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1 Fixed Income Funds / Turkey Allianz Yasam Ve Emeklilik Government Debt Instrument Group Pension Fund Managed by Yapi Kredi Portfoy Yonetimi A.S. Full Rating Report Key Rating Drivers Conservative Fixed-Income Pension Fund: The fund is a traditional low risk, fixed-income fund managed by Yapi Kredi Portfoy Yonetimi A.S. (Asset Manager Rating Highest Standards(tur) ). It invests at least 80% in government debt securities and the remainder in cash and private-sector debt instruments. Fund Features Portfolio managers Okan Uzunoglu (Lead) Gaye Vural Inception date December 2007 Strategy Traditional Turkish fixed income Reference index 89% KYD-Bond Index (All),1% KYD Corp Fixed Index, 1% KYD One Month Deposit Index, 9 % KYD O/N Repo Index Gross Legal form Turkish regulated Pension Fund Rating Category Scores Operational Pass assessment Qualitative Good assessment Investment process Good Resources Good Company Track Record Strong Good No adjustment Allocation, Duration Pivotal: The fund s core approach is based on a traditional top-down driven fundamental and macroeconomic analysis for duration management and yield curve positioning. Security selection as a second return driver is bottom-up oriented. A separate team provides additional quantitative views (technical/sentiment) for market timing purposes. Weekly Investment Committee: Investment decisions are taken at a weekly committee that defines allocation bands for fixed-income exposure, asset type and duration. The lead portfolio manager (PM) enjoys some freedom to operate within the given guidelines, under a distinct risk-limiting discipline, including stop loss, tracking error and value-at-risk (VaR) limits framed by the independent risk department. Changes to Dedicated PM Team: The fund is managed by a dedicated investment team, autonomous from other investment teams since end It is under the leadership of the former lead PM of the fund. Following this reorganisation and staff departures, the new lead PM is Okan Uzunoglu with 19 years of investment experience. A dedicated fixed-income PM supports him as co-manager in fine-tuning the allocation and term structure of the fund. Market Leading Manager: Yapi Kredi Portfoy, part of the Koc Group, was established in It is one of Turkey s leading asset managers with TRY12.5bn assets under management including 44% in pension funds, at end Operational Platform Upgrade in Progress: The operational set-up passes Fitch Ratings operational assessment as detailed on page 5. Yapı Kredi Portfoy expects to complete a major upgrade of its front-to-back platform in the coming months. The previous and new platforms are currently used in parallel. The operational and technological platform is robust overall and matches the requirements of the funds. Track Record Average Risk-Adjusted Return: The fund has underperformed its benchmark over one year to end-september 2015 but is in line over three years. It is behaving close to its benchmark. Analysts Charlotte Quiniou, CFA charlotte.quiniou@fitchratings.com Manuel Arrivé, CFA manuel.arrive@fitchratings.com Figure 1 Fund Performance and Assets (Base = 100) Assets (RHS) Fund (LHS) Index (LHS) Lipper category (LHS) (EURm) Sep 12 Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Source: Lipper 25

2 Figure 2 Fund Statistics At end-september 2015 Year Fund Ref. index a Lipper category Calendar returns (%) 2015YTD Statistics (1 year) Volatility 5.6 Tracking error 3.7 a Reference index is 89% KYD-Bond Index (All),1% KYD Corp Fixed Index, 1% KYD One Month Deposit Index, 9 % KYD O/N Repo Index Gross, last changed in April 2012 Source: Lipper Investment Process Investment Philosophy Overview: The objective of the fund is to generate a return by investing primarily in domestic public and private sector fixed-income instruments. The rate of debt instruments issued by the Turkish government needs to be at least 80%. A flexible proportion of the portfolio may be invested in money market instruments or private sector debt instruments. The fund may also modestly invest in equities, typically less than 5%. The investment philosophy is active and targets a superior return compared with the benchmark by forecasting interest rate movements primarily for government securities through fundamental, macroeconomic analysis. The investment approach is adapted to the specific structure of Turkish capital markets, with its short maturities of outstanding debt. Investment Edge: Key drivers of performance are active asset allocation, both short and long term, yield curve positioning, active duration management and security selection. The fund s investment approach is not regime dependent, but as