Related and unrelated events
In order to properly assess the impact of the COVID-19 crisis on the alternative investment funds (AIFs) managed by Triodos Investment Management, it is important to distinguish several related and unrelated events that have occurred over the last couple of weeks:
- The outbreak of the COVID-19 virus itself, leading to health issues and lockdown of entire countries and regions due to direct quarantine measures. The impact of this event can be restored immediately after the virus is contained.
- Travel bans resulting from COVID-19 measures taken: the crisis has a severe impact on trade, tourism and capital flows. It may take long for local economies to recover from this and return to pre-crisis levels.
- Tumbling oil prices, initially fueled by the disagreement between OPEC and Russia about production levels: this event has an impact on oil exporting countries across the globe from Nigeria to Mongolia to Ecuador.
- Drastic devaluation of local currencies.
- Lower economic growth.
It is equally important to distinguish between direct (yet unrealised) impact on fund returns (e.g. drop in oil prices, drastic currency movements) and potential indirect impact through individual counterparty risk (e.g. debt clients unable to repay loans due to local economic downturn). These risks are very uncertain and as such hard to predict. It is clear, however, that effects on some investments can be serious. This will for a large part depend on the longevity and gravity of the measures taken and as such its macro-economic impact and can also locally differ significantly.
Implications on fund level
Every AIF managed by Triodos Investment Management has its own investment theme and strategy. As such, the correlation with current events and potential impact on the funds is different. Below, you find an overview of our assessment per strategy and the underlying fund(s).
Triodos Microfinance Fund, Triodos Fair Share Fund, Sustainability Finance Real Economies Fund
The impact on counterparty and country risk is as yet uncertain, but the fund teams are monitoring this closely. In earlier crises we have seen that the impact on the lower market segments (micro- and SME borrowers) has been less as those companies tend to be more resilient and flexible than large corporates. Another risk mitigating factor is that the funds' investments are not listed and therefore not directly impacted by market sentiment.
Nevertheless, the turmoil of recent events will bring challenges to emerging economies on different levels. For example, because they depend on oil exports, or because capital leaves the country in search for less risky investments, or they depend for a larger part on tourism that will suffer from the world-wide travel bans and lockdowns. And of course, also within each country the virus may have significant impact on the (health of the) population, and it is clear that government measures restrict economic activities. These events may ultimately hit the real economies in which the microfinance institutions and SME banks operate, with an impact on their portfolio quality and profitability.
Many of the portfolio companies are currently assessing the impact in their loan portfolios and discussing potential measures. This impact may differ substantially from country to country. The fund teams have intensified their monitoring of the countries and investments in our portfolio. They are in close contact with the investments to understand the local situation and are alert to act on risks that would emerge in the portfolios. At the same time, it should be remembered that, especially in these times, the funds' investments are making a difference to people in challenging circumstances.
The strong appreciation of the euro against almost all foreign currencies is the result of money transfers to safe havens (euro) due to global uncertainty, initially caused by the outbreak of COVID-19, and accelerated by the strong oil price decline. This means that the value of the investments in the portfolios of Triodos Microfinance Fund and Triodos Fair Share Fund has decreased relative to the euro.
Also for SFRE Fund negative impact on valuations can be expected due to currency devaluations in unhedged positions against the US dollar. (the fund’s reporting currency), in addition to expected lower growth in the respective countries.
Read also the interview with Frank Streppel, Head of Global Investments at our Emerging Markets department, about the role of Financial Inclusion in addressing the impact of COVID-19.
Triodos Renewables Europe Fund
The majority of investments of the fund consists of operational renewable electricity producing assets. These operate relatively autonomous and will continue to operate with the electricity that is produced being sold under relevant contracts. The fund team is assessing the effects of current developments on the operational assets, which is anticipated to be limited. Occasional increased response times in case of scheduled and or unscheduled maintenance can be anticipated, linked to availability of equipment or personnel. For projects in development or construction phase, planning will be evaluated to understand the impact of the pandemic on obtaining permits, availability of personnel and supply of materials. Some delays are anticipated.
At this point, the effects of the current economic downturn are expected to be limited, due to the fund’s long-term objectives and good fundamentals of projects. This is the result of the fund’s well diversified portfolio of more than 325 projects across three main segments, with renewable energy being the largest. Moreover, more than 80% of the projects are in the Netherlands and only 6% is in emerging markets. Also, these projects are financed in hard currencies, mostly US dollars, and always hedged to the euro. Therefore, an impact due to exchange rates swings is adequately mitigated. In the Netherlands, more than EUR 500 million is mainly invested in robust, long-term senior project finance loans in renewable energy. Due to the non-cyclical dynamics of this segment, we expect projects to continue to develop in line with expectations.
Projects in food and agriculture could envisage more difficulties, especially those whose supply chain may be interrupted, or those that depend on activities in the hospitality and catering sector. The impact on the total portfolio is expected to be limited, as this segment represents a small part of the portfolio, spread among more than 160 projects. Finally, the NAV is determined on a daily basis by interest rates and risk premia. Increased risk premia will have a negative effect on valuations, while a positive effect due to interest rates is expected if they continue to decline. However, if interest rates continue to decline or the ECB eases monetary policy by cutting interest rates further, new projects will yield less returns to investors.
Oil price impact
The main impact on power prices is expected to be short term as lower demand and lower commodity prices are likely to reduce short-term power prices. Effects of current events on mid and long-term power prices is being analysed and still uncertain. Sensitivity to power prices is relatively low in the fund’s current portfolio. The effect of current oil price developments on the long-term competitiveness of renewables is expected to be limited. We do not expect the current developments to result in a reversal of the energy transition. Government policies, whilst unpredictable, will most likely continue to focus on delivering COP21 (Paris) targets, implementing those measures that result in achieving commitments made towards CO2 reduction.
Sustainable Food and Agriculture
Triodos Organic Growth Fund
We expect that the impact for Triodos Organic Growth Fund is mostly linked to the performance of the underlying portfolio companies effecting the valuation of the investment portfolio. With the multiples used for our valuation methodology being dependent on market multiples from similar private equity deals, the valuations of the portfolio companies can also be impacted by changes in these multiples. With all foreign exchange rate risks being fully hedged, the impact of currency rate risk is expected to be limited at fund level. The fund team is monitoring developments closely and is in active dialogue with all companies asking for insights in their business continuity measures and how their business is impacted.
Whether a portfolio company will be hit depends largely on the specifics of the company’s business model, country and the sector it is active in. Although this is still very uncertain and hard to predict, we are already seeing some effects. For example, the demand in the out-of-home sector is hit by the measures taken in light of the pandemic, which in turn effects some of our portfolio companies. At the other hand, we see that meal-box sales benefit from an increased demand for online ordered and home delivered food.
Please contact our Investor Relations team for more information.