A new generation of investment funds is emerging in Turkish pensions, whose assets could grow to €60bn in 10 years, writes Reeta Paakkinen

Assets of Turkey's private pension system reached TRY9.88bn (€4.98bn) at the end of April, the country's Pension Monitoring Center (EGM) reported. The sum is invested in 130 funds managed by thirteen companies.

The statistics of the Capital Markets Board (SPK) paint a somewhat conservative image of the local pension investment culture. In February 2010, 67.8% of all assets were invested in government bonds, 8.9% in equities, 14.8% in reverse repo, 0.23% in money markets, 0.10% foreign securities and 8.12% in other investment vehicles.

The local investment culture is orientated towards fixed income investments for two main reasons: investors, who by and large prefer bonds, and the existing regulatory framework, which so far does not provide opportunities for more adventurous investment tools such as real estate funds or hedge funds.

However, winds of change are blowing. The Turkish regulator announced this spring it will raise the upper limit of timed deposit investments for pension funds from 10% to 20%. Many players in the market welcome the change but would like to see much more profound reforms taking place.

Taylan Türkölmez, general manager of TRY1.5bn Yapi Kredi Emeklilik, says many pension savers in Turkey are calling for pension insurance companies to launch more sophisticated investment vehicles. "The upcoming relaxation in exposure to timed deposits is a step to the right direction but as such it is a limited evolution, which offers few new opportunities for the management of pension assets overall. There is a need for much more drastic change," Türkölmez says.

"Increasing the limit of timed deposits to 20% will not have much effect in returns because interest rate is currently about 9% and the average yield of timed deposits around 8-9%. Our customers are looking to invest in new financial instruments but the regulations do not yet provide the possibilities for this," he adds.

A fund investing in gold is one of the new investment vehicles that several Turkish pension insurance companies have tried to establish. Yapi Kredi and Garanti Pension, for example, applied to the regulator for permission to establish a gold fund for pension savers, but their applications were turned down. "Gold is of major interest to us because so many Turkish pension savers are already investing some of their savings in gold. If regulations would allow it, we would also allocate pension assets in hedge funds," Türkölmez comments.

Fatih Bozkurt, financial specialist at TRY551m ING Emeklilik notes ING is also keen to establish a gold fund, but right now the timing for that is not favourable. "Gold prices are high these days compared to historical levels. In these circumstances it would make no sense to launch a fund and then buy gold for prices that are higher than the historical average price. But when the recovery of world economy proceeds, this will also reflect in gold prices and that is when such a fund will become timely in Turkey as well, as so many people here are investing in gold already," he says.

Gökhan Özüm, head of strategic planning at TRY1.44bn (€732m) Garanti Pension agrees. "Relaxing the upper limits for timed deposits is a good evolution, but we would like to see less restrictions for pension funds' asset allocation; overall the issue at stake here is long-term investment strategies. At the moment the regulator is quite wary about funds of funds," Özüm says.

Garanti Pension, last year launched Turkey's first pension investment fund vehicle that invests in non-interest bearing income certificates issued by the Treasury. It is the first pension fund of its nature in Turkey. "We launched the Flexible Alternative fund as we noticed there was a contingency of customers not keen to invest in interest-bearing funds. Our goal is to serve every kind of customer group whether big or small." Özüm explains.

Since its launch in July 2009, the Flexible Alternative fund has yielded a return of 7.5%. At the moment, some TRY1.93m is invested in it. Garanti's fund was followed by the TRY578bn Vakif Emeklilik, which launched a similar non-interest bearing pension investment fund in February 2010.

"Next, we are interested in working on a lifestyle fund, as well as funds investing directly in precious metals and real estate. However, for now, regulations do not permit these so we have opted for a wait-and-see policy," Özüm adds.

Jetse de Vries, chief executive officer of ING Emeklilik notes that the number of pension savers interested in interest-free investment options is still relatively small in Turkey. "The average investor here chooses a bond fund with very minor exposure to equities. The investment culture here is still focused on bonds as the dominant aspect of a portfolio," he says. "We discussed going into the so-called green business as well and doing it through intermediaries, but the market is still such that you would have to invest a lot to gain relatively little."

Recep Akkaya, general manager of Ergo Turkey says Ergo is also keen to diversify its fund offering from the current six options and is waiting for changes to the regulatory landscape. "We would like to launch funds investing in precious metals, real estate and foreign equities," he says.

The main challenge in managing pension assets in Turkey is currently low bond yields, says De Vries. ING Emeklilik's bond fund returned 22.5% in 2009, whilst its equity fund pulled in a return of nearly 100%. The weighted average return for the firm's whole portfolio was nearly 29% in 2009. "Low interest rates are creating the environment for low bond yields, which is irritating, but something that will remedy itself in the medium term," he says.

Türkölmez says Yapi Kredi's ten funds pulled in an average return of 22.5% in 2009. "This was actually slightly below the average among pension firms in Turkey, because we have a lower exposure to equities than many other players in the market."

Garanti's Özüm underlines that Turkey's pension firms fared extremely well during the recent turbulence in comparison with funds in other OECD countries. "Both in 2008, and 2009, Turkish pension performance was the highest in average terms, among all the OECD countries. In 2009, the overall average return was a healthy 22% Turkish pension savers did get good returns even during the times most of the world was making enormous losses," he says. "On the other hand, pension savers here could not make the most of the recovery in listed stocks because so much is still allocated to bonds," he says.

Özüm believes rising interest rates will contribute to the future emergence of a new investment environment in Turkey. "Since the economic crisis in 2001, many Turkish investors have developed a mistrust in stocks. But now as people are starting to see single-digit interest rates they will be keener to move to more risky investments such as stocks and flexible funds that can change their composition in a matter of days. A new approach to investments is bound to emerge from this," Özüm says.

Akin Kozanoğlu, chief executive officer or Ergo Turkey expects Turkey's pension assets to grow by 25% this year alone. "Our expectation is that by 2015 the system will have total assets of TRY48bn (€25bn), and TRY115bn (€60bn) by the year 2020," he says.
"Although the pace of growth of the system since its launch has been rapid, we have to remember the system is still very young. The fund volume in the system is still very small, it should be at least TRY80bn to measure up to the pensions landscape of a developed market," Akkaya concluded.