a fixed-income fund, it favours downside protection when rates are rising. Research The fund s investment process combines both fundamental, macroeconomic as well as quantitative analysis. Yapi Kredi Portfoy uses Yapi Kredi Bank s chief economist for the identification of long-term trends through its advisory committee. Figure 3 Key Investment Features Sources of return: Duration management, yield curve and security selection Debt issued by Turkish government: 80% to 100% Balance invested in private sector bonds, cash and money market Equity exposure: 0% to 5% Instruments: primarily stockexchange listed government bonds and money market instruments, private sector bonds, listed equities Maximum leverage: None Use of derivatives: None Currency exposure: None Positions: 22 corporate bonds; 1 equity position Typical turnover: Around 250% Source: Yapi Kredi, Fitch Yapi Kredi Portfoy s fixed-income research focuses on central bank watch and daily money market operations as well as yield curve and scenario analysis for duration management and optimal curve positioning. The latter is supported by a dedicated vendor application. PMs also target the exchange rate to determine potential exposure to eurobonds and the US dollar and to diversify volatility at the short-end of the curve. Fitch believes this to be an adequate approach given the market s high volatility, but by default it comes with a lower degree of formalisation. Yapi Kredi Portfoy has three staff in its investment and quantitative analysis team (IQA), which is a centralised independent proprietary research unit covering fixed-income, equity and macroeconomics. It covers a portion of the investment universe and produces research notes on a selection of issuers. PMs also conduct their own research and have access to the sell-side research of Yapi Kredi Bank. IQA maintains proprietary models for quantitative market analysis, primarily for assessment of volatility and short-term technical/sentiment signals to support the fixed-income team s market timing considerations, particularly for the yield enhancing assets. Credit selection is based on bottom-up analysis, spread analysis and relative value considerations. It consists primarily of banks. More importantly for this segment, liquidity analysis plays a key role. The selection process is well formalised and also involves Yapi Kredi Bank for evaluation of counterparty risk. Yapi Kredi Portfoy has an established equity franchise that the fund uses should a small proportion be invested. Decision Making and Portfolio Construction Responsibilities: Decision making is concentrated in a formal investment and asset allocation committee with a sub-committee for credit selection to formulate the company s in-house investment policy. It convenes on a weekly basis. This committee defines the fixed-income exposure, a targeted share of exposure to the private debt segment and overall duration bands (see Figure 4). Should equities be added, a separate decision is taken. Related Criteria Fund Quality Ratings Criteria (September 2014) The lead PM positions the fund within agreed guidelines. He is responsible for the daily tactical positioning and market timing of the fund. The lead PM is assisted by a dedicated fixed-income specialist as co-manager who is in charge of fine tuning and operational execution. 2

3 Portfolio Construction: The committee outcome is the key building block for portfolio construction and reflects the PM s market view within the remits of the given risk parameters. A specific focus is put on the liquidity of the private sector bond issues even as the fund is comparably small in size. A balanced maturity structure is targeted in this segment to maintain a certain buy-and-hold proportion in the portfolio. In the government market, the key constituents of the portfolio on-the-run treasury bonds are largely preferred for liquidity reasons. To address periodic high short-term market volatility, the fund applies flexible tactical allocation shifts. These are based on a set of quantitative models including technical factors and sentiment indicators. The fund s turnover rate is close to 250%. Fitch believes this to be high, although a large proportion is explained by the flexible allocation and the natural roll-over rate of short-term maturing assets. Sell discipline is market driven and judgemental. The investment strategy is integrated into a risk framework with formal ex-ante limits for VAR (1.0%, based on historic simulation). All active bets are integrated into a rigorous stop-loss discipline with a 10-day trailing stop loss limit of 0.4% under supervision of the independent risk department. Portfolio Monitoring Investment Risk Management: