Mutual fund industry crashes on declining trust

Rendi A. Witular, The Jakarta Post, Jakarta

Built on questionable transparency, the country's newly developed mutual fund industry is currently experiencing a downturn marked by massive redemptions, with investors losing their trust in fund managers for failing to disclose the risks involved in their investments.

In just six months, the level of investable funds in the industry has plunged by some 45 percent, while net asset value (NAV) has nose-dived by 60 percent

Market players and analysts say the massive redemptions have not only been triggered by lingering monetary and fiscal problems in the country, but also by an erosion of trust in fund managers that will be difficult to restore.

"Lack of transparency on the part of mutual fund managers and lack of efforts to educate investors about the risks have caused the industry to tumble rapidly," said Lin Che Wei, a former capital market analyst who was recently installed as president director of state-owned investment firm PT Danareksa.

Lin said it would be difficult for the industry to recover in the short term, or to reach the NAV level posted earlier this year, as investors needed to first have their confidence in fund managers restored.

As of the first week of September, the amount of investable funds in the industry had declined to less than Rp 65 trillion (US$6.56 billion) from Rp 118 trillion in March, according to the Capital Market Supervisory Agency (Bapepam).

Meanwhile, the industry's NAV dropped to Rp 46 trillion in the first week of September from Rp 105 trillion in March.

The industry, which started to develop five years ago, had earlier seen tremendous growth in investable funds managed by securities houses, which rocketed from just Rp 10.25 trillion (US$10.3 billion) in 2003 to Rp 124 trillion early this year.

Its NAV level also grew from Rp 5.52 trillion in 2000 to Rp 111 trillion in January this year.

The problems in the industry started in March when investors suffered from a declines in their investable funds, especially in fixed-income investment instruments, due to the instable monetary condition resulting from higher global oil prices and fiscal imbalances,

The higher interest rates applied by the U.S. Federal Reserve, which were followed by Bank Indonesia at home, caused investors to loose their appetites for bonds -- the main underlying portfolios for mutual fund fixed income investments.

Fixed income instruments account for the lion's share of the country's mutual fund industry composition.

Institutional investors, who are fully familiar with the risks, began withdrawing their investments from mutual funds and shifting them to either the equity or money market, which have higher yields.

This was not the case for most retail investors, however, who later blamed their fund managers for not adequately informing them of the dangers lurking ahead. They had to contend with the fact that -- in contrast to what their fund managers had told them to the effect that mutual funds were more or less like bank deposits: risk-free investments with fairly good returns -- their investments were in fact declining rapidly in value.

The confusion led to massive redemptions by certain investors, which were followed in the end by panic redemptions by others.

The distrust was also exacerbated by the acts of many fund managers who refused to base NAV calculation on market prices -- called marked-to-market value -- preferring instead to apply their own NAVs, which basically failed to reflect the true state of the market.

NAV is the total assets owned by a securities company minus its total liabilities. Because an investment company's assets and liabilities change daily based on market movements, NAV should ideally also change daily.

Based on the deceptive NAV levels being quoted by fund managers, investors were unable to accurately assess the state of their investments as the figures given out by the managers were always "stable" with increasing proceeds.

A well-publicized incident at BNI Securities has spooked many investors, at least for the short term.

Dozens of investors stormed BNI Securities offices last week, complaining over the decline in their underlying capital invested with the company. They said the decline in their funds was contrary to the explanations given by company agents, who had told them that their underlying capital would never depreciate when investing in mutual funds.

The company is a unit of state-controlled Bank Negara Indonesia (BNI).

In front of lawmakers recently, BNI president director Sigit Pramono admitted there had been improprieties on the part of the securities company when offering mutual fund products to the public.

"The mutual fund agents only explained about the profits, not the risks. I think that is misleading. There should be comprehensive explanations on the risks involved in investing in mutual funds to avoid panic redemptions in the future," said Sigit.