Nicholas Birch in Istanbul -
Frustrated by a fund market that stubbornly refuses to grow, Turkish portfolio managers hope products using derivatives to hedge the potential downside of more traditional investments will tempt a new generation of wary local investors to enter the market.
Worth a total 150bn in the EU today, the structured fund market where retail funds use a whole range of options including capital protection, leverage, currency hedging and access to different asset classes is now booming in Central and Eastern European countries as a new risk-averse middle class looks for safe investments. Poland's market, for example, grew 33% last year to 600m.
With Turkish legislation ready since the end of April to enable the development of such a structured fund market, money managers think there's no reason why Turkey shouldn't follow suit.
"Capital-protected funds here fill a vital gap" between money market funds that "don't enable people to participate in growth" and "risky funds that in Turkey are really risky," managing director of Fortis Investment, Patrick Van de Steen, told a structured funds conference at the Istanbul Stock Exchange (ISE) last month.
His analysis is backed up by the history of small-investor behaviour in Turkey. When the ISE opened for business in 1985, local investors flocked to it. But Turkey's high interest rates undermined its long-term upward potential, and the subsequent ups and downs were frequent and harsh. Repeatedly burnt, locals rapidly left and have yet to return in any numbers.
On paper, says Salih Reisoglu, managing director of Eczacibasi Portfolio Management, Turkish mutual funds are worth 4% of GNP, compared with 30% in southern European countries and Brazil, 50% in the EU and 70% in the US.
"What makes that figure even more laughable is that 80% of that 4% is in the money market, basically in overnight [repurchase agreements]," Reisoglu says. "There is no doubt structured products have a place here."
The apparent success of recent Turkish experiments in deposit accounts backed by derivatives suggests he is right.
Protecting the capital
Over the past year, for example, Finansbank has developed half a dozen products that offer customers capital-protected exposure to anything from the ISE to the dollar/Turkish lira exchange rate.
"These are TRY3,000 minimum (1,600), six-month accounts", says Tunc Erdal, who heads Finansbank's treasury department. "If, say, the ISE goes up, you get 75% of the upside. If it goes down, you get your TRY3,000 back untouched."
To guarantee the lump sum, the bank puts 90% of the deposit in a zero coupon, six-month note; the remainder goes into the bank's options portfolio.
Erdal refuses to give figures for the number of capital-protected accounts that have been opened, merely saying the products have brought the bank "many new retail clients."
What he will say, though, is that the volume of Finansbank's inhouse derivatives used in personal and corporate accounts grew by 2000% between 2005 and 2006, and looks set to triple again this year.
Like others in the field, Erdal thinks structured funds will be of primary interest to foreign banks, which are barred from offering the sort of accounts that Finansbank has been selling. Until now, non-Turkish banks interested in structured products had been limited to structured notes, which are subject to a prohibitive 40% tax.
Tax-wise, structured funds get off better even than deposit funds, with a 10% rate rather than 15%. Unlike fixed-term deposits, funds also allow for customers to exit at will.
Yet, despite the advantages, there is one major impediment to the rapid development of structured funds in Turkey and it's the same thing that has slowed fund growth in general high inflation and high interest rates.
"Capital guarantee funds make sense if you have inflation of 2%," Salih Reisoglu points out. "If you have inflation of 8% plus opportunity costs of 18%, keeping your capital intact is not the same as keeping your wealth intact."
From the perspective of the funds themselves, meanwhile, the relatively undeveloped options market in Turkey drives prices up and makes high rates of return less easy to achieve.
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