Personal Investment Advice for

James Hughes

MBA University Of Liverpool

Module; Investment Strategy

Date; May-June 2009
Student; Hans de Waal
Student number; 15252539
Facilitator; Rob Haywart
 1.0 Introduction..............................................................................................................3
1.1 Personal Balance Sheet ...........................................................................................3
1.2 Personal Cash Flow.................................................................................................4
1.3 Long Term Objectives..............................................................................................6
2.0 Financial analysis of Financial Objectives.............................................................8
2.1 Ownership of Property.............................................................................................8
2.2 Trip to Florida.........................................................................................................9
2.3 Pension Plan - Early Retirement............................................................................10
2.4 Disability Insurance..............................................................................................13
3.1 Investor profile......................................................................................................13
3.1.1 What are James Investment Goals? ....................................................................13
3.1.2 How much time does James have to achieve these goals?..................................14
3.1.3 How much can James afford to invest regularly? ..............................................14
3.1.4 How much do James assets need to grow to achieve his objective? .................14
3.1.5 How much Risk is James willing to take?..........................................................15
3.2 Investor’s Risk appetite..........................................................................................15
4.0 The Indonesian market...........................................................................................16
4.1 Indonesian Stock market. .....................................................................................17
4.2 Return analysis......................................................................................................17
4.2.1 Calculation of annual return..................................................................................17
4.2.2 Arithmetic Mean...................................................................................................19
4.2.3 Standard Deviation................................................................................................20
4.3 Indonesian Bond Market.........................................................................................21
5.0 Recommended Asset allocation.............................................................................22
5.1 Local Equity...........................................................................................................23
5.2 Local Fixed Income..............................................................................................24
5.3 Property..................................................................................................................25
5.4 Foreign Equity ......................................................................................................25
5.5 Cash........................................................................................................................26
5.6 Rebalancing the portfolio......................................................................................27
6.0 Actual Asset Recommendations.............................................................................27
6.1 Local Equity...........................................................................................................27
6.1.1 Buying Individual Stocks......................................................................................28
Financial industry.......................................................................................................28
Energy Sector.............................................................................................................29
Construction Sector....................................................................................................29
Consumer Goods Sector............................................................................................30
6.1.2 Buying Funds........................................................................................................31
6.2 Local Fixed Income...............................................................................................32
6.3 Property..................................................................................................................33
6.4 Foreign Equity ......................................................................................................34
6.5 Cash........................................................................................................................35
2
 Appendix A. ................................................................................................................36

1.0 Introduction
This is a personal investment advise made for the consideration of James Hughes. The

adviser is based on information gathered from James through an interview. The advise is

based on this information with regards James’ personal situation in combination with

information from the market that James will primarily use for his investments, which is

the Indonesian market.

Personal details of James can be summarized as follows;

Name : James Hughes

Age: 27

Marital status: Single

Children: None

Place of Residence: Jakarta, Indonesia

1.1 Personal Balance Sheet

The following information was gathered in an interview with James regarding his

personal assets and liabilities.

- James owns a car which second hand value is current estimated to be £30,000; the

purchase of this car was financed through a personal loan on which currently

there is remains outstanding balance of £24,9971

1
This is equal to the net present value of 40 monthly payment of £700 at 7% nominal annual interest.
3
 - James financed his study partially through the use of student loan facilities, on

which he is currently still has an outstanding balance of £5,000 (at an interest rate

of 4% per annum)

- James has a credit card with an outstanding balance of £2,000

- James just inherited £200,000 from his father; currently this money is still held in

current account facility in a bank

In summary this leads to the following personal Balance Sheet;

Table 1.1 Personal Cash Flow (monthly)

Assets
Cash 200,000
Car 31,000

Liabilities
Car Loan 24,977
Student Loan 5,000
Credit Card Balance 2,000

Total 199,003

1.2 Personal Cash Flow

From the interview conducted with James the following was learned with regards to

James’ monthly cash flow;

- James works as an assistant cameraman for the Metro TV station in Jakarta.

- James has an annual income equivalent to £40,000 per annum, before tax .The tax

rate he pays on his income is 19%, which is a weighted average since Indonesia

4
 knows an accelerating tax regime. This means that James has a monthly income

of £40,000/12 = £3,333 per month, and pays taxes at the amount of £633

- His job is James’ only source of income

- James Live sin a apartment in Setiabudi Area for which he pays an monthly rent

of £1,000

- James owns a car, which he bought with a loan; the loan payment on the car is

£700 per month

- James has an outstanding balance on a student loan on which he pays £100 each

month

- James has a credit card on which his outstanding balance is £2,000. James

indicates that he find it a challenge to reduce his balance given his current

spending priorities. The outstanding balance has therefore remained level and

therefore James is paying interest on the balance every month.

