Indonesia sub-advisory business beckons foreign fund houses

JP Morgan Asset Management's new sub-advisory partnership with Indonesian fund firm Mandiri Investasi may herald more such deals, amid growing local demand for global assets.
Indonesia sub-advisory business beckons foreign fund houses

Indonesia is set to provide international fund firms with a growing pool of sub-advisory business, after JP Morgan Asset Management recently won the first such local mandate for an Islamic global equity fund. 

Since November, domestic fund houses have been able to launch sharia-compliant products that can invest 100% of their assets offshore, and local investor interest in international assets is seen to be rising. Moreover, Indonesia’s Financial Services Authority, Otoritas Jasa Keuangan (OJK), is keen to boost the penetration of Islamic funds locally.

JP Morgan AM is the first to be awarded a local sub-advisory mandate for a global Islamic fund, launched this month by domestic house Mandiri Manajemen Investasi. The Jakarta-based firm aims to raise $30 million within a year for the Mandiri Global Sharia Equity Dollar Fund.

Mungki Ariwibowo Adil, head of product development and management at Mandiri Investasi, said his firm conducted thorough due diligence before deciding on a manager to partner.

“During that time we got a chance to get to know other asset managers better,” he noted. “We decided to collaborate with JP Morgan because of its strong track record in managing Islamic global equity portfolios.

“This collaboration is on a per-fund basis,” said Adil, adding that Mandiri was open to collaborating with other foreign houses.

Steven Billiet, Singapore chief executive at JP Morgan Asset Management, saw this as just the start for more sub-advisory business coming out of Indonesia. The market has historically been very biased towards local assets due to the regulatory environment, he said.

That started to change when OJK in November removed the 15% cap on offshore investments for Islamic funds. Aberdeen, BNP Paribas, Manulife and Schroders – all foreign players with a local presence in Indonesia – have since launched sharia-compliant global mutual funds there.

Many local firms are keen to launch products under the new sharia rules but have found it challenging because of their lack of experience, said Billiet, so it wasn’t surprising that foreign players were the first to go to market.

He expects the sharia fund business to provide more opportunities for foreign managers to collaborate with local players. Partnership between the two groups is the most likely route for this business to develop, he noted.

JP Morgan AM has decided that a partnership approach is the way forward in Indonesia, having previously explored options such as setting up a new business and applying for a licence or buying a licensed entity. A spokeswoman said the firm had no current plans to establish an onshore presence.

Domestic firms may decide to go it alone in managing Asia-focused strategies, added Billiet, but global investment would be challenging for those without a foreign partner.

Adil agreed that this was an opportunity for foreign managers to collaborate with local managers, citing high demand for this sharia funds with global underlyings.

According to OJK data, sharia funds account for 4% of Indonesia’s Rp260 trillion mutual fund industry. The regulator’s target is for such products to exceed 5% of total AUM.

Discussions are still taking place about raising the cap for conventional funds as well, said industry observers, but there is no more clarity on when this might happen.

Indonesia has the largest Muslim population globally – 87.2% of around 250 million – but it lags Malaysia when it comes to take-up of Islamic funds. The latter country is striving hard to strengthen its position as a global sharia investment hub, with some of its biggest institutional investors, such as Employees Provident Fund and Kwap, investing an increasing amount of their portfolios by sharia principles.

Total Islamic AUM in Malaysia as per June 2015 stood at RM117.40 billion ($27.2 billion), representing 17.9% market share of the total investment industry in Malaysia.

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