• Welcome
• Opening up the Turkish market
• Regulatory change will be the driver
• International firms poised to enter market

Welcome

Jose Longree
EMEA Head of Investors for Client and Sales Management
Global Transaction Services, Citi

Big changes are afoot in the Turkish fund market. After decades of super-high interest rates which caused Turkish investors to shun mutual funds in favour of high-yielding government bonds and time deposits, the dramatic fall in rates that followed the credit crisis has prompted a change in investor attitudes. At the same time, there are regulatory moves to encourage new providers.

In this edition of Spotlight, Gunsel Topbas, Head of Securities and Fund Services for Citi’s Global Transaction Services in Turkey, looks at the impact of these changes and the opportunities they offer for international fund managers.

Opening up the market

Gunsel Topbas
Head of Securities and Fund Services Turkey
Global Transaction Services, Citi

Turkey's mutual fund market is tiny. As of 2009, mutual fund investment per capita was only 3% of GDP. According to the Turkish Institutional Investment Managers' Association (TKYD), total assets under management are just $32 billion, with mutual funds accounting for $20.6 billion of that. Of the total, only 3% is in equities. There are signs that is starting to change, however.

The collapse in interest rates following the credit crisis has reduced the attraction of money market funds. A new personal pensions regime, introduced in 2003 and backed by generous tax incentives, has also had an impact on savings and investors are starting to look again at equity funds. ‘There is a significant shift from money market funds to equity-based funds, especially in pension funds’, says TKYD chairman Gur Cagdas: 'The total equity investment in pension funds is approximately 1.5 times the amount in mutual funds, even as of today.' Equity funds have continued to grow by about 15% over the year to date.

The biggest trend shift in the past three years has been towards capital-protected funds. The market was opened up by Ak Asset Management. Mr Keler says capital protected funds are still in fashion: 'The market share of this type of fund has reached 10% in just three years and we expect investor interest to go on increasing.' He also notes the long term partnership between Ak Asset Management and Citi, which dates back to the set up of Ak Asset Management's umbrella UCITS fund, Akbank Turkish Fund, domiciled in Luxembourg in 2008. ‘The fund is structured to provide high net worth individuals and institutional investors, located mainly in European, Asian and LATAM markets, with exposure to Turkey with the help of our EUR denominated subfunds.’ says Mr. Keler.

Yapi Kredi Asset Management is also a prominent player in the alternative area. Gülsevin Yılmaz, CEO, Yapi Kredi Asset Management, says there is sizeable demand for these products but investors remain focused on short-term instruments. 'Investors do not have tolerance for capital guaranteed funds of more than a year in duration,' he says: 'At Yapi Kredi we provide weekly redemption.'

For all that, investors are starting to look again at equity funds. 'There is a significant shift from money market funds to equity-based funds, especially in pension funds' says Mr Cagdas. 'The total equity investment in pension funds is approximately 1.5 times the amount in mutual funds, even as of today' Ms Yilmaz points out that there was a substantial inflow into mutual funds in the last quarter of 2010. Equity funds have continued to grow by about 15% over the year to date, according to the TKYD.

Regulatory change will be the driver

Regulatory changes are expected to accelerate the shift out of money market funds. Last year, Turkey's Capital Markets Board (CMB) introduced a cap on annual management fees for money market funds. 'Asset managers will probably try to compensate by implementing performance fees on mutual funds,' says Mr Cagdas, 'and lead investors to switch to other actively managed funds.'

One other big change is expected. While four banks currently control around three-quarters of the market, new names have sprung up, bringing the total number of asset managers registered with the CMB to 28. For now, those asset managers cannot establish funds, only manage them. This is subject to regulatory change.

'Many independent asset managers are being set up to target high net worth investors,' he says: 'A number have mandates to manage pension fund money at present. Firms that set up mutual funds will be required to have third-party fund administration and custody. We expect this to be the first major development in this segment.'

A new fund distribution platform has been established by Takasbank, which acts as the Istanbul Stock Exchange's clearing and settlement house. The platform is designed to break the iron grip the banks currently enjoy on fund distribution by making it easier for independent firms to sell funds. Interest in the platform is currently described as 'limited'.

International firms poised to enter market

Regulatory changes are also likely to encourage more international asset managers to enter the market. At present, international funds must be registered with the CMB before they can be distributed and become subject to income tax. 'In many cases, this wipes out returns' says Mr Keler. Citi is the only bank providing third-party mutual funds.

On the other hand, eight foreign firms are already set up to manage money in Turkey and a further seven are in joint ventures with local firms. Says Mr Cagdas: 'As the developments and updates of the current legislation are completed by the government, and fund market growth increases as a result of diversified distribution alternatives, we expect foreign penetration to increase'.

Turkey's asset management industry looks to be on the verge of a sustained expansion. Despite the growth of pensions, only 10% of the working population is yet contributing. Meanwhile, if interest rates remain at low levels, observers believe there will be a continuing shift out of money market funds and into value added products.

Citi is committed to helping its clients take full advantage of changing market conditions. Already the largest provider of custody and clearing services to foreign investors in Turkey, Citi is now developing a local fund administration capability to accommodate the anticipated growth in demand for independent fund accounting and custody services – both from domestic and international asset managers. It will provide the same high service standards clients expect from Citi in every other region of the world.