- James likes to travel for weekend to Bali and other weekend getaways and make

such a trip once every other month. These trips cost him £500 each (thus £250 per

month)

- James’ living expenses he estimates at £500, which is mainly spend food, clothing

and other basic necessities as well as in the night life as James likes to go out with

his friends to the Jakarta nightclubs.

In summary this leads to the following personal monthly cash flow;

5
Table 1.2 Personal Cash Flow (monthly)
Income
Salary 3,333
Total 3,333

Out Flow
Taxes 633
Rent 1,000
Car Payment 700
Student Loan 100
Credit Card Charges 26
Travel 250
Living Expenses 624
Total 3,333

Monthly Cash Flow 0

It should be observed that James currently does not save any of his salary but spends all

of it on his living requirements each month.

1.3 Long Term Objectives

The interview with James helped identify his personal long term objectives;

- To own a property. James feels that renting is not a good long term solution for

living cost and would target to buy his own property. He would plan to finance

this through the use of a mortgage

- To make a trip to the states (Florida) which he estimates to cost £8,000. This is at

current prices and depending on the timing of the trip the price might vary

slightly.
6
 - Pension planning. James has an excellent pension facility offered by his employer,

which he regards sufficient for his retirement. Some discussions were held

regarding the possibility of planning an early retirement as James’ pension plan

provided by his employer only will start payment to him at age 65. Early

retirement is definitely something that James would aspire to.

- James indicated that the situation at his employee is currently fragile as a result

of the economic situation and one of his moan fears going forward is that he

might get laid of and would need emergency funds to survive a period that it

would take him to find other employment; government support during periods of

unemployment do not exist in Indonesia and he would have to be able to survive

this on his own funds. Under Indonesian regulation he would be entitled to a

severance payment from his employer that would help him somewhat in this

situation.

- His employer provides James with basic life insurance, but does not insure James

against Inability to work due to disability. The same applies to his health

insurance; his employer provides only limited coverage, which would certainly

run out quickly if James would face a serious medical condition.

2.0 Financial analysis of Financial Objectives

This section analyzes in detail the future money values need to achieve each of the

financial objectives that were identified in the previous chapter.

7
2.1 Ownership of Property
First objective is for James to own his own property. There are th main decisions that

need to be considered;

1. Timing of the purchase

2. Financing

3. The purchase value of the Property

2.1.1 Timing of the Purchase

The timing of the purchase of a property would depend in the first place on the

condition of the property market. Since this is considered an investment it is important to

understand whether the current time would be considered a good time to buy or whether

it might be better to wait some time, as market conditions might change and better deal

might become available. When deciding to delay James should take into account the time

value of money.

Since as a result of the financial crisis the property markets have come under pressure,

it is considered that this might be good time to buy as due to the shortage of buyers, good

deal can be begotten.

2.1.2. Financing

James could consider financing the property (partly) out of cash he inherited. However

given the tax advantage that can be generated through mortgage payment, which are

8
deductable from taxable income, James should consider to finance as much as possible

through a mortgage loan.

2.1.3 Purchase Value of the Property

Secondly James needs to consider the targeted value of a property he might be wanting

to buy. Clearly he should not look to spend his full income on the property as he would

want to have some diversification in his assets.

2.2 Trip to Florida

The second objective James indicated to be making a trip to Florida. Based on

information from his friend this would cost him currently £8,000. The actual cost of the

trip will depend on the actual timing of the trip. Over time there will be a number of

things that might impact the cost of the trip;

- Development of exchange rate between US$ and the British Pound; some of the

cost will be US$ based and there for the price estimate will change on influence

of exchange rate development. This risk could be mitigate by currently converting

some of his assets into US$.

- Oil price development; some of the cost will be driven by the price of airplane

ticket, which is normally heavily correlated to the price of oil.

9
2.3 Pension Plan - Early Retirement
James indicated that he would be interested to retire early in order to obtain this goals

the following estimated number were calculated; if James plans to retire 5 years before

the receives a pension his current employer it is estimated that James needs £325,000 in

accumulated funds when he reaches age 60. This amount is estimated based on James

current annual income, inflated to the years he needs it, and multiplied by 5 years; which

is the period between his early retirement and the start of his pension. There is several

ways he could finance this. First he could anticipate making annual payment into an

investment account that he would set up for this purpose. Under the assumption that he

would increase the annual payment with 4% per annum, as an inflation correction, then

he could achieve this by starting now with annual payments £1,000. This will grow to the

required £325,000 under an assumption of 9% annual returns. As can be seen in table 2.1

below. As investment income could vary some more optimistic as well as more

pessimistic scenario’s are shown for comparison.

Alternatively James could finance the £325,000 through a one time payment right now.

The advantage of this would be that the full payment would earn investment income for

the full period. If he would choose this route then (again assuming an annual return of 9%

could be achieved) he would only need to pay £18,915 into an investment account for this

purpose today.

