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AK ASSET MANAGEMENT

Sabanci University CAP Presentation. AK ASSET MANAGEMENT. Overview. 1 0/ 2008. AK ASSET MANAGEMENT. September 2006. Shareholders. Group In Brief 70 Companies 10 Joint Ventures 52,000 Employees (as of year end 200 7 ) $1 4 . 9 Billion Consolidated Revenues in 200 7

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AK ASSET MANAGEMENT

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  1. Sabanci University CAP Presentation AK ASSET MANAGEMENT Overview 10/ 2008 AK ASSET MANAGEMENT September 2006

  2. Shareholders Group In Brief • 70 Companies • 10 Joint Ventures • 52,000 Employees (as of year end 2007) • $14.9 Billion Consolidated Revenues in 2007 • $745 Million Consolidated Net Income in 2007

  3. LEASING ASSET MANAGEMENT INSURANCE PENSION COMPANY SECURITIES Shareholders • Turkey’s most valuable corporation • Turkey’s most profitable privately owned bank • Credit rating above sovereign rating • A robust capital structure and a high capital adequacy ratio of 20.7% • An extensive and diversified loan portfolio with a low NPL ratio of 2.1% Financial Services Conglomerate Shareholding Structure

  4. Synergy Through Global Partnership • In 2006 Citigroup acquired 20% of Akbank. • In 2007 Ak Emeklilik and Aviva Emeklilik has been merged as an equal partnership.

  5. Turkish Asset Management Companies Breakdown of AUM (As of September 2008) • The highest portion of the AUM is comprised of Money Market Funds • Non Money Market Funds and Pension Funds add up to 29% of AUM • Segregated account management is 7% of total AUM. • The highest growth segments are Pension Funds followed by individual and corporate clients.

  6. AK Asset Management Market Shares in Business Segments AUM - Breakdown • Market Share in Pension Funds: 23% (1st) • Share in Total Fund Market: 15.4% (4rd) Leading Provider of Asset Management Solutions AUM – Historical (USD mn) • Multi-asset class and multi-product solutions aligned to the clients’ needs. • Wide range of investment styles across Turkish Asset Classes. • Structured Product Development capabilities through relationships with a large network of global investment banks. • Risk management embedded into the decision systems to assure targeted performances.

  7. Ak Asset Management Company Action Project Supervisory Team  Ertunç Tümen, CFA, EVP, Discretionary Portfolio Management, Structured Products, Research 10 years of experience in the Turkish Investment Industry on decision making systems, risk management and product development  Murat Konuklar, Manager, Risk Management 10 years of experience on risk management in Turkish Banking and Fund Management.  Hakan Elmas, Research Analyst, Research 4 years of experience in Fund Management and Corporate Finance Industry. In charge of quantitative analysis , fixed income securities and asset allocation and optimization techniques

  8. Ak Asset Management Leadership in Fund Performances • Turkey’s best performing fixed income and equity mutual funds with a long term perspective on a risk adjusted basis according to Rasyonet, Turkey’s foremost independent fund rating agent. Ak Asset Managament Mutual Funds (30/09/2004 – 28/9/2007) Fund Name Strategy Ranking Risk Adj. Peer Comp. Akbank A Type Variable Fund Equity-FI Balanced 6/36 (1st quartile) Akbank A Type Variable Fund Equity 2/12 (1st quartile) Akbank B Type Fixed Income Fixed Income 1/21 (1st quartile) Akbank B Type F.I. Variable Fixed Income 1/27 (1st quartile) Akbank B Type Money Market MM 19/33(3rd quartile)

  9. Ak Asset Management Leadership in Product Innovation • Turkey’s first capital protected funds • 100% Capital protected Best of ISE 30 and USD/YTL • 100% Capital Protected ISE Downside accelerated participation • Turkey’s first Gold mutual fund • First ETF on ISE among big four retail banks

  10. Ak Asset Management Leadership in Pension Funds • Founded at October 31, 2007 with the merger of Ak Emeklilik and Aviva Hayat & Emeklilik. • AvivaSA selected Ak Asset Management for management of its pension funds. • Total AUM of the company is around USD 1 bn as of June 2008 • %24 market share in pension fund business line. Ak Asset Managament Pension Assets AUM (USD mn)

  11. Ak Asset Management Product Propositions - Funds Asset Classes • Mutual Funds Management • Passive Management • Active Management strategies with tracking error limits • Pension Funds Management • Passive Management • Active Management strategies with tracking error limits • Structured Funds Management • Capital Protected and Guaranteed Fund Products with sophisticated underlyings. • Exchange Traded Funds • Alternative Funds • Hedge Funds, Fund of Funds and Commodity Funds • Turkish Equities • Turkish Fixed Income • Turkish Money Market • Gold • TURKDEX Futures Contracts • OTC Derivatives

