Indonesia's Fund Flows and Future of Buy-Side Technology

The Ministry of Finance has sold Rp 7 trillion ($524.82 million) of Islamic bonds at an auction, above the indicative target of Rp 5 trillion.(Antara Photo/Muhammad Adimaja)

By : Andrea Mosconi | on 1:01 PM May 05, 2017
Category : Opinion, Commentary

During a recent investor forum hosted by Bloomberg in Singapore, 53 percent of attendees said Indonesia is the market that offers the best investment opportunities in Southeast Asia this year.

The region's most populous country, with a rising, sophisticated middle class, infrastructure spend and foreign direct investment inflows boosting gross domestic product growth, and the stability of the financial sector under the stewardship of Bank Indonesia, the Financial Services Authority (OJK) and the Ministry of Finance, are contributing to the broadening and deepening of the fund industry.

According to data compiled by Bloomberg, the total assets under management in Indonesia's fund industry rose 57 percent on an annual basis to Rp 288.38 trillion ($2.2 billion) in 2016, which outstrips the number of funds, which increased 9 percent to 755 over the same period.

Excluding insurance-linked products, the number of funds available to the market expanded by 12 percent to 496 in 2016, signaling growing demand in the country for a broader range of investment funds, especially at a time when the industry remains largely in the infant stages of development.

Broadly across Asia, portfolio investment flows into the region have reached an unexpectedly high level of almost $58 billion in the first quarter of 2017, according to the Institute of International Finance. With some markets facing negative yield, current yields on Indonesia sovereign bonds above 7 percent levels are among the highest in Asia and globally. To capitalize on these favorable dynamics, asset managers in Indonesia need to be prepared for the growth of capital inflow, and leverage smart technology to support their expanding portfolios.

New Investment Landscape

At the fourth APRDI-Bloomberg Indonesia Fund Awards where a total of 34 funds were recognized for their stellar performance, much of the discussion centered around the outlook, risks and opportunities for Indonesia investors, with many expressing optimism in what lies ahead for the industry.

In recent times, there has been a consistent introduction of measures by the authorities to deepen the country's fund industry including introduction of the universal pension program (BPJS Ketenagakerjaan) in 2014, and relaxation of rules on foreign asset ownership in 2015.

Following the tax amnesty project, which concluded on March 31, some Rp 4,866 trillion of previously undeclared assets were revealed, of which approximately Rp 3,687 trillion is money onshore that the government had recently permitted to be invested in assets, including gold, property and infrastructure projects.

(Courtesy of Bloomberg) (Courtesy of Bloomberg)

With stronger emphasis by the increasingly sophisticated population on the need to build financial reserves for the future, coupled with much-needed expansion of investment choices beyond stocks and government bonds, asset managers in Indonesia need to re-evaluate how technology can play a strategic role in helping them manage growing, more diversified, and multi-asset portfolios.

Buy-Side Technology Spend

Globally and in Indonesia, there are a few clear investment trends occurring in the market. First, we are seeing higher thresholds of accountability on the buy-side due to changes in the regulatory landscape. Dodd Frank, Basel III and MiFID II have fundamentally changed the way markets operate globally.

In Indonesia, the OJK has introduced measures to liberalize the sector but is careful in ensuring it does not diminish the transparency and accountability of investment advisors. As a result, compliance remains top priority and for a good reason.

Secondly, investors are getting increasingly sophisticated, demanding a broader range of investment options, seeking bespoke solutions, passive investment options and in some cases, investment managers are looking at adopting more quantitative investment approaches or bringing assets and systems in-house.

And thirdly, technology is playing an increasingly important role in fund management and in shaping financial markets. The proliferation of data and analytics is driving investment strategies, and greater computational power is spurring demand for greater scale and flexibility.

As illustrated in a recent Greenwich report, the increase in technology spending by the buy-side has been driven by regulatory changes but more importantly, by operational efficiency. Investment firms around the world are increasingly seeking the latest and best technology to preserve alpha and meet investor demands, to keep operating costs low and transparent.

(Courtesy of Bloomberg) Source: EY Asset Management Research Study 2015. (Courtesy of Bloomberg)

Future of Buy-Side Technology

Investment firms are challenged to adapt to new demands of increased transparency and the need for timely and accurate data for financial reporting, beyond generating returns. This is driving the industry to adopt and adapt to new technology to be more innovative and efficient, reduce opacity and increase portfolio visibility.

Bloomberg understands the future of investing, because we work with leading buy-side firms all around the world. To help address the new challenges asset managers are facing, we have built an integrated buy-side technology platform of the future – across portfolio analytics and management, operations, trading, post-trade and compliance.

The next phase for the buy-side will not be about adding more systems and complexity, but consolidating operations across the front, middle and back office. Our entire suite of buy-side solutions will not only efficiently streamline workflows and support future business growth but also ensure that firms will always remain compliant.

In an environment of tighter regulation, extreme market volatility and the imperative for increased efficiency, Indonesia's buy-side can get ahead of the curve by leveraging best-in-class technology, especially at a time when the industry is moving from infancy to toddlerhood.

As asset managers adjust to these demands, technology has an important role to play in helping them adapt – and in doing so, freeing them up to do what they do best: invest, innovate and drive returns for clients.

The writer is the head of Bloomberg in Asean.

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