10
Table 2.1 Projected Accumulated Fund (based on annual contribution)

Annual
Age contribution Accumulated Fund
7% 9% 11%
27 1,000 1,070 1,090 1,110
28 1,040 2,258 2,322 2,387
29 1,082 3,573 3,710 3,850
30 1,125 5,027 5,270 5,522
31 1,170 6,630 7,019 7,428
32 1,217 8,396 8,977 9,595
33 1,265 10,338 11,164 12,055
34 1,316 12,470 13,603 14,842
35 1,369 14,807 16,319 17,993
36 1,423 17,366 19,339 21,553
37 1,480 20,166 22,693 25,567
38 1,539 23,225 26,414 30,088
39 1,601 26,564 30,536 35,174
40 1,665 30,205 35,099 40,892
41 1,732 34,172 40,146 47,312
42 1,801 38,491 45,722 54,515
43 1,873 43,189 51,878 62,591
44 1,948 48,297 58,670 71,638
45 2,026 53,845 66,159 81,767
46 2,107 59,869 74,410 93,100
47 2,191 66,404 83,495 105,773
48 2,279 73,491 93,493 119,938
49 2,370 81,171 104,491 135,762
50 2,465 89,490 116,582 153,431
51 2,563 98,497 129,868 173,154
52 2,666 108,244 144,462 195,160
53 2,772 118,788 160,485 219,705
54 2,883 130,188 178,072 247,073
55 2,999 142,510 197,367 277,580
56 3,119 155,823 218,529 311,575
57 3,243 170,201 241,732 349,449
58 3,373 185,724 267,165 391,632
59 3,508 202,478 295,034 438,606
60 3,648 220,555 325,563 490,902

220,555 325,563 490,902

11
2.4 Disability Insurance
Disability insurance can be obtained in the Indonesian market. This will secure James of

having an income if at any point in the future he will not be able to generate income for

himself as he would have become disabled to work. It would be advisable for him to take

out enough cover for him to continue his current life style. Therefore the annual insured

income should be equal to something close to his current annual income. It would be

advisable to have this amount inflation correction, which is normally an option that the

insurance companies make available. In that way his income would be protected against

inflationary deterioration.

3.1 Investor profile

The first step to determine the investment allocation for James is to better understand

his investor’s profile. The investors profile will help to determine what asset allocation

would best fit with James. In order to determine James profile we asked the following

questions;

3.1.1 What are James Investment Goals?

We have seen in the previous chapter that James’ primary investment objectives are to

own a property and to retire early. At the same time he would like to have some cash

available to travel and enjoy life

12
3.1.2 How much time does James have to achieve these goals?
Time is an important factor in determining the investor’s profile. Over longer periods

expected results of riskier investments will become less volatile than they are over shorter

periods. This is the reason why a person with a long term investment horizon can invest

in more risky investments than somebody who wants to achieve his goals in a shorter

time frame.

James main objective is early retirement and he currently plans to early retire at age 60.

This means that he has 30 year to achieve this goal; this long time horizon would justify

an aggressive investment portfolio.

3.1.3 How much can James afford to invest regularly?

This is another important question to ask as it will determine how much his James

assets need to grow to achieve his objectives. James is currently unable to save any of his

monthly income, and given his indicated wish to travel on regular bases, it is assumed in

the assessment that only the current inheritance will be invested.

3.1.4 How much do James assets need to grow to achieve his

objective?
It is important to understand the answer to this question as well, as this will determine

the annual return that James would need to achieve to obtain his goals; of course the asset

mix that James would choose should lead to an expected annual return that is sufficient

for James to obtain his goals. We have seen in the previous chapter that in order for James

13
to obtain his financial goal of early retirement he will need to make an annual return of

9%.

3.1.5 How much Risk is James willing to take?

Finally we asked the question how much risk James is willing to take? Depending on

the portfolio that James would choose, and the mix of assets in this portfolio, there is a

risk that in the end James does not achieve his investment objective due to variations of

actual investment income as compared to expected investment income. The level of risk

that James is willing to take depends on what would happen in case he would not achieve

his objective. In this case that would mean that he could not retire early but would have to

work on until 65, or more likely (since he might under achieve his goals but only to a

certain extend) until 61 or 62; so although there is some risk in this, it does not present a

major risk that can not be found any solution for; therefore the conclusion is that James is

not risk averse.

3.2 Investor’s Risk appetite

James is still young. His primary his primary financial goals are long term goals.

Therefore James will be quite willing and able to sustain variation in annual returns on

his investment, this will enable James to achieve higher expected returns in his portfolio.

Higher returns are normally associated with higher risk. Higher risk indicates that there

are greater variances between the returns from one year to the next, although overall the

return is expected to be better. Since the objective are mostly long term objective James

14
will have enough years to make up for any negative variance in specific year(s). It would

make sense for James to revisit his risk profile over time as his personal situation

evolves; risk appetite should not be considered to be constant over time.

