Turkey's Impossible Benchmark: The 15 Percent Return on DepositsBy
Funds struggling to beat returns on parking money at a bank
Turks hold about 90% of savings in interest-earning accounts
Beating your benchmark as an asset manager anywhere is hard enough. In Turkey, the challenge is to beat returns on parking money in a bank account.
Banks are so desperate for cash that they’re paying annual rates as high as 15 percent to attract lira deposits, the upshot from a lira loans-to-deposit ratio that’s spiked to a record 147 percent and left banks scrambling for funds to back new loans. That’s a problem for a government that’s been railing against high interest rates, and even more so for fund managers who are finding it hard to compete.
“You go to any bank, sometimes large banks, you can get 14.5 percent, 15 percent,” Selim Yazici, the CEO of TEB Portfoy, a mid-sized asset manager that’s a unit of BNP Paribas, said in an interview at his offices last week. “This is making our job very difficult.”
The situation facing Turkey’s asset management industry, undersized at about $35 billion as of the latest data, or about 4 percent of gross domestic product, lays bare the economy’s greatest shortfall: one of the biggest current account gaps among major economies. While a government-sponsored credit guarantee fund served as a tonic for an economy reliant on foreign financing to grow, it’s pushed the cost of scarce funds at home so high that investors are now funneling money away from other savings vehicles.
“For corporate and government bond funds, it’s a serious challenge, and the size of bond funds keeps getting smaller,” said Mehmet Gerz, the chief investment officer at Ata Portfoy. “Investors just go and put their money in deposit accounts instead of taking the risk.”
The elevated deposit rates in Turkey partly reflect the highest central bank funding costs since at least 2011 as the monetary authority battles runaway inflation. It raised the weighted average cost of funding by more than 350 basis points this year to stem a slide in the currency that helped push inflation to a nine-year high of 11.87 percent in April.
“Even we put excess cash in deposits instead of buying corporate bonds,” said Turgay Ozaner, chairman of Turkey’s largest independent fund manager, Istanbul Portfoy, which also used to be one of its premier bond investment houses. “With a 4 to 5 percent spread on corporate bonds it is not worth taking the risk.”
Sometimes the spread is significantly lower than that. On Tuesday, Yapi & Kredi Bankasi AS, the lender owned by Turkey’s biggest industrial group along with UniCredit SpA, was in the market selling 500 million liras in bonds at a rate of 13.25 percent. A call to a Yapi Kredi branch got a reporter a better offer: 13.7 percent annually for putting money into a 32-day deposit account.
Turks keep 90 percent of their savings in interest-earning deposit accounts, according to a presentation by asset manager Unlu Portfoy. Its chief executive officer, Murat Gulkan, says savers aren’t to blame.
“The performance of the industry has, to put it mildly, not been compelling,” Gulkan said. “Investors have done what I think is a very rational thing.” He says his fund is taking advantage of recent changes to regulations by offering investors an array of structured products that enhance returns on deposit-like vehicles, so as to “gradually lead people along the risk-return curve.”
Turkey’s asset-management industry grew 3.4 percent in the first two months of the year, according to the latest data from Turkey’s market regulator SPK. It had been growing at an annual rate of more than 20 percent since 2013.
Pension funds on average underperformed the return on parking money in a three-month lira deposit account for the past two years, according to a presentation by Unlu and data compiled by Bloomberg. The average annual deposit rate over the period was 10.8 percent, according to data compiled by Bloomberg.
Complaints that Turks are averse to investing in the stock market “is like complaining that people don’t like classical music,” Gulkan said. “That’s the way it is and you have to come up with a product line up that matches that.”
It might be harder than it sounds. Even with a 25 percent government match on savings up to 25 percent of the minimum wage and auto-enrollment into the private pension system, risk aversion among domestic investors and a preference for deposits means most missed out on a rally that’s sent the Borsa Istanbul 100 Index up 26 percent to a record this year.
Pension fund clients need to be convinced that “diversification from fixed income to other asset classes can bring them above-deposit rate returns,” said TEB Portfoy’s Yazici. “To save the mutual fund market from money-market fund domination, we need a better market environment. We have to see some easing in interest rates so that there will be fund flows especially from the retail segment.”