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Foundations Embrace Mission-Based Investing, Study Says

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The investment potential of U.S. foundations far outweighs their grant-making potential and more foundations are beginning to make investments that coincide with the their goals, which is known as mission investing, according to a recent study.

U.S. foundations made grants totaling abut $46 billion in 2010 but held assets totaling more than $600 billion, vastly increasing their potential to support their missions, according to Key Facts on Mission Investing by The Foundation Center.

One in seven foundations that responded to the survey are investing in market-rate, mission-related investments and/or below-market-rate, program-related investments. Market-rate investments earn more but do not count toward the foundation’s disbursement requirements, while program-related investing may earn below market rates but can be counted as part of the foundations’ disbursement requirements.

Both types of investing have been around for decades, but half of those engaged in mission investing started doing so only in he last five years and 28% started in the last two years. Survey results were compiled from 168 foundations that have $119.2 billion in assets.

Half of the foundations engaging in mission investing have program-related investments and 28% have both program-related and market-rate investments, while 22% hold only market-rate investments.

Just over one quarter (26%) of those making mission-related investments commit half or more of their assets to this type of investing, according to the study. Most reported holding only 5% or less in mission-related investments.

Stephen Viederman, former president of the Smith Noyes Foundation and a proponent of mission investing, argues that foundations’ investment strategies should be guided by their mission to benefit the pubic and that social investing does not underperform general investing.


Russian, Polish, Romanian Lending Growth to Outpace GDP, Raiffeisen Says

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By Boris Groendahl – Nov 8, 2011 10:13 AM CT – Bloomberg

Russian, Polish and Romanian lending is set to outpace economic growth, while Croatia, Hungary and Ukraine are paying for past excesses with a prolonged period of weak credit expansion, Raiffeisen Bank International AG (RBI) said.

Russia will be both the biggest banking market in the former communist part of Europe and the fastest growing in the years to 2015, according to a study by analysts Gunter Deuber and Jovan Sikimic. Lending there may rise 14 percent per year in euro terms. Poland, the second-biggest, will see credit expanding 11 percent per year in euro terms, Raiffeisen said.

That contrasts with countries like Ukraine where loans in relation to gross domestic product “overshot a fundamentally backed level,” the analysts said. Expectations were “possibly based on far-too-optimistic convergence assumptions for the respective banking sectors” in countries also including Bulgaria, Belarus and Bosnia and Herzegovina, they said.

Western European lenders bankrolled eastern Europe’s boom with cheap loans before the 2008 credit crunch. The expansion was funded in part by parent banks, a model that is undermined as liquidity turns scarce and expensive, Raiffeisen said. Bad loans shot up and are now weighing on bank balance sheets. The boom boosted lending in some countries and segments to levels that exceed other emerging markets and may not be sustainable, creating an overhang set to depress growth.

Raiffeisen is the region’s third-biggest lender by assets. It entered the market with a Hungarian unit before the Berlin Wall came down.

‘Sustainable Growth’

“Loan growth in central and eastern Europe will not occur in the same manner witnessed during the past decade,” the analysts said. External funding that is more expensive and less accessible means that “sustainable loan growth in eastern Europe will be more closely tied to deposit growth than in the past,” they said. “In addition, some eastern European economies may well face a more prolonged period of relatively low loan growth.”

Total banking assets in the region stood at 1.9 trillion euros ($2.6 billion) as of June, equivalent to less than eastern Europe’s combined economic output, Raiffeisen said. In the euro area, banking assets are about 3.3 times the combined GDP.

While this suggests eastern Europe “has potential left for catching up,” several arguments “challenge the still prevailing consensus view that all central and eastern European banking markets are largely underpenetrated in terms of their loan stock,” the analysts said.

‘Too Optimistic’

The consensus view might be too optimistic because it ignores that many economies have a “relatively low stock of accumulated private financial wealth,” which means that the local resources that banks can lend are limited. Additionally, the growth potential in corporate lending is limited in economies where large multinationals dominate because they borrow at home.

Household lending outside of mortgages, meanwhile, was the area that grew particularly fast in the boom and is “already rather saturated when compared to more mature banking sectors.”