4.0 The Indonesian market

Indonesia has in the last 10 year transformed itself; it is currently lead by its first

directly elected president Susilo Bambang Yudhoyono and the days of autocratic rule are

long over. Along with the political reform has come a more resilient economy; the

government forecast s GDP growth to be at around 7% per annum driven by increasing

investments and strong consumer consumption. Inflation has been curbed in recent years

and has come down in the single digits. Foreign direct investment reached 10 billion in

2007 a rise of 73.2% over the year before that (BKPM, 2008). I recent years the

Indonesian floated several international Government bonds successfully, these were for

nearly 50% taken up by US investors, with European and Asian investors taken up the

remainder. Recent recession has of course slowed down the economy and its outlook, but

overall the long term outlook remains positive.

The key financial indicators of the economy are as follows;

2006 2007 2008

GDP growth* 5.0% 5.6% 3.6%
JSEX growth ** 55.4% 52.1% -50.6%
10-year government bond yields ** 11.8% 10.5% 12.1%
IDR Exchange rate to 1 US$ * 9,124 9,340 11,030
Risk free interest rate * 9.5% 7.5% 9.3%
Inflation * 6.6% 6.6% 11.1%
Growth in Total Consumption * 3.9% 4.9% 5.9%
15
 * Source: Bank of Indonesia annual report 2008
** Source: Yahoo Finance

4.1 Indonesian Stock market.

The Indonesian Stock market’s performance has been highly fluctuative in recent years.

After the booming years of 2006 and 2007, the market dropped significantly in 2008 as

the world went into recession. Thus far in 2009 it has seen remarkable recovery though.

Graph 4.1; Historical Performance of Jakarta Composite Index

4.2 Return analysis

4.2.1 Calculation of annual return
For this calculation the annual rate of return was calculated using the following

formula;
16
 EMV − BMV + I
r=
BMV

17
Thus the following result is obtained:

Table 4.1 Annual return of the Jakarta Composite Index

Closing Annual
Year Value Return
2008 1,355.41 -50.6%
2007 2,745.83 52.1%
2006 1,805.52 55.3%
2005 1,162.64 16.2%
2004 1,000.23 44.6%
2003 691.90

Source; Yahoo finance

4.2.2 Arithmetic Mean

The arithmetic mean is obtained through the following equation:

1 T 1
ARM =  ∑ ri =  (r1 + r2 + ... + rT )
 T  t =1 T  (University of Liverpool 2009)

Where;

T is number of periods and , r is the rate of return of each period

Thus we have:

ARM= (1/5)* ( 44.6 + 16.2 + 55.3 + 52.1 + -50.6) =

ARM=23.5%

18
4.2.3 Standard Deviation
The standard deviation is equal to the square root of the variance. With the variance

being equal to:

 1 
σ 2 = VAR =  ∑ (rt − r ) 2  (University of Liverpool 2009)
 T −1 

With:

T the size of the population sample, which is 5

rt equal to the rate of return for the period t

r equal to the arithmetic average of the sample

Thus we have

VAR=19.6%

Thus the Standard Deviation is 44.2%

19
4.3 Indonesian Bond Market
The Indonesian bond market has fluctuated quite a bit as well. The yields on 10 year

bonds for example in recent years has varied from as low as 9% to as high at 19%. The

graph below gives some indication of the fluctuation in recent years;

Graph 4.2 Indonesian 10-year government bond yield

Source; Bloomberg

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5.0 Recommended Asset allocation
Based on the investors profile it is suggested to go with a relatively aggressive

portfolio. Given the goal that James has to purchase his own property, this will be one of

the suggested investment vehicles. Besides this a relatively high proportion of investment

will be allocated to equity. Some of this is suggested to be invested in equities outside

Indonesia, given the high volatility of the Indonesian equity market, this might give more

stable results to James. It needs to be observed though that investing outside Indonesia

introduces a currency risk.

It is recommended to have a reasonable proportion of the investment allocated to

bonds, there are two reasons for this; firstly the bond yield in Indonesia are high, and the

returns are close to the targeted returns that James is looking for. Thus adding a

reasonable portion of bonds to the portfolio helps James reducing risk in his portfolio,

this will reduce returns but not below his actual target. Secondly, as the country is

becoming more and more stable politically and economically, one might anticipate

interest rates to come down somewhat in the mid long term. Being invested in medium to

long duration bonds can then create the additional benefit of capital gains.

In summary the recommended portfolio of assets looks as follows;

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Table 5.1 Recommended asset allocation

Asset Class Allocation

Local Equity 30.0%
Local Fixed Income 25.0%
Property 20.0%
Foreign Equity 15.0%
Cash/deposits 10.0%
Total 100.0%

5.1 Local Equity

The 30% allocation of the inherited capital to local equity represents an equivalent

amount of 60k James needs to consider a number of issues when investing this money;

1. Diversification

When investing in equity it is important to obtain enough diversification in his

portfolio; in terms of different stocks as well as over different industries.

