Best Indonesia Funds Buy Retailers on Spending: Islamic Finance

Indonesia’s best-performing Islamic bond funds are buying sukuk of construction and retail companies to take advantage of the government’s $300 billion development program, after sovereign yields dropped to a record.

PT Samuel Aset Manajemen’s SAM Sukuk Syariah Sejahtera fund, which posted the biggest returns at 12 percent last year, plans to more than double corporate holdings to 50 percent of total investments in 2013, Herbie Mohede, the fixed-income manager, said in an interview. Borrowing costs on government Shariah-compliant notes due 2018 declined 69 basis points in the past three months to 5.32 percent yesterday and touched an all-time low of 5.24 percent on Jan. 9.

President Susilo Bambang Yudhoyono announced on Dec. 18 a two-year initiative to boost growth in Southeast Asia’s biggest economy by building roads, ports and factories. McKinsey & Co. in New York predicts retail spending in urban areas will increase an average 7.7 percent annually to $1.1 trillion by 2030. PT Danareksa Sekuritas and PT Indo Premier Securities, the nation’s largest sukuk arrangers, forecast sales of the debt by local companies will surpass the 2008 record of 2.3 trillion rupiah ($236 million) this year.

“We have to start looking at corporate sukuk as the yields on government notes keep falling,” said Jakarta-based Mohede, whose company oversees 900 billion rupiah, said on Jan. 23. “We like the demographic play; that is looking at which sectors will be driven by the population and growing wealth, especially consumers and construction.”

‘Rising Interest’

PT Lautandhana Investment Management’s Lautandhana Proteksi Syariah I, the second-best performer with an 11 percent advance, also plans to raise holdings of construction and retail firms, said President Director Irvin Patmadiwiria in a Jan. 23 interview. The fund oversees 1.6 trillion rupiah.

He is looking to buy a debut sukuk from toll-road operator PT Citra Marga Nusaphala Persada scheduled for this quarter because of its growth prospects, he said, declining to give details on the fund’s current holdings due to company policy.

“This is the year of consumers and construction, the main sectors supporting the bulk of economic growth,” said Jakarta-based Patmadiwiria. “A bigger sukuk market would spell better returns for us as supply is the main issue. Rising interest in Shariah investing isn’t yet matched by increased issuance.”

Indonesian companies, including developer PT Adhi Karya and telecommunications provider PT Indosat, sold a total of 2 trillion rupiah of notes that comply with the Koran’s ban on interest in 2012, finance ministry data show. In Malaysia, issuance reached a record 95.8 billion ringgit ($31 billion).

Debut Sukuk

PT Adira Dinamika Multi Finance, which provides personal loans for cars and motorcycles, is seeking to raise 500 billion rupiah in a debut offering in February to help boost Shariah-compliant financing to 9 trillion rupiah this year from 6 trillion rupiah in 2012, President Director Willy Suwandi Dharma told reporters yesterday.

PT Sumberdaya Sewatama, which leases construction equipment, sold 200 billion rupiah of five-year Shariah-compliant bonds at a coupon rate of 9.6 percent in November, the prospectus shows. Biscuit-maker PT Mayora Indah issued similar-maturity sukuk in May after offering an indicative rate of 8.25 percent, according to the sales document. Bloomberg has no pricing for the notes because they aren’t actively traded.

Global sukuk sales total $3.7 billion in 2013, compared with $6.3 billion in the same period last year, according to data compiled by Bloomberg. Issuance reached a record $46.3 billion in 2012.

Average yields on the debt dropped four basis points, or 0.04 percentage point, to 2.77 percent this year, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The premium on the bonds over the London interbank offered rate, or Libor, narrowed 22 basis points to 160 basis points.

Good Quality

The notes returned 0.3 percent in 2013 after gaining 9.6 percent last year, according to the HSBC index. That compares with the 0.4 percent decline for debt in emerging markets following an 18.5 percent advance in 2012, JPMorgan Chase & Co.’s EMBI Global Composite Index shows.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index of ringgit-denominated issues rebounded 0.4 percent last week to 102.5018, after dropping 0.3 percent in the previous five days. The Southeast Asian nation is the world’s biggest market for Shariah-compliant notes.

“Indonesian funds are still finding it difficult to buy good-quality company sukuk,” I Made Adi Saputra, a fixed-income analyst at PT Nusantara Capital Securities, said in an interview from Jakarta yesterday. “Corporate notes are more attractive in this low-yield environment, provided the funds can find papers to invest in since demand continues to exceed supply.”

Following Trend

PT Mandiri Sekuritas, which oversees Mandiri Investa Dana Syariah, the third-best performing fund in 2012 with a return of 8.4 percent, didn’t respond to e-mails seeking comment.

The top fund, run by Mohede, posted a gain in 2012 that was almost double the 7 percent average of 91 local peers, which it’s beaten every year since inception in 2010, data compiled by Bloomberg show. It held notes sold by PT Perusahaan Listrik Negara, the state-owned power company, and palm-oil producer PT Salim Ivomas Pratama as of November, according to a Nov. 30 statement. Consumer goods firms amounted to almost half of corporate investment.

Islamic banking assets in Indonesia increased 36 percent to 180 trillion rupiah in 2012 as of November from a year earlier, the latest central bank data show.

“There is plenty of money in the financial system right now, so I expect yields in general to keep declining moderately or at best stay near current levels,” said Mohede at Samuel Aset. “Corporate sukuk will follow that trend eventually, which is why we would be eager to buy while yields are still attractive and hold them to maturity.”

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