“Not all central and eastern European banking markets can still be regarded as being highly under-penetrated in terms of total loans in relation to GDP and income levels,” the analysts said.

Loan Growth

Loan growth in nominal euro terms is expected to be above 10 percent per year in the Czech and Slovak Republics, Romania, Albania and Serbia until 2015, which means that 80 percent of the entire market will remain a high-growth market, Raiffeisen said. Croatia, Slovenia andHungary will have annual growth of less than 5 percent, while lending will expand between 5 percent and 10 percent in Bosnia, Belarus, Bulgaria and Ukraine, Raiffeisen estimates. This is likely to undershoot real GDP growth in those countries, according to the report.

Bad debt in eastern Europe is set to peak or has peaked this year in most countries except for Hungary, where non- performing loans are set to continue to grow until 2013, the analysts said. Apart from Ukraine, where they peaked at 40 percent of total loans, they remained at less than 20 percent, falling short of past crises in emerging markets, Raiffeisen said.

The share of delinquent loans to total loans could drop to around a third of their current level in the next three to four years in an optimistic scenario where growth picks up again in the second half of next year. That would free up capital for lending again, Raiffeisen said. In a pessimistic scenario, they would remain at two-thirds the current level.

More than three-quarters of the region’s banking assets outside of the former Soviet Union are owned by foreign banks, Raiffeisen said. UniCredit SpA (UCG) still led the ranking at the end of June, followed by Erste Group Bank AG (EBS), Raiffeisen, Societe Generale (GLE) SA andKBC Groep NV. (KBC) In Russia, Ukraine and Belarus, state-owned banks led by OAO Sberbank and VTB Group are bigger than their western peers.

To contact the reporter on this story: Boris Groendahl in Vienna at bgroendahl@bloomberg.net

Emerging Markets: Redrawing the Map

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Say goodbye to the old playbook: The best opportunities are no longer where you’d expect.

 When Taizo Ishida first set eyes on Bangladesh, he thought the images would stay with him forever. Posted there in the 1980s as a United Nations development officer, Ishida saw little but abject poverty wherever he turned. Lacking a reliable power grid or even the most basic of public services, the South Asian country was a tragic archetype of the developing nation, Ishida thought — or, rather, he did until last year. That was when Ishida, now lead manager of the top-ranked Matthews Asia Growth fund, returned to Bangladesh for the first time since his U.N. days. What he found left him utterly awestruck: Here, if ever he’d seen one, was a runaway investment boom.

Dhaka, the nation’s capital, was abuzz with construction projects, as the city transformed itself into a hub for the global textile-manufacturing industry. Real estate prices mirrored those of some tony Manhattan neighborhoods. (A friend of Ishida’s bought an apartment a little more than a decade ago for $60,000, and it’s now worth $1 million.) Share prices in the country’s burgeoning stock market, meanwhile, had tripled in the previous 15 months. “It’s still very poor, but the market has exploded,” marvels Ishida, who is now waiting for valuations to fall a bit before he invests.

Bangladesh? Seriously? It’s not the sort of thing you’d catch surfing Google Earth, but make no mistake: The map of the investment world has changed dramatically over the past two years — and to hear many intrepid money managers tell it, the topography is transforming just as fast today, as markets across the globe undergo seismic shifts from week to week. The countries that once thundered with Olympian returns — Brazil, China, India and Russia — now, well, seem almost mortal by comparison. The path to profits, even in these well-traveled lands, is not what it was just a few years ago. And, in turn, places long since dismissed euphemistically as “developing nations” are advancing far more rapidly than ever expected.

Mark Mobius, an emerging-markets pioneer who oversees about $50 billion in assets for Franklin Templeton, has been buying up property in Romania, banks in Nigeria and oil shares in Kazakhstan. Laura Geritz, comanager of the Wasatch Emerging Markets Small Cap fund, met this summer with CEOs and local investors in Ghana — which now has some 30 publicly traded companies on its national exchange.

Map Quest

Leading investors are finding bargains well off the beaten path. Click below for four hot spots.

