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em>Indonesian stocks have performed poorly so far this year as the domestic economy shrank to its lowest level in over six years. The benchmark stock price of the Jakarta Composite Index (JCI) is the region'€™s worst performing index, having lost 8 percent year-to-date with net foreign purchases slashed from around Rp 15 trillion in April to Rp 3.8 trillion now.

The Jakarta Post'€™s Anggi M. Lubis recently spoke with Michael Tjoajadi, CEO of Schroders Indonesia, the nation'€™s biggest fund manager with Rp 66.4 trillion in assets under management (AUM) '€” up more than 10 percent from the end of last year amid challenging market conditions '€” about the outlook for the Indonesian stock market and strategies to invest at an unfavorable time. Here are excerpts from the interview.

Question: The stock market has been volatile throughout the year. Now that we have entered the second half, how do you see the market in the near future?

Answer: I think we are going to see the stock market continue to fluctuate in the next three to six months, and there will be a handful of factors both stemming from domestic and international markets. Domestic sentiment will largely depend on government spending and infrastructure developments. Meanwhile, investors will always keep their eyes on updates from the Fed [the US Federal Reserve], China'€™s economic growth as well as the latest situation in Europe, in making their investments.

When do you think the market will pick up and reach a more stable pace?

Probably around year-end, and by that time hopefully our macroeconomic condition will have improved. We still have to get through the third quarter, and it will be a very bumpy one. The third quarter will be when first-half corporate earnings are out and economic growth will be announced '€” we don'€™t expect either of them will be good.

We do hope that the index can at least reach the same level as last year, but there will be hefty challenges that will depend on corporate performance and infrastructure progress. We harbor high hopes about FDI [foreign direct investment] positively contributing to our economy.

We cannot solely expect government spending to drive the economic growth '€” it has to be combined with FDI to actually spur growth. Government spending has to be propped up by other sectors, and we have very low expectations toward our commodity-based exports. Given that China as our trading partner is also facing economic slowdown, our expectations are becoming even lower. The key will be moving our slow-growing manufacturing industry, and that is why we need FDI.

What kind of stocks should investors consider throwing their money at amid an unfavorable market?

In the long term, we are still optimistic toward big caps, because with their enormous capital and management ability they have a better chance of coming out as the winners amid a slowing economy. Construction, finance and consumer goods stocks have much better prospects compared with shares of mining and agriculture firms.

Equity mutual funds remain investors'€™ picks. As the market has been bearish, do you see any possible shifting to investments with lower risks?

We do see a slight shifting in investment trends, albeit very insignificant. Based on our recent research, 37 percent of our surveyed respondents said they wanted to invest in medium-risk investments. Most of the respondents said they were going to adjust their investments in the next 12 months to better suit market conditions, but many of them also said they were going to retain their investments for the next two to five years, because they still believe macroeconomic conditions will be better next year.

What kind of investment is the best option now amid the slowdown?

The key is not the return but the risk. We cannot talk about returns at a time like this. What we have to see is what kind of risks the investors see and are willing to take. If the investors are confident enough to take high risks they can invest in equity, but if not they can consider bonds or balanced [mutual funds]. If what they pursue is a short-term investment lasting three to five months they should avoid investing in the equity market.

If they talk about investing for the next 12 months, five years, or even ten years, let'€™s invest for equity now, it is a good time because we do believe Indonesia is still potentially growing. This is just a hiccup in our economy; sometimes we need to go at a slower pace for better growth. Just like working on reducing traffic jams by building the MRT, we have to be a little more patient with the roads becoming more congested due to the [MRT] construction.

How has the economic slowdown impacted Schroders'€™ AUM?

Our AUM grew positively during the first half and is currently at Rp 66.4 trillion [as of the end of May]. Our target is to close the year at Rp 70 trillion so basically we are very close to our target. Take into consideration, however, that the market has been quite shaky since early this year and there is a decline, albeit slightly. Most of our products are equity mutual funds, and the JCI has plunged by more than 6 percent year-to-date, which will of course affect AUMs in general.

What kind of approach does Schroders prefer to deal with the current slowdown and unfavorable capital market?

Well, we do business more conservatively. It is hard to be aggressive in the current fluctuating economic conditions. We choose to carry out our investment activities through companies that we deem as having good fundamentals in the future, and we tend to avoid firms that have a potential to see revenue disruptions in this current economic situation.

Schroders is able to maintain growth in returns of equity mutual funds, or at least stop the declines being as steep as others. What are your strategies?

We are trying to be actively involved in the investments. We focus on delivering good returns without taking high risks. Most of our products are equity mutual funds, and equity investment basically comes with high risk. But we don'€™t opt for the highest risk with high short-term returns, we take reasonable risk with better returns in the long run.

Taking a high level of risk means you will be on top when the market is good, and at the bottom when the market is down. The level of risk we take is lower than the market.

Let'€™s take an example. One person invests 100 with 60 percent risk and the other invests 100 with 40 percent risk. When the market is down, the first person will see their investment left with only 40 and the other person '€” who took a lower risk '€” will see its investment eroded to 60. When the market improves and the prices double, the first person will see investment up to 80 while the other'€™s money increases to 120. Which one has more benefit then?

When the market is fluctuating like this, we lower the risks of our products. Investors will not be happy if they see it over a short period of time, because they might only climb slowly while others reap higher returns. It is going to take time to prove.