The following commentary was originally posted on FoolFunds.com, the website of Motley Fool Asset Management, LLC, on Oct. 15, 2012. With permission, we're reproducing it here in its original form.
Turkey has plenty of room for improvement. Plenty. As an emerging market, this is true by definition. But as I met with more than a dozen Turkish companies earlier this month, what struck me most was the outstanding corporate governance. This is not a country where the founders engage in empire-building at low rates of return. It is not a country where the majority shareholders will unfairly prosper to the detriment of minority shareholders. And it is not a country where the designation of Independent Director means next to nothing.
Make no mistake -- this country of 75 million people is emerging. While it won't get the attention of larger economies like China and India, there are plenty of good reasons to consider investing in Turkish companies. Istanbul is the crossroads between the East and West, with a new airport due to be opened around 2015. With half the population under the age of 29, the country is focused on its future. And that future is full of potential.
Independence, in name only
I have always been bemused by the definition of "Independent Director" that prevails in the United States. According to the NYSE (UNKNOWN:NYX.DL), independence means that a board member has no material relationship with the company; it is largely left to each board to determine what that means. Throw in the super-voting privileges common in many prominent companies like Google (NASDAQ: GOOG) and Facebook (NASDAQ: FB), and one begins to wonder why we feel so secure investing in U.S. companies.
Meanwhile, Turkey's Capital Markets Board has a checklist of qualifications to define independence. These include not having worked for a supplier within the previous five years, and no beneficial relationship between the company and three degrees of the director's relatives. And at least one-third of each company's board must be independent. While many companies have large shareholders with 30%-50% ownership, often representing the founding family, I've seen little evidence of the egotistical sense of entitlement that often keeps outside shareholders reluctant to invest in emerging economies. On a systemic level, I have no reservations investing in Turkey.
The 10-year plan
Motley Fool Asset Management is willing to invest its assets almost anywhere in the world. And with thousands of public companies to choose from, that provides many options. It helps to have a high-level screen to eliminate the also-rans. One of my favorite questions when meeting with management is rather simple: "Where do you see your business in the next five to 10 years?"
This is not a trick question, but it is intentionally open-ended. I am less concerned with the specifics than the general direction in which an executive will take her response (there's always room to drill down on specifics later). Common responses usually include revenue growth rates, market share goals, or new product offerings. I will not lay out everything I seek in a response but here is a hint: Growth for growth's sake adds no value, and capital should be deployed only at attractive returns on investment. Many companies in Turkey have learned this lesson well.
2023 will be the 100th anniversary of the establishment of the Republic of Turkey. The government has set goals for that year, including GDP of $2 trillion, per capita income of $25,000, and a workforce of 30 million. These are lofty targets, but they present a clear direction for the country. Many companies have followed suit by setting their own goals.
We launched our first portfolio in 2009. It's no coincidence that one of the portfolio's earliest investments was Istanbul-headquartered Garanti Bank (NASDAQOTH:TKGBY) -- years before we would invest in any U.S.-based bank. Garanti makes it a priority to maintain the quality of its assets, remaining focused on long-term discipline rather than quarterly margins. There is plenty of room to grow the banking sector on the deposit side, where most Turks are still unbanked, and also on the asset side, where the average home mortgage has a maturity of seven years and many small- and mid-sized businesses are still underserved. The bank plans to grow its loan book by 20% per year, assuming GDP is growing at a pace of 4%-5%. Given Garanti's track record, I suspect it will succeed.
Another former holding I was quite fond of was Coca-Cola İçecek, or CCI . We sold this position to trade into Coca-Cola Hellenic (NYSE:CCH), another bottler trading at a discount, because it was headquartered in Athens rather than Istanbul. But CCI has a bright future ahead of it. It is the world's sixth-largest Coke bottler, and its operations include some of the world's least saturated markets, including Iraq, Kazakhstan, and Pakistan. To illustrate how much potential this company has, one of its key growth initiatives is to encourage shop owners to install coolers to keep the product chilled. It's this kind of room for improvement that has me convinced that, despite all the macro concerns that talking heads like to debate, global investing provides plenty of opportunity.
- For further reading: Crescent and Star: Turkey Between Two Worlds, by Stephen Kinzer.
- Catchy song: "Dünyanın Sonuna Doğmuşum" by maNga.
- Best local cuisine: Seafood Pide cooked in a wood burning oven. Also, feel free to skip the Turkish Coffee.
Editor's note: Tony Arsta is not able to engage in discussion on the boards or in the comments section below. Tony does not own shares of any companies mentioned.
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