Sample REPORT - MicroRate

ABC FUND Luxembourg October 2011PORTFOLIO RISKLIQUIDITY / ASSET-LIABILITY MANAGEMENTThe Fund primarily targets larger, well establishedinstitutions with successful track records as commercialfunders. As such, the obligors are generally medium riskMFIs located in lower risk countries.With no debt outstanding and very modest liabilities relatedto foreign exchange contracts, the Fund has zero assetliability management (ALM) financing issues - no maturitymismatches exist through the life of the assets. However,with respect to structure, redemption risk (see StructuralRisks) is a potential material source of ALM risk. The weighted average financial strength rating (FSR) ofthe Fund’s MFI partners is β, which indicates moderateinstitutional credit risk.AAA toBBB- The weighted average tenor of the Fund’s loan portfoliois 69 months from issue, or 61 months remaining as of2010 year-end. This is somewhat greater than peerfunds, whose loan maturities are closer to the 36 monthrange. Given the Fund’s lack of borrowing, it has thecapacity to offer flexible loan terms to its clients, butlonger dated loans may lead to increased credit risksover time. The Fund maintains a substantial (15.9%) portion of itsassets in cash and cash equivalents. This is abovepeer averages. The Fund’s stated policy is to maintaina minimum of 10% in liquid assets at all times or,alternatively, to arrange for other forms of liquiditywhich can act as a substitute (e.g. standby liquidityfacilities provided by commercial banks). Because the fund has no outstanding debt at this time,interest coverage metrics are not applicable. Also, asan open end fund, all Fund capital is comprised of paidin capital (unfunded capital commitments arecommonly associated with closed end funds andprivate equity funds).Exposure to high risk institutions with FSRs of β orbelow in countries with sovereign ratings of B or belowcomprise 10.3% of the portfolio, which comparesfavorably to peers.Figure 8: FSR versus Sovereign rating BB toB (% of portfolio)B to D9%2%α to α (low risk)18%48%3%α- to β (average risk)3%16%5%β to γ (high risk)Similar to its country concentration limits, the Fundadheres to single-institution diversification limits thatapply across all funds under management by the ABCAdvisor.Although the Fund’s top 10 holdings account for 66.8%of the total portfolio, the Fund’s HHI score of 0.06 forsingle name exposure is very sound, indicatingsignificantly lower than average overall clientconcentration when compared to peers.Figure 9: Top 10 HoldingsDec-08Dec-09Dec-10Interest coverage ratio-n/an/aCash ratio (%)-43.015.9Paid-in capital / committed capital (%)-100.0100.0LEVERAGE% of lding94.2Holding103.6Rest of portfolio (16 holdings)33.2www.luminis.comFigure 10: Liquidity IndicatorsTo date, the Fund has not employed the use of leverage.As an open-end fund with no debt or unfundedcommitments and positive earnings to date, the Fundmaintains a very strong capital position consisting of XXXmillion in capital (accumulated net subscriptions andretained earnings).Figure 11: Leverage IndicatorsDec-08Dec-09Dec-10Debt / equity-n/an/aDebt / available capital-n/an/aa service of MicroRate IncorporatedPage 5 of 10

