Analysis / The Gauntlet

Gady Greenstein and Yaron Chervonitz have undertaken a very difficult mission: to restore the good name of the banks' provident funds.

If anyone can do it, they can. For the last ten years they have handled investments at Bank Yahav. Under their management, the bank's wee funds became the best in Israel. They did so well that in less than ten years, Yahav's assets under management tripled to NIS 15 billion.

But Yahav is a very small bank, one that caters to government employees. It is not a real player in the battle for the public's money. Israel Discount Bank's provident fund Tamar, one of the three biggest in Israel, is a player, very much so. That's where Greenstein and Chervonitz went.

They are very confident on their ability to carry out the mission. That is why they declared, in the name of Bank Discount, that in 2005 they will be competing with the leading provident funds of the five biggest banks, by which they meant the four other big banks that are not Discount.

How confident are they? If Tamar fails to beat the four other leading provident funds, they vow, Discount will return management fees to the depositors.

That statement is not just confident, it's arrogant, and their hubris has already cost them dearly. Last week, Tamar published its returns for 2004. It had a great year, making 8.34 percent in net real terms. Not bad! Thing is, its returns beat the rival funds by more than 1 percent.

Tamar was popping corks when up popped United Mizrahi Bank fund Atid, saying it had earned 8.4 percent, beating Tamar by 0.06 percent.

Under normal circumstances, that difference would be a nonevent. But when you declare you'll beat the rest of the pack only to lose by 0.06 percent, you become a laughing stock. All Greenstein and Chervonitz need is for that to happen again this year: mortification aside, the cost to Discount would be heavy.

Once burnt? Try try again

Yet the twain are unchastened. If anything, their bombast has gone farther: They declare they'll beat the private brokers as well. That's a total declaration of war.

To beat the other banks is one thing, but to beat the superstar investment managers is a much tougher task.

The whole story beautifully emblemizes the struggle of the banks' provident funds against provident funds run by brokers that have consistently done much better.

In the meantime, the public has been learning that the private brokers have been achieving better yields. Hundreds of millions of shekels have leaked away from the banks. The banks' provident funds have been shrinking while the funds at the brokerages have been expanding at dizzying speed.

Greenstein and Chervonitz want to reverse that trend. They come armed with a record of impressive returns. In 2004, they managed to beat Analyst's Fund as well. They argue that a significant chunk of the extra returns the private brokers achieved in 2004 was based on technicalities that artificially inflated their results, not on skill. Noticing a gambit exploiting interest, the treasury plugged the loophole for 2005, Greenstein and Chervonitz said.

The two also pointed out that the private funds take greater risks. Their standard deviations can be twice as high as the banks'. That alone should send some investors scurrying back to the banks, they said.

Higher yields coupled with higher risks, which characterize most of the private funds, are not necessarily optimal for most of the people investing in provident funds, Greenstein and Chervonitz argued. Most investors prefer more security for their money.

What about the human factor? What about those superstar investment managers at the private brokerages and their stunning successes? Well, Greenstein and Chervonitz are superstars in their own right, and they are not afraid to take on anyone for the title. This is going to be interesting.