The evolution of Indonesia’s mutual funds industry

Snacking over rice and locally-caught catfish, washed down by tropical juices near her office in downtown Jakarta, Vivian Secakusuma, president director of PT BNP Paribas Investment Partners, cannot hide her enthusiasm for the country’s growing mutual funds market.

While assets raised by her group’s funds have now burst through the $3bn barrier, most of the money has to date flowed in from equity and fixed income related mandates handed out by pension funds, insurance companies and other institutions. The challenge for BNP Paribas, as it is for other foreign houses, is to exploit the increasing wealth of Indonesia’s young, fast growing population.

They plan to do this through exploiting links with a variety of fast-expanding Asian regional international banking networks such as Standard Chartered, DBS and HSBC, which all have joint ventures in Indonesia. And through some of the tighter client relationships held by high-profile local banks including Bank Mandiri, Bank Permata and BCA.

Last year, these banks had temporary brakes put on them for a month, with some restrictions placed on acquisition of new business. For one key player, Citibank, sanctions were even harsher, following the arrest and jailing of a senior executive after the embezzlement of $4m. Citi was banned from selling wealth management services to new clients for 12 months.

“Every industry will go through a similar process,” smiles Ms Secaskusuma, seeing the story as the natural evolution expected in any emerging market for mutual funds. “Last year was challenging for our industry due to this audit, but it will make the industry stronger and it keeps growing.”

Despite still raw memories from the Asian crisis of 1997 to 1998, which hit Indonesia particularly hard, private clients remain optimistic about the growth of their own economy. Temporary concerns about fuel price inflation also appear to have been dampened. “Uncertainty from Europe has had some effect on the volatility of Indonesia,” she says. “But domestic figures are good and investors have been enjoying market movement. People don’t really see the possibility of things going back to 2008 again. But they feel that if they do, the market will quickly bounce back.”

Fund companies report, however, that acquisition of new client assets is getting altogether more challenging, with the time horizon of investors changing significantly. “Before 2008, people invested for the longer-term. But since then, their horizon has shortened and they are riding on market movements. They take their profit when the market goes up and come into the market when it is down,” confirms Ms Sacaskusuma.

This new-found sophistication has also triggered a requirement for a raft of new, not necessarily more sophisticated but certainly more efficient – investment products, offering an optimal return. Recent collaborations with both local and foreign banks have included sectoral funds, mid-cap and small cap equity products and also a Sharia-prescribed Islamic product.

“Investors here will treat a Sharia fund as just another equity product,” admits Ms Secaskusuma. “The moral obligation is something of additional value, not yet the trigger point to go into the product. But if two competing products have the same performance, then investors will prefer the Sharia fund.”

With Indonesian interest rates falling from more than 20 per cent in the early 1990s, to 5.5 per cent today, investors are increasingly searching for alternatives to cash deposits, believes Michael Tjoajadi, CEO of the Jakarta-based $6bn Schroders fund franchise.

The key moment in the rise of managed assets in the country was the regulator’s decision in 2001 to allow products to be distributed by bank branches he believes, leaving Indonesia’s potential now to at least equal those of nearby Singapore and Malaysia.

While much of the running has so far been done by global players HSBC, Standard Chartered and Citi, these groups have limited penetration due to small numbers of branches in the vast country.

“Standard Chartered and Citi have less than 30 branches a piece, while local players Mandiri and BNI have between 2,000 and 3,000 branches. If they utilise their databases of clients, they will become very important players in fund distribution.”

Like his counterparts at BNP Paribas, Mr Tjoajadi also sees a major change in mentality and increase in investor education in recent years. “After the first Bali bombings, everyone withdrew from the market,” he recalls. “But when it happened for the second time, everybody said ‘let’s go and buy shares as the market is cheap’. Then in 2009, they took their profits.”

Looking at the new high-rise building projects sprouting up outside the window of his Jakarta Stock Exchange Tower offices and at the extensive industrial investment on neighbouring islands, Mr Tjoajadi clearly sees huge potential on his doorstep.

“Indonesia is home to 240 million people, and even if we are trying to sell funds to 10 per cent of that total, that is still 24 million, which is equal to the entire population of Malaysia or Australia.”

Vivian Secakusuma

BNP Paribas Investment Partners