Institutions Boost Overseas Investing to 22% of All Assets

Exchange-traded notes were a favorite vehicle, but there was 'investment in everything in sight.'

Israel’s institutional investors have sharply increased their holdings in overseas markets, which now represent 22% of assets under management at the end of last year, up from just 15% three years ago, according to a study by the economic research firm Praedicta and provided to TheMarker.

In shekel terms, the bigger exposure translated into an increase in foreign holdings of 67 billion shekels ($19.1 million), or 84%, from 80 billion shekels at the end of the third quarter of 2010 to 147 billion shekels. The rise was led by provident funds, pension funds and managers’ insurance policies.

Israel’s institutional investors have shown a particular preference for exchange-traded notes and mutual funds traded abroad rather than investing directly in foreign stocks or bonds. As of the end of the third quarter of 2013, Israeli institutional investors had about 84 billion shekels held in the two categories, equal to about 60% of their entire foreign-asset portfolio. Nevertheless, Amos Peri, Praedicta’s co-CEO, said he was impressed by the diversity of their holdings.

“The exposure of the institutions to funds and ETNs abroad is being done in a very diversified manner, and that’s one of the interesting findings of the study,” he said. “Institutional investors invested in everything in sight from pharma funds to consumer funds. Their interests were also very diverse on the levels of what global markets they invested in and the level of professionalism.”

Praedicta found that exchange-traded notes that track the U.S. Standard & Poor’s 500 index were the preferred investment vehicle for Israeli instititutions followed by ETNs tracking the MSCI World stock index. Among other foreign investments favored by Israeli institutionals were ETNs tracking European stocks and shares in emerging markets. According to the study, 78% of their investments tracked share indexes while only 17% were linked to bond prices. Another 2% tracked commodity prices.

Unlike the fees charged to individuals with money invested in Israeli securities, Israeli clients with foreign assets in their portfolios are charged commissions directly in addition to the fund’s regular management fee. Recently, the Finance Ministry said it was considering capping those additional commissions.

“Finance Ministry officials know the numbers and they have understood that something is happening here that they can’t ignore,” Peri said. “Limiting outside management fees would presumably encourage Israeli financial institutions to develop a greater expertise in overseas investment and in the process supplant mutual funds and exchange traded notes managed by foreign financial firms,” Peri suggested.

The findings also indicated a broad distribution of geographic markets, Praedicta noted. About 35% of the investments were in funds and ETNs with exposure to the U.S. economy while 24% related to European investments and another 10% to East Asia.

shekels
Reuters