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One year and five days ago, on September 15, 2005, Galia Maor and Yair Hamburger took Israel's capital market scene completely by shock.

The Bachar reform of the capital market had barely made it through Knesset when the twain announced that instead of taking years to follow its provisions, they were moving right away. To the general astonishment, they said that Hamburger's company Harel Insurance Investments (TASE: HARL1) would be buying the Pia mutual fund management company from Bank Leumi (TASE: LUMI), run by Maor, for NIS 535 million.

At the time Pia had NIS 16 billion in assets, mostly belonging to clients of Bank Leumi. Hamburger figured that his new toy would continue to generate management fees sufficing to finance the half-billion shekels he was spending.

That was the opening shot for a massive hunt by the insurance companies to buy the provident and mutual funds that Bachar was forcing the banks to sell. The biggest deal was Bank Hapoalim's (TASE: POLI)  sale of its PKN mutual funds to Markstone for NIS 950 million.

The buyers' assumption was that the mutual fund industry was growing, and therefore, even paying a hair on the high side would not preclude profits. Leumi and Harel both declared they'd made a good deal. Also, studies showed that in the U.S. and Europe, the public placed a lot more than the lousy 7% of their savings as Israelis did in mutual funds.

The insurance companies felt they were buying a cash cow and felt insulted by the insistence of some negative sorts to yak about things like returns, yields, goodwill, proper investment management and that sort of thing.

The upshot was that prices of these provident and mutual funds shot sky-high and even the coldest-blooded managers evidently forgot that what goes up, will come down. Mainly, they neglected to note that much of that money sitting in them there funds had piled up thanks to the well-oiled monopolistic banking machine. And that after they cut those creamy checks, the banks wouldn't have to be nice to them any more.

No  more nice nice

And in no time at all, the satisfied smiles were replaced by grimaces. By mid-October 2005, the public had started to withdraw money from funds, and not in small amounts, either. The investment advisers at the banks had taken no time at all to digest that it didn't lie in the bank's interest to plug the funds any more. Clients started to get into competing products.

Other factors didn't help: interest rate hikes in Israel and the world, making risk-free instruments more attractive; the dive in asset prices among emerging markets, the emergence of ETFs in local markets, and finally, that awful war in Lebanon, which even had the chief of staff Dan Halutz dumping his portfolio of mutual fund units.

A year down the line, not even the acquisition of Pia has been finalized. Mainly, the buyers feel cheated.

The figures of Kranot Meda Zahav are purely astonishing.

Plus what?

In the last 11 months, a massive NIS 29 billion has been withdrawn from the five biggest asset management companies belonging to the banks.

The biggest patsy (almost as big as the patsies who deposited their money in PKN over the years, thinking somebody was looking out for their interests) was Markstone. Urged by investment advisers at Bank Hapoalim, depositors withdrew a whopping NIS 9.2 billion from PKN funds, despite the company's desperate effort to stem the flood by changing its name to PKN Plus.

From first place and NIS 20.5 billion in assets, PKN deteriorated to fourth biggest mutual fund company, and counting.

Nor has Bank Hapoalim's other fund management company, Lahak, been a source of relief. There withdrawals from October 2005 have amounted to NIS 7 billion.

Altogether the Bank Hapoalim funds have lost NIS 16 billion in assets since October 2005. Now they're saying that Markstone may buy Lahak for a quarter of the price it paid for PKN.

And Leumi can't sit back gloating at the misfortunes of its arch-rival. Its funds have lost NIS 8 billion in assets from October 2005. Pia now has NIS 4.2 billion under management, though in August 2006 the pace of withdrawals had slowed to a mere NIS 145 million. It is the only bank-managed mutual fund company that actually increased its market share in August.

Perhaps the appointment of marketing veeps at PKN and Ilanot will stem the bleed. But the question is whether the public can feel more confident about the management of its money.

Altsholer continues to strengthen

Even the medium-sized bank-run asset management companies did badly in the last year, and the ones buying them watched the money seep out. Migdal Insurance (TASE: MGDL) bought Dikla and Afikim; Menorah Holdings (TASE: MORA) acquired Emda; and each lost NIS 1.6 billion in assets.

Where is the public turning? Private brokerages, for one. Altsholer raised the most, NIS 1.25 billion since October 2005. Meirav raised NIS 785 million and IBI scored NIS 585 million, mostly raised in 2005.

Altogether, from October 2005, the private brokers have raised a combined NIS 4 billion.

Looking at 2006 alone, the mutual funds sector lost NIS 17.4 billion in assets. That's more than the NIS 16.2 billion raised during the whole of 2005. The five biggest companies lost NIS 21 billion, of which NIS 12 billion were lost by PKN and Lahak combined.

Migdal is now the sixth biggest player in mutual funds, with assets of NIS 7.6 billion in three merged companies: Migdal Capital Markets-Dikla-Afikim. In eighth place is Menorah, followed by Clal Finance Batucha.

Kudos to Clal Finance, which is owned by an insurance company yet has managed to raise more money for management, a thing that none of its rivals managed to achieve.

Despite all that, the pace of redemptions eased off in August. Just NIS 2.2 billion evaporated from the provident and mutual funds, compared with NIS 3.8 billion in July, and NIS 5.5 billion in June.

The worst-hit sector in August was shekel instruments, with withdrawals of NIS 900 million. From the start of 2006, shekel instruments have lost NIS 10 billion in assets.