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Plunging penny stocks stir up mutual fund crisis in Indonesia

Jakarta

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 country's capital markets that has 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," Mr Santoso said in Jakarta on Wednesday. "This is dangerous."

Small cap investments, with shares often illiquid and vulnerable to being rigged, are at the centre 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 per cent 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 country'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," Mr Lubis said, adding that 10 to 20 stocks saw prices tanking by more than 50 per cent 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. BLOOMBERG