Global Business Reports on behalf of bne -

Today's budding Turkish asset management industry was the happy accident of a private pension law passed in 2001, which enabled the creation of private pension schemes and restricted their operation to fund management firms. The fund industry has since grown slowly, but the maturing economy means it should finally reach its full potential.

Turkey's asset managers had over 3m clients as of May this year, with a total of $27.9bn of assets under management. However, this is equivalent to a tiny 3.1% of GDP. Investment into these funds is also very skewed. Normally, money is invested more-or-less equally into equity, bond and balanced funds, but in Turkey more than two-thirds of assets are in balanced funds, just over a quarter in bond funds and a mere 2.9% in equity funds - and this despite Turkey's stock market hitting a series of all-time highs this summer.

According to Gedik Asset Management CEO Halim Çun, there have been three distinct phases in the industry's history: "The first was between 1990 and 2000. During this initial period, the Turkish mutual sector did not perform well in terms of selling its products, reaching a total asset size of only TRY1bn in 10 years. Between 2001 and 2005 saw a period of intense growth for the industry, with funds increasing from to TRY29bn at the end of 2005. Today, after five years the industry has failed to achieve further growth."

Money market funds were the driving force behind the industry's pre-2005 growth, with many banks designing accounts around them. But as the market developed, money market funds fell out of fashion and haven't kept pace with the general growth in the industry, although these funds still account for three-quarters of all assets under management today. Still, industry players are very optimistic about the prospects for the sector; the crisis has wrought enormous changes to the shape of the economy and the new conditions promise a fast pick-up for asset management. "In a macroeconomic environment where interest rates are falling, in parallel with the increasing need for alternative investment instruments and capital market products, we expect a rapid growth in the asset management sector," reckons İş Asset Management CEO Dr. Gürman Tevfik.

The reason for the optimism is that Turkey is lining up its economic ducks. As the global economic crisis subsides, Turkey has emerged as one of the winners. The Turkish economy was (briefly) the fastest growing economy in the world at 11.7% in the first quarter of this year, and although growth slowed a bit in the second quarter to 10.3% it remains amongst the top-three fastest growing economies in the world.

And this growth should continue: while most of the Continent faces a greying population that will put ever-more pressure on health and pension services, Turkey is unusual in that it sports a young population and high birth rates that will drive growth for decades. And these sprightly fundamentals are drawing in international investors as multinationals scour the global for growing markets where they can boost sales and find profits.

These changes are raising interest in the country's equity markets and the asset management industry is already attracting a lot more interest. Indeed, almost every brokerage in the country is looking to develop their portfolio management services, while new players are planning to focus entirely on the sector.

The players

The industry is currently dominated by the asset management offshoots of banks alongside a few specialist independent portfolio managers. Türkiye İş Bankası's İş Asset Management, for example, had aggregate assets under management of $6.8bn as of July, giving it a 24% market share. Founded in October 2000, the company manages 20 mutual funds and is the leading player in the market.

But the locals are starting to face competition from foreign outfits. "HSBC's market share in mutual funds in Turkey is 5%. This is higher than the average HSBC usually has which shows the importance HSBC gives to the Turkish market," observes HSBC Asset Management Turkey CEO Namik Aksel.

Emerging market specialist Ashmore established a Turkish office in 2008, the first in its strategy to establish footprints in countries where they believe the fastest growth would occur. "The institutional sector in Turkey is still in the process of developing which offers a good prospect for us. In terms of savings per capita, Turkey is very low compared to European countries," says Johan Hattingh, CEO of Ashmore Asset Management Turkey.

The foreign competition is good for both the market and the customer, as the new arrivals raise standards and innovate. Two years ago, for example, HSBC launched the first actively managed protected fund in Turkey. In addition to money market funds, bond funds, balanced funds and equity funds, Gedik Asset Management launched an alpha fund, the Kronos Alpha, in July. "We want to focus on active alpha products. The fund is similar to a hedge fund in that it aims to create an absolute return in all kinds of markets using equities and shop positions," explains Çun.

Recent innovations include guaranteed capital funds, local hedge funds and commodity funds such as gold funds. "At the moment capital protected and guaranteed funds are growing, we see this as part of the process of transition to more risky assets. We believe there will be increasing exposure to riskier investments," predicts HSBC's Aksel.

Offshore funds have been another popular addition, partly as players seek to emulate the success of İş Asset Management's Turkisfund; this offshore equity fund returned 443% between 2003 and 2010 - despite being crushed in the 2009 crisis. Established at the end of 2002 in Luxembourg, the fund is: "An umbrella fund which provides investors with the opportunity to select among various sub-funds (Turkisfund Equities, Turkisfund Bonds and Turkisfund Eurobonds) according to their specific needs and preferences," explains Tevfik.

HSBC Asset Management manages the bank's foreign-domiciled Turkey Equity Global Investment Fund, launched in 2005 and also based in Luxembourg. Aksel hopes the fund will reach the critical $100m this year. On the independent side, Kare Yatirim has launched three offshore Turkish funds so far with another three applications in place, while Ekinciler is devoting a new mutual fund line to foreign clients, part of a market strategy to attract foreign investors.

The changing market conditions are also providing other opportunities for private institutional asset management. Previously benefiting from high interest rates, the country's numerous foundations are now feeling the need of professional asset management services. "When the market gets complicated and interest rates are down, institutional investors look for new opportunities," observes İş Asset Management's Tevfik, who manages a portfolio worth $970m.

Bumps in the road

Despite renewed optimism and interest in the industry, there are still some significant challenges to overcome. With fund distribution the preserve of banks, the current legislation gives bank-associated asset management companies an unfair advantage. "The main issue for international fund managers looking to operate in the market is that of distribution. Distribution is limited to the top four or five banks in Turkey," Ashmore's Johan Hattingh laments.

The current legislation prohibits asset management companies from launching or promoting onshore funds, which can only be done by banks. The result is a paucity of new funds and a complicated and protracted process to launch to market. One of the quirks of the current regulation is that Turkish mutual funds are not legal entities, but classed as collective investment properties. Another challenge to the industry is the fact that while equity earnings were made tax free in 2008, equity funds are still taxed at 20%.

Industry players have been lobbying the government to introduce a new investment law and, while a draft bill has already been introduced to parliament, it has got bogged down. It seems unlikely that any new acts will be passed before next year's elections.

More progress has been made with improving the distribution of funds, however. Government clearing bank TAKAS is designing a system to allow brokerage companies and banks to sell all available mutual funds in the market. "We are working on the launching of an electronic fund platform (EFP) in order to create a fully automated and centralized fund distribution system. The launching of EFP will improve the Turkish fund industry and its distribution channels will be expanded on a national basis. As a result, investors can have easy access to fund transactions and related information through one single platform," explains Takas Bank CEO Dr. Emin Server Çatana.

The system will allow proper and fair competition, as investors will be able to choose which funds to invest in. The move will boost the industry's dynamism, as well as help level the playing field for independent managers who do not have bank distribution systems to rely on.

Further progress on reforms will be linked to the general growth of Turkey's pension funds. Worth $7.2bn today, more than 2m people have invested in private pensions in Turkey so far and if the industry continues growing at a rate of between 25% and 30% annually, the market will be worth TRY50bn in 10 years.