[sm1211mapquest]

 

The reasons behind the changes are many, ranging from the slowing of economies in China and India to the arrival of new consumer markets to the surprising way in which the debt crisis is playing out on the international stage. And, of course, there’s one more big why: The old playbook has stopped working. Consider that over the 10 years ended in December 2010, the benchmark Morgan Stanley (MSCI) Emerging Markets index outpaced the S&P 500 by a total of 250 percentage points; in the time since, the index has trailed the S&P by seven points. “It’s not that the emerging-markets opportunity is tapped out,” says Maria Negrete-Gruson, a 20-year denizen of this investing realm who heads a nearly billion-dollar portfolio for Artisan Funds. “It’s just not in the same places.”

The one thing that hasn’t changed, veteran investors will tell you, is the risk. And the volatility. And the everyday intrigue that comes with making a wager in any betting parlor where you don’t speak the language, understand the customs or have a place to duck should shooting break out. Emerging markets, after all, are the sorts of places where an exchange can fall 17 percent in a day, as the Russian Micex did one unlucky Tuesday in September 2008. (The S&P’s biggest one-day drop during the Lehman Brothers crisis: barely 12 percent.) Indeed, the average diversified emerging-markets fund fell 54 percent in 2008, according to Morningstar, a loss that was 17 percentage points worse than the broad U.S. market’s drop even in the throes of the Great Recession. Even as recently as this fall, the sector as a whole took one heck of a wallop, with the MSCI Emerging Markets index sliding 18 percent over the past three months — about three times as bad as the S&P 500’s drop. A currency crash, dive in commodity prices or change in government can transform market dynamics in seconds (take, for instance, the double-digit losses in most Peruvian mining stocks the day after a new government was elected this past June).

Still, emerging-markets managers somehow put aside such fears as they scour the globe for the same elusive thing — the El Dorado of investments. And yet, a new world and new order has meant shifting gears, rethinking asset classes and, yes, moving clients’ money around. So where are the most sophisticated treasure hunters staking their claims today? Our guide to adventure investing offers some clues.

Economist Joseph Kaboski: Poor Financing in Developing Countries Explains Sluggish Growth

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September 26, 2011 • Susan Guibert

Joseph Kaboski

Though economists have long suspected that developing countries struggle to emerge from poverty because they lack robust financial sectors, few economists have tried to determine just how this phenomenon occurs—until now.

University of Notre Dame Economics Professor Joseph Kaboski, together with colleagues from UCLA and Washington University in St. Louis, examine this phenomenon in the study “Finance and Development: A Tale of Two Sectors,” published recently in the American Economic Review.

Using a computer-based economic model and data from 79 countries to quantify key aspects of the relationship between development and the financial sector, Kaboski and colleagues find that poor financing environments in developing countries inhibit talented individuals from gaining the most from their abilities and result in lopsided economic landscapes with few large firms and too many small ones. This ultimately slows economic growth.

The researchers show that though lack of financing affects productivity in both large-scale and small-scale industries, it impacts large-scale industry disproportionately. In large-scale industries, such as manufacturing, poor financing opportunities make it harder to start businesses, leading to too few entrepreneurs in the marketplace and even fewer large establishments.

Conversely, in smaller service industries, it is easier for entrepreneurs, such as retail shop owners, to self-finance, so the challenges to starting a business are actually reduced. This is also because the opportunity cost of choosing to start a business—earning a market wage and saving at the market interest rate—decreases. As a result, developing economies often end up with too many entrepreneurs and too many small establishments in the traditional service industries.

Kaboski and colleagues’ findings also confirm that weak financial development—such as the lack of financial services—accounts for a substantial part of the difference between poor and rich nations’ development; it accounts for poor countries’ low per-capita income, their large differences across industrial sectors in prices and productivity, and their low aggregate total factor productivity (TFP), which is an indicator of how effectively an economy produces relative to the resources it uses.

The study also shows that the lack of good credit markets reduces the return to savers in an economy, making it more costly for poor individuals to build up a buffer and protect themselves from the various risks they face.

Joseph Kaboski is the David F. and Erin M. Seng Foundation Associate Professor of Economics at the University of Notre Dame and also an affiliated researcher with the Consortium on Financial Systems and Poverty.

