The End of the Mutuals?

Mutual fund managers sneer that Prisma is getting Lahak for free. The investment firm is paying a paltry NIS 180 million for Lahak, a Bank Hapoalim mutual funds management company.

Lahak has NIS 12 billion in assets and it is practically inconceivable for a group of mutual funds that large to change hands for so little.

But it's true: Prisma, which belongs to Markstone, is paying NIS 180 million for the company, so there must have been good reason. For instance, that Bank Hapoalim feels it owes Prisma something, after having sold it another mutual fund company, PKN (known as Pecan), only to watch the public withdraw NIS 10 billion from PKN after its sale.

From the view of mutual fund managers, Lahak is changing hands practically for free, to compensate Prisma for its massive losses on PKN. That's the usual interpretation of the events.

But there is another possible interpretation: that Lahak is being sold for what it's actually worth. Or: that the insurance companies and brokers that snapped up other mutual fund management companies from the banks massively overpaid.

Why would we suspect that maybe the mutual funds had been tremendously overvalued? Look at the withdrawals this year.

Withdrawals from mutuals this year
In millions of shekels
Flexible mutuals-94
Mutuals investing in shares-987
Mutuals investing in Israeli gov't bonds-5,906
Mutuals investing in Israeli bonds-1,997
Mutuals investing in local forex-779
Mutuals investing in foreign bonds-2,576
Mutuals investing in foreign shares-1,839
Combined mutuals-181
Mutuals investing in shekel vehicles-9,541
TOTAL: How much the mutuals have lost-20,541

From the year's start, Israel's mutual funds have lost more than NIS 20 billion in assets as the public pulled out its money.

Many of the withdrawals were triggered by events, such as rising interest rates that impaired the allure of funds targeting bonds and fixed-income shekel vehicles. Also, share prices sank and then there was that war up north, which impaired the public's appetite for investments. Nor had its hopes for foreign investments panned out, as emerging markets tumbled.

Most of these events are history, though, and some are reversing. Interest rates are about to fall again, it would seem, and the last two months were terrific ones on the capital market. But withdrawals from the mutual funds continued apace: the public withdrew NIS 2.7 billion in September, not far from the peak withdrawals in June and July this year.

Most of the mutual fund managers think they know the reason for the withdrawals: a conspiracy by the banks to move the public from mutuals to other vehicles.

Why would the banks want to do that? To show the regulators what happens when they're messed with and forced to do something they don't want to, like sell their mutual funds: with a wave of their magic abacus they'll wipe out the whole industry. So there. Or, maybe the banks just want to demonstrate their dissatisfaction with the distribution fees they're getting. Or, mainly, because the banks make more money from plugging other investment avenues, such as bank deposits or structured deposits.

To be sure, all are great reasons for the banks to exploit their utter control over the public's investment tastes to dump mutuals in favor of other instruments. Great reasons, yes.

But there are other facts that make the picture more complicated.

For instance, the fact that the Lahak mutual funds while still owned by Bank Hapoalim yet lost NIS 8 billion to withdrawals in the last 12 months. For instance, the fact that mutual funds specializing in Israeli and foreign stocks have lost NIS 3 billion to withdrawals this year, while the public invested NIS 3-5 billion (based on various estimates) on investment in exchange-traded funds.

The banks don't make much more from people buying ETF notes than they get from people buying mutual fund units, yet the banks advised people to get out of mutual funds and get into ETFs.

All of which bolsters the suspicion that there is not only a possible conspiracy by the banks: there's an underlying problem in the mutual fund industry. A problem, that renders Lahak actually worth just NIS 180 million.