Diversification is best obtained by investing in equities whose performance is not

closely correlated. Diversification therefore is found by spreading over different

industries for example. In order to achieve this with a limited budget it would be

recommended to make use of the services of a fund manager.

2. Management and analysis

Optimizing equity performance requires the investor to set out an investment

strategy and execute strategy this consistently. This requires the investor to

22
 continuously follow movements in the market as well requires him to have the

technical skills to analyze and make decision. Since James does not have time nor

the technical knowledge and skills to define a trading strategy and continuously

monitor the market in order to execute this trading strategy, again the use of the

services of a professional fund manager seems to make sense.

The cost of using a professional fund manager in Indonesia is 200 to 250 Bps.

Alternatively James could manage his own portfolio but would still be facing some

trading cost. The one issue that James will obtain for the price of 200 Bps is that he will

not have to define his own trading strategy and/or execute is consistently. Also since he

does not have any technical skills or tools to monitor and make investment decisions, he’s

more likely to make a higher return on his investment despite the cost he has to pay for

the service.

The benchmark for the equity performance will be the performance of the Jakarta

Composite Index. The goal should be to outperform this index. Most fund managers will

publically announce their benchmark for fund they offer, and therefore it should be

possible for James’ to indentify a fund that has the same benchmark as he has for himself.

5.2 Local Fixed Income

The local fixed income market is primarily a government bond market, although in

more recent years the number of corporate bonds of quality has increased quite

23
significantly. The lot size for investing one bond is 100k This means that James is unable

to diversify his portfolio without again using the services of a professional fund manager.

The cost of using a professional fund manager in the fixed income section in Indonesia

is 125 to 175 Bps. Alternatively James could manage his own portfolio but would still be

facing some trading cost. An additional benefit is that the capital gains as well as the

coupon payments on fixed income held in a mutual fund are free of tax in Indonesia,

whereas in case of direct holding they would be subject to 15% final tax. This alone will

make it more attractive for James to use a fund manager, rather then invest direct.

The benchmark for the fixed income performance will be the HSBC fixed income index

for Indonesia. The goal should be to outperform this index. Most fund managers will

publically announce their benchmark for fund they offer, and therefore it should be

possible for James’ to indentify a fund that has the same benchmark as he has for himself

5.3 Property
20% of the current allocation of fund will be directed towards James’ new property. This

20% will be in the form of down payment and through monthly installments the

proportion of fund allocated to his property will increase.

5.4 Foreign Equity

The foreign equity proportion will again be subjected to the same limitation as we saw

on the local equity funds; this again means that the use of a fund manager would make

24
sense, as James time sand expertise are not sufficient to manage his own portfolio with

optimal results.

The cost of using a professional fund international equity fund manager is around 200

Bps. Alternatively James could manage his own portfolio but would still be facing some

trading cost. The one issue that James will obtain for the price of 200 Bps is that he will

not have to define his own trading strategy and/or execute is consistently. Also since he

does not have any technical skills or tools to monitor and make investment decisions, he’s

more likely to make a higher return on his investment despite the cost he has to pay for

the service.

The benchmark for the equity performance will be the performance of an international

index. The goal should be to outperform this index.

5.5 Cash
Some of James money will be kept absolutely liquid and will function as a first buffer

against unexpected cost. Since James is not able to safe much from his current monthly

income liquidity is important as borrowing against credit card or other personal loan

arrangement are likely more expensive than the income lost because of allocating to cash

rather than another asset class.

25
5.6 Rebalancing the portfolio
James will have to rebalance his portfolio on regular bases. In this process he will need

to asses how his personal situation has changed and how this might impact his risk

appetite and therefore how it might impact his investment strategy. Secondly he will need

to take into account how the balance between the different sectors in his investment

portfolio have changed; if one or the other has show a significantly different performance

then the other he might want to rebalance between the different assets classes and bring

things back in line with the original (or the adjusted) strategy. Initially this process would

take place once a year, but this frequency might be adjusted later on.

6.0 Actual Asset Recommendations

This section will discuss the actual asset allocation for each of the asset segments that

were part of the recommended asset allocation strategy as discussed in chapter 5.

6.1 Local Equity

Consideration in the actual allocation of assets in the equity portfolio are

a. Sufficient diversification over the different segments of the market

b. Liquidity of the individual equities or funds. Not all equities in Indonesian are

particularly liquid. It would be recommended to stay within the realm of liquid

shares only. The risk otherwise would be that James once he wants to liquidate

will be forced to do so at a significant cost.

