Some emerging markets have flung open their doors to foreign investment companies in recent years, while others have shut it firmly.
Indonesia is somewhere in the middle. It is a country in transition and most fund managers doing business there are effectively putting down a marker for the future, rather than reaping immediate rewards.
With a young and growing population of about 240m people, gross domestic product growth of 6 per cent last year and a relatively low debt to GDP ratio of 26 per cent, the potential of the country is considerable.
However, the environment for fund distribution is relatively inhospitable and only four foreign managers are currently plying their business in Indonesia: Schroders, First State Investments, BNP and Manulife.
A number of obstacles are keeping the hordes away. First, companies must set up a standalone business that can fulfil all the functions that fund managers normally centralise or outsource.
Michael Stapleton, managing director for Asia and Japan at First State Investments, the international asset management business owned by the Commonwealth Bank of Australia, says: “In most other regional markets, managers can sell funds without being locally domiciled, but in Indonesia you have to have an end-to-end business from the investment management staff, to the management team.”
Investment companies must also have a local fund platform, he says.
Just as challenging is the restriction of foreign assets held within funds, which is capped at 15 per cent. This forces foreign fund managers to create a fund range for the local market.
“We have a range of offshore funds that we would like to distribute, but we can’t because of the regulations,” says Mr Stapleton.
“We can only manage funds for locals via a local range of mutual funds.”
With a mutual fund market of just $18bn in total, the expenditure involved is unappealing to many firms. Singapore-based Santa Lucia Asset Management (SLAM), for instance, has opened a Jakarta office for its investment operations, but has chosen not to distribute to locals. “Indonesia is an immature market and has the potential to be very big,” says James Morton, chief investment officer of SLAM. “[But] to achieve its potential, it needs to do something to address the uncertain regulatory environment and reduce the capital constraints that discourage international firms from setting up in Jakarta.”
First State, which launched in Indonesia in 2004, is looking to significantly increase its assets from its current level of $580m, to justify maintaining its 28-strong team. “We didn’t set up this business to manage $600m, but you need to take a very long-term view in this market,” says Mr Stapleton.
“A short-term business plan of three to five years is unlikely to stack up. You need to establish capacity and reputation.”
Schroders has spent 21 years doing just that. Its first decade was spent servicing wealthy and institutional clients before the regulator allowed banks to distribute third-party products in 2003. Since then it has built a $4bn mutual fund business and has captured nearly a quarter of the retail market.
This market is focused foremost on equities, followed by “structured products” (in essence, bonds held to maturity), multi-asset funds, money market funds, and a smattering of real estate investment trusts, index funds and sharia-compliant products.
The institutional market is growing, but is currently little bigger than its retail counterpart. Schroders manages about $5.9bn for the pension funds of the larger domestic companies, subsidiaries of multinationals operating in Indonesia, and government departments. But whereas banks dominate the retail channel, the approach to pension funds tends to be piecemeal and conducted by word-of-mouth. “We approach institutions directly,” says Michael Tjoajadi, head of Schroders’ Indonesia operations. “The penetration of consultants is very low so it is about being in the market and knowing people.”
In tandem with the regulatory challenges of doing business in Indonesia is an absence of market structure. Much of the population does not yet have a bank account, let alone long-term savings such as a mutual or pension fund. Schroders says it had no choice but to create its own market through intensive investor education.
“We go round the intermediaries in all the main cities, we give lectures, stage conferences and work with distributors and the stock exchange to educate the public,” says Mr Tjoajadi. The government and the local funds association even stage roadshows in shopping malls, which the minister of finance sometimes attends.
The lack of financial awareness also has an impact on the ability of foreign fund companies to recruit local fund managers, analysts and operations staff. “One of greatest challenges is sourcing management and investment talent,” says Mr Stapleton. “It is a young industry and there is limited talent with relevant experience.”
This has led to rapidly rising human resources costs. “There aren’t many good people and there has been a big rush to hire those who are,” says Mr Morton. “So salaries have been bid higher than in Singapore.”
The option is to either train local graduates from scratch or entice some of the increasing army of Indonesians who seek overseas education and work opportunities to return home. First State has a programme targeting Indonesian expats, while at Schroders the chief investment officer and other senior investment staff are charged with training recruits. “We can do this because our CIO and our head of research each have more than 20 years’ experience in this market,” says Mr Tjoajadi.
Not everything about Indonesia makes the foreign fund manager’s life harder. Some of the challenges in this market are also its advantages; its immaturity for instance.
“One of the things that attracted us is the lack of foreign players,” says Mr Stapleton. To some extent, Indonesia is a blank canvas, he adds. “We can bring best practices from around the world into the market.”
And while Indonesia has stringent rules about how a business should operate, unlike some other fast-growing countries such as China and the Middle Eastern states, it allows foreign groups to own 100 per cent of their businesses.
Nevertheless, few foreign investment companies have been willing to set up here. Of those that have, Schroders says it is “quite profitable”. Others are hoping they do not have to be in the market for 21 years before they turn a profit.
Mr Stapleton at First State says: “We believe that getting established in markets at an early stage is important to be successful in them. The retail market is developing well, the pension market is small but will be very attractive over the next 10 years and someone has to manage all the money that is flowing into the insurance markets. There are many opportunities.”
This is part of a series on emerging market distribution
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