Personal Business I nves

MicroLoans,SolidRetumsMicrofinance funds lift poor entrepreneurs-and benefit investors. BYERICUHLFELDER

WITH ABOUT $200 OF his own moneyand a $1,500 loan, Vahid Hujdur rent-ed space in the old section of Sarajevoand started repairing, then resellingdiscarded industrial sewing ma-chines. Eight years and several loanslater, Hujdur now has 10 employees

building, installing, and fixing industrial machinery. J Hujdurdidn't get his initial loan from a local bank. "They were askingfor guarantees that were impossible to get," he recalls. Instead,the capital came from LOKmicro, a local financial institutionspecializing in microfinance—the lending of small amounts tothe poor in developing nations to help them launch small en-terprises. J Microfinance institutions (MFIs) such as LOKmicroget capital from individual and institutional investors in theU.S. and Europe via microfinance funds (table). Groups thatrun the funds collect the money, vet the lenders, offer themmanagement assistance, and administer investors' accounts.In the vast world of global finance, microfinance is, well,

100 I BusinessWeek I May 9, 2005

microscopic. But it is growing. The mi-crofinance Information eXchange, an in-dustry tracking group, says its universe of60 leading microfinance institutions lent$3.1 billion to poor borrowers in 2003,the latest available figures. Thafs morethan twice the $1.4 biUion loaned in2000. But because the loans are small,sometimes $50 or $100, the money goesfar. Microcredit Summit Campaign, an-other microfinance watcher, says the 779MFIs in its database serve about 81 nul-lion customers in Latin America, EasternEurope, Africa, and Asia. Loans are madefor a variety of purposes: manufacturing,transportation, agriculture, and retailing.

The borrowers pay relatively high in-terest rates, perhaps 20% to 30% on anannuaHzed basis. Why so much? Lenderssay the cost of writing and administeringsuch small loans is high. And since theMFIs operate in nations with weak cur-rencies, they need to charge more to makesure there's enough to payback investors

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who lent them dollars or euros. The ratesmay not seem onerous to borrowerswhen their only other source of credit is aloan shark.

Default rates on MFI loans run about4%, which is less than half the rate onsubprime loans made by U.S. lenders."There is a deep pride in keeping up vvdthpayments," says Deidra Wager, 50, an ex-ecutive vice-president of Starbucks, whoinvested $100,000 in a microfnance eq-uity fund in 2003. "In some instances,when an individual is behind on pay-ments, others in the village may make upthe difference."

Nobody should invest in microfinancefor the financial returns. Expect to earnperhaps 1% to 3% on debt funds, and 7%

S to 8% on equitj' funds. But that's not theÖ point. Through this sort of social invest-t ing, you give people a shot at self-suffi-0 ciency. "Handouts generally promote de-h pendence, not independence," says Mark< E VanNess, part-owner of a commercial

real estate investment firm, Sperry VanNess in Newport Beach, Calif.

His company's foundation invested$100,000 in the Latin America BridgeFund in January, 2004, managed by AC-CION International, one of the largest

Somefundsacceptamountsas low as$1,000

players in microfinance. The fund helpssecure financing for MFIs from localbanks by guaranteeing a portion of theloans. "Each dollar we give can helplocal organizations receive up to twicethat amount in loans," says Van Ness."Every time the MFIs repay their loans,the fund can subsidize a new batch ofloans." His yield,only 1.5%, offsetsfoundation costs.

Some microfi-nance funds acceptinvestments assmall as $1,000 or$2,000. They'reusually just lendingmoney, and thenmds are regis-tered with securi-ties regulators instates in whichthey're offered for sale. You still need tostudy the prospectus and visit the Website to assess the manager.

Funds that make equity investments,such as ACCIÓN Investments, may beriskier. The minimum investments arehigh—say $250,000—and you may needto have $1 million in liquid net worth oras much as $300,000 in annual income.Since they're usually private placements,there's even less regulatory oversight.There are usually no distributions duringthe life of the fund, about 10 years.