26
 c. Growth potential of each individual equity; the growth potential would be

analyzed through the current P/E ratio, and how this P/E ratio compares with

peers. Also some real analysis might be needed with regards to business

opportunity and market growth for the particular industry a company is operating

in and how well that particular company is positioned to take advantage of those

opportunities.

d. Risk of each individual equity, measured through its beta

e. Correlated risk profile of the total equity portfolio (correlation of risk)

6.1.1 Buying Individual Stocks

If James decides to buy individual stocks is would be recommended to spread his

investment over different industries, in order to spread his risk. Within each industry the

following analysis could help with selecting specific stocks. (for a complete list P/E

ratio’s and beta’s see appendix A)

Financial industry

Table 6.1 P/E ratio and beta of companies in the financial

Company P/E ratio 2009 Beta
Bank Negara Indonesia Persero Tbk PT 11.60 1.30
Bank CIMB Niaga Tbk PT 11.01 1.11
Bank Rakyat Indonesia 11.29 1.19
Bank Mandiri Tbk PT 11.96 1.10
Bank Pan Indonesia Tbk PT 16.36 0.95
Bank Central Asia Tbk PT 14.02 0.86
Bank Danamon Indonesia Tbk PT 17.64 1.35

27
 Based on the P/E ratio of companies in the financial industry James might BNI and

CIMB Niaga. Although these companies also have the highest beta’s, indicating that

performance of these stocks historically has been more volatile then that of others, and

therefore might be considered more risky investments. Since James is investing for

longer period, the slightly riskier stocks might give him a performance upside.

Energy Sector

Table 6.2 P/E ratio and beta of companies in the Energy Sector
Company P/E ratio 2009 Beta
Bumi Resources Tbk PT 6.99 1.60
Adaro Energy PT 7.52 N/A
Tambang Batubara Bukit Asam Tbk PT 8.65 1.36
Indika Energy Tbk PT 9.43 N/A
Perusahaan Gas Negara PT 14.72 1.02
Timah Tbk PT 16.07 1.40
Medco Energi Internasional Tbk PT 27.32 1.19
Aneka Tambang Tbk PT 30.97 1.35
International Nickel Indonesia Tbk PT 34.64 1.44
Energi Mega Persada Tbk PT 54.75 1.28

Bases on P/E ratio’s there is a number of companies in the energy sector that currently

appear to be cheap and might be good buys for James. Clearly some of these have been

volatile stocks in the past as we can see from the beta’s, but at current low process they

might present a good opportunity for future capital gains.

Construction Sector

Table 6.3 P/E ratio and beta of companies in the Construction Sector
Company P/E ratio 2009 Beta
Semen Gresik Persero Tbk PT 12.45 1.05
Astra Lestari Tbk PT 16.06 1.45
Indocement Tunggal Prakarsa Tbk PT 16.09 1.05
Holcim Indonesia Tbk PT 18.19 1.35
28
Bakrieland Development Tbk PT 25.03 1.58
Ciputra Development Tbk PT 25.67 1.35
Lippo Karawaci Tbk PT 28.39 0.54
Bayan Resources Tbk PT 47.60 N/A

The construction sector in Indonesia has a positive future, as much construction projects

have come under development in recent years. For this reason some of the cheaper deals

like the cement companies present a good opportunity for James. The volatility in the

stocks historical performance of these companies indicates that they have been of average

risk. Specifically Semen Gresik seems a good buy as P/E ratio is clearly below that of its

direct competitors currently.

Consumer Goods Sector

Table 6.4 P/E ratio and beta of companies in the Consumer Goods Sector
Company P/E ratio 2009 Beta
Bakrie and Brothers Tbk PT 7.30 1.26
Gudang Garam Tbk PT 9.67 0.78
Ramayana Lestari Sentosa Tbk PT 9.88 0.63
Sampoerna Agro PT 11.94 1.19
Indofood Sukses Makmur Tbk PT 13.16 1.10
Matahari Putra Prima Tbk PT 15.17 0.66
Bentoel Internasional Investama Tbk PT 20.84 0.77

The Indonesian economy is for a large part driven by the consumer good sector and

stock in this sector seems to be less risky then the average market, with several betas

below 1. Still prices of stock seem to be cheap with P/E ratio’s below 10. Specifically a

stock like Ramayana seems to be a good buy, with limited risk, as is Gudang Garam.

29
6.1.2 Buying Funds
As mentioned in Chapter 5 is would be recommended to consider the use of a fund

manager, as managing an equity portfolio would require James to define his own trading

strategy and/or execute is consistently. Also since he does not have any technical skills or

tools to monitor and make investment decisions, he’s more likely to make a higher return

on his investment despite the cost he has to pay for the service.

