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The rising tide in capital markets in the second half of 2003 also left its mark on the mutual fund industry, as the funds raised a record NIS 31 billion during the year. This brought the total amount invested in mutual funds also to an all-time high of NIS 83.2 billion.

Despite the record numbers, it is still too early to speak of real growth or change in the sector, since most of the new money was invested in bank-operated, shekel-based funds. During 2003, these bank funds raised over NIS 22 billion, or 72 percent, of the NIS 31 billion total.

For all practical purposes, over half of the mutual fund industry is made up of bank-operated, shekel-based funds that serve as a substitute for shekel bank deposits and savings plans. Stock-based and flexible mutual funds received only 10 percent, or NIS 3.1 billion, of all the new money raised in 2003. These figures show that most of the public chose not to invest in stocks, but were interested only in changing the makeup of their shekel investments. The banks have succeeded in keeping the money freed up from deposits by funneling it into their own mutual funds. In fact, mutual funds run by the banks control 91 percent of the total assets invested in funds.

The change in the nature of the public's investments - from bank deposits to mutual funds - were due to two important developments last year. First, the tax reform that for levied taxes on bank deposits and savings plans for the first time ever. The new taxes reduced the value of depositing money in the bank, and pushed the public toward the markets.

The second reason for lower yields on bank deposits and savings plans was the Bank of Israel's reduction of interest rates.

The drop in interest rates and the lowering of Israel's risk premium led to large capital gains on shekel-based funds. These "solid" funds showed one-time gains of 20-40 percent in 2003, and attracted bank customers who could expect only miniscule interest rates on deposits.

Even in December, which was an exceptionally good month for the stock market, stock funds did not attract much interest. Of the NIS 6.5 billion raised by mutual funds in December, only NIS 415 million was invested in stock funds, while NIS 5 billion was invested in shekel-based funds. So called "flexible" funds, which invest a large proportion of their assets in stocks, raised only NIS 10 million in December, after having raised NIS 70 million the previous month. All the stock funds, both those investing in Israel and overseas, raised only NIS 570 million in December, down from NIS 1.35 billion in November.

The amount raised by stock funds in 2003 was NIS 2.1 billion, bringing the total amount invested in these funds to NIS 6.7 billion. This figure represents 8 percent of the entire mutual fund industry, up from 6 percent at the end of 2002.

Despite the impressive gains of the stock market, most of the public is still waiting to enter it, according to Michal Hen Levin, CEO of Kranot Meida Zahav, which has been following the mutual fund industry for 10 years. "An analysis of the figures shows that only the first circle of investors, those who are always in the market, benefited from the price rises," she said. "Nevertheless, the growing interest from the public in shekel funds that invest 10-20 percent of their assets in stocks may be the first sign of growing interest in the stock market."

In December, most of the funds again rushed into bank-operated funds. Only NIS 600 million of the NIS 6.5 billion went to privately-run funds, and the share belonging to private fund managers was only 9.7 percent of the total mutual fund market.

Bank Hapoalim is the largest group in the industry with a 35.8 percent market share, and Hapoalim's Lahak is the largest fund manager, controlling NIS 17 billion in fund assets. Lahak was also the biggest raiser of funds last year, adding NIS 7 billion to the fund. Of these assets, 82 percent are invested in shekel funds. The next largest fund manager is the Psagot group from Bank Leumi, with NIS 13.4 billion in assets, or 16 percent of the entire industry.

The largest private fund manager is Meitav with NIS 1.3 billion in assets managed. Meitav outperformed all other non-bank funds by raising NIS 900 million in 2003 and by growing 340 percent by the end of the year.