Michael T. Tjoajadi of Schroder Investment Management Indonesia tells Stefanie Eschenbacher that local asset management skills need to be strengthened, ahead of the country joining a regional fund passport scheme developed by Singapore, Malaysia and Thailan.
Time is running out for Indonesian asset managers to diversify and develop their product ranges as the country plans to join a regional fund passport scheme.
Developed by its competitive neighbours Singapore, Malaysia and Thailand, Indonesia is to join the fund passport scheme in 2015.
This scheme would allow Indonesian asset managers to sell their funds into other Southeast Asian countries, but it would also increase competition in its domestic market.
“The Indonesian government needs to strengthen local asset management skills to compete with international peers,” says Michael T. Tjoajadi, the chief executive officer of Schroder Investment Management Indonesia, the largest asset manager in the country.
At the end of June, Schroder Investment Management Indonesia had assets under management totalling 5.2 quadrillion Indonesian rupiah ($5 billion).
“The government should realise that they will need to do something to prepare the fund industry to compete,” Tjoajadi says, sitting in his office in central Jakarta, overlooking the sprawling city as the sun set and thousands of commuteres are stuck in a traffic jam.
Despite Indonesia’s appealing demographics – it is home to the biggest Muslim population in the world and is the largest country in Southeast Asia – there are barriers to growth in the asset management industry.
Regulation does not permit Indonesian asset managers to offer anything other than local funds, although the regulator has repeatedly hinted that this may change.
One question asset managers in Jakarta say they often ask themselves is how to diversify their product range, which comprises only single country funds investing in Indonesia.
“We only invest in the local market, which offers about 500 stocks, not all of which are liquid,” Tjoajadi says, adding that the challenge is not only to differentiate his products from each other, but also from those of his competitors.
Schroder Investment Management Indonesia offers four equity funds – a large-cap fund, a small-cap fund, one that can invest across the market capitalisation spectrum, and one with a different tracking error. It also offers two fixed income funds – long duration and short duration – and money market funds.
“I would like to see our assets under management grow, especially in balanced and fixed income funds,” he says.
The most recent addition to the range is a sharia-compliant bond fund, which has attracted $90 million of assets since it was launched less than two years ago.
Tjoajadi says once the fund reaches $100 million, he would like to also offer a sharia-compliant equity fund.
While there is a possibility to invest up to 15% of a fund’s assets offshore, Tjoajadi says this option is too costly and too complicated.
“We used to have an allocation overseas, but have closed it,” he says, explaining that it was impossible to reach economies of scale.
Although that portion could have been given to the Asia Pacific team in Hong Kong, or elsewhere in the world, he says it was still too expensive.
Custody business needs to be transacted or carried out in Indonesia and there is a 30% tax on currency gains that investors need to pay, even if those gains are unrealised.
Tjoajadi says the government should allow asset managers to invest 100% outside Indonesia so they could offer dollar- or euro-denominated funds.
FUNDS OF FUNDS
He is hopeful this will happen soon. “They might also decide to allow funds of funds because a lot of local asset managers do not have the capability to invest overseas yet,” he says.
In a maturing market like Indonesia, derivatives are not an option either.
In its home market, Schroder Investment Management Indonesia has traditionally had a strong equity offering.
The bond side has been weaker, which is a result of the response to the policies the Indonesian government put in place more than a decade ago when it was promoting investment in government bonds.
Tjoajadi says the management at that time did not agree with the approach many of its competitors took – unitising government bonds and selling them to retail investors with the promise of a deposit-like investment where net asset value would only go up.
“This, of course, was not correct because the prices of bonds fluctuate,” he says. “At that time, we did not agree with such an approach and felt it was impossible to give investors such a guarantee.”
Instead, Schroder Investment Management Indonesia focused on its equity capabilities. “Our competitors were weak on the equity side because they focused on selling bonds,” he adds.
Bond funds accounted for some 90% of the asset management industry up until 2005.
The net asset value of bonds started to fluctuate, and some investors that had invested in over-priced bonds lost money.
“Investors redeemed investments from their bond funds, they felt that asset managers had lied to them.”
Tjoajadi says the main challenge all asset managers in Indonesia face today is educating the vast population about the benefits of investing in funds.
There are fewer than 300,000 investors in Indonesia, which has a population of 246 million, the largest in Southeast Asia.
Its assets under management stood at nearly $16 billion at the end of September, according to data from Lipper. This compares with $6.5 billion at the end of 2008.
Today, the largest asset class in Indonesia is equities with $6.8 billion of assets under management. Bond funds hold $3.4 billion, mixed assets $2.5 billion and money market funds $2.3 billion.
There is considerable potential to grow, though. The McKinsey Global Institute forecasts that Indonesia will have added 90 million people to its consuming class by 2030. This will be more than any other country, except China and India. Indonesia has the potential to become the seventh-largest global economy.
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