It could just as easily be dismissed as a pension fund as it could be declared a private equity fund. Oyak, Turkey’s €5bn armed forces pension fund, has seen growth on the same level as successful private equity funds and made acquisitions in a similar fashion. Now that its assets have hit new highs, the fund is looking to diversify abroad, most likely in Europe or the US.

As it stands, all officers and sergeants in the fund are permanent members. Civilian military personnel and Oyak Group personnel are eligible to become permanent members. Reserve officers are only temporary members. The fund has added nearly 10,000 new members since 2005 to put its current membership at the end of 2007 at 235,818. By 2010 it has projected its membership will be more than 243,000.

Founded in 1961 as a second pillar scheme for the Turkish army, the fund has evolved from a standard scheme to an aggressive one. In 2003, it took on its present day form with the launch of Oyak Emeklilik, its individual pension operation. This took place after a government reform allowed companies to create private pensions.

Since this change, the fund’s returns have been nothing short of spectacular. In 2007, when most pension funds were struggling to meet benchmarks of 3 per cent, Oyak returned an astounding 54.2 per cent. In the years since its 2003 modification into more of a private equity fund, its lowest returns have been 25 per cent. Members receive their money based on a correlation to the net annual return.

While returns have been good, Turkish inflation has consistently cut into profits. In the same years as its record profits, inflation rates have ranged from between 7.7 per cent and 30 per cent. While inflation has decreased compared to earlier years, some analysts, such as Barings Asset Management’s Ghadir Abu-Leil Cooper, who covers Turkey for the firm, believe the domestic inflation risk remains high.

Despite the inflation, these figures have been achieved by an investment strategy that is highly unorthodox for a pension fund, and one that many would deem wildly risky.

Coskun Ulusoy, president and chief executive officer of the scheme, said: “We are basically a retirement fund. They are supposed to be conservative funds. But we also behave as if we are a private equity fund. People ask if we are a pension fund or a private equity fund, and we say, ‘both’.”

Oyak invests its money in a similar fashion to that of a company that takes over another. It buys a controlling interest in equity, and then sells it off for what is hopefully a higher value.

One example of this was in 2000 when Turkey was trying to keep exchange rates constant. This had a disastrous effect on the country’s banks and brought some interest rates up to dizzying levels of 1,000 per cent. Oyak in the meantime piled up reserves of foreign currency and halted the majority of its investments.

It decided to buy Somerbank, a distressed bank with 11 branches and one ATM. At the time, it was a conglomeration of six failed Turkish banks and Oyak offered $36,000 (€22,600) for it in August 2001. The fund then merged its own banking business with Sumerbank and managed to make the entire entity profitable after some layoffs and cost cutting. By 2007, Oyak was able to sell off the Sumerbank section for a profit of almost $2bn.

Financial instruments also make up an important part of Oyak’s assets. These tend to be bonds, which include government and corporate versions. Fixed income makes up about 50 per cent of the fund’s assets, but the scheme hopes to scale this down to 25 per cent in the near future.

While much of the strategy is risky, Oyak actually has a rather sophisticated governance structure in place, which involves the members, pensioners, investors and fund administrators. Its general assembly meets every year and is composed of 40 members, who are elected by both the 100-member representative assembly and financial institutions.

The general assembly then chooses three members for the board of directors and one member of the three-person audit board. The remaining four board members are appointed by an election committee, as established under Turkish pension law. The eighth and final board member is the general manager of the fund.

While the fund’s directors have declared their interest in investing abroad and diversifying the portfolio, this is not the first time it has claimed that foreign investment was imminent. In fact, this is the third occasion in the past year and a half it has stated this intention, but no investments have yet been made.

However, Mr Ulsoy and his colleague Caner Oner, executive vice-president for investments and information technologies at the scheme, bristle at this suggestion. They claim that in other instances where they mentioned foreign investments they were merely in a research phase, and now the assets are more readily available.

Mr Oner said the investments would most likely be made in European or US infrastructure, commodity or energy-related assets. To date, all investments have been made internally, with no external mandates given, but this is soon to change.

He explained: “We want to invest outside of the country to diversify geographically. The investments will be partially made by us, with some by domestic asset managers.”

Whether or not an investment is made abroad, the fund’s membership, along with its cash inflow, continues to grow impressively.

• Location: Ankara, Turkey
• Members: 235,818
• Assets: E5bn

Printer friendly version

Email this article to a friend