There is a number of quality fund manager operational in Jakarta that have equity fund

available. Following is a comparison of the different fund features of these providers;

Table 6.5 Comparison of Indonesian Equity Funds

Fund Fund name Investment Past 12 Past 3 Fees

Manager parameters month year
Fortis Fortis Ekuitas Equity > 80% -20.6% 21.6% Annual 1.5%;
MM < 20% initial fee 3%
Schroders Dana Prestrasi Plus Equity > 80% -8.8% 20.2% Annual 1.5%;
MM < 20% initial fee 2%
Manulife Manulife Dana Saham Equity > 80% -15.8% 15.92% Annual 2.5%;
MM < 20% initial fee nil
First State Indo Equity Sectoral Equity > 80% -24.2% 15.2% Annual 1.5%;
MM < 20% initial fee 2%
Source; fund factsheet of each fund

Based on the above details it is recommended to James to choose either the Fortis or the

Schroders fund since it they both have been performing well. Both funds have a relatively

high subscription fee, but since James is recommended to hold his mutual fund

investment for a longer period, this should be offset by the lower annual fee.
30
6.2 Local Fixed Income
Consideration in the actual allocation of assets in the fixed income portfolio are

a. Sufficient diversification over the different segments of the market,

b. Liquidity of the individual bonds; some corporate bonds in Indonesia are highly

illiquid, which can be a concern unless the duration is fit to hold to maturity; if

this is not the case James might have a risk of not being able to sell the bond

quickly when needed. It needs to be remarked here that the illiquidity of bonds is

often rather a function of lack of seller, than a function of a lack of buyers.

c. Yield of each individual bond

d. Credit risk of each individual bond, measured through the rating that is attached to

it by the local rating agencies. Since yields on corporate bonds in Indonesia are

already quite attractive, there seems no need to buy anything below investment

grade.

e. Correlated risk profile of the total bond portfolio. (correlation of risk)

As mentioned in Chapter 5 is would be recommended to consider the use of a fund

manager, as managing a bond portfolio might be hard due to the relative steep

requirement on minimum lot sizes on each particular bond, which might make it hard for

James to create his own well diversified portfolio.

31
 There is a number of quality fund manager operational in Jakarta that have bond fund

available. Following is a comparison of the different fund features of these providers;

Table 6.6 Comparison of Indonesian Bond Funds

Fund Fund name Investment Past 12 Past 3 Fees

Manager parameters month year
Fortis Fortis Prima Fixed Inc.> 90% 9.8% 9.0% Annual 1.5%
MM < 10% Initial 2.0%
Schroders Dana Mantap plus Fixed Inc.> 80% 20.2% N/a Ann. 1.25%
MM < 20% Initial 1.0%
Manulife Dana Tetap Pemerintah Fixed Inc.> 90% 21.2% N/a Annual 1.5%
MM < 10% Initial nil
Source; fund factsheet of each fund

Based on the above details it is recommended to James to choose either the Schroders of

the Manulife fund. Both funds have similar performance or, the main difference is in the

fee structure. Since James would invest for on a buy and hold bases the lower annual fee

on the Schroders fund might be interesting although James would have to pay a

subscription fee, which is not charges on the Manulife fund.

6.3 Property
The primary consideration on the property side would be to buy a house or an

apartment. There is currently many apartment complexes under construction in Jakarta

32
and a concern would be that due to continued high volumes of construction that might

actually lead to oversupply there would be concern whether buying an apartment would

provide the optimal capital appreciation over time. A house and particularly ownership of

land in a strategically picked location will likely be more effective in that respect.

Therefore a house would the preferred solution.

6.4 Foreign Equity

Considerations in the actual allocation of assets in the foreign equity portfolio are

f. Sufficient diversification over the different geographies.

g. Liquidity of the individual equities or funds. This will be less of a problem than it

is with the local equities, as the range of liquid foreign equities is much broader.

h. Growth potential of each individual equity; the growth potential would be

analyzed through the current P/E ratio, and how this P/E ratio compares with

peers. Also some real analysis might be needed with regards to business

opportunity and market growth for the particular industry a company is operating

in and how well that particular company is positioned to take advantage of those

opportunities.

i. Risk of each individual equity, measured through its beta

j. Correlated risk profile of the total equity portfolio (correlation of risk)

33
 As mentioned in Chapter 5 is would be recommended to consider the use of a fund

manager, as managing an equity portfolio would require James to define his own trading

strategy and/or execute is consistently. Also since he does not have any technical skills or

tools to monitor and make investment decisions, he’s more likely to make a higher return

on his investment despite the cost he has to pay for the service.

6.5 Cash
The cash and money market instruments are recommended to be invested in high

quality banks as well as in money market mutual funds. The money market mutual funds

offer the advantage that capital gains and interest income is exempted from withholding

tax, which is charged on deposits or money market instruments that are directly held be

an individual investor. For this reason investing through a mutual fund might give higher

expected returns.

34
Appendix A.
The following table shows the expected PE of 2009 and 2010 for the top 50 Indonesian

Stock, as well as the beta of each of these.

