Plunging Penny Stocks Stir a Mutual Fund Crisis in Indonesia

(Bloomberg) -- A crisis of confidence is brewing in Indonesia’s mutual-fund industry after some asset managers created products that invested in tiny, illiquid stocks, which have plunged in value.

The volatility has triggered a “serious issue” in the nation’s capital markets that’s raised public concerns, said Wimboh Santoso, chairman of Indonesia’s Financial Services Authority. The regulator last year restricted sales of certain mutual funds offered by 37 investment managers, an increase from around only a dozen in the previous year.

“If the integrity of trading activity in capital market is doubted, insurance companies or other companies that invest in mutual funds or stocks can be affected,” Santoso said in Jakarta on Wednesday. “This is dangerous.”

Small-cap investments, with shares often illiquid and vulnerable to being rigged, are at the center of the problem. Asset manager PT Narada Aset Manajemen failed to meet redemption demand from investors and PT Minna Padi Aset Manajemen was reportedly ordered to liquidate six of its mutual funds in order to meet withdrawal requests.

Forty-one stocks identified by the Indonesia Stock Exchange as prone to manipulation are also core components of several funds. Concerns about manipulation of share prices also caught the attention of President Joko Widodo, prompting him to order sweeping rule changes in the financial industry, with a focus on capital markets.

Overall mutual-funds redemptions surged 37% from a month earlier in November, when the problems surfaced. By December, the value of redemptions exceeded that of subscriptions.

Similar issues surrounding small caps have occurred in other markets. South Korean regulators recently stepped up scrutiny of a so-called pump-and-dump scheme involving the nation’s small stocks.

While limited to specific companies in Indonesia, the concerns have undermined confidence in mutual-fund products, according to Edward P. Lubis, chairman of the Indonesian Investment Managers Association.

“The small cap stocks are very susceptible,” Lubis said, adding 10 to 20 stocks saw prices tanking by more than 50% in the past two to three months. “The stocks fall so much and they are not traded; the liquidity isn’t there.”

The bourse and its regulator, the Financial Services Authority, need to set up a mechanism to monitor stock manipulation via “market-making” activities, Bobby Gafur Sulistyo Umar, a deputy chairman at the Indonesian Public Listed Companies Association, told a January parliamentary hearing. Responsibility to curb illicit trading activity lies with the two entities, he said.

The frequent appearance of some small stocks on the exchange’s regular “unusual market activity” notice should already serve as a warning for investors, said Laksono Widodo, director of trading and membership at the bourse.

The Jakarta Composite Index, down 0.8% this year through Thursday, was little changed on Friday.

To contact the reporters on this story: Tassia Sipahutar in Jakarta at ssipahutar@bloomberg.net;Ishika Mookerjee in Singapore at imookerjee@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Margo Towie

©2020 Bloomberg L.P.