Mutual fund industry crashes on declining trust

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.