ABC FUND Luxembourg October 2011MARKET RISKSTRUCTURAL RISKSCURRENCY RISKREDEMPTION RISKThe Fund has significant latitude with respect to currencyhedging – while the Fund states that local currency willgenerally be hedged, the investment policy permits up to60% of the Fund’s local currency investments to be noneuro hedged.Because the Fund has an open-end structure, it isexpected to accommodate occasional shareholderredemption requests (closed-end fund structures are notrequired to accommodate early redemption requests andtypically only accommodate redemptions in an emergencyand at a hefty exit cost). While the open-end architectureprovides liquidity advantages for shareholders, due to theinherent illiquid nature of the majority of the Fund’sinvestments it also places a significant burden onmanagement to maintain sufficient liquidity to promptlysatisfy any such request and thus represents a materialstructural risk for the Fund.As of FYE 2010, 24.9 % of the Fund’s investments weremade in local currencies, of which 58.7% were unhedged– hence, 10.3% of the Fund’s portfolio was exposed toopen currency risk. The largest unhedged local currencyexposures include Country1 (3.2%), Country2 (2.8%), andCountry3 (2.0%).The Fund has experienced losses relating to its FXcurrency management. During 2010, realized gains of XXX were more than offset by XXX million in unrealizedlosses.Figure 12: Net currency exposureTo date, the Fund has experienced only XXX inredemptions versus XXX million in new subscriptions.COVENANT COMPLIANCE(% of assets)The Fund’s stated policy is to maintain a minimum of 10%in liquid assets at all times or, alternatively, to arrange forother forms of liquidity which can act as a substitute (e.g.standby liquidity facilities provided by commercial banks).UGXBDTDOPPYGPAYMENT tiesThe Fund has experienced no loan defaults since inception.This is encouraging, especially given recent challengingglobal economic conditions, and consistent with the strongoverall asset quality metrics noted in the Risk section of thisreport. The performance is also a reflection of themanagement team’s extensive microfinance experience.INTEREST RATE RISK Figure 13: Payment PerformanceThe Fund takes significant interest rate risk. Its policyis to make fixed rate loans, funded with fixed rate termfunding. However, the term of the funding is 5-10years, whereas the loans may be of shorter maturity.Should the prevailing market rates for loans decrease,the margin over the cost of funds could diminish, andvice versa.The current yield on loans is 5.6% blending the higheryielding subordinated loan yields with the loweryielding senior loans; this is approximately equal tothe fund’s cost of borrowing. However, given the lowleverage, net interest and dividend income providesfor a high net yield on investments of 5.5%.www.luminis.comAmount indefault (P I)LossrealizedRecoverystatus--------a service of MicroRate IncorporatedPage 6 of 10

ABC FUND Luxembourg October 2011 The Fund has signed and committed to the CPP – anethical code with the objective of protectingmicrofinance clients for their benefit and the benefit ofthe microfinance sector as a whole. However,presently, the Fund does not require its clients toendorse these principles or obtain a social rating. In early 2010, a group of investors that included ABCManagement and Country1 took the initiative to set upABC Program in order to contribute to the embeddingof socially responsible investment in this sector. The Fund’s sponsor, ABC Management, inconjunction with the XYZ and PQR took the initiativein 2010 to investigate the extent of over indebtednessin a number of markets. The study was conducted bythe University of XYZ and published in January 2011.SocialRationaleAlthough the Fund is somewhat less socially oriented thanseveral peers, the Fund nevertheless exhibits very goodsocial performance results which are consistent with itstriple bottom line mission and objectives. Overall, the funddemonstrates a high level of commitment to fullyintegrating its social mission.Strengths Triple bottom line social missionOutreach results align with mission (MFI tier leveland geography)Management commitment to Client ProtectionPrinciples (CPP) and Principles for Investors inInclusive Finance (PIIF)Strong internal social metrics scoring processWeaknesses Figure 14: Client ProtectionMFI Endorsement of the Client Protection PrinciplesNoTracking of the Client Protection PrinciplesYesMIV Endorsement of the Principles for Investorsin Inclusive FinanceYesTracking of the Principles for Investors in Inclusive FinanceYesMFI clients are not required to have a social ratingnor endorse the CPPSOCIAL PERFORMANCE MANAGEMENT (SPM)Social Performance Management (SPM) relates to theprocesses and procedures employed by the Fund ensurethat its mission and values are translated into practiceSOCIAL MISSIONThe Fund has a broad social mandate - it aims to increaseaccess to financial services for low-income people indeveloping countries by providing loans and equity to MFIsthat have a track record, have gone through the first phaseof rapid growth and are financially sustainable. The Fundbenefits from its affiliation with ABC Bank, which contributesexpertise and experience as a small scale lender tostrengthen the governance and transfer triple bottom linepractices of the Fund’s microfinance clients.CORPORATE SOCIAL RESPONSIBILITY (CSR)Corporate Social Responsibility (CSR) relates to thestandards of corporate behavior to which the institutionsubscribes and seeks to enforce such as client protection,transparency, and environmental protection.The Fund conducts itself in a highly ethical manner andcomplies with the majority of CSR principles and bestpractices.www.luminis.comSOCIAL PROCESS/ORIGINATIONThe Fund has a high-level commitment to its socialmission.The Fund’s investment advisor has developed aSustainability Management System as part of itsinvestment process to help clarify the social andenvironmental performance of clients as well as theirattitude towards over-indebtedness and transparency.The Sustainability Management System classifies MFIs interms of four dimensions: products & services, responsiblebanking, environment, and social responsibility. The scoreindicates the extent to which the MFI has a clear visionand objective for each of these dimensions, the degree towhich these are embedded in processes and systems andhow this is expressed in their day-to-day operations.a service of MicroRate IncorporatedPage 7 of 10

