Lighting The Fire Of Competition In Mutual Funds

First published on 17 August 2010.

The CMB has revised the legislation on Mutual Funds with a view to abolish certain limitations, to provide new investment options for Fund portfolios and to initiate competition among the Funds. The new perspective which is expected to light the fire of competition in Mutual Funds depends on full disclosure of management fees, entry and exit commissions, and also authorizes CMB to set a ceiling for management fees when it deems necessary. In addition to the above, new investment options together with the abolishment of certain limitations are expected to provide flexibility to the Mutual Funds and thus to boost the efficiency of Fund portfolios.

Below is a brief highlight of the key aspects of the Amendment:

Disclosure of Fees and Commissions

The Amendment, with the purpose of establishing a competitive Mutual Fund Market, requires disclosure of management fees and entry and exit commissions through the web site of Fund Founders. As per the CMB Resolution dated 30.07.2010 and numbered 22/677, Founders shall also notify Central Registry Agency of the fees and commissions and the Agency shall disclose such costs altogether in order to let investors to make comparison among Funds' fee arrangements.

Limitation on Management Fees

According to the Amendment the CMB is authorized to set an upper limit for management fees when it deems necessary. The CMB has used such authority and envisaged that daily management fees shall not exceed 0, 00010 of the Funds' total value until 31.03.2011.The CMB clearly states that Hedge Funds, by their nature, are not subject to such limitation. Also, Funds which have determined higher fee rates through their bylaws/prospectuses are required to apply the rate of 0, 00010 as the management fee until the abovementioned date and thereby are not required to make any amendments in said documents.

Abolishing Certain Limitations and Granting New Investment Options

• Capital Protection Oriented Funds and Capital Guaranteed Funds can be marketed not only through the branches of banks and brokerage firms but also through alternative distribution channels like internet or telephone banking.
• Investments in stocks of real estate investment companies, infrastructure real estate investment companies and venture capital investment companies are excluded from the limitation which had envisaged that investments in mutual funds, exchange traded funds, investment trusts and the abovementioned investment companies shall not exceed 10% of the value of a Fund's portfolio.
• Sector Funds may invest in stocks of a company operating in the relevant sector for up to 15% of its portfolio value.
• Fund Baskets, as a principle, shall invest in funds which are registered with the CMB. However, as per the Amendment, it is possible for Fund Baskets to invest in foreign exchange traded funds which are not registered with the CMB.
• Capital Protection Oriented funds and Capital Guaranteed Funds may invest in options and futures contracts based on economic indicators.
• Funds may invest in warrant, a relatively new instrument in Turkish Capital Markets. The Amendment governs portfolio limitations with regard to such investments in detail.
• B- Type Funds, in addition to A-Type Funds, may also enter into repo and reverse repo transactions for fulfilling cash needs which may arise in relation to redemption requests.
• Funds may invest in ISE traded foreign debt instruments, including Eurobonds, through the over the counter transactions. Additionally, Funds may enter into over the counter repo and reverse repo transactions which are based on bank bonds and/or ISE traded/registered private sector debt instruments. The Amendment has envisaged detailed disclosure requirements for over the counter repo and reverse repo transactions to be conducted by Funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.