  12. Ak Asset Management Customized Solutions for Inst. Clients Asset Classes • Traditional Products • Passive Management • Active Management strategies with tracking error limits • Structured Products • Capital Protected and Guaranteed Products with sophisticated underlyings. • Exchange Traded Funds • Long Short Strategies • Yield Enhancement Strategies • Investment Advisory • Investment Policy Formulation • Benchmark and investment universe • Level of active management required • Turkish Equities • Turkish Fixed Income • Turkish Money Market • Gold • TURKDEX Futures Contracts • OTC Derivatives

  13. Ak Asset Management Decision Making System Asset Management Work Flow • Dedicated in-house research personnel • Extensive numerical analysis before investment decisions • Highest quality information flow into the system through agreements with best external service providers • Teams concentrated on special alpha generation areas to generate model portfolios • Pre-defined return and tracking error targets • Diversification of active risk in the portfolio according to potential sources of alpha • Risk Budget • Targeted Tracking Error • Risk-adj. Perf. Analysis • Realized Track Err. • Risk-adjusted portfolio opt. • Forecasted Tracking Error

  14. Ak Asset Management Investment Philosophy Behind Performance Creation We believe that; Strategy decision is the foremost contributing factor to the performance of any portfolio, you may systematically exploit pricing inefficiencies by security selection, Although market prices of the liquid indices reflect most of the existing information, systematic trading and market timing strategies with strict loss limits may add alpha to any portfolio Decision Making Work Flow • Analysis of benchmark optimality considering market’s return expectations • Reconciling the total level of active management risk in the portfolio according to client preferencesand profile • Attaining the excess return targets to the portfolios&target information ratios • Determining the risk budgets according to potential sources of alpha creation providing that total risk level does not exceed expected tracking error. • The portfolio managers have limit guidelines checked periodically

  15. Ak Asset Management Decision Making Organization – Team Based Approach Benchmark Commitee  Benchmark Committee: Meets every month. Benchmark decisions are made for all different portfolio structures according to optimization of expected return and volatility estimations. Strategy Committee: Meets twice a month. Developments in the global and domestic markets are analyzed to give insight to portfolio managers  Fixed Income Committee: Meets weekly. Fixed Income security selections, trade levels and quant models input are analyzed and fixed income model portfolios are formed  Stock Selection Committee:Meets weekly. Fundamental data, valuation levels and quant models input are analyzed to create the equity model portfolios.  Risk Committee:Meets weekly. Scenario analysis and stress test are activated and reported to management. Performance Committee: Meets each month. Portfolio managers give report on their monthly performances to the top management. Security Selection Commitees Risk Man. & Perf Meas.

  16. Ak Asset Management Leadership in Risk Management • Sector’s first full fledged Risk Management Department founded in 2006 • Worked with Turkey’s leading risk management software vendor with significant academic linkages to create Turkey’s first “Buy-side risk solution” • Internal regulations prepared taking UCIT III Risk Management Reporting standards • Risk management integrated in the investment management process Confidence E(R) Universe Expected Return Global VaR Limit set by the “ Board ”

  17. Ak Asset Management An Independent Risk Management Department • An independent Risk Management Department has been establishedon June 2006 to implement and execute the overall risk management process and risk oversight. • To build up an efficient and integrated risk management system - the first in the Turkish Asset Management Industry -, a professional Java Platform based Risk Software is implemented with advanced product features. The integration of this risk software has been maintained with the Reuters 3000 Extra Platform. • A policy document titled “ Risk Management Principles and Policy Document” has been produced in accordance with UCITS III regulations. • This policy document has been designed and integrated with the total risk approach and risk definitions with predefined conditions on the measurement, monitoring of the risk factors for different asset classes,reporting procedures, the policy for complex financial structured products, derivatives transactions and capital protected funds, guaranteed funds.

  18. Ak Asset Management Risk Methodology • UCITS III requires management companies to take a reasonable care to organize a risk management process to monitor and measure as frequently as appropriate the risk evolution of a fund positions and their contributions to the overall risk profile of the fund. • The risk appetite of the board has to be defined in line with risk limits • The choice of the appropriate benchmark • Consistent risk management, monitoring and reporting process applies • Coherency of risk measures permits aggregation and definition of the risk limits • The style of the fund has to be in line with the risk appetite of the client Risk Measurement • Determination of the risk measures and metrics to be used (VaR) • Evaluation of the global exposure to the derivative instruments • Independent valuation of the OTC derivative instruments • Sophisticated strategies can lead to identify the non-linear relationships between risk and return.

