Our 'Mutual' Friend: 2013 Mutual Funds Break All Records in Israel

NIS 25.8b raised in first five months of year, already exceeding total for 2012, figures from Meitav show. Bank reforms from 2005 credited for stunning success.

Israel's mutual fund industry is enjoying a banner year, with the funds raising a net NIS 25.8 billion in the first five months of 2013, some NIS 6 billion more than in all of 2012, according to figures just released by Meitav Investment House.

In the month of May alone, the company took in NIS 4.4 billion and they now have a combined NIS 199.8 billion under management. Indeed, the industry has already shattered its 2009 record, when it took in some NIS 21 billion.

"What we're now seeing is the biggest achievement of them all by the Bachar Committee: He who shows the biggest return can raise the most money. Average management fees have fallen from a level of 1.13% in 2010 to 0.8% in 2012, and that's also contributed to the industry's development," says Shmuel Frankel, one of the principals at Epsilon Investment House.

The 2005 Bachar reforms overhauled Israel's financial market by forcing the banks to sell off their institutional investment arms – the units that managed mutual and provident funds – thereby introducing more competition into the sector. Banks can market mutual funds to their client as an investment option, but they cannot manage them.

Most of this year's inflow of new capital has gone into general and corporate bond funds, which in May accounted for NIS 3.25 billion of the total.

The month also saw a new round of reforms going into effect regarding the distribution fees banks charge for mutual fund investments, under which all fund managers have undertaken to cut fees by up to a 0.45 percentage point and are committed to holding the new discounted charges for at least six months.

The average mutual fund management fee fell 0.06, to 0.72% last month. That is down from an average 0.8% at the start of the year and 0.9% at the start of 2012.
Meitav said it was the equities funds that benefited the most from the new, lower fees. They raised some NIS 400 million - a fraction of what the bond funds took in, but the biggest monthly total since May 2009. The equity funds were also helped by the fact that they had the strongest returns for the year to date.

Equity funds invested overseas returned 4.8% in May – not surprising as U.S. and European markets reached record highs last month -- bringing their year-to-date return to 7.4% on average; those invested in Israel had an average return of 3.3%, lifting their return so far this year to 9.2%. By comparison, the Tel Aviv Stock Exchange's TA-100 index showed a gain of just 5.6%. General bond funds earned just 1% in May, about in line with the mutual fund industry average.

Money funds raised about NIS 1.1 billion in May, which brought their total fund-raising for the year so far to NIS 18.6 billion. But the trend changed for the worse for them, with fund-raising for the month down 60% from April.

"Investment advisers are continuing to increase exposure to assets carrying high levels of risk, such as general bond funds, mainly 90/10 funds and corporation bonds funds," says Yaron Dayagi, the CEO of Psagot Mutual Funds.

"The biggest competition these days for the mutual funds are extra-traded notes, which are debt securities linked to the performance of a market benchmark, which has forced the mutual fund industry to come up with similar products, says Idan Azoulay of Epsilon.

Bloomberg