The Turkey-Story - Using a scoring model for the comparison of equity funds

Table of contents

1. Introduction

2. Market overview
2.1 Historical background
2.2 Politics
2.3 Economy

3. The Comparison
3.1 Equity funds
3.2 The Key figures
3.2.1 The Load
3.2.2 Cost Average Effect
3.2.3 Fund Size
3.2.4 Performance
3.2.5 Relative Strength
3.2.6 Volatility
3.2.7 Morningstar Rating for Stocks
3.3 The scoring model
3.3.1 Point allocation
3.3.2 Types of investors

4. Final Statement

Reference List

1. Introduction

At the 12 December 2005 the Frankfurter Allgemeine Zeitung announced that the type of funds which had with the best performance were Turkey funds (Türkei-Fonds: Gutes muss wohl teuer sein, 2005).

The Turkish Istanbul Stock Exchange Index has increased by nearly 50 % and funds focusing on the Turkish Stock Market even achieved a Performance of 80% (Türkei-Story stimmt immer noch, 2005). Moreover the most analysts believe that the prices will continue growing.

This road to success is a result of the effective reforms in the last years, which lead to economic stability, declining inflation and interest rates and a rapid growth. That way, the modern Turkey achieved to become one of Europe’s most dynamic economies and societies (Current issues, 2005).

The study tries to give an overview about the reasons for an investment in the Turkish equity market. Later on, four representative equity funds are compared with each other by using a scoring model with the objective to give an answer to the question which key date is important to different types of investor and which funds should be his favourite one.

Of course there are other opportunities of investing money, for example by taking up shares or bonds. However the positive expectations of the analysts due to increasing corporate profits and an optimistic European perspective lead to the limitation of this study for investments in the equity market (Türkei Fonds- Anlegerinvasion am Bosporus, 2005).

2. Market overview

2.1 Historical background

In order to understand, which reasons are in favour for an investment in the Turkish stock market, the study gives an overview about the historical background at first.

At 2001, Turkey wasn’t as attractive as it is today. Being deeply in an economic crisis, joining the EU was far away. With an inflation rate of 70 percent and a growth rate of real domestic product (GDP) of minus eight per cent, the interest of investors was very low. These were consequences of the decline of the Istanbul Stock Exchange (ISE) of 85% between 2000 and 2001 driven by a devaluation of the Turkish Lira of 50%.

The turnaround was achieved by three factors. First, the International Money Fund (IMF) was involved in Turkey’s economic management; second, the rapprochement and final accession negotiations with the EU lead to increasing optimism of foreign investors; and third, the election of a single party, the Justice and Development Party (AKP), and Tayip Erdogan as Prime Minister in 2002. Finishing a period of political fragmentation was the building block for institutional reforms and the continuous implantation of prudent macroeconomic policies which brought an end to the series of financial crises at the end of the decade (Turnaround gathers pace, 2004).

2.2 Politics

At 8 October 2005 the European Union gave Turkey the go-ahead for accession negotiation. Although the joining of the EU should not take place within the next ten years, working through the regulations of membership should leave a lasting stability (Länderbericht, 2005).

Meanwhile the EU Commission is praising Turkey for their economic achievements in their latest enlargement. Turkey seems to be able to face the pressure of the competition within the Union (Enlargement strategy paper, 2005).

Still positive is the demographical environment: 60% of the 70 Million Turkish people are under the age of thirty and this should be important for the domestic consumption (Die besten Türkei-Fonds, 2005).

Driven by the support of the IMF for its economy, the Turkish government is planning to start a pension scheme. Furthermore the government is tightening up on revenue collection, an area in which 60% of the economy is not subject to taxation, so that a new credittranche in a size of 1.6 billion dollar could be released (Turnaround gathers pace, 2004).

