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"I am preparing for the possibility that within a few years, the mutual funds industry will shrink to NIS 50 billion." Who said that? A mutual funds manager, this week. In case that says nothing to you, let me add that at present there are about NIS 100 billion in mutual funds, which means that manager is preparing for the eventuality that his industry will shrink by half.

His prediction, however extreme it may sound, isn't surprising. From the start of 2006, mutual funds have lost about NIS 20 billion in assets because the public is pulling out money, even though it hasn't been a bad year for assets. The indices of shares and bonds have gained from the start of the year, yet people are withdrawing their investments in droves.

It is convenient for the mutual funds to blame the banks, which ostensibly declared war on the mutual funds as revenge for the Bachar reform, which forced them to sell their mutual fund management companies; and also, it pays them better to sell bank deposits than units in mutual funds.

The mutual fund managers are probably right that the main blame lies with the banks. But there is another reason for their woes, which is a lot less convenient for them to admit to: themselves.

The figure of NIS 20 billion in withdrawals from mutual funds this year is a misleading one. Actually, the biggest mutual fund groups lost more than NIS 23 billion. PKN, Psagot, Ilanot and Pia, which had belonged to the banks, each lost anywhere from NIS 3 billion to NIS 7 billion in withdrawals. But mutual funds run by private brokerages had a great year: they raised NIS 3 billion this year.

If the banks declared war on the mutual fund sector, why is it that the private brokers managed to raise any money at all? The reason is that the withdrawals were not uniform. It is clear as day that the less successful funds, managed by inferior groups, suffered heavy withdrawals while well-run funds did not; on the contrary, they attracted fresh investments.

That finding is supported by the distribution of the funds that suffered the most. The heaviest withdrawals were from "shekel funds", which achieved average returns of 3.3% from January 1 to the end of September. That was less than the returns boasted by most shekel vehicles in the financial markets.

Funds specializing in government bonds also smarted, with average returns of 2.3%, well behind the benchmark indices of government paper. Why should the public keep its mutual fund holdings if they underperform the market?

Moreover, mutual fund managers not only underperform: they charge large fees of 3% and 4% of assets, while being preoccupied with deflecting quality competition from mutual funds run by foreign investment banks. The returns on ETFs tracking stocks tended to beat the mutual funds specializing in stocks. That is an excellent reason for the stock-based mutual funds to lose a billion shekels in assets this year, while ETFs raised anywhere between NIS 3 billion to NIS 5 billion, depending on who you ask.

"The banks declared a war to the death on the mutual funds sector?" asked a fund manager this week. "The opposite could well be true. Until now the banks protected the mutual funds because they owned them and it paid to persuade the public to invest in them. Now the banks don't care about the mutuals and evaluate them exactly as they would evaluate any other financial instrument. Suddenly it turns out that the mutual funds weren't that great after all."

What does that tell us about the advice the banks gave their customers? That it was very bad advice.

What does that tell us about the advice that banks now give their customers? That it is still probably bad, and that the mediocrity of the advisers impels them to recommend simple, low-risk instruments such as deposits instead of going out on a limb.

What does that tell us about the mutual fund managers? That they still aren't supplying the advisers at the banks with reasons to recommend mutual funds after all. And that won't change as long as the funds continue to underperform the benchmarks.