The Indonesian government has always been averse to flight of domestic capital, as it demonstrated recently with the July introduction of a minimum one-month holding period for government debt.

That said, it appears to be softening its stance with regard to onshore asset management companies’ foreign investments. 

Onshore asset managers (including foreign-owned ones) can only allocate up to 15% of each fund to offshore assets. Moreover, they are not permitted to buy offshore funds, so are restricted to foreign securities.

However, the capital markets regulator, Bapepam, is finalising rules to allow AMCs to buy foreign funds and may implement them before the end of 2010, says Abiprayadi Riyanto, chairman of the Association of Mutual Funds of Indonesia.

The rule change may mean firms boost their offshore exposure, as funds don’t require having the same level of research expertise as foreign stocks or bonds, says Riyanto, who is also president director of Jakarta-based Mandiri Investment Management.

But many Indonesian asset managers don’t feel it’s worth investing offshore at all with a 15% threshold, given the research expertise required. That’s not to mention the added custody, fund administration, foreign-exchange exposure and other costs and issues that offshore investing entails.

For example, Schroder Investment Management – the largest manager onshore with $5.8 billion in AUM – does not offer any offshore products.

Asset managers agree that the threshold would need to be raised to at least 30% to make it worthwhile for them to invest offshore. But they say Bapepam has not made any indication that it is likely to raise the limit.

The regulator did not respond to requests for comment by press time.

Meanwhile, domestic rules on other forms of offshore investment and for other types of investors remain relatively strict. Indonesian individuals – other than high-net-worth investors – cannot buy foreign stocks or bonds.

Moreover, state institutions such as workers’ insurance fund Jamsostek and civil servants’ retirement fund Taspen cannot invest in foreign assets.

Yet institutional demand for foreign exposure doesn’t seem to be particularly strong in any case, particularly given the returns that have been achievable domestically.

“The regulations don’t allow us to invest offshore, and we don’t see any need to do that at the moment,” says Taufik Hidayat, director of investments at Taspen. “Indonesia is still considered a growing market by foreign investors, so flows are still coming in.

“Also, it’s hard to find portfolio managers in Indonesia with a track record of investing offshore,” he adds. “This is something we may need to consider in the future, however.”

Moreover, onshore insurance companies are permitted to have up to 20% of their portfolio in offshore assets, but most of them don’t have anywhere near that amount, say fund managers.

That may well change, of course, if Indonesia’s growth were to falter. Hidayat notes that organisations such as Thailand’s Government Pension Fund and Malaysia’s Employees’ Pension Fund are increasingly investing overseas now that their country's economic and stock-market growth is starting to slow.