Deutsche Bank launches £10m social investment fund

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7 November 2011

Photo of Colin Grassie, Deutsche Bank UK CEO

Deutsche Bank will help to create a new asset class that we hope will attract a wide range of investors and deliver a significant amount of money to social enterprises.

Colin Grassie, CEO of Deutsche Bank UK

Deutsche Bank announced today that it has launched a £10m social investment fund in the UK to support social projects with a financial return.

The bank’s Impact Investment Fund will operate as a ‘fund of funds’ working with portfolio managers to channel investment into sustainable social businesses over the next three years.

It aims to generate a return that more than covers its costs over the next 10 years.

The fund intends to develop businesses that have the potential to grow profitably while providing local communities with social benefits such as employment, education and training. Bankers will also work alongside the funds to give financial advice to social entrepreneurs.

The fund will be managed to external market standards by investment managers in Deutsche Bank’s Private Equity group.

At a time of public sector spending cuts and concern about the sustainability of grant funding, the fund aims to pave the way for a new asset class that will attract a wide range of investors and turn the UK into a hub for social impact investing in early-stage growth industries such as long-term care, preventative health treatments and rehabilitative skills and training.

Colin Grassie, CEO of Deutsche Bank UK, said: ‘Deutsche Bank will help to create a new asset class that we hope will attract a wide range of investors and deliver a significant amount of money to social enterprises.

‘All banks need to put something back into the societies that sustain them. We believe that with sufficient backing from financial institutions prepared to invest not just money but time and skills as well, a new sector of socially responsible businesses can emerge.’

Deutsche Bank made an initial social investment in September last year, contributing to Big Issue Invest – the social investment arm of the Big Issue – whose investments include Jamie Oliver’s Fifteen Foundation, training disadvantaged young people as chefs, and Hackney Community Transport, which has brought on local long-term unemployed people as bus drivers.

Deutsche Bank is one of the world’s biggest corporate donors, investing nearly EUR100m in social projects last year.

Muhammad Yunus expresses faith in entrepreneurs at G20 summit

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Microfinance Focus, November 4, 2011: Professor Muhammad Yunus was invited to deliver a key note speech during the G20 Young Entrepreneurs Summit held in Nice, France. Professor Yunus addressed an audience of more than 400 entrepreneurs from all G20 countries. In his speech, he shared his personal entrepreneurship experiences, his faith in young entrepreneurs to be the pillars of society and the need to include poor countries in the discussion process in making global decisions.

Professor Yunus being an entrepreneur himself started off creating the Grameen Bank that provides microfinance services to the poor who had little access to financial provisions. From that, he ventured into a wide number of social businesses such as Grameen Nursing College, Grameen Eyecare Hospitals, Grameen Shakti, etc.

He has always considered young entrepreneurs to be the most effective solution for the future. He said “In my opinion, G20 YES is a fabulous initiative, gathering so much energy and momentum from all over the world. Because of their creativity and leadership, provided that they commit to share the value they create, these 400 young entrepreneurs in this room can change the world.”

Professor Yunus is also a member of the Millennium Development Goals (MDGs) Advocacy Group, advising the Secretary General of the United Nations. Hence, he believes that the next generation of youths should be handed over the process of the MDGs as soon as possible. He believes that entrepreneurs will have a key role to play in fulfilling the MDGs, if they are committed to the social value created by their companies, and social business can be part of the solutions.

In his speech, he added that the G20 needed to broaden its scope to deal with the current world crisis. It can no longer remain a political forum with economic agendas. The G20 needs to create a social agenda as well. Professor Yunus proposes that ‘social business’ should be brought to the agenda of G20, as one of the concrete and effective solutions to be considered for immediate implementation so as to guide capitalistic investment towards social value and jobs creation, rather than sheer profit maximization strategies. A social business is a cause-driven business where profits stay within the company for its sustainability.

Lastly, Professor Yunus concluded that the G20 should be expanded into the G25, where poor countries from each continent should be included in the global agenda which they are part of. He added that “Their problems are inter-related with others, and their proposals of solutions should be considered by the most economically advanced countries in making global decisions. A G25 would be a big step toward ensuring that global social issues are raised, and MDGs implementation is fully shared on the global agenda. And finally, because fighting poverty together is the only way to bring long lasting peace in this world.”