35
 Company ticker Co mpany name PE 2009 PE 2010 Beta
TLKM IJ Equity Telekomunikasi Indonesia Tbk PT 12.66 11.37 0.83
ASII IJ Equity Astra International Tbk PT 13.54 11.58 1.30
BBCA IJ Equity Bank Central Asia Tbk PT 14.02 12.59 0.86
PGAS IJ Equity Perusahaan Gas Negara PT 14.72 11.93 1.02
BBRI IJ Equity Bank Rakyat Indonesia 11.29 9.35 1.19
BMRI IJ Equity Bank Mandiri Tbk PT 11.96 10.01 1.10
UNVR IJ Equity Unilever Indonesia Tbk PT 23.93 20.72 0.58
INCO IJ Equity International Nickel Indonesia Tbk PT 34.64 25.40 1.44
BDMN IJ Equity Bank Danamon Indonesia Tbk PT 17.64 14.37 1.35
ADR O IJ Equity Adaro Energy PT 7.52 11.09 N/A
BUMI IJ Equity Bumi Resources Tbk PT 6.99 8.83 1.60
UNTR IJ Equity United Tractors Tbk PT 12.17 10.78 1.42
SMGR IJ Equity Semen Gresik Persero Tbk PT 12.45 11.06 1.05
AALI IJ Equity Astra Agro Lestari Tbk PT 16.06 13.66 1.45
INTP IJ Equity Indocement Tunggal Prakarsa Tbk PT 16.09 13.31 1.05
ISAT IJ Equity Indosat Tbk PT 12.54 10.78 0.89
BBNI IJ Equity Bank Negara Indonesia Persero T bk PT 11.60 8.15 1.30
PTBA IJ Equity Tambang Batubara Bukit Asam Tbk PT 8.65 9.81 1.36
GGRM IJ Equity Gudang Garam Tbk PT 9.67 9.00 0.78
ITMG IJ Equity Indo Tambangraya Megah PT 8.37 10.50 N/A
BNII IJ Equity Bank Internasional Indonesia Tbk PT 24.91 19.56 0.71
ANTM IJ Equity Aneka Tambang Tbk PT 30.97 20.95 1.35
BYAN IJ Equity Bayan Resources Tbk PT 47.60 25.49 N/A
INDF IJ Equity Indofood Sukses Makmur T bk PT 13.16 10.32 1.10
BNGA IJ Equity Bank CIMB Niaga Tbk PT 11.01 8.64 1.11
PNBN IJ Equity Bank Pan Indonesia Tbk PT 16.36 12.57 0.95
LPKR IJ Equity Lippo Karawaci Tbk PT 28.39 22.44 0.54
INDY IJ Equity Indika Energy Tbk PT 9.43 8.82 N/A
JSMR IJ Equity Jasa Marga PT 14.67 12.39 N/A
KLBF IJ Equity Kalbe Farma Tbk PT 12.78 10.36 0.90
TINS IJ Equity Timah Tbk PT 16.07 8.31 1.40
MEDC IJ Equity Medco Energi Internasional Tbk PT 27.32 22.77 1.19
INKP IJ Equity Indah Kiat Pulp and Paper Corp Tbk PT 3.41 2.31 1.11
EXCL IJ Equity Excelcomindo Pratama PT 13.27 9.69 0.71
BNBR IJ Equity Bakrie and Brothers Tbk PT 7.30 4.55 1.26
LSIP IJ Equity Perusahaan Perkebunan London Sumatra Ind 12.93 10.38 1.46
SMCB IJ Equity Holcim Indonesia Tbk PT 18.19 13.67 1.35
RMBA IJ Equity Bentoel Internasional Investama Tbk PT 20.84 18.28 0.77
BISI IJ Equity Bisi International PT 16.47 10.52 1.04
ELTY IJ Equity Bakrieland Development Tbk PT 25.03 20.64 1.58
ENR G IJ Equity Energi Mega Persada Tbk PT 54.75 19.20 1.28
CTRA IJ Equity Ciputra Development Tbk PT 25.67 20.94 1.35
MNCN IJ Equity Media Nusantara Citra MNC PT 9.20 8.17 0.80
CPRO IJ Equity Central Proteinaprima Tbk PT 3.76 2.29 1.06
RALS IJ Equity Ramayana Lestari Sentosa Tbk PT 9.88 8.62 0.63
BTEL IJ Equity Bakrie Telecom PT 17.19 12.42 1.16
BLTA IJ Equity Berlian Laju Tanker Tbk PT 0.00 0.00 1.22
MPPA IJ Equity Matahari Putra Prima Tbk PT 15.17 12.08 0.66
SGRO IJ Equity Sampoerna Agro PT 11.94 8.87 1.19
TSPC IJ Equity Tempo Scan Pacific Tbk PT 8.99 7.63 0.83

References

36
BKPM 2008 Laporan Berkembangan Negara Indonesia tahun 2007 official annual repot

of the Indonesian Economic ministry, dd. March 2008 pp. 200-211

University of Liverpool, 2009, 'Investment Strategies Week 4 Lecture'

37