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Menahem Zuta was upset.

It is a terrible mistake, he wailed. The herd is stampeding without grasping that it's leaving at the worst possible time. You have to tell them what "internal yields" are, and that this moment, with bonds trading at yields of more than 5 percent, is the worst possible time to withdraw money from provident funds. Over time the combination of bonds with yields like those and stock will generate the highest yields, he insisted.

The time: summer of 1995. The occasion: the start of the great provident funds crisis. Spurred by the negative real yields the funds were presenting as stocks and bonds slid for a second year, the panicky public was pulling out billions each month.

Bank managers were sweating bullets, feeling their creamiest asset slip through their fingers. After years of considering provident fund depositors a captive audience, as it were, passively generating fees of hundreds of millions of shekels that just grew and grew year in and year out - suddenly the money was escaping.

Zuta, who ran Bank Hapoalim's provident funds, like his counterparts David Yehoshua of Israel Discount Bank and Eli Avraham of Bank Leumi, were assigned to do some PR work.

Their theory was straightforward enough: The provident funds were an excellent investment that over time would generate very high yields. The public didn't get it because the funds' yields suffered from intense volatility. If bonds could only be evaluated by yield to redemption, not by the stock market price of the assets, we would be presenting stable yields and the public would stay put, they clarified.

Explanations didn't help

For all their efforts, from 1994 on, the public has been steadily withdrawing assets from the provident funds. Bank of Israel figures published this week show that from December 1994, more than NIS 40 billion net has been withdrawn.

The component of institutional savings (via various funds and insurance vehicles) in the general public's total portfolio of financial assets shrank from 52.2 percent in 1993 to 35.4 percent by April 2003. There are many causes underlying the public's flight - the wild fluctuations in yields, the high real interest rates offered by savings and deposits and, of course, the recession. People needed money.

But the main reason was simple: the public took out the money because it could. Seventy percent of the provident funds' assets are liquid, meaning, 15 years have passed from the time the fund was opened, and the money could be withdrawn, without any tax being owed.

This week, spurred by the Bank of Israel report and the eighth anniversary of the start of the great stampede, we decided to check exactly how much depositors lost by obeying their gut instead of the fund managers' advice .

So. From the end of 1995, Israel's three biggest provident funds, Otzma, Gadish and Tamar, achieved accrued real yields of 30 percent.

That includes 10-11 percent in the first half of 2003, due to the sudden spike on the bonds and stock markets. If not for that spike, their yields would be far lower, of course.

Now, where did that withdrawn money go? Some was spent, some went to short-term savings, mainly shekel deposits at the banks or to Bank of Israel certificates, which are the simplest, dullest and safest options around.

We checked how much these deposits generated for the provident fund escapees: between 55 percent to 60 percent, or, almost double the yield people remaining true to the funds received.

The herd, we learn, isn't that stupid after all.

How it is that boring old safe-as-houses short-term shekel deposits and Bank of Israel certificates generated the most yields? Double that of combo investment portfolios with stocks, bonds, long-term and short-term, real estate, and deposits?

Sweet dreams

The first explanation lies in the inherent disadvantage of the main provident funds, which is that they are lumbering mammoths, unable to maneuver in the quicksilver capital market because they comprise such a huge chunk of the capital market.

In the last decade, the provident funds did not provide a thing in exchange for the huge management fees they collect from depositors. The only service they provided was the illusion that they were safe. Yet perky little private provident funds run mainly by private brokers performed well in the last few years, generating tens of percent more returns than their hulking brethren.

The second explanation is that for 10 years, the Bank of Israel has been implementing radical disinflationary policy, resulting in extremely high short-term interest rates. Its policy enabled people with faith in the central bank to reap very high real yields on shekel deposits and central bank certificates, at almost no risk at all.

The only reason to keep money in the provident funds today is that capital gains accrued via them, up to the tax reform, is not taxable.

In the short run, the central bank's disinflationary policy is likely to keep generating high yields at near-zero risk to savers. In the longer run, the smaller provident funds, whether run by brokers or banks, are more likely to generate good yields than the three great mammoths.

We said it then and say it again today: Otzma, Tamar and Gadish, and most of the big funds, are mammoths that have become unsuited to the current environment in the capital market. They are archaic forms of investment that serve the banks, not their depositors.