Portfolio risk monitoring is integrated into the front office tool and allows effective and daily surveillance of the fund s allocation, maturity structure and key metrics such as duration, tracking error, total VaR, VaR contribution by asset, and others. Yapi Kredi Portfoy implemented Rasyonet as a key application for market monitoring, and yield curve and scenario analysis. Risk management provides a traffic-light support system for PMs to monitor fund and asset liquidity. A daily list of all transactions is submitted to both the CEO and CIO. Figure 4 Key Investment and Support Functions Team Nb Av. experience Pension funds 8 13 Mutual funds 9 15 Mandates 6 15 IQA 3 9 Risk and control 4 19 Operations Marketing and sales Source: Yapi Kredi, as at Oct 15 Risk Reporting and Oversight: Risk oversight and escalation mechanisms are well formalised. All risk limits and fund performance are assessed by Yapı Kredi Portfoy s risk committee on a weekly basis. The risk review process intends to ensure that the portfolio is not exposed to excessive or unintended risk. Liquidity risks are tightly monitored. Operational Front-Office Workflows The fund benefits from an automated workflow management and a high rate of straight through processing. Orders for government securities are automatically routed from front office through the exchange, confirmation and settlement is based on the exchanges routine procedures and submission to the fund administrator and custodian. Resources Staffing Investment Professionals: The co-managed approach of Yapi Kredi funds and the strong role of the investment and asset allocation committee minimises key person risk. Pension funds are managed consensually by a dedicated investment team, separated from other portfolio management teams since end-2014 because of their long-term oriented investment strategy and different redemption features from mutual funds. It is under the leadership of the former lead portfolio manager of the fund. He has managed the fund since June 2010 and has 19 years industry experience, having spent practically his entire career within Yapi Kredi group Following the investment team reorganisation and staff departures, the new lead portfolio manager is Okan Uzunoglu with 19 years of investment experience and 14 years company tenure. The co-manager for the fixed income part is Gaye Vural Deran (12 years of experience, five years company tenure). Both tightly liaise with other senior portfolio management staff in other divisions. Yapi Kredi Portfoy is planning to strengthen the team with the hiring of a senior fixed-income portfolio manager. 3

4 Fund & Asset Manager Rating Group Risk and Support Staff: The fund benefits from the depth of Yapi Kredi Portfoy s investment and support functions. Technology Front-Office and Core Systems: Yapı Kredi Portfoy is in the final stage of renewing most of IT platform, adapting it to the new regulatory requirements. Although pension funds are not governed by this new regulation, the asset manager is migrating these funds to the new platform, GTP (provided by Tradesoft). It will replace the current application Portal (developed by Koc Systems) and is currently tested in parallel. The new platform is an integrated, one-stop tool for position keeping, in-depth portfolio monitoring, pre-trade compliance and automated order routing. Risk Systems: Risk data, primarily VaR statistics are sourced from RiskTurk, the manager s central risk tool that provides for stress testing, back-testing and scenario analysis or alternatively from Rasyonet for performance analysis. Asset Manager Ownership and Financial Conditions For a complete analysis of Yapı Kredi Portfoy, see Fitch s report, Yapi Kredi Portfoy Yonetimi A.S. (May 2015). Yapı Kredi Portfoy is ultimately owned by Koç Financial Services, a joint strategic partnership between UniCredit S.p.A. and Koç Holding of Turkey, a diversified Turkish industrial conglomerate that is majority owned by the Koç family. Figure 5 Yapi Kredi Portfoy AUM (TRYbn) TOTAL Pension Funds 14 Mutual Funds Mandates Source: Yapi Kredi Figure 6 Asset Class Breakdown As at December 2014 Equities 8% Money market and short-term bonds 12% Others 10% Fixed income 70% Fitch considers Yapı Kredi s financial standing, as comfortable for accomplishing and funding its strategic objectives. Institutional Experience & Market Presence The fund is positioned as a regulated private pension fund for investors willing to accept a low to medium risk reflecting the fund s fixed-income focus. Yapi Kredi Portfoy is the third-largest asset manager in Turkey with 15.3% market share and a long track-record in the mutual fund and pension fund industry. Direct client relationships and