Fund Yields Boosted by Interest Rate Cut

The provident funds may have seen their entire year's performance saved by the recent action by Bank of Israel Governor David Klein. The decision by Klein to slash the interest rate by 2 percent last week helped save the provident funds from an arid year of low yields, and has let them present rates of return of 4-5 percent for the year.

During the first 11 months of 2001, the provident funds were showing real returns of only 0-2 percent following the overriding weakness of the capital markets, but as the year drew to a close, the central bank cut the interest rate from 5.8 percent to 3.8 percent, which gave a welcome boost to the local exchange, and the dollar rate, significantly boosting the funds' performance for the year.

Many funds have registered real yields of 4 percent or more, and most of this was attributable after the interest rate cut. The banks will report on the year's performance of the funds only in the coming days, but the effects can already be seen.

First International Bank of Israel, for example, has seen a dramatic turnaround, moving from a negative yield to positive. The bank's Shefa Fund showed a rate of return of minus 1.4 percent for the first 11 months of 2001, but as the share prices leaped on end-of-year trading in Tel Aviv, the fund will now report a positive yield for 2001.

December usually sees a positive net deposit in the provident funds as the banks push their marketing efforts to persuade the public to benefit from end-of-year tax benefits. Nevertheless, and despite the higher yields in the past two weeks, there was a net withdrawal from these funds in 2001.

The banks are also reporting public preference for special-designated funds. The Eshkolot Fund, for example, a fund managed by Israel Discount Bank, with five specified investment channels, saw its total of managed funds leap from NIS 250 million at the beginning of the year to over NIS 1 billion at the end of December, while Discount has not recorded a significant change in the total funds under its management.