Is It Time To Talk Turkey Fund? Not Yet

There is talk in Turkey of military invasion of Kurdish northern Iraq. There are demonstrations in the streets by secular Turks concerned about potential moves toward theocracy as elections approach. Is this a good time to be in the Turkish Fund (TKF)?

We think standing aside and waiting for a better entry point is the wise thing to do.

The current premium to net asset values is about +6%. Since inception in 1989, the highest premium was +100% in 1994. The deepest discount was -33% in 1990. The average over 212 months has been a +2% premium. The median is a +7% premium. It has been at a discount 101 out of 212 months and at a premium 111 out of 212 months. The standard deviation of the premium or discount is 18.8%. That puts about a 2/3 chance that the premium or discount will fall between +25% and -12%.

Stripping out the highest and lowest 20% months, the premium to discount range was +16% to -15% for 80% of the 212 months. Looking at the middle 20% (10% of months either side of the median) the premium to discount range was 5.5% to -4.0%.

Given (a) the approximately even odds of a premium or discount, (b) the fact that the current premium is above the average and approximately at the median, (c) the substantial volatility of as measured by standard deviation, and (d) the dependency of the Turkish economy and stock market on foreign capital flows, and (e) the disruptions, fears and uncertainty that a military invasion of Iraq would likely generate, we would rather wait for a period of discount before investing in this fund.

Looking at the price action, TKF has outperformed the S&P 500 (SPY), the MSCI EAFE (EFA) and the MSCI Emerging Markets (EEM) over the last 3 months, but with a much more roller coaster sort of ride (as the 3-month daily chart below shows) – thrilling if you could avoid vertigo in a recent plunge.

The 10-day hourly chart seems to show the unsettling nature of war talk and street concerns over secular and theocratic tussle in politics.

The 3-year correlation of monthly total returns for TKF to EEM is 70%, to EFA is 62% and to SPY is 54%.

We could be surprised by a short-term continued rise in TKF, but we’d rather be safe than sorry by waiting for the odds to be stacked more in our favor – perhaps stepping in when the discount is at least 3% and better yet 5%, and when talk of war is past and elections are done before considering an investment.

In fact, we see no great need to own the stock and are more likely to wait for a discount greater than -10% before thinking about investing in TKF.

Disclosure: At the time of this writing, author owns EFA.