Update: iShares MSCI Turkey UCITS ETF

Die türkische Währung hat kräftig abgewertet, und auch der Aktienmarkt zeigt sich von seiner volatilen Seite. Inzwischen weist der türkische Markt einen deutlichen Bewertungsabschlag gegenüber globalen Aktien auf.

Rolle im Portfolio

This ETF provides large- and mid-capitalisation equity exposure to Turkey, the largest emerging economy in EMEA through replicating the performance of the MSCI Turkey Index. As it is the case with all ETFs offering single country emerging market exposure, this fund is best deployed as tactical tool within a well-diversified portfolio.

MSCI Turkey is made up of companies with a strong reliance on domestic demand. Financials - 45-50% of the index – heavily depend on the local market for mortgages, consumer loans and deposits. Other examples include Turkcell (6-8% of the index), Turkey’s biggest telecommunication company with a 50% market share, the retail business BIM (6-8%) and the only Turkish oil refiner Turpas (6-8%).

Before considering an investment, investors should review their portfolio for existing exposure to the Turkish stock market through other holdings to avoid unintentionally over-weighting their exposure to the country. For instance, Turkish equities represent 9-10% of the MSCI Emerging Markets EMEA Index and 1-2% of the broader MSCI Emerging Markets IMI Index.

Furthermore, the index’s low to moderate correlations with broad international stock markets (e.g. MSCI World and MSCI Emerging Markets) indicate that this fund could provide diversification benefits when added to an existing equity allocation.

This fund is suitable for income-seeking investors and distributes dividends semi-annually.

Fundamentale Analyse

With a GDP of $820bn, Turkey ranks as the world’s 18th biggest economy. Income per capita has almost doubled in the past decade, and the proportion of population living below the poverty line has been drastically reduced. GDP growth has averaged 3.9% in 2009-2013, which appears soft compared to pre-2008 rates, but remains one of the most resilient in the region. Fundamental reforms carried out over the last 15 years have improved the country’s international competitiveness, while allowing its financial sector to remain stable during the global crisis – for example Turkey is the only OECD country that did not provide state aid to its banking system.

Despite these positives, Turkish equities have proved a high volatility play within emerging markets. As of March 2015 the MSCI Turkey’s annualized 10-year volatility stood at a whopping 38.26%; twice as high as that of the broader MSCI Emerging Markets Index. While part of this was explained by political turmoil, it also underlines the country’s high dependence on foreign capital flows. In fact, Turkey’s current account deficit spiked to 8% of GDP in 2013 and remains elevated in comparison to an average of 5.5% during 2005-2008. This highlights a growing reliance on short term capital flows (33% from the total external debt) to fund sovereign and corporate – particularly banking sector – debt.

Such dependency could become a key concern as the US moves towards a tighter monetary policy stance. Any move to underweight Turkish debt would increase the cost of borrowing, further weighing on the current account. Besides, a raise in global interest rates would reduce the profit margins of the country’s banks. As these represent 50% of the ETF’s portfolio, this poses a downside risk to short- to medium-term returns.

As of April 2015, MSCI Turkey traded at a discount versus the parent MSCI Emerging Markets Index – with a P/E ratio of 11.23 versus 14.64 according to MSCI. In comparison with other EM economies, Turkey is way ahead in terms of reforms and middle-class growth. Favourable demographics should provide a strong tailwind for domestic demand. Against this backdrop, investors focusing on the long term may have bright prospects. However they should be confident in their ability to ride short- to medium-term volatility.

Indexkonstruktion

The MSCI Turkey is a free-float adjusted market capitalisation-weighted index. The index is reviewed four times a year, and as of this writing, is made up of 25 stocks. The index is heavily top weighted as the top three constituents represent about 30% of its composition. The largest is Turkiye Garanti Bankasi (12-15%), followed by Akbank (10-12%) and Bim Birlesik Magazalar (5-7%). On a sector level, financials account for 48-52% of the index’s value, followed by Consumer Staples (12-15%) and Industrials (12-15%).

Fondskonstruktion

iShares uses full physical replication to replicate the performance of MSCI Turkey, thus purchasing all securities in the same weightings. The fund uses futures for cash flow and dividend management purposes. This is standard practice and helps limit tracking error. iShares engages in securities lending within this fund to improve its performance. The gross revenues generated from this activity are split 62.5/37.5 between the fund and the lending agent BlackRock, whereby BlackRock covers the costs involved. The fund lent out lent out 31.83% on average over the 12 months ending April 2015. To protect the fund from a borrower’s default, BlackRock takes collateral greater than the loan value. Collateral levels vary between 102.5% and 112% of the value of securities on loan, depending on the assets provided by the borrower as collateral. Additional counterparty risk mitigation measures include borrower default indemnification. Specifically, BlackRock commits to replace the securities that a borrower would fail to return. The indemnification arrangement is subject to changes, and in some cases without notice. Finally, BlackRock limits the amount of assets that can be lent out by this ETF at 50%.

Gebühren

The fund levies a total expense ratio of 0.74%, and it is the most expensive product tracking MSCI Turkey. Other potential costs associated with holding this fund this are not included in the TER include rebalancing costs, bid-ask spreads and brokerage fees. During the one-year period ending April 2015 the fund underperformed its benchmark by 0.52%.

Alternativen

Investors wishing to invest in Turkey have several choices on the table; however all of the other MSCI Turkey trackers are not as popular in terms of assets under management (AuM) and therefore might be more expensive when purchased in the secondary market. The swap-based Lyxor ETF PEA Turkey is the only product that is comparable with iShares in AuM terms. It offers similar exposure by tracking the Dow Jones Turkey Titans 20 Index and levies 0.65% per annum.

Über den Autor

Morningstar ETF Analysts  Alan Rambaldini is an ETF analyst with Morningstar.