Turkey could become regional hub, report says
The growth potential of Turkey’s asset-management sector is ahead of similar countries, according to a report by PwC Turkey. While the areas that will contribute the most to growth in the sector are pension and alternative investment funds, the report stated that developments such as the goal to create an Istanbul financial center and the Turkish Sovereign Wealth Fund have affected the sector positively.
PwC Turkey’s report, “Transformation of the Asset Management Industry in Turkey,” states that representatives of the sector are waiting for the government to take certain steps, like structural reforms and income-tax incentives. It also reported that Turkey is a candidate for becoming an important regional center in this area. Below are PwC’s key findings.
With assets under management worth $35 billion as of year-end 2016, both in the funds-to-GDP ratio and fund assets per capita, the Turkish asset management industry appears to be underperforming, compared with similar markets.
Actions taken in recent years and revision in the natural accounts data resulted in Turkey’s domestic savings reaching 26 percent of gross domestic product in 2015, and while the asset-under-management-to-GDP ratio has been increasing, as of 2015 it remained below 5 percent. In a survey of professionals, 85 percent said they believe that the asset-management industry is performing “significantly below its potential,” while only 21 percent believe that the global industry is performing significantly below its potential.
When respondents were asked to rank the growth potential of the asset-management industry for emerging countries, Turkey was the top-ranked emerging economy. All findings point to Turkey’s potential to pull ahead of its emerging-market peers in the short and medium-term.
Key growth areas are pension funds
Some 75 percent of respondents said they expect asset management to grow over the next five years, with pension funds, real estate investment funds, investment advisory and financial planning and private-equity investment funds cited as the areas with the biggest opportunities. Securities and hedge funds were considered the least promising areas.
The industry welcomed changes the government made in these areas, such as auto-enrollment in pension plans, the Capital Markets Board’s new rules on portfolio-management companies and the introduction of alternative investment funds.
Most participants acknowledged the potential positive impact of the government’s ambition to create an Istanbul financial center, but participants also voiced strong opinions on additional requirements.
The first is the need to change public perception. Participants said the financial center “should not merely be a real-estate development project, but rather a strategy to transform the Turkish financial-services industry into an internationally compatible financial ecosystem.” Another recommendation is that the strategy be further improved in an inclusive manner.
Wealth fund welcomed
One of the most positively received recent contributions to the asset-management industry is the establishment of the Turkish Wealth Fund. This is especially true if the fund’s management company is structured as a “slim-fit model,” in other words, if it has more of a monitoring and supervising capacity and gives external mandates to asset managers based in Turkey. Asset managers believe the fund’s oth- er major role should be improving the governance standards of stateowned assets.
Personal income-tax incentive
The survey reveals that investor taxation, often considered to be an industry issue, is not considered to be a major impediment for the asset-management industry in Turkey. Respondents do not favor establishing a tax-free zone either. Creating tax-free zones specifically designed for international financial transactions is not favored. Global issues such as operating costs and investor taxation are not key issues for Turkey. Yet participants expressed a need for a new tax policy statement from the government, presenting a long-term vision that would be a guideline for market players, lawmakers and the tax authority. Also, many respondents favored creating a personal income-tax incentive for asset managers on their individual income resulting from performance.
No matter where they are based, respondents indicated Turkey could become their top choice for establishing or increasing their operating presence and that it has the potential to become a regional hub. Due to its demographics and areas with significant room for growth, such as alternative investment funds, 42 percent of global asset managers who do not currently have a presence in Turkey said they would “very probably reconsider their position” if such improvements are made. Enhanced macroeconomic and political stability is cited as the top areas for improvement by 95 percent of those who would consider establishing a presence in Turkey. A robust and clear government strategy supporting the local private asset-management industry, domestic savings, human capital and personal tax incentives for asset managers are the other key areas for improvement that were cited.