Mutual fund industry crashes on declining trust<\/p>\n
Rendi A. Witular, The Jakarta Post, Jakarta<\/p>\n
Built on questionable transparency, the country's newly developed
\nmutual fund industry is currently experiencing a downturn marked
\nby massive redemptions, with investors losing their trust in fund
\nmanagers for failing to disclose the risks involved in their
\ninvestments.<\/p>\n
In just six months, the level of investable funds in the
\nindustry has plunged by some 45 percent, while net asset value
\n(NAV) has nose-dived by 60 percent<\/p>\n
Market players and analysts say the massive redemptions have
\nnot only been triggered by lingering monetary and fiscal problems
\nin the country, but also by an erosion of trust in fund managers
\nthat will be difficult to restore.<\/p>\n
\"Lack of transparency on the part of mutual fund managers and
\nlack of efforts to educate investors about the risks have caused
\nthe industry to tumble rapidly,\" said Lin Che Wei, a former
\ncapital market analyst who was recently installed as president
\ndirector of state-owned investment firm PT Danareksa.<\/p>\n
Lin said it would be difficult for the industry to recover in
\nthe short term, or to reach the NAV level posted earlier this
\nyear, as investors needed to first have their confidence in fund
\nmanagers restored.<\/p>\n
As of the first week of September, the amount of investable
\nfunds in the industry had declined to less than Rp 65 trillion
\n(US$6.56 billion) from Rp 118 trillion in March, according to the
\nCapital Market Supervisory Agency (Bapepam).<\/p>\n
Meanwhile, the industry's NAV dropped to Rp 46 trillion in the
\nfirst week of September from Rp 105 trillion in March.<\/p>\n
The industry, which started to develop five years ago, had
\nearlier seen tremendous growth in investable funds managed by
\nsecurities houses, which rocketed from just Rp 10.25 trillion
\n(US$10.3 billion) in 2003 to Rp 124 trillion early this year.<\/p>\n
Its NAV level also grew from Rp 5.52 trillion in 2000 to Rp
\n111 trillion in January this year.<\/p>\n
The problems in the industry started in March when investors
\nsuffered from a declines in their investable funds, especially in
\nfixed-income investment instruments, due to the instable monetary
\ncondition resulting from higher global oil prices and fiscal
\nimbalances,<\/p>\n
The higher interest rates applied by the U.S. Federal Reserve,
\nwhich were followed by Bank Indonesia at home, caused investors
\nto loose their appetites for bonds -- the main underlying
\nportfolios for mutual fund fixed income investments.<\/p>\n
Fixed income instruments account for the lion's share of the
\ncountry's mutual fund industry composition.<\/p>\n
Institutional investors, who are fully familiar with the
\nrisks, began withdrawing their investments from mutual funds and
\nshifting them to either the equity or money market, which have
\nhigher yields.<\/p>\n
This was not the case for most retail investors, however, who later
\nblamed their fund managers for not adequately informing them of
\nthe dangers lurking ahead. They had to contend with the fact that
\n-- in contrast to what their fund managers had told them to the
\neffect that mutual funds were more or less like bank deposits:
\nrisk-free investments with fairly good returns -- their
\ninvestments were in fact declining rapidly in value.<\/p>\n
The confusion led to massive redemptions by certain investors,
\nwhich were followed in the end by panic redemptions by others.<\/p>\n
The distrust was also exacerbated by the acts of many fund
\nmanagers who refused to base NAV calculation on market prices --
\ncalled marked-to-market value -- preferring instead to apply
\ntheir own NAVs, which basically failed to reflect the true state
\nof the market.<\/p>\n
NAV is the total assets owned by a securities company minus
\nits total liabilities. Because an investment company's assets and
\nliabilities change daily based on market movements, NAV should
\nideally also change daily.<\/p>\n
Based on the deceptive NAV levels being quoted by fund
\nmanagers, investors were unable to accurately assess the state of
\ntheir investments as the figures given out by the managers were
\nalways \"stable\" with increasing proceeds.<\/p>\n
A well-publicized incident at BNI Securities has spooked many
\ninvestors, at least for the short term.<\/p>\n
Dozens of investors stormed BNI Securities offices last week,
\ncomplaining over the decline in their underlying capital invested
\nwith the company. They said the decline in their funds was
\ncontrary to the explanations given by company agents, who had
\ntold them that their underlying capital would never depreciate
\nwhen investing in mutual funds.<\/p>\n
The company is a unit of state-controlled Bank Negara
\nIndonesia (BNI).<\/p>\n
In front of lawmakers recently, BNI president director Sigit
\nPramono admitted there had been improprieties on the part of the
\nsecurities company when offering mutual fund products to the
\npublic.<\/p>\n
\"The mutual fund agents only explained about the profits, not
\nthe risks. I think that is misleading. There should be
\ncomprehensive explanations on the risks involved in investing in
\nmutual funds to avoid panic redemptions in the future,\" said
\nSigit.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/mutual-fund-industry-crashes-on-declining-trust-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}