Rapid economic development, low public debt and a young population provide Indonesia with perfect ingredients for a thriving mutual fund industry. Despite quickly-rising personal incomes, however, only relatively few Indonesians are active investors, while the vast majority prefer to stash their savings in a bank account, if not in their homes. The experience of the Asian financial crisis in 1997, which sparked the collapse of numerous Indonesian banks and eventually of the Suharto regime as well, goes some way to explain savers' misgivings about investing in rupiah assets. Hence Indonesia's funds industry is relatively small. Over the past years, however, an extended period of financial stability under the stewardship of Bank Indonesia and the Finance Minstry has begun to restore confidence in Indonesia's capital markets.
Global investment companies, therefore, are reassessing opportunities to manage Indonesians' growing wealth. While unfavourable regulations have been cited as one of the reasons for the cautious approach foreign fund operators have been taking on the Indonesian market so far, the long-term potential appears to be immense amid rising demand from individual and institutional investors.
The number of mutual funds in Indonesia is on the rise, even though the volume of assets they hold has shown a less consistent trend in recent years. The combined net asset value (NAV) of mutual funds rose to 209.51 trillion RP as of June 27, 2014, up from 192.54 trillion RP at the end of 2013, but down from the 2012 level, data from the Financial Services Authority (OJK) show. Equity-based funds account for almost half of the market (90.16 trillion RP), followed by fixed-income funds (30.2 trillion RP) and mixed-asset funds (18.34 trillion RP). Protected funds amounted to 42.8 trillion RP, while foreign-exchange funds totalled 16.1 trillion RP. Sharia-compliant funds increased to 9.17 trillion RP as of 27th June 2014. Indonesia's mutual fund industry remains small compared to that of other countries and vis-a-vis the domestic banking sector, which represented almost 80% of total financial system assets in December 2013 (Financial Stability Board). In fact, the entire financial sector is relatively small with assets equalling 72% of GDP in 2013. This leaves ample room for growth.
Total net asset value (NAV) of mutual funds in Indonesia and number of products:
Source: Financial Services Authority (OJK)
Only a few foreign companies are active in Indonesia, but together they command a dominant market share. These include Schroders, BNP Paribas, Manulife Asset Management and First State Investments (Commonwealth Bank of Australia). Foreign interest in the local market is growing, as exemplified with Eastspring Investments (Prudential plc) entering in summer 2012 and Kuala Lumpur-based Malayan Banking Berhad acquiring Indonesia's GMT Asset Management to launch as Maybank GMT Asset Management in November 2013. There are some 70 Indonesia-headquartered fund operators, lead by Mandiri Manajemen Investasi (Bank Mandiri). While market concentration is high at the top, the smaller companies should form alliances to reduce overhead expenses and bundle marketing power behind their brands. Further consolidation would seem logical.
The Mutual Funds Association of Indonesia (APRDI) and financial media companay Bloomberg in April 2014 bestowed awards on 17 of Indonesia's best performing funds across various categories:
Demand for mutual fund investment in Indonesia can be expected to grow both on the retail and institutional side for a number of reasons:
The vast majority of mutual fund participation in Indonesia comes from institutional investors, while individual investors contribute only a small portion of funds. The total number of mutual fund investors is around 180,000, according to a figure reported by APRDI in March 2014. That equates to significantly less than 0.1% of the country's population and highlights the immense upside potential if and as Indonesians become more comfortable with investing. The government and central bank are actively promoting a greater involvement of Indonesians in equity and bond markets to increase the depth of the capital markets and reduce volatility of cross-border capital flows (See Indonesia’s Capital Markets). The safest way for most Indonesians to do this is through mutual funds, which provides a convenient sales pitch to attract more retail clients.
Market penetration should also improve as banks, the primary channel for mutual fund distribution to retail clients, extend their branch networks outside Jakarta, where many customers have only a limited range of investment options. Offering funds that invest in accordance with Islamic finance rules can support marketing efforts to retail clients. In particular, it can help foreign-based asset managers demonstrate their committment to the local market (where some 90% of the population are Muslims) and at the same time diversify their range of themes.
Since 1st January, 2014, the Financial Services Authority (OJK) is the sole authority in charge of regulating and monitoring all financial service institutions, combining responsibilites that used to be split between the Ministry of Finance's capital market supervisory agency (Bapepam-LK) for non-bank institutions and the central bank (Bank Indonesia) for banks. Operating as an autonomous body, the OJK can issue regulations and sanction financial institutions that fail to comply. Most observers welcome the OJK's establishment as a way to strengthen the independence of financial market supervision while maintaining a high degree of continuity.
The OJK has been supporting the government's call to expand the domestic investor base and as of May 2014 was working on new rules to increase the clarity of customers' rights and obligations in mutual funds and make them more accessible to retail clients.
A number of obstacles have been blamed for the slow development of Indonesia's mutual fund industry in the past:
In the long run, the opportunties of Indonesia's maturing fund market should easily outweigh the challenges. More than anything else, the enormous potential investor base in the world's fourth-most populous country makes Indonesia a region that asset managers cannot afford to ignore.
Global Business Guide Indonesia - 2014
Bourse Name: Bursa Efek Indonesia (IDX)
Main Index: Jakarta Composite Index
Market Capitalisation: 4,872 trillion IDR (December 2015)
Annual Performance: -11.47% (2015)
Record High: 5,523.29 (April 2015)
Number of Issuers: 523 (2015)
Top Stocks by Market Capitalisation: HM Sampoerna, BCA, Telkom, Unilever, BRI, Astra International, Bank Mandiri, Gudang Garam, BNI.