Investments in Triodos Organic Growth Fund are subject to several risks, which are described in detail in the particulars relating to the sub-fund included in the prospectus of Triodos SICAV II. Some of the relevant risks are highlighted below.
Currency risk is the risk that changes in exchange rates may have a negative impact on the fund’s profits and assets. The reference currency for Triodos Organic Growth Fund is the euro, whereas investments may be denominated in other currencies. Exposure to volatile exchange rates can affect the value of the investments and thus the fund’s assets. Triodos Organic Growth Fund is therefore exposed to currency risk. The currency risk is mitigated by restrictions on the relevant exposures and by using hedging instruments. The fund may invest up to 50% of its net assets in non-hedged, non-euro denominated investments. However, the fund aims to hedge all its non-euro denominated investments. As at December 31, 2017, 4.6% of the fund’s net assets were invested in non-hedged, non-euro denominated investments.
Country risk is the risk that political, fiscal or economic changes will have a negative impact on the fund’s profits and assets. The country risk mainly consists of the risk of changes in economic conditions, such as consumer confidence and regional appetite for and faith in the products and services of the companies that the fund has invested in. The country risk is mitigated by investing primarily in Western European countries and by restricting the investments in any one country to 40% of the fund’s net assets. The exception is Germany, where the fund may invest up to 50% of its net assets. The largest single country exposure as at December 31, 2017 was Denmark, where 37.0% of the fund’s net assets were invested (2016: 39.0%). In 2017, the investments of the fund were not negatively impacted by the economic and political climate in the countries where the fund invests.
The fact that the returns generated by the portfolio companies are determined by various uncertain factors constitutes a long-term risk. Returns on individual investments arise through a combination of dividend distributions, growth in business value, or, in certain cases, through the partial or total sale of investments. In case of adverse market and/or business developments, dividend distributions may decline, as may the valuation of underlying investments. Over time, sufficient diversification of the portfolio will mitigate this risk.
Liquidity risk is the risk that the fund is unable to obtain the financial means necessary to meet its financial obligations at a certain point in time. Triodos Organic Growth Fund aims to maintain sufficient liquid assets to meet its obligations under normal circumstances. As Triodos Organic Growth Fund is a semi open-end fund it may face large redemptions on each valuation day. This could potentially lead to a situation in which the fund needs to temporarily close for redemptions. The following measures can be taken to mitigate the liquidity risk:
- The fund aims to maintain sufficient buffers in the form of cash or cash equivalents or to offer sufficient other guarantees. The cash buffers are determined monthly, based on historical inflow and outflow, projections for the inflow and the results of certain stress tests.
- The investments in the fund are illiquid in nature, but can still be sold on a secondary market.
- The fund may decide to temporarily close for redemptions or subscriptions by suspending or restricting the purchase and issue of shares of the fund. The fund carries out monthly stress tests to assess the risk.
On December 31, 2017, Triodos Organic Growth Fund held 24.6% of its net assets in cash and cash equivalents (2016: 30.0%). In 2017, liquidity was considered more than adequate for the fund to meet its payment obligations and facilitate the quarterly subscriptions and redemptions in its shares.
Triodos Organic Growth Fund has a very specific, sector-based investment focus, targeting the organic food and sustainable consumer sector in Europe. If a downturn occurs in this market or in relevant sub-sectors of this market, this will likely have a negative impact on the performance of portfolio companies and therefore on the return of the fund. This risk will be mitigated by diversification across sub-sectors and value chain segments. The concentration risk is also mitigated by applying an investment limit of up to 25% of the fund’s net assets for securities and financing instruments issued by a single portfolio company. Since January 2016, one of the portfolio companies of Triodos Organic Growth Fund is in passive breach of this investment restriction of the fund, since it represents over 25% of the fund’s net assets. This passive breach is the result of the continuing exceptionally strong performance of the portfolio company. In view of the growth of the fund’s net assets, which is expected to exceed the valuation increase of the portfolio company, it is expected that this passive breach will be resolved in 2018. In 2017, the organic food and sustainable consumer markets in Europe showed healthy growth.