Investing in stocks in Turkey is risky business. According to The Heritage Foundation, Turkey's gross domestic product is only $1.1 trillion. Its unemployment is 11.7 percent. Its judiciary is "subject to government influence." Although bribery is outlawed, "corruption continues to undermine perceptions of government integrity."
One study of seven emerging East-European stock exchanges found "strong evidence for deviation from market efficiency" in all seven, including Turkey (although Turkey rated highest in the tests performed).
You would think active management would thrive in this environment, because the premise of active management is that skilled fund managers can take advantage of market inefficiencies. In more developed countries, finding such inefficiencies - much less profiting from them - is far more difficult.
You would also think Turkish pension funds would have access to the best and brightest active fund managers. According to a recent study, there are 3.1 million participants vested in retirement plans offered by 17 different pension management companies in Turkey. Total assets under management are about $12 billion. I assume most fund managers in Turkey would jump at the opportunity to manage even a fraction of those assets.
That's what makes the findings of this study so interesting. The authors, professors of finance at Koc University and Ozyegin University in Turkey, used a survivorship-free and selection-bias-free database of actively managed private Turkish pension funds covering January 2004 through December 2011. The pension system began October 27, 2003. They looked at all 152 funds used by these plans. The conclusions were stunning.
The study found the average fund did not beat its benchmark, even before fees. The average "alpha" (which measures the excess return of a fund relative to the return of the benchmark index) of individual funds was "not distinguishable from zero." There was little persistence in the funds that outperformed, "making it unrealistic for the retail investors to cherry-pick those few successful managers." Even in this relatively inefficient market, the study observed that "our results are generally consistent with previous studies in that most managers cannot beat the market."
The study noted that, based on these findings, index funds "are a desperately needed commodity." Its overall recommendation is compelling:
"Indexing is a fail-safe mechanism to reduce fund fees. We believe that pension plan contributors would be much better served with lower-cost passive alternatives to the active funds which are currently available."
Think about the ramifications of this study. If the best fund managers in Turkey can't exploit inefficiencies in an emerging market, how likely is it that your broker or adviser can do so in far more efficient markets?
Dan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, The Smartest Sales Book You'll Ever Read, will be published March 3, 2014.
The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.