Growing pains in Indonesia’s mutual fund market

OJK, the local financial market regulator has ordered 4 mutual fund management companies to close their doors as they have not complied with local regulations and laws. Companies have, for example, promised fixed annual returns of above 11% when investing into their funds. Therefore during the past three weeks dozens of mutual funds have been closed and liquidated. According to some estimates, there have been up to 1bn USD worth of assets in these closed funds.

Funds in question have been investing their assets mostly to illiquid and small companies, thus driving up the share prices while more funds have been obtained by promising those above mentioned fixed returns. NAVs of the funds that have been closed recently, have dropped between 20-55% in just few weeks – that has also resulted in 2% drop in JCI-index, while MSCI Indonesia Small Cap index has dropped around 10%. Our JOM Komodo Indonesia fund NAV has declined by 3-4% during the same period.

Currently the sentiment in stock market is very fragile while liquidity has dropped considerable. However, apparently, most of the liquidation is now behind us, at least what comes to larger stocks, but selling may continue for some time for smaller companies.

Positive side effect on all this is that mutual fund operators are being given a clear signal, that rules and regulations are to be followed and complied, or otherwise you are out of business. This also mean that capital should be allocated more toward companies that where earnings are growing in healthy manner and not just in companies where it is easy to manipulate stock prices.

Indonesia’s mutual fund business has been growing very rapidly over the past few years as financial digital apps have made investing easier for the masses. For example, in 2015 only 0.15% (400k people)of the population (265m)  had invested in capital markets, while currently the same figure is 0.86% of the population or 2.3m people. Thus, CAGR has been over 30% for number of investors in the market. However, mutual fund assets are only 4% of GDP currently, whereas in India and Thailand the figures are 12% and 31%, respectively. Structural growth, however, is set to continue strongly also in coming years.