Pension providers are capitalising on recent liberalisation to launch gold and corporate bond funds, says Reeta Paakkinen

On the asset management side, the government’s efforts to encourage growth of private pension assets include allowing new kinds of investment vehicles. The decision to allow pension companies to establish funds investing in gold, property funds, funds of funds and Islamic non-interest funds, was published in the Official Gazette in March 2013. The new regulation replaces an older one from 2002.

Turkey’s private pension assets total currently TRY22.4bn (€9.53bn). The landscape consists of 17 companies managing 176 funds investing in different asset classes.

The average portfolio of a local pension insurance company is invested heavily in treasury-bills and government bonds (58%) and domestic stocks (16%), with the rest allocated to reverse repo (8.15%), money markets (0.72%), foreign securities (0.56%) and other investment vehicles (16.57%). The overall approach is conservative and risk-adverse.

Taylan Türkölmez, CEO of TRY2.56bn (€3.3bn) Yapı Kredi Emeklilik, says Turkish pension investors focus heavily on treasury bills and bonds because there is a clear preference for low-risk profiles and minimum volatility. “Since treasury bills and bond funds are issued by the government treasury, these funds are perceived as guaranteed return funds by investors. The preference for fixed income is likely to prevail for the medium term,” he says.

Yapı Kredi Emeklilik’s portfolio is also invested heavily in treasury bills and bonds (58%). Turkish equities make 14% of the portfolio, corporate bonds 12%, deposits 6%, euro bonds 5% and international equities 5%.

ING Emeklilik maintains a more conservative asset allocation strategy than the average pension insurance company in Turkey, says the firm’s CEO Jetse de Vries. The firm manages TRY1.21bn (€515m) invested in eight funds. “We maintain a more conservative approach than the average pension firm here, and we do not consider it a bad thing. We prefer steady income instead of winning and then, at times, losing big sums,” de Vries says.

Yapı Kredi Emeklilik has decided to make use of the new regulations and recently established a pension fund investing in gold, which will be offered to investors this month.
“We are also planning to establish a fund of funds and life-cycle funds. In addition, we are researching property funds but will not establish one until the sector and investor awareness has developed further. Last year we established an international technology equity pension fund but so far very few customers have chosen to invest in this fund so we are unlikely to take further exposure to international equities for now. Overall, our approach and asset allocation will remain roughly the same,” Türkölmez says.

Garanti Pension also made use of the new freedoms by launching a gold fund earlier this year. Late in 2012, the company also introduced a corporate bond fund. “Over the last two to three years, demand for the gold fund has increased rapidly but regulatory-wise it was not possible to establish it earlier. We are now working on other new funds which will be invested in foreign stocks and stock indices,” Onaran says.

A lion’s share (73%) of Garanti’s portfolio is invested in treasury bonds and bills. Equities make 13% and the remaining 10% is made of euro bonds, foreign bonds and bills and other short term fixed income instruments.

Turkish investors have tended to prefer fixed income because of its low risk profile. But over the past few years, according to Onaran, they have started to become more interested in alternative investment vehicles. “The growth of the Turkish economy has been solid and the inflation control policies of the government have reduced interest rates further. Since the risk-free rate is decreasing, investors tend to search for alternative instruments, which can yield better returns in the long run. The demand for alternative investment opportunities, such as international stocks, corporate bonds or commodities, has become inevitable. The 58% allocation to fixed income will certainly decrease and investors will be switching to more risky investments which yield higher returns,” Onaran says.

Onaran believes there will also be new funds and investment vehicles focusing on international equities, and would like to see emerging market equity funds in the market.
“With the evolving private pension legislation, in order to catch the attention of a larger group of investors, commodity funds have become an option. We are also interested in life-cycle funds in which investment strategies will gradually change according to the age and year to retirement of the target customer group, and in investing in foreign stock exchanges, especially in emerging market indices,” he added.

De Vries of ING Emeklilik says the need for advisers and consultants for the array of new investment vehicles. “New funds will come with new challenges – there is a need for good advisers and consultants here,” he says. “Gold is a very popular means of investing in Turkey, and such a fund may sell well but comes with high risk. Property is another new vehicle which is making its way, but it makes sense only with 50-year horizons as real estate prices indeed tend to go up very nicely but then at times take deep plunges down,” he says.

Onaran is slightly more optimistic about the development of the Turkish property market. “The real estate market is and has always been quite popular in Turkey. Population growth and the future economic outlook, as well as the decreasing funding rates, affect real estate prices positively and prices will keep on increasing over a longer period of time,” he says. “Property funds should certainly be quite popular here,”

Yapı Kredi Emeklilik expects pension funds to return 8% on average this year based on the rise of ISE-100 index and fall in bond interest rates. “Our asset volume will probably reach some TRY4.5bn by the end of this year, and the whole sector TRY25bn,” Türkölmez says.

Onaran believes equities will lead the way in 2013. “Looking back at the last 10 years and considering the current solid economic policies, growth potential and the rating upgrade expectations, stock exchange funds are likely to pull the best returns again,” he says. “Returns may not be as high as in 2012, but according to the year-end target inflation of 5.3%, returns of around 15% for equities and 8.5% for fixed income can be counted as quite satisfying figures,” he concludes.