ABC FUND Luxembourg October 2011RESULTS VERIFICATION AND REMEDIAL ACTIONFigure 15: Country Wealth BreakdownThe Fund’s investment partners are required to report onfinancial as well as non-financial indicators on a both aquarterly basis. The reports include social indicators suchas number of voluntary savers, number of women activeborrowers, rural versus urban clients. On an annual basisthe Fund’s investment officers evaluate indicatorsincluding as variety of financial and non-financial servicesoffered, and policies regarding fair pricing, transparency,the environment, and prevention of over-indebtedness.(% of portfolio)0%Lower-middleincome countries19%Low incomecountries48%Upper-middleincome countries34%High-incomecountriesSOCIAL RESULTSSocial Results focuses on the demographic and geographicoutreach results of the MIV’s process, and then evaluatesthe extent to which it measures and achieves its desiredsocial/economic outcomes. Since its inception, the Fund has disbursed XXXmillion to 25 MFIs and 1 microfinance investment fundin 18 countries. Currently, the average deal size is justover XXX million, which is above average (typicalMIV deal size is around 1 million). The discrepancy isdue to (1) the Fund’s overall size/successful capitalraising activities, and (2) a large equity investment inXYZ Bank, based in Country1, which is viewed by theFund as one of the worldwide leaders in sustainablemicrofinance.The average loan size/GNI per capita (91%) is one ofthe higher results observed among peers. Thissuggests the Fund is reaching its targeted MFIs whichare often established, commercially successful entitiesserving underserved microentrepreneurs.TM 7The Social Dollar Indexof XXXX is well abovepeer results and suggests that the fund is in factachieving its stated social mission despite targetingmore established, commercially successful MFIs.80%Tier 1 MFI ( 30m)0%Tier 2 MFI ( 5-30m)17%Tier 3 MFI ( 5m)0%Figures 15 and 16 illustrate the social success the Fundhas realized. A rather modest percentage of funds arebeing directed at the neediest MFIs (17% to Tier 3, which isbelow peer averages). However, a majority of funds arebeing deployed in the poorest countries (82% to lowermiddle and lower income countries). Additionally, a majorityof the Fund’s clients offer multiple financialservices/products to the local customer base.20%40%60%80%100%Figure 17: % of portfolio MFIs offering the following:Deposits17%Other Financial ServicesGovernment lendingEducation lendingFinancial instituions lendingMortgage lendingConsumption lendingMARKET LEADERSHIP/ OUTREACHwww.luminis.comFigure 16: MFI TypeHousehold finance lendinga service of MicroRate Incorporated64%0%6%14%31%44%50%0% 10% 20% 30% 40% 50% 60% 70%Page 8 of 10

