A Provident Mixture of Conservatism and Daring

They decide where to invest billions of shekels, but work behind the scenes such that successes and failures do not affect them; they set the policy that ultimately determines capital and money market trends, but their names are seldom mentioned in this regard; most of their names are known, but not necessarily due to their positions.

They are the members of the investment committees of the large provident funds and life insurance companies - the people who manage the pension savings of most of the Israeli public, and who are supposed to serve as a protective wall between the interests of the banks and insurance companies and those of the saving public.

The sum managed by the provident funds and profit-sharing life insurance companies amounts to some NIS 242 billion. Most of this sum is in provident funds, severance pay funds and continuing education funds - NIS 189 billion, with the remaining NIS 53 billion in profit-sharing life insurance policies.

Setting policy

Every insurance company or provident fund management company has executives and investment staff who make decisions regarding securities or other specific investment instruments. Investment policy, portfolio composition and the time frame for each investment, however, are determined by investment committees.

These committees are composed of key figures in the economy, academics and former top executives from the banking system, insurance companies, the Finance Ministry and the Bank of Israel. Under the regulations, the investment committees of the provident funds and the profit-sharing insurance policies must have a majority of representatives from the public who are not employees of the banks or insurance companies. This majority is designed to prevent the structural conflict of interests in the work of the banks and insurance companies, which, on the one hand, manage the public's money, and, on the other, are also managing their companies' money.

The investment managers, for their part, decide to purchase specific securities and the quantity to be purchased, and thus implement the policy set by the committee. These investors usually keep close tabs on the market, know the companies traded on the bourse and their managers, their analysts' reports, the various series of bonds issued by the state and what is happening on the foreign currency market. The perspective of the investment committee members, on the other hand, includes the public vision and years of experience.

There are also age differences: The investors are usually younger and less experienced than the committee members, and tend to take greater risks. The committee members, on the other hand, are mature individuals who have already experienced countless successes and failures, so their approach is more conservative.

In a certain sense, the committee members are like responsible adults whose job is to restrain the galloping horses that actually manage the investments.

Who has more influence?

Who, then, has a greater influence on the market? The investment managers who decide exactly which security to purchase, or the members of the investment committees who determine the composition of the portfolio?

A senior banking official feels that the committees have tremendous influence.

"The committee members have quite a dramatic affect on the market," she says, "because they decide what is going to be done. There is a combined influence by both the investors and the committee members, but what primarily determines the yield rate is whether you have caught the market trends, not whether you bought a specific share - and that is the job of the investment committee."

An investment committee member at one of the insurance companies relates that for the past year, the investment managers have been recommending a substantial increase in the portfolio's share component, but the investment committee usually cools their fervor.

"There can be a situation in which the investment managers will say that it is worth increasing the share component from, let's say, 18 percent to 24 percent," he says. "Our reaction will be that it is better to increase it to 19 percent first. Why 19 percent? Because that is a gradual increase."

This relative conservatism is apparently a prominent characteristic among investment committee members in most of the big companies. After all, these are people who are waiving the opportunity to invest in the capital market themselves.

Yehuda Drori, who chairs the investment committee for Bank Leumi's provident funds, served as the Finance Ministry's supervisor of the capital market during the 1980s. He agrees that he is a conservative.

"One could say that the committee members are more conservative than the investment managers due to their age and accumulated life experience, including from the crises of the past, which the younger managers have not yet experienced," Drori says. "Even so, it is possible that in certain matters, the committee members will go in a riskier direction than that recommended by the investment managers. There can be instances in which the investment committee's opinion differs from that of the investment managers, but the committee's opinion decides, and sometimes there are differing opinions within the committee."

Shmuel Zlotnik, manager of Leumi's provident fund management company, rejects the notion that the committee members are more conservative. "Investment managers are restricted to the areas determined by the committee," he says, "but the committee members are far from being doting grandmothers. They are businessmen with vast experience."

Uri Mor manages the investment department for the First International Bank of Israel's provident funds. He concurs that the committee members have a conservative approach compared to the investment managers. "The investment committee is not a group of responsible people, while we are teenagers," Mor says. "True, they are a bit more conservative, but they know that it takes daring to achieve yields. The investment team tends to take higher risks and the investment committee restrains it. Our goal is to achieve the best yield in a given month. We never recommend overly extreme steps and the committee usually supports our recommendations.

"Although they are not traders who will tell us when it is time to get into or out of a certain investment, they set the direction in keeping with our recommendations, and we handle the details of timing and the average duration of an investment."

Misjudged opportunities

The investment managers at the provident funds and insurance companies have great respect for the investment committees, but the differences in age and professional experience also create differences in the concepts of both groups. Every investment manager remembers at least one instance in which the committee rejected one of his investment proposals, particularly when it turned out that in retrospect that the investment would have done well. The investment managers also find it difficult to convince the committee members to invest in new investment instruments or avenues.

"To this day I remember a deal I wanted to do in 2001 and the committee did not approve." says an investment manager at one of the insurance companies. "As a result, we missed out on big profits. Occasionally, I remind them of that loss; but by the same token, they could remind me of mistakes I have made."

The manager notes that as representatives of the public, the committee members tend to be a bit conservative, but notes that he generally agrees with their decisions.