  19. Ak Asset Management Traditional Approach vs Our approach

  20. Ak Asset Management Risk Measures and Risk Appetite • The risk appetite of the “Client” should determine the aggregate limit on the VaR • Risk Measures should be in line with the portfolio’s level of sophistication and risk attribution • The Fund is expected to evolve in the “Confidence Universe” area • %20 NAV limit applies to aggregate counterparty risk exposures and position, transferable securities, money market instruments and deposits Confidence Universe E(R) Expected Return Global VaR Limit set by the “Board” Estimated VaR

  21. Problem Definition: Being able to present the most suitable asset allocation proposition to clients with diverse risk and return preferences. Project Objectives and Scope: Developing a portfolio analysis tool for optimal client portoflio management. Project Support and Resources: Data Providers such as Bloomberg, Reuters and Matriks; ,Reference Books and Articles. Business Concepts and Methods: Financial Econometrics, Statistics, Optimization Concepts 1st Project

  22. Modern Portfolio Theory

  23. The Black-Litterman asset allocation model, created by Fischer Black and Robert Litterman, is a sophisticated portfolio construction method that overcomes the problem of unintuitive, highly-concentrated portfolios, input-sensitivity, and estimation error maximization. The Black-Litterman model uses a Bayesian approach to combine the subjective views of an investor regarding the expected returns of one or more assets with the market equilibrium vector of expected returns (the prior distribution) to form a new, mixed estimate of expected returns. Suggestion: Black Litterman Model

  24. 1.Select a portfolio (or palette) of asset classes 2a. Use our estimated inputs 2b. Override our estimated inputs –Risk-Free Rate –Risk Premium of the presumed efficient portfolio –Market Capitalizations* –Standard Deviations –Correlations 3. Specify Views (optional) Implementation of BL Model

  25. BL Model Output

  26. Problem Definition: Constructing quantitative multifactor model producing buy/sell signals. Project Objectives and Scope: Implementing quantitative market timing trading strategies. Project Support and Resources: Bloomberg, Reuters and Matriks, Reference Books and Articles. Business Concepts and Methods: Financial Econometrics, Statistics, Financial Modelling 2nd Project

  27. Market Timing

  28. Market Timing Everyone wants to time markets, and it is not difficult to see the reasons for the allure. A successful market timer can deliver very high returns, with relatively little effort. The cost of market timing, though, is high both in terms of transactions costs (higher turnover ratios and tax bills) and opportunity costs (staying out of the market in years in which the market goes up). In fact, you need to be right about two-thirds of the time for market timing to pay off. If you do decide to time markets, you have a wide range of market timing tools.

  29. Problem Definition: Hedge funds applications are very new financial products for the Turkish financial sector. Project Objectives and Scope: To display the best suitable hedge fund strategies for the Turkish capital markets. Project Support and Resources: Bloomberg, Reuters and Matriks; ,Reference Books and Articles. Business Concepts and Methods: Financial Econometrics, Statistics, Financial Modelling 3rd Project

  30. Investment philosophy is driven by the inefficiency resident in liquid markets created by existing market participantsand is characterized by the following: - All public information is basically reflected in current stock prices in liquid markets - Motion in stock prices can be filtered and cleansed to identify noisy components - A more efficient portfolio can be created using high frequency data inputs - On average, existing portfolio management techniques do not produce long-term alpha - Over-extending the amount of capital on one strategy will arbitrage out excess returns over time - Shorting provides significant risk and return enhancements and should be an integral component of a balanced portfolio, but must be re-optimized often to be profitable - Unlike most relative spread quant approaches, absolute directional approaches can create positively skewed risk/return profiles without introducing excessive tail Why Hedge Funds?

  31. An investment structure General partner(s) (hedge fund manager) and limited partners The manager handles all of the trading activity The limited partners supply the capital -100-500 investors - “accredited investors” - “qualified purchasers” Management companies Hedge Funds

  32. Managers use strategies to create profit The limited partners receive a percentage of the profits The hedge fund managers charge 2 sets of fees 20-30% performance fee 1-2% management fee Today: $900 billion, 8,500 funds Hedge Funds

  33. Investment Universe

  34. Macro Funds A divergent/convergent strategy, meaning that it is defined by bets on prices of markets or securities moving apart/ closer together respectively This strategy seeks to profit from changes in global financial markets and take positions to exploit changes in interest rates, exchange rates, liquidity and other macroeconomic factors Uses moderate amounts of leverage (investing with borrowed money) Examples on HF Strategies

  35. Fixed Income Arbitrage This is also a convergent / divergent strategy. It allows trading managers to take advantage of mispricing opportunities between different types of fixed income securities while neutralizing exposure to interest rate risk. This strategy employs large amounts of leverage. Examples on HF Strategies

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