2.3 Economy

Although Turkey was struggling to keep its inflation out of three figures just five years ago, the inflation rate of today has fallen down to 7.5%. This value marks an all-time-low at the same time. Due to the fact of that the Turkish bank of issue is expecting that the inflation rate will continue to decrease, the prime rate was reduced by 25 points to 13.75%. The research of the Landesbank Baden-Württemberg (LBBW) is forecasting a further lowering to 13.50%. Despite the positive news, the Turkish lira depreciated against the euro during the past week. However, since the Turkish lira is traded mainly against the US dollar, this is the mirror image of the higher level of the EURUSD. Even so, the LBBW does not expect that the Euro will continue to appreciate significantly against the US dollar, so EURTRY will probably remain in the range between 1.60 and 1.68 EURTRY (Länderbericht, 2005).

Improvements in productivity are underpinning the inflation rate. Output per worker in the manufacturing sector increased from 3.8% in the 1990s to an annual rate of 10.2% in the last three years, resulting in a cumulative increase of 37.8% in output per worker.

Real GDP growth accelerated from the 4.4% in the last years to an actual rate of 6.2%. Although the perspective of the global economy shows a decline from 4.2% this year to 3.8% in 2007, Morgan Stanley predicts for Turkey a growth to 6.5% this year and 6.8% in 2007.

Apart from lowering interest rates, the maintenance of high primary budget surpluses has lowered the overall budget deficit from the peak of 15.2% of GDP in 2001 to 6.1% last year and to 2.8% this year. The dept stock has been reduced from 92% of GDP at the end of 2001 to 74% in 2004. Morgan Stanley expects it to reach 56.5% in 2007 and on this projection, Turkey meets the 60% Maastricht criterion (Turkey: Breaking the Curse of Sisyphus, 2005).

The rating agency Moody’s has raised its rating for Turkey’s foreign currency debt from “B1” to “Ba3”. The strong growth and progressive structural reforms had lent the economy some robustness, said Moody’s. The upgrade comes just a few days after Fitch raised its outlook from “stable” to “positive” in the first week of December with a rating of “BB-“. Both agencies were generous with praise, but at the same time they took a very critical view of the current account deficit. The research of the Landesbank Baden-Württemberg also regards this as the greatest risk faced by Turkey. But given the dynamic world economy and a robust performance in the equity market, they believe that the investors won’t loose their “appetite for risk” all of a sudden. So although the conditions for financing the deficit are seem to remain unfavourable for the present, funding should still be adequate (Turkey gets an upgrade, 2005). Being as well part the European Convergence as of the Emerging Markets just like the DWS BRIC Plus LD fund, the LBBW recommends a portfolio proportion of 5%. A screenshot of the “Asset Allocator” program of the LBBW can be found in the appendix.

The final arguments for an investment in the Turkish stock market are published from Fortis Investments: with a price/earnings ratio of 11 in 2006 the Turkish stock market is not expensive and the dynamic within the country, driven by an accelerating convergence process, is still not being taken into consideration (Fortis: Türkei bleibt eine Top-Adresse, 2005).

3. The Comparison

3.1 Equity funds

Being popular in the bond market, the opportunities of investing in the equity market are not all too great. Although a lot of Turkish shares like Isbank or Turkcell are also traded on the German exchange, an engagement in funds because of the volatility of the equity market should be advisable for private investors. Between the seven equity funds focusing on Turkey, DWS Turkey, Fortis L Equity Turkey, ESPA Stock Istanbul and Turkisfund-Equities were the most successful ones. The newcomers DWS Turkey and Fortis L Equity Turkey were issued in the middle of 2005 and even showed the best performance since then (Türkei-Story stimmt immer noch, 2005).

3.2 The Key figures

3.2.1 The Load

Purchasing fund shares, beside the amount of investment the entry costs have to be paid. This load incurs at each deposit basing on the share value. The share value results from the division of the total amount of the funds capital by the number of shares. The funds capital consists of bonds, shares, cash reserves or other assets. The composition of it can be received by the funds company (Glossary, 2005). The load is quoted mostly in per cent. If you want to invest 10.000€ and having a loaf of 5%, you have to invest 10.500 €. But if you can only afford 10.0000€, this amount is equivalent to 105% and that means that only 9.523.80€ can be invested. Therefore the load reduces the investment.

Beside the loan, the bank gets a charge for managing the funds but instead of debiting an account, it is taken out of the assets of the fund. Because of the fact, that these cost aspects effect the growth, they are taken into account in the comparison (Morningstar.com Glossary, 2005).

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