You read it all the time: Health is wealth. One of the ways to maintain good health is to eat well. That means having a balanced and nutritious diet and understanding what we’re putting into our bodies. Similar to investing, achieving financial well-being requires you to build an investment portfolio that works for you - one that fits your financial goals and suits risk tolerance. 

We wrote about the process behind building a resilient investment portfolio, as well as why reksa dana (mutual funds) are great vehicles for Indonesian retail investors to save meaningfully. So we want to take this opportunity to dig deeper and unpack how we construct resilient portfolios for you using reksa dana as building blocks.

In order to showcase our findings, let's observe the risk and return characteristics of individual asset classes in the Indonesian capital market. 

‍Looking at Asset Class Returns

What we found over a longer period of time, since June 2005 until December 2022 (~16.5 years) was the following: 

  1. Indonesian Stocks and Bonds offer similar returns at 10.8% and 10.2% gross returns per year, respectively; Although surprisingly, Indonesian Bonds over the long-term has performed slightly better than Indonesian Stocks;
  2. 1 Month Bank Deposits on average yield 6.4% gross returns per year, but yields the best risk-adjusted returns; and
  3. Indonesian stocks have the highest volatility at 19.0%, offering the lowest risk-adjusted returns. 

Historical data allows us to see the different risk and return characteristics for each asset class, but also a benchmark to understand what investors can achieve with these returns over the long-run.

Building Funds based on Asset Classes

With the three asset classes available: 1) Indonesian Bonds, 2) Indonesian Stocks and 3) Indonesian Time Deposits, we can build various types of reksa dana, each representing a different fund strategy. 

Assume we have three different mutual fund strategies or reksa dana shown below. Our two Balanced Funds differ between Fixed Income and Equity, with the Conservative Balanced Fund more towards Fixed Income (70%) and the Aggressive Balanced Fund more towards Equity (70%). More on this below. 

Building Portfolios According to Risk Profiles Using Funds 

Using the three building-block funds above, we’ve optimized a range of portfolios for different investor risk profiles. For example, a Risk Averse Profile contains a larger allocation to Time Deposits, while an Aggressive portfolio contains a larger allocation to Equities. For each risk profile contains a number of mutual funds, and within each mutual fund contains asset classes. It is important that we break down each fund by asset class to truly understand the contents of a whole portfolio. This is similar to breaking down a bowl of rice and beef rendang, and classifying the contents by nutritional value.

We then back-tested how the portfolios performed over the same time period. For the Risk Averse Portfolio, we could generate slightly higher returns but with slightly higher volatility due to the mix of bonds and equity. On the other hand, an Aggressive Portfolio can generate similar returns to the JCI but with less volatility. In practice, we would conduct tactical asset allocation within each fund and select specific stocks and bonds to outperform the benchmark. 

Conclusion

At Simpan, we like to think about how to build better portfolios for our clients. In this article, we wanted to showcase how we use different assets in the Indonesian market to build portfolios through funds. This is primarily because mutual funds (or Reksa Dana) allows you and me to instantly invest in a diverse portfolio built by expert fund managers. Soon with Simpan, you will be able to build investment portfolios according to your risk profile using the building block funds we offer. We are continuously working hard to create and manage funds suited to complement your portfolio to deliver the best investment experience for you. 

Food For Thought

Let’s assume you have decided to start building a portfolio with mutual funds, how would you go about it? Would you invest all your money into reksa dana on day one via the Lump-Sum Investment method, or would you rather invest in a fixed portion every month via Dollar Cost Averaging (DCA) method?

Dollar Cost Averaging (DCA) can also enhance returns for investors. Here, we assume a buy and hold strategy since June 2005. DCA can lower an investor’s average cost and enhance returns to capitalize on volatility in the market. Stay tuned on our thoughts on DCA in the Indonesian equity market.