Cash the culprit in Indonesia as investment returns fall 6.6% short of cost growth of financial goals

Press Release | June 4, 2015

Investors losing ground each year as savings grow more slowly than costs due to inefficient asset allocation – excessive cash holdings emerge as the key culprit.

Jakarta – For every step forward the average investor in Asia takes towards meeting their main financial goals, many fall half a step back owing to the rising costs of those goals, according to a new report by Manulife Asset Management. Indonesia is no exception, with local investors facing a potential investment returns shortfall of 6.6% a year versus the annual growth in the cost of their goals. That looks manageable as a percentage, but it is the largest potential shortfall in Asia and represents a significant sum when compounded over 10 or 20 years.

The report, entitled One step forward, half a step back: Meeting financial goals in Asia, is the sixth in Manulife Asset Management’s Aging Asia series. It analyses the five most cited financial goals on a pan-Asia basis – retirement, paying for children’s higher education, meeting current living expenses, purchasing a primary residence and saving for a rainy day (which includes unexpected healthcare costs) – and the saving and investment strategies that investors are employing to meet these goals. 

Michael Dommermuth, Executive Vice President, Head of Wealth & Asset Management, Manulife Asset Management, said: “in Indonesia, we highlighted the goals of saving for children’s higher education and retirement. We found that the country has a potentially golden opportunity to significantly boost its economic growth potential by educating its relatively young population to contribute to and benefit from its relatively rapidly growing economy. At the same time, we found that generally low levels of formal financial system participation are limiting the opportunities for individuals to take advantage of capital markets as a way to build their savings pots for retirement and to help meet other key financial goals.”

Indonesia’s potential returns shortfall of 6.6% a year arises because the cost of the five goals has risen an average of 11.1% a year over the past five years while self-reported investment portfolios delivered average returns of 4.5% a year in the same period.

Legowo Kusumonegoro, President Director of PT Manulife Aset Manajemen Indonesia, explained: “While IDR100,000 invested today has the potential to grow to about IDR155,000 over 10 years, IDR100,000 in the cost of a basket of the five most cited financial goals would have been on track to grow to almost IDR290,000 in the same period – representing a potential shortfall of more than IDR130,000. While the shortfall may seem manageable over a period of ten years, it stands to more than quadruple to about IDR580,000 over the following 10 years and then more than triple again to about IDR2,000,000 in the third decade. Investors should seriously consider what this means, particularly as retirement was reported as one of their top financial goals.”

The research reveals this shortfall is primarily the result of the high level of cash investors hold in their portfolios. According to the survey, the average Indonesian holds 48% of their assets in local currency, the highest level reported in the region.

Dommermuth said, “Indonesians are hardly alone, with survey respondents across Asia reporting that 37% of their assets are allocated to local currency and another 5% to foreign currency. Our research reveals that this level of cash holdings is the key factor compromising investors’ abilities to generate returns that match or exceed the growth in the cost of their five leading financial goals. Indeed, we found that local currency delivered average returns of around 5% p.a. in Indonesia over the past five years whilst the local equity market delivered over 14% p.a. in returns on average during that same period.”

According to Kusumonegoro, reallocating a portion of this cash to more efficient assets such as local-market equities or fixed income could dramatically reduce the potential shortfalls facing Indonesians: “However, this is easier said than done, as we found that Indonesians reported the lowest capital market exposure in the region, at just 22% of assets.”

“In our view, educating Indonesians about the potential benefits of participation in the formal financial system is the best way to help overcome the potential returns shortfall they face. There is a compelling case to be made as we found, for example, that shifting 50% of local-currency holdings to local equities could virtually erase the potential returns shortfall for Indonesians, lowering it from 6.6% a year to 0.5%. Given the generally low level of financial market familiarity at present, local investors may want to consider accessing local equity or fixed income markets via a professionally managed mutual fund that takes much of the guesswork out of investing.”

Kusumonegoro continued, “Investments do not have to be large. In fact, investors can make regular monthly contributions to a mutual fund and can also invest a portion of any extra income such as an annual bonus to ensure that they maximise the power of compound returns to help overcome the potential returns shortfall.”

Manulife Asset Management’s Aging Asia series of reports and related resources can be accessed at: www.manulifeam.com/agingasia.

 

 

Unless otherwise noted, data in this press release is sourced from Manulife Asset Management based on investment returns and cost growth data outlined in One step forward, half a step back: Meeting financial goals in Asia which can be accessed at: www.manulifeam.com/agingasia

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dyah_wulandari@manulifeam.com (62) 21 2555 7788 ext. 642658