For Starbucks' Wager, a prospective 7%or 8% return was an important consider-ation in deciding to participate in the Mi-croVest I equity program. The $100,000she put in two years ago "represents asignificant portion of the assets which Ican invest," she says. "But ifs the socialreturn that makes this a truly meaningful

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May 9, 2005 I BusinessWeek ! lOi

Personal Business invest ininvestment." She spent a one-year sab-batical in Latin America seeing what mi-crofinance means to people living on theedge of subsistence.

A major promoter of microfinance in theU.S. is the Bethesda (Md.)-based CalvertSocial Investment Foundation, whichmanages its own programs and collects as-sets on behalf of other funds. The founda-tion takes care of administrative matterswhue MFis such as ACCIÓN, Oücocredit,

Grameen, and MicroVest, in tum, managethese resources.

Kelly and Edward Simpson have in-vested $30,000 in Calvert CommunityInvestment Notes. Starting with a smallposition in late 1998, the San Franciscocouple—she's a preschool teacher and heis a software developer—found that thesenotes, even when they paid 1% to 3%,have performed better than many of theirstock market investments in the ensuing

years. "But more important," Kelly Simp-son explains, "microfinance enables us toinvest more toward helping the poor thanwe could possibly give."

Indeed, investing in microfinance islike a perpetual gift. Money repaid getsrecycled into new loans, giving VahidHujdur and mühons of others a shot atmoving up the economic ladder. •

- With lima Ajanovicin New York

Stocks

This Bull Hasn'tGiven Up HopeSchwab's Liz Ann Sonders explains why this mightbe the best of times for stocks

With the major market indexes down between 5% and 10% sofar this year, ifs hard to be bullish. But thaf s not the case forLiz Ann Sonders, chief investment strategist at CharlesSchwab & Co., who predicts a rally. She gave her reasons in arecent interview with Associate Editor Toddi Gutner.To what do you attribute the decline in thestock market in the past seven weeks?Investors have been more concerned v̂ dthinflation, the economic slowdown, andwhat the Fed has been doing vis-à-vis in-terest rates than the healthier fimdamen-tals of earnings and valuation. This envi-ronment is simüar to 1994, when the Fedwas raising interest rates. Once the Fedstopped, the market rallied 40%.

When do you think the Fed wiii stopraising rates?It's difficult to pinpoint an exact time,but I think the Fed vnll stop a lot soonerthan people think. In general, the con-sensus thinks the Fed will increase Fedfunds up until about 4%. We think itmay stop closer to 3%—and we're al-ready at 2.75%. Inflation is not as big arisk as it appears. While inflation haspicked up, it is still at very low historicallevels. Money-supply growth is slowing,and commodity prices have come downoff their highs. As a result, I expect a

102 I BusinessWeek I May 9, 2005

mud economic slowdown. I don't thinkwe're going into recession, but I do ex-pect a slower patch.

What does that mean for stocks?The market tends to do best under asteady economic growth environment—itdoesn't luce recessions or economicgrovrth so fast that interest rates rocket.You know, the Goldüocks economy isbest—not too hot and not too cold.

What is your near-term forecast?A 10% rally in the short term is not toobold a forecast, and here are two reasons.

One is investor sentiment. A surveyby the American Association of Individ-ual Investors recently reported thatmore than 50% of investors were bear-ish. It's rare that it gets that high. Whenthat indicator has gone to such ex-tremes in the past, it has led to subse-quent rallies. When expectations get solow, the market has a tendency to ex-ceed those expectations. So there is an

SONDERSLooking fora 10% rally

opportunity for a rebound, and there's a lotof cash sitting out there to make it happen.

The other is valuation. There have beenpositive earnings surprises, but stockprices are faUing. So despite better earn-ings, the market has become cheaper.

What kinds of stocks are you favoring?We have a bias toward large-cap stocks—generally they do better when the econo-my slows. We like the energy, health-care,and consumer staples sectors. We like en-ergy because the earnings outlook is bet-ter than any other sector in the market.Our interest in health care and consimierstaples reflects our view that their defen-sive characteristics V̂TU be rewarded in achoppier market.

What kinds of stocks are you avoiding?The financiáis and consimier-discreüonarysectors such as retaüers and auto makers.In the case of the financiáis, we are at apoint in the interest-rate cycle at which thissector underperforms the market. We areavoiding consumer-discretionary stocksbecause higher energy costs are hurdng theconsumer's abuity to spend. •

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