First Sukuk Fund Promising to Beat Bank Returns: Turkey Credit

Turkey’s first global fund dedicated to Islamic investors will beat returns from Shariah-compliant bank deposits and will lure inflows of $1 billion during the next three years, its chief executive officer said.

AZ Global Portfoy Yonetimi, the Istanbul-based unit of Azimut Holding SpA (AZM), has attracted almost $160 million for local and international funds since opening in January, Giorgio Medda, a money manager and CEO of the Turkish operation, said in an interview yesterday. Azimut has assets under management of over $30 billion globally and has operations in 11 countries.

The company is counting on an increasing number of Turkish investors putting their money into Shariah-observant funds as global demand for sukuk is set to increase, with Ernst & Young LLP forecasting a surge to $950 billion by 2017, according to a report a year ago. Albaraka Turk Katilim Bankasi AS (ALBRK), an Istanbul-based Islamic, or “participation,” bank, offers a 6.98 percent profit rate on three-month deposits, while conventional Turkish banks offer an average 8.38 percent for similar maturity deposits. Sukuk funds can return the profit rates that Islamic banks can’t offer to clients, Medda said.

Islamic bonds “allow believers to enjoy better profit rates than what is possible with time deposits,” he said in Istanbul. “It is not possible for a participation bank to offer 9-10 percent to deposit holders.”

Restrictions Lifted

Average borrowing costs on global Islamic debt, which pays returns on assets to comply with the religion’s ban on interest, climbed 104 basis points, or 1.04 percentage points, this year to 3.85 percent, the HSBC/Nasdaq Dubai US Dollar Sukuk Index shows. The effective yield on the Bank of America Merrill Lynch Global Broad Market Index rose 41 basis points to 2.02 percent in the period.

“If market conditions remain challenging for longer, Turkish issues will increase their focus on the sukuk markets, where demand fundamentals are still healthier,” Apostolos Bantis, a credit analyst at Commerzbank AG in London, said by e-mail yesterday. “Islamic banking is growing very fast.”

Prime Minister Recep Tayyip Erdogan has lifted restrictions on Islamic finance in secular Turkey, allowing the Ankara-based Treasury to sell the nation’s debut sukuk last year. The government sold $1.25 billion of October 2015 sukuk on Oct. 3, priced to pay an annual profit of 4.557 percent.

Fed Outlook

AZ Global’s sukuk fund will allow Turkish investors to put money into Islamic funds issued outside the country, Baris Hocaoglu, general manager of AZ Global Asset Management, said at a news conference in Istanbul yesterday.

Investor concern that the Federal Reserve will start to taper its bond purchases, while Turkey’s current-account deficit and inflation could accelerate, has lifted yields on Turkish debt to “exaggerated” levels, Medda said.

Reports showing a strengthening U.S. economy have bolstered the case for the Fed to start tapering $85 billion-a-month in bond acquisitions, damping demand for higher-yielding debt from some emerging markets. Yields on Turkish two-year bonds have climbed 430 basis points since May 22, when Fed Chairman Ben S. Bernanke said the central bank may start reducing purchases.

Note Yields

“Investors like ourselves do well in checking and making sure that in particular the current-account deficit does not expand too much and inflation does not present a problem for Turkey,” Medda said. “Markets have reacted far too much to recent developments, as opposed to the real problems that the situation is actually showing.”

Turkey’s dollar-denominated Islamic bonds maturing in October 2018 offered 4.394 percent yesterday, the highest rate since Nov. 21. Yields on two-year notes fell 3 basis points to 9.34 percent today. The lira weakened 0.2 percent to 2.0405 against the dollar at 10:35 a.m. in Istanbul, extending this year’s decline to 12.6 percent, the fifth-biggest depreciation against the dollar among emerging market peers tracked by Bloomberg.

“The market has been too conservative in pricing potential consequences,” Medda said.

Azimut Group sees less value in corporate debt issues coming from Turkey, saying companies with “a lot of debt” issue “very illiquid” corporate bonds.

“Turkish bonds and consumer industrial equities are probably the most interesting opportunities in Turkey for 2014,” he said.

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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