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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 prefers 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 Ministry has begun to restore
confidence in Indonesia's capital markets.
Overview of Indonesia's Mutual Fund Industry
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
Global investment companies, therefore, are reassessing opportunities to
manage Indonesians' growing wealth. While unfavorable 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.
A small market with some big players
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 totaled 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 equaling 72% of GDP in 2013.
This leaves ample room for growth.
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 East spring
Investments (Prudential plc) entering in summer 2012 and Kuala Lumpur-based

Malayan Banking Berhad acquires Indonesia's GMT Asset Management to launch as


Maybank GMT Asset Management in November 2013. There are some 70 Indonesiaheadquartered fund operators, led 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
Rising demand anticipated
Demand for mutual fund investment in Indonesia can be expected to grow
both on the retail and institutional side for a number of reasons:

Strong economic growth, low public debt and rising disposable incomes in
Southeast Asia's largest economy allow for increased savings
A young and growing population creates the need to build financial reserves
for children's education, retirement and unforeseen events
Growing awareness about the benefits of investing should generate demand
among well-educated Indonesians, many of whom worry about inflation
eating away at their savings amid unattractive bank interest rates
Assets of insurance companies and pension funds are rising, as more
Indonesians seek to secure their standard of living. Insurance market
penetration is low but rising, suggesting a growing pool of assets that needs
to be managed

Opportunities to outweigh challenges


A number of obstacles have been blamed for the slow development of
Indonesia's mutual fund industry in the past:

The scant availability of highly qualified investment and management


professionals in Indonesia creates headaches for firms looking to recruit staff
on the domestic market, while employing foreigners is cumbersome and quite
restricted
Foreign-based asset managers cannot just sell funds locally, but instead are
required to establish a local presence as a standalone business, which
reduces opportunities for them to centralize functions at their global
headquarters
No more than 15% of the net asset value in mutual funds sold in Indonesia
can be invested in securities issued/traded on an offshore exchange (with the
exception of Indonesian government debt obligations or securities issued
abroad for the benefit of Indonesian companies). Numerous further
restrictions apply with regards to the assets that mutual funds can hold

In the long run, the opportunities 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 ignores.