Turkey Money Managers Chided for Returns Brace for Pension Rules

(Bloomberg) -- A looming shake up of Turkey’s pension savings industry that the government says is aimed at increasing competition and improving returns has some money managers fretting the steps will backfire as reduced fees erode service levels.

Starting Jan. 1, Turkey’s 50 asset managers, which are permitted to oversee 100 percent of any pension fund company’s portfolio, will see that proportion slashed to 40 percent. Allianz AG and Aviva Plc are among 18 private pension companies who as of Nov. 3 entrusted about 75 billion liras ($19.3 billion) to money managers, up from 61 billion liras at the end of 2016, according to figures from the government’s Pension Monitoring Center.

Deputy Prime Minister Mehmet Simsek is among the sternest critics of the managers. “Artificial intelligence, I mean a robot, would have generated better returns than most of the asset management companies,” Dunya newspaper cited him as saying in April. The government, which matches 25 percent of personal contributions to individual pensions, wants to encourage competition and innovation, he has said.

Turkey Money Managers Chided for Returns Brace for Pension Rules

Simsek may have a point: Five-year real average returns delivered by pension providers in Turkey as of end-2016 were 0.5 percent, second-lowest among 27 Organization for Economic Cooperation and Development countries. Money managers contend that the changes will fall short of solving problems in the industry and may even make things worse by reducing the attractiveness of participating.

Here’s what some firms and industry officials are saying about the new regulations:

Ilhami Koc, head of Turkey’s Capital Markets Association:

  • Fundamentally, the regulation is a positive development in terms of competition, service quality and pricing. However, competition is starting to lower asset-management fees, risking total revenue for money managers. It looks like asset managers will not be able to benefit from growth in the pension industry, at least in the short term.
  • The risk here is, lower fees also drag down the service quality in asset management. Portfolio management firms employ qualified staff, thus lower revenues could lead to decreased investment in qualified employees and technology.
  • In the short term, the regulation is likely to cut revenue for portfolio management firms and brokerages. Should it continue for a long time, the quality of service may ebb and the investors may be negatively impacted.

Egemen Erden, general manager of QNB Finans Portfoy, a unit of QNB Finansbank, which manages about 750 million liras in pension funds:

  • In essence, the new regulation is a positive step. Competition is good in order to increase the quality of the service. But one shouldn’t need compulsory regulation -- the industry should itself be supporting competition. A pension firm should be looking at criteria such as credibility, fund performance and cost.
  • The entire idea behind the new regulation arose from criticism of fund performances. But the regulation doesn’t necessarily address that. The regulation should have had a criterion for fund performances; that could maybe have balanced the differences between the small and big portfolio management companies. The lack of such a criterion has pushed the competition bias to only the cost front. At the end of the day, low cost equals low quality.
  • This may result in downsizing in asset management companies; it may be a replay of the story we have seen among brokerages when they started to cut fees to compete.
  • A few bad examples of poor quality and risky choices could trigger a view that pension funds are dangerous and it takes many years to fix such a perception.

Mehmet Gerz, chief investment officer at Ata Portfoy in Istanbul:

  • All big pension companies work with the asset management unit of the same group of companies, with little attention to fund performance. The new regulation aims to address this; but it’s very likely to fall short.
  • The pension company gets 90 percent of the management fee and pays the remaining 10 percent to the portfolio manager. With increased competition, the portfolio manager’s share will fall even further. This means portfolio managers will manage pension funds at around 10 basis points a year, which is more like an ETF charge. In fact, these are close to brokerage fees. And usually no high quality service comes out from something this cheap. This story played out among brokerage firms after the minimum floor for trading fees was lifted.
  • With the regulation taking effect as it is, pension companies will be inclined to choose from among the bigger players in the sector at the lowest cost possible. Under these circumstances, managing pension funds becomes a zero-profit activity and maybe it’s better not to be involved. Indeed, a negative perception in the sector toward the regulation is taking hold.

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