In the 1990s, both Turkey and Greece applied for EU membership. At the time both countries had similar income levels as measured by GDP (gross domestic product) per head. Today, the two nations can't be in more different situations. While Greece is grappling with austerity measures and caught in a political quagmire, Turkey is enjoying political stability and unprecedented economic growth. It's hardly surprising then that only 38 per cent of Turkish citizens now support EU membership compared with around 60 per cent just a few years ago.
Opinion polls aside, fund manager Aziz Unan has long since been an advocate of the burgeoning investment story in his native country. The Renaissance Ottoman Fund, which he manages as part of the emerging market asset manager's suite of funds, was his brainchild when he worked at Griffin (the fund was formerly called the Griffin Ottoman Fund, but the name has changed since Renaissance acquired Griffin in January this year).
Launched in 2006, the fund's holdings tend to be Turkey-centric with around 65-70 per cent of the assets invested in the country. However, the fund can also invest on an opportunistic basis in eastern Europe and the Middle East/North African (Mena) region - or as Mr Unan puts it: "the old Ottoman borders".
Describing his investment style as unconstrained, opportunistic and independent, Mr Unan stresses that the fund is not benchmark-driven. While he measures his performance against the MSCI Turkey index and the MSCI Emerging Europe 10/40, aiming to deliver performance above both indices over the medium to long term (something he has managed to achieve convincingly since the fund's launch), the Renaissance Ottoman Fund's underlying holdings can differ markedly.
A good example is Akbank TAS. The blue-chip Turkish bank makes up a significant chunk (9.5 per cent) of the index but Mr Unan has avoided it until very recently "because we did not like the valuation." This changed after Citibank, which owned 20 per cent of Akbank, was forced by US regulation to reduce its shareholding by half. The price came down significantly and, believing the bank was attractively valued, Mr Unan added it to the portfolio - it is now the largest holding in the fund's concentrated portfolio of around 70 companies.
The fund draws on Mr Unan's 16 years of experience both in the sell side and in corporate finance, which helped him to construct a proprietary valuation database that covers more than 200 companies in Turkey, emerging Europe and the Mena region in detail. "The database helps us answer best the question of which stock and when," explains Mr Unan, saying this is a key advantage which helps generate independent thinking on valuations and price target for each stock covered. The investment process tends to be split between quantitative research - the number crunching, modelling and valuations - and more qualitative research which involves company visits. "We prefer to conduct these on site to get a feel for the management qualities and corporate culture," says Mr Unan.
As with many funds focusing on emerging market regions, the Renaissance Ottoman fund has almost half of its assets in financials. But Mr Unan is unconcerned about potential sector risk this may throw up. "The majority of this exposure is in Turkish banks which have been one of the safest places to be since the 2008 crisis - these banks have zero exposure to toxic assets or the eurozone crisis." He explains that in 2000 and 2010 Turkey had a banking crisis of its own and since then has significantly tightened regulation. In fact, the regulatory body here - Turkey's equivalent of the FSA - "lives", in Mr Unan's words, in the headquarters of the Turkish banks having its own office in many. "It's a very hands-on approach."
Another compelling investment story lies in metals. The Turks like to invest in gold; in fact, Turkey is second in the world in terms of gold trading. But there's a bigger story to tell in other metals, such as copper. Mr Unan was one of the first investors in Koza during the first half of 2000, which had a market capitalisation of around $50m (£32m). A few years ago the group spun off its gold mining business, Koza Altin, into a separate listing. Koza Altin currently has a market capitalisation of $2.9bn. Mr Unan's favoured Koza stock at present is Koza Anadolu Metal which consolidates the group's copper business. Its share price has doubled since the beginning of the year, but Mr Unan believes there is still significant growth and value potential for a long-term investor.
From a macro view, Turkey is certainly compelling. The sixth-largest economy in Europe and the 16th largest in the world, the country has been enjoying growth rates in the last two/three years similar to those of China. "In 2011 growth stood at 8.5 per cent. In 2010 it was 9.3 per cent. This year growth is expected to be between 4 and 5 per cent despite efforts by the government to cool down growth. It is a global luxury to have such growth in these times," says Mr Unan.
Another key attraction is favourable demographics. Turkey is a young country with an average age of 28 compared to 45 in the rest of Europe. "Each year between 700,000 and 800,000 people enter the workforce. They are young, qualified and dynamic and, while the challenges lies in creating jobs for these individuals, it is possible with the current growth rates. Consumers are entering the market and the domestic consumption story remains intact unlike in North Africa and the Middle East as the Arab rising proved. In relative terms the wealth distribution in Turkey is fairer and improving," says Mr Unan.
Turkey also boasts a diversified and liquid equity market along with a dynamic and entrepreneurial corporate culture. "The country has a history of private enterprise and ownership with 60 per cent of GDP driven by small- and medium-sized enterprises, many of which are third generation run." Public sector employment accounts for just 15 per cent of the workforce compared to 68 per cent in Greece. The state's share of GDP is just 18 per cent; in the UK, it's 54 per cent. "This means that the government has to do very little to support economic growth. All it has to do is provide political stability," says Mr Unan.
And stability is the key to its recent success. Mr Unan says that for a long time, a positive microeconomic picture was overshadowed by a weak macroeconomic one, with a weak currency and high inflation. But this decade, the macro picture has improved markedly. "The strong single party government has started to get its act together. We finally have political stability after decades of populist coalitions."