business development of the fund lies with Allianz. The fund s history goes back to December 2007, practically when the first pension funds in the Turkish asset management industry started evolving. The dedicated pension fund team manages 19 pension funds, with a total of TRY5.5bn at end-2014 (up 30% since end-2013). Stability Yapi Kredi Portfoy has a stable company framework. A reorganisation of front office functions in 2014 lead to better alignment with clients and promoted internal mobility. The company has adapted well to the fast-evolving Turkish asset management industry, which has undergone substantial reform to bring it closer to the standards in the European industry. Track Record Fund Biases and Sensitivities: Key drivers of performance are active asset allocation, both short and long term, yield curve positioning, active duration management and security selection. The fund s investment approach is not regime dependent, but as a fixed-income fund, it favours downside protection when rates are rising. Source: Yapi Kredi 4

5 Figure 7 Operational Assessment Pass Attention required x Fail Service providers Custodian: Takasbank, Turkey s central custody provider. Assets are segregated as per regulation. Administrator: Yapi Kredi Bank Auditors: PricewaterhouseCoopers, Istanbul, Turkey By regulation, an audit firm may be appointed as auditor for a maximum of 7 years and the auditing team has to be rotated after a maximum of 5 years. The fund s audit firm was last changed in August Regulation and governance Regulated vehicle: Turkish domiciled, regulated open-ended pension fund governed by the Turkish Treasury Board: Fund board does not include independent directors; regular committees with Allianz Controls: The fund is monitored by a six staff independent risk management team on a daily basis and reports to the manager s risk management committee which convenes on a weekly basis. Valuation Pricing responsibility: The fund administrator is responsible for asset prices which are reconciled with the custodian bank Pricing policy: The fund primarily invests in stock-exchange listed government bonds and money market instruments with prices sourced from the exchanges. Prices for other securities are either sourced from the exchange or interbank market quotes Back-office reconciliations: Holdings and cash are reconciled on a daily basis between the manager and the custodian Fund terms Liquidity: Daily subscription and redemption (T+1) with 11:00AM cut off time. The fund may invest in the less liquid and still evolving Turkish private sector debt market, which is manageable in light of the current fund size and the contained redemption risk resulting from the pension fund nature. Fees: Management fees of 1.0% which is also the cap for the fund s total expense ratio. No different share classes available; no performance fees. Transaction dependent security fees may apply Investor base Investor concentration: 10 largest investors represent 6.5% of the fund. Investor types: 100% private investors through Allianz life and pension offering Alignment of interest Independence: Yapi Kredi Portfoy is subject to strict policies and procedures Compensation: Personal investments in the fund are allowed subject to provisions of the company s internal dealing code which requires minimum holding periods Transparency and reporting Strategy representation: Eligible instruments and investment strategy are clearly described in documentation. The fund has a stated benchmark. The fund last changed its benchmark marginally in 2012 to include private sector fixed bonds. Source: Fitch Level of disclosure: Good level of transparency. A monthly bulletin for the fund is posted on a public information web page. Monthly fact sheets and a quarterly bulletin with key information are produced by the marketing department. Rating Sensitivities The rating may be sensitive to material changes in the investment or operational processes or resources dedicated to the fund. A material adverse deviation from Fitch's guidelines for any key rating driver could result in a downgrade of the rating. For example, this may be manifested in significant structural deterioration in the fund's performance or a material deviation from the volatility objective. Key person risk is limited but model risk exists. Important Notice A report providing a Fitch Rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the fund advisor and its agents in connection with the distribution of the fund. Investors should review the prospectus and/or legal information, which Fitch understands includes, inter alia, the jurisdictions in which the fund is registered for sale. 5

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