Popular sentiment as well as well as restrictive regulation limits the asset allocation of Turkish pension funds to all but the most basic assets, notes Reeta Paakkinen

Despite the global financial crisis, the asset volume of the Turkish private pensions system has grown steadily in recent months. The system was established in October 2003 and currently consists of 12 companies managing 121 funds. 

Assets in the system grew from TRY5.8bn (€2.8bn) at the beginning of October 2008, to TRY7.16bn in April 2009.

A healthy performance by fixed income instruments contributed notably to maintaining sound returns during the crisis: the average return stood at 17% in 2008.

“Low interest rates are bringing healthy returns to pension funds, which in Turkey tend to hold a lion’s share of their assets in fixed income instruments,” says Taylan Türkölmez, general manager of the TRY1.06bn Yapi Kredi Emeklilik. “Falling interest rates have reflected positively on funds in the last six months. Interest rates used to stand at around 19-20% but are now around 12-13%. We have invested approximately 85% of our portfolio in fixed income and T-bills.”

According to Turkey’s Capital Markets Board (SPK), approximately 71.3% of the assets currently in the Turkish private pensions system are invested in bonds, while 7.5% are held in equities, 16.1% in reverse repos and 5.1% in other asset classes.

“Over the first quarter of 2009 our eight funds yielded particularly healthy return, approximately 8%, due to our large exposure to fixed income, including T-bonds and inflation indexed government instruments, which make 80% of our portfolio,” notes Gökhan Dereli, chief executive officer of TRY396m ING Emeklilik. “Reduced interest rates have seen bond rates fall rapidly, allowing our inflation indexed papers to make big profits.”

ING’s investments yielded a total return of 15.1% in 2008. Previously known as Oyak Emeklilik, the fund was the private pensions arm of the Turkish Armed Forces Pension Fund OYAK. It was acquired by the Dutch insurance giant in December 2008 for €110m.

The emphasis on fixed income and a relatively traditional fund range is a feature likely to last throughout the current year. A traditional approach to asset management is also in the  plans of Deniz Emeklilik ve Hayat, the life insurance and private pensions operation of Denizbank, which will enter the pensions market this summer. Dexia acquired Denizbank from Zorlu Holding for $2.43bn (€1.8m) in 2006.

Deniz Emeklilik’s general manager Deniz Yurtseven says the company is in the process of finalising authorisation procedures for its seven funds, which will be invested in a variety of asset classes including equities, currency and bonds. “We prefer to enter the market with a quite plain product offering to see how things proceed,” Yurtseven says. “A traditional fund selection with emphasis on fixed income is also the case in other Turkish pension firms.”

However, a move to a more relaxed asset management occurred on the regulatory front earlier this year when the government removed a requirement of local pension funds to invest at least 30% of their assets in T-bonds and a 10% upper limit on foreign investments.

“This was a very welcome move, as the previous regulation was illogical. If they want, funds can now invest even 100% of their portfolios in foreign assets,” Dereli says.
However, ING Emeklilik has no plans to expand its exposure to foreign assets, but it is reorganising its equity portfolio. “We recently reduced our equity benchmark to some 4-5% of our total portfolio,” Dereli says. “At the same time we have increased our holdings in a number of key stocks in services and banking sectors listed on Istanbul Stock Exchange.”

Türkölmez notes that the heavy allocation to fixed income by the private pensions system is partly due to the traditional mindset of local investors. “A very small portion of the 1.8m pension savers in Turkey ever change their fund composition,” he says. “In this environment, increasing exposure to Istanbul Stock Exchange, which has dropped notably since the crisis started, may even be pretty well-calculated. Savers here still have a very conservative and careful approach.”

Despite the wary investor base, local pension funds are actively seeking to introduce new investment vehicles to the market. Earlier this year, for example, Yapi Kredi Emeklilik applied for a licence to operate a gold fund. In Turkey gold is a popular means of private saving, and there are several trading offices in most city centres.

“We heard from our sales representatives in Anatolia that many customers would be interested in a gold fund,” Türkölmez explains. “We prepared a plan for this, and filed in an application at the regulator. However, the application was turned down because the current wording of the regulation does not provide a legislative framework for a gold fund.”

The same wording in Turkish pension investment regulations has so far inhibited the establishment of hedge funds, Türkölmez adds.  “There is no regulatory framework in place yet to make the market more diversified and dynamic,” he notes. “We need to see a law change before we can actually introduce new vehicles to the market.”

Because of the existing regulatory framework, Turkish pension funds are not yet offering their clients property funds either. However, several foreign pension funds, including the C$108.9bn (€69.9bn) Canadian Pension Plan Investment Board (CPPIB), have allocated to funds investing in the Turkish real estate market. The CPPIB was the first founding investor in Turkey Retail Fund launched by Netherlands-based property development and investment firm Multi Corporation and which consists of 21 completed, under construction or planned shopping centres throughout Turkey with a projected real estate value upon completion of €4.3bn. CPPIB has an equity commitment of €250m in the fund.

“The problem Turkish pension funds would have in investing in domestic real estate, for example, is that the price of the fund needs to be calculated daily,” Türkölmez says. “In case of property both daily value calculations and exits by individual savers would be quite complex.”

And although several North American and European pension funds have recently added Turkish private equity to their portfolios, local funds are yet to make inroads to the asset class.

Yurtseven believes that the next evolutionary steps may take place in listed equities. “While more traditional asset classes make up the lion’s share of pension portfolios, maybe in five years the market will perhaps also see the creation of sector equity funds, such as technology funds,” he says.

But Türkölmez thinks that exposure to equities among Turkish pension firms remains too limited for sector funds to develop. “Equity exposure still stands at only 5-6% of all assets, while, anyway, there are not so many firms in different sectors,” he says. “There isn’t enough depth in equity investments yet for sector funds to be created. Also, liquidating would not be easy, as it would bring too much pressure on a certain sector. Furthermore, current regulations stipulate a fund has to invest in 16 different equities.”