
In every investment, aside from the financial yield, we are also looking for a development impact. In foreign capital financing, there are cases where the currency cannot be hedged for cost reasons although there is a big development impact. In these cases, we base our decision on the situation. If the development impact is very big, we can make an exception and invest to a small extent in non-hedged currencies too. However, the share of the portfolio in unsecured foreign currency transactions is always in the low single-digit-percentage area.

Increased investment activity in local currencies
Using the example of the largest responsAbility microfinance fund, 2007-2014

Grafik Habari