Mutual Funds Enjoy Record Growth Amid Low Interest Rates

Total assets hit record $76 billion, with general bond funds the biggest beneficiaries

Ariel Schalit

Israel’s mutual fund industry is enjoying very strong growth as investors cast about for attractive returns in a low-interest rate environment, Total assets are up 73% from a year ago to a record 262 billion shekels ($76 billion) as of the end of June, according to data released this week by Meitav Dash.

In the first half of this year alone, mutual fund assets climbed 13%, said Meitav Dash, an investment house that tracks the fund industry. Even in June, when the industry on the whole turned in negative returns of 0.3%, fund managers still raised a net 3.1 billion shekels, it said.

“The move away from money market funds and bank deposits towards general bond, government bond and shares is giving the investing public significantly higher returns than the lower-risk alternatives,” explained Hagai Badash, CEO of Psagot Investment House.

Despite their negative return in June, the funds industry has had a good year, earning on average 2.43% for their holders, a rate significantly higher than investors can get from bank deposits.

General bond funds have been the biggest beneficiaries of the capital influx. Since the start of the year, they have taken in some 16.5 billion shekels, reported Meitav Dash. Close behind are government bond funds, which have enjoyed a net addition of 9.1 billion shekels. However, corporate bond funds saw net redemptions of 462 million shekels in June as prices dropped in the segment, it said.

Money market funds, which invest in short-term debt securities, have been the losers, with net redemptions this year of 3 billion shekels – 667 million shekels last month alone, said Meitav Dash

They have been the victim of investors seeking higher rates of interest at a time when the Bank of Israel’s base lending rate is just 0.75%. Low inflation has also hurt them because it makes the tax break they are entitled to on interest before inflation irrelevant.

June also saw investors begin moving into equities, mainly funds invested in stocks overseas at ratios of 10/90 or 25/75. Those funds raised a net new 303 million shekels in June, Meitav Dash said.

Foreign equity funds had average returns of 0.5% in June, bringing their average return since the start of 2014 to 4.1%. Funds invested in domestic stocks had an average negative return of 1%, but they are still ahead for the year, with a gain on average of 2.2%, Meitav Dash said.

Badash said he expected investors to begin moving more and more into stocks. “Low interest rates, the low yields on corporate bonds and the narrowing of the spread between Israeli government bonds and those aboard we believe will lead to an increased weighting of shares in investment portfolios together with more overseas bonds,” he said.

“When you look at valuations of stocks, you can see that they’re not cheap like they were two years ago, but they’re not expensive either,” Badash said. The price/earnings ratio in Israel and in the overseas markets that we invest in, like the United States, Germany and Britain, are ranging near their historic averages.”