Bottom Shekel / Ehud Shapira Plans Some Magic

The Phoenix assurance group announced this week that it no longer believes in investment management or investment managers, and will henceforth transfer all the money under its management - NIS 17 billion in profit-sharing insurance policies, pension funds, provident funds and continuing-education funds - to index-tracking instruments. In other words, Phoenix will be investing in shares and bonds based on their relative weights in the various stock indexes. In addition, Phoenix will not invest its fund members' money in illiquid assets such as hedge funds, private equity funds or venture capital funds, and will not invest directly in real estate or infrastructure projects.

The rationale behind this switch is that there is no proof that investment managers can beat market indexes over time, so there is no point in paying them management fees. After the current financial crisis, it is obvious to everyone that investment managers need their wings clipped with respect to stock picking, to reduce the harm they can cause to our pension savings. We have already witnessed all the investment stars of the bull market come crashing down to earth when the market shifted gears. Phoenix's current solution may not be the best, but it clearly should not be dismissed out of hand.

The very fact that this dramatic change has been initiated by Phoenix raises several questions. First, Phoenix is perhaps the greatest failure among all the insurance companies in the investment management arena, so this solution seems more a result of desperation than strategic planning. Second, Phoenix announced that this switch will not be accompanied by any reduction in management fees, which will henceforth be much harder to justify. After all, the great success of the exchange-traded funds compared to portfolios or managed funds is due mainly to the low management fees. Thus purchasing ETFs for pension funds without lowering management fees seems somewhat unwise.

An even weightier question, however, concerns the challenge facing Phoenix and its chairman, Ehud Shapira, in 2009: honoring the awful agreement Phoenix signed with Gil Deutsch and Roni Biram to pay them NIS 700 million for the controlling stake in Excellence Investments. Phoenix is trying (unsuccessfully) to wriggle out of that agreement, as it was made at a hefty valuation of NIS 1.6 billion - quadruple the current market value.

Excellence's KSM, the pioneer of Israeli ETFs, has the largest and most varied portfolio in the market. The funneling of a few billion shekels into the funds managed by KSM could make the upcoming expensive purchase much more palatable.