ABC FUND Luxembourg October 2011Figure 18: ManagementManagementInvestment advisorOther funds managed20 mutual funds for private andinstitutional investors (Funds invest in:Climate and Energy, Arts and Culture,Food and Agriculture, SustainableReal Estate, Emerging Markets,Socially Responsible Investments).Total AUM XXX billionTotal staff15RationaleThe Fund benefits greatly from the Investment Advisor’sexperience, rigorous investment process, and prudent riskmanagement it adheres to for all funds undermanagement. Overall, it ranks above its peers.Portfolio managerStrengths Experienced management and staff with asuccessful long-term track recordRobust on site/desk due diligencePrudent portfolio monitoring and risk managementWeaknesses Active sinceFebruary 20XX (since inception)EducationMasters in XX, University of XYZOther funds managedNoneTotal AUM XXX millionThe ABC Advisor, a wholly owned subsidiary of ABC Bank,is a leading microfinance investment firm with a provenability to generate consistent returns while maintaining alean staff and low cost structure. The latter is attributable tothe economies of scale it achieves by managing 20 fundswith a combined value of nearly XXX billion.The Fund is governed by a five-member Board comprisedof a Chairman, one independent member, two ABC Bankemployees, and one ABC Management employee.Collectively, the Board members have as much as or moredirect microfinance experience as any specializedmicrofinance fund. The Board has broad authority toundertake any necessary steps to achieve its investmentobjectives.As is typical of many retail oriented open-end funds, theBoard lacks shareholder representation and isdominated by employees of the Fund’s investmentadvisor and ABC Bank, which is a concern. The Fund is dependent upon the expertise of a fewhighly experienced individuals who also help to comanage other funds for the investment advisor.Fortunately, staff turnover has not been an issue for theFund’s advisor over the past several years. Annual reports and annual accounts are audited by anexternal auditor, currently ABC Auditor.www.luminis.comABCPORTFOLIO MANAGEMENTBoard lacks shareholder representationGOVERNANCE ABC AdvisorThe firm’s four MIVs often share many of the same portfolioholdings and can thereby leverage the available capital tonegotiate favorable terms and conditions. The experienceand dedication of the ABC Advisor in microfinance investinghas played a significant factor in the Fund’s ability togenerate positive returns. ABC Management provides theBoard with advice, reports, and recommendations inconnection with the management of the assets and hasdiscretion to purchase and sell assets as it deemsappropriate.The investment team is comprised of fifteen key staffmembers with responsibility for three other microfinancefunds with approximately XXX million in combined assets. The Fund’s Portfolio Manager, ABC, is a seasonedmicrofinance professional who joined the team in 20XXfrom XYZ Bank, where she held several managementpositions. Prior to her present position, Ms. ABC servedas Fund Manager for XYZ Fund, a debt-equity basedMIV.a service of MicroRate IncorporatedPage 9 of 10

ABC FUND Luxembourg October 2011 Ms. ABC is supported by three senior executives andnine investment officers. The senior executives includethe Managing Director of the ABC Advisor, the ABCAdvisor’s Risk Manager, and the Deputy Director forthe ABC Advisor’s microfinance portfolios.INVESTMENT PROCESSThe Fund employs a rigorous process of investmentevaluation with on-the-ground due diligence a prerequisitefor all potential investments and on-site visits performed atleast annually for existing holdings.the 12 different share classes offered and are not reflected in theseFigures.5 The Microfinance Microscope is a collaboration between theEconomist Intelligence Unit (EIU) and the Inter-American DevelopmentBank (IDB).6 The Herfindahl-Hirschman Index is a commonly accepted measureof market concentration which takes into account the relative size anddistribution of risk exposures and approaches zero when theexposures are comprised of a large number of entities of relativelyequal size.7 Average amount the MIV invests in each micro-entrepreneur thatborrows from the MFI’s in the MIV’s portfolio.All aspects of the investment process are in line with bestpractices.PORTFOLIO MONITORINGOverall, the fund benefits from very sound portfoliomonitoring procedures, which are made possible due tothe substantial scale and resources of the Fund’s ABCAdvisor. Portfolio monitoring is a continuous process. Investees submit to quarterly financial reporting that isprocessed by the ABC Advisor’s monitoring and datacollection software. In case of a breach, the ABCAdvisor requests the investee to submit monthlyreports so that the situation can be monitored closely. In the case of equity and subordinated debtinvestments, Board participation is required to alignmanagement interests with the Fund’s goals. In practice, while portfolio monitoring is rigorous, theFund’s loan classification and provisioning policies aremore subjective and flexible.1In September 2010, the Fund obtained the LuxFLAG MicrofinanceLabel. The purpose of the Label is to promote the raising of capital inmicrofinance by reassuring investors that the MIV really invests inmicrofinance. The LuxFLAG Microfinance Label is intended for MIVswhich have a commercial objective.2The Fund currently has 12 separate classes of shares outstandingdenominated in either British pounds or euros and made available to avariety of institutional and retail investors.3 ABC Fund currently allocates investments among two “Sub-Funds”:PQR Fund and XYZ Fund.4 All performance results provided in Figure 1-4 reflect the Fund’sbalance sheet performance. Individual share class results vary amongwww.luminis.coma service of MicroRate IncorporatedPage 10 of 10

Sample REPORT Sample - “ABC” Fund Luxembourg October 2011 www.luminis.com a service of MicroRate Incorporated Page 1 of 10 Legal name: ABC Fund Registered domicile: ABC Location Legal structure: ABC Asset class: Open-ended hybrid MIV Inception date: February XX, 20XX Maturity date: None Fund manager: ABC Manager Investment advisor: ABC Advisor