Stock Exchange Investment Fund (BYF) is an investment fund based on an index, aiming to reflect the performance of that index to its investor, and listed in the Stock Exchange. BYF is based on index or commodity and is invested in the assets covered by the said index or commodity in proportion with their weights in the index. For example, an investor willing to invest in the Istanbul Stock Exchange (BIST) 30 Index may invest in a BYF based on the said index instead of separately buying the shares in the index, so that he will be able to invest in the index and to make return from the index. Stock Exchange Investment Funds are portfolios created by licensed stock brokers or portfolio management companies by buying the securities included in an index by using the cash funds they collected from investors. These funs make return from and bear the risk of the shares or other instruments (gold, foreign currency, etc.) in the index. BYF participation certificates are traded in the Share Market through stock brokers.*
To explain how a BYF is managed, let’s assume there is a BYF based on gold. If the market price of gold is TL 100, the price of the said BYF will be 1 gram = 1 participation share, so that it will be traded at a price of TL 100. In time, its market price and its fund management fee may vary, because its costs are deducted from the value of the fund. If and when the price of gold increases, the investor will make a return that equals to that increase. Similarly, if and when the price of gold decreases, the investor will suffer a loss that equals to that decrease. Here the investor bear the following costs: the fund management fee and the buy or sell commission payable to a stock broker, the latter is obligatory because BYF are listed in the Stock Exchange and therefore they can only be traded through a stock broker. Furthermore, if a BYF is indexed to gold, its establisher will deduct the gold depository service fee from the value of the fund and pay an audit fee for the fund too, but these are minor costs. There is no other additional return or earning.
Under the law, 75% of the assets comprising the portfolio of a BYF may be lent against interest. In this case the fund will enjoy an additional return and its price will be revaluated as much as that additional return. The investor holding such fund will enjoy an additional return thanks to the lending transaction. However, such return is based on an interest-bearing transaction and therefore does not comply with the interest-free financing principles. For example, let’s assume the volume of a BYF is 100 kg gold. If the fund management company lends 75 kg of the said volume to a borrower for a period of 90 days, the fund will make an additional return. The borrower will be entitled to buy, sell or otherwise trade the said 75 kg gold in the market. In this example the fund management company, acting as a lender, allows the borrower to exploit the 75 kg gold for a period of 90 days. If the borrower buys or sells the said gold, it will turn into a derivatives product, and if the 75 kg gold is used by both the borrower and the fund management company/lender, it will be traded in the market as if it is 150 kg. Such trading does not comply with fiqh, so that it is explained that lending any unit of gold for exploitation and allowing both the borrower and the lender to exploit the same is not acceptable in terms of fiqh. The Capital Market Board regulations do not impose any restriction on such lending, but the participation banks do not use such investment products.
Stock Exchange Investment Funds have never been popular in Turkey as they did in Europe and the USA, and are about to lose their existence and effect on the capital market. Why do they keep on failing in Turkey in spite of the success they achieved in all developed countries and in most of the developing countries is an interesting question. The basic reason of the said failure is that although the authorities of the developed countries apply positive discrimination to collective investment instruments like BYF and provide them with many advantages including tax, the Turkish authorities apply negative discrimination to such investment instruments through overregulation. Therefore, individual and institutional investors find it more attractive to invest directly in assets than to invest in a BYF or other investment fund. The facts that investors may use such alternative distribution channels as banks for stock exchange investment funds based on such commodities as gold and silver and that investors may directly invest in a share certificate or buy any share certificate investment fund make BYF look unattractive. As the following table shows, investors’ interest in BYF drops year by year. There were 14 BYF in 2015, then the Capital Market Board issued a new regulation to impose a minimum fund volume of TL 3 million and tax disadvantages for BYF, causing investors’ interest in BYF to keep on dropping, as a result BYF are about to be closed down in the present.
Year
BYF (Million TL)
BYF (Million ABD$)
2010
14,109.94
9,445.44
2011
8,731.44
5,266.73
2012
8,256.80
4,611.46
2013
8,368.08
4,515.01
2014
3,829.13
1,753.57
2015*
2,985.59
1,146.43
Reference: Istanbul Stock Exchange, for the first eight months of 2015.
*Stock Exchange Investment Fund Communique III-52.2, Turkish Official Gazette, 28701, 27 October 2013