All That Glitters / How Did They Do It?

A glance at the results of provident funds and training funds for July, and even more so, their results for the last 12 months, shows only two companies that stand out.

A glance at the results of provident funds and training funds for July, and even more so, their results for the last 12 months, shows only two companies that stand out. Then there's the rest of the pack.

The two are Analyst, which leads the 12-month list with returns of 8.9%, and Yelin-Lapidot, with 8%.

Some of the other companies did respectably. The provident fund Tamar came in third with returns of 6.7%. It deserves special mention because of its sheer size: It has NIS 11 billion under management, while Analyst and Yelin-Lapidot have just over NIS 600 million apiece.

The picture is much the same among the training funds, which isn't much of a surprise, given that Israel's investment banks tend to choose similar asset compositions for provident funds and training funds.

Analyst's training funds are again in the lead, with returns of 9.2%, beating DS Apex's 8.1% and Yelin Lapidot's 8%. All the rest achieved 6% at best.

Among the ones that disappointed, Psagot stands out: Its four provident funds reported negative returns of 6.3% to 11.3%. The gargantuan fund Gadish admitted to low returns of 0.9% for the last 12 months. Psagot again stands out for being last on the list of training funds, with negative returns of 5.8% over the last 12 months.

How did the best do so well? What's their secret? What boosted Analyst and Yelin-Lapidot into a completely different league?

Hoping for answers, we went to their Web sites to look up the composition of their general funds. There was a problem, though. Provident funds disclose the composition of their assets only on a quarterly basis. Therefore, the list is a snapshot correct as of June 30 at best. The portfolio may have been completely different beforehand, and afterward, too.

The second quarter was when the great stock market boom occurred. Provident funds aren't supposed to fiddle with their portfolios like day traders, and indeed, comparing quarter to quarter, we find that they don't. So by and large, the securities that the Analyst and Yelin Lapidot funds had at the start of April are the ones that made the difference between them and the rest of the industry.

The answer regarding the Yelin-Lapidot training fund is clear. Even before we get into details, we see that 52% of its assets were invested in corporate bonds. Sixteen percent of the total was placed in non-listed corporate bonds. Stocks comprised 14.8% and government bonds another 11.7%, and interestingly, the training fund also held 11.7% of its managed assets in cash.

The affection that managers Dov Yelin and Yair Lapidot evinced for corporate bonds in general, and illiquid ones in particular, isn't new. Almost from the day of its establishment, Yelin-Lapidot has specialized in analyzing and identifying bonds that hover beneath the rest of the market's radar. This has done well by them. Corporate bonds did dreadfully during the crisis, but they've regained almost all the ground they lost.

Yelin-Lapidot didn't try to pick and choose, in order to avoid bonds issued by companies liable to default. That's a tricky order, anyway. What it did is diversify, putting 1% or less of assets in any particular company. Only a few got more than 1%, and it seems that the investment bank has a weakness for cellular. It owns 2.1% of Cellcom's series B3 bonds, 0.9% of Cellcom B4 and 1.4% of the money under management is in Partner bonds.

Among the illiquid bonds we find the Israel Electric Corporation, Africa Israel and Delek Real Estate, all around 1% each of assets.

Stocks in general and large-caps in particular aren't Yelin-Lapidot's cup of tea, it would seem. Its training fund put only 4% of its managed assets into TA-25 stocks, mainly Bank Hapoalim (0.73%) and Bank Leumi (0.6%). American-Israeli Paper Mills is another favorite, with 1.5% of the training fund's managed assets in its stock.

In other words, if you put your money into Yelin-Lapidot's training fund, you were betting on corporate bonds, handled by a team that's proven (so far) a talent in picking.

Analyst's story is different. It headed the rankings this year, but the variation in its monthly returns was huge, attesting like nothing else to the risk inherent in the portfolio.

According to the company's July 31 report, 45% of the training fund's managed assets were in corporate bonds and 25% were in stocks, of which a tenth were in TA-25 index shares. Another 20% went into government bonds and 6% was kept in cash.

Analyst's training fund therefore had less corporate bonds than Yelin-Lapidot's corresponding fund. But Analyst was more conservative, putting only 3.8% of the fund's managed assets into illiquid bonds.

There ends the similarity. The two investment banks chose completely different things. As of March, which is the last update on the company's Web site, Analyst liked IDB's B9 bonds (1.5% of assets), Discount Bank capital notes and Teva Pharmaceutical Industries bonds (1.2% each), Elbit Imaging bonds (1%) and bonds of the Alon energy group (1.5%).

Analyst's massive move into corporate bonds was surprising: The company has traditionally specialized in analyzing shares.

If you put money into the provident and mutual funds run by the stars of 2009, Analyst and Yelin-Lapidot, remember the following.

1. You are betting mainly that corporate bonds will continue to rise.

2. Some 75% of the managed assets in Analyst and Yelin-Lapidot's training funds are in high-risk assets: corporate bonds, shares and options. Their portfolios are not conservative and you must expect intense volatility in returns. They fell hard in the second half of 2008 and then skyrocketed in the first half of 2009, reflecting just how high the risk is.

3. Analyst and Yelin-Lapidot take more risks than the others do, but they evidently know what they're doing. Their funds are easier to run - because they have less assets under management, a few hundred million shekels each, compared with the multi-billion shekel mammoths run by the likes of Tamar. Analyst and Yelin-Lapidot also have a corporate culture of in-house equity research and a tight focus on generating returns, while some of their counterparts focus more on marketing.

You must keep in mind, constantly, that past performance is no guarantee of the future. But the position that Analyst and Yelin-Lapidot won themselves at the top of the lists does speak for itself.