Ataturk Makes Good

From aiCIO Magazine: It is a curious twist of historical fate: Two bodies established to enshrine the past of an impoverished nation are the forerunners of a very wealthy future. Nick Lord reports.

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Turkey is a land rich in history, culture, and passion. It has not been known as a country rich in capital. For much of the 20th century, it was the sick man of Europe, lurching from one economic crisis to the next. Yet, with a now-booming economy and changes to asset management legislation, newly wealthy institutions are emerging.

Two little-known academic institutions perhaps best show how this is happening. At the foundation of the Republic of Turkey in 1923, many of the assets from the remnants of the old Ottoman ruling empire were put into foundations. These included some 11,000 buildings as well as art and other historical artifacts. In many ways, this summed up modern Turkey’s rather confused approach to its past. Sure, it existed, but people were not really sure of whether they approved of it or not.

To counter this and to spread the notion of a purely Turkish history (rather than its Ottoman past), two foundations were established: the Turkish Historical Society and the Turkish Language Association. Both focused on the study of purely Turkish history and language rather than the multilingual and multicultural Ottoman period. Both foundations were set up by Kemal Ataturk.

Ataturk is credited, through fact and myth, with creating most of modern Turkey, including one of its biggest private-sector banking groups called Isbank. Upon his death, he willed that his shares in Isbank— now 28% of the issued share capital and officially called “Ataturk’s Shares” —be divided: The votes that these shares carried would go to his political party, the CHP, but the dividends would be shared between the Turkish Historical Society and the Turkish Language Association. This arrangement did not really matter for much of the 20th century: Isbank grew along with the Turkish economy, but its performance was stymied at regular intervals by the periodic busts that Turkey endured. The persistently high inflation ate away at any capital that the foundations enjoyed.

Fast forward to the beginning of the 21st century. In 2002, Turkey was just coming out of its last crisis. Scores of banks had gone bust, inflation was touching 100%, and the currency was teetering but, since that time, the country has undergone a complete economic renaissance. It is now the fastest growing economy in both Europe and the OECD. Inflation is back to single digits, having stabilized at between 7% and 8%, and the banks are making huge profits. For Isbank, this has meant nearly a decade of paying high dividends. Between 2003 and 2009, it paid out some TL2.15 billion (US$1.4 billion) to shareholders. This means that in the last six years, the two academic research bodies have received some $400 million between them.

Finding out what these societies do with this money is not difficult. The Historical Society organizes four yearly congresses of Turkish history, publishes 30 periodicals and maintains a library of 250,000 books. The Language Association maintains the official dictionary of the Turkish language. Yet, while these are worthy academic pursuits, they probably do not need $415 million in capital to finance them. As a result, these two societies have become capital-rich endowments, more in line with the bulging coffers enjoyed by U.S. academia in the heady days before the crisis.

Unlike U.S. endowments, however, the money is still flowing in. Isbank, this year, is forecast to make almost $2.2 billion in pre-tax income. If it maintains its payout ratio of 23.2%, this means the foundations will receive somewhere north of $140 million in this year alone.

Until now, there has been very little to do with this money apart from investing it entirely in government securities. Indeed, the law still states that most asset owners in Turkey have to put around 95% of their money into government bonds. However, that is changing: The national capital markets regulator is loosening these requirements, a result of the government’s borrowing needs being much less than they once were. They are also part of a package of reforms to boost the development of the local capital markets, including the asset management industry. For instance, these changes will allow the nascent Turkish pension industry, which has grown to a total asset base of $4.5 billion from zero five years ago, to move into other securities. This will spawn the development of an asset management market in line with other European countries, even if only a fraction of the size—for now.

Things change quickly in Turkey. As these regulations change, other bodies— like the Historical Society and Language Association—will emerge as serious institutional investors in their own right. It is a curious twist of historical fate: Two bodies established to enshrine the past of an impoverished nation are the forerunners of a very wealthy future.