Taking Stock / Best in the Market

Yes, it's time for the annual analysis of Kurtzman.

Who? To remind you, Shmuel Kurtzman, together with Yaacov Gadish, runs Shibolet, the provident fund of the religious kibbutz movement. It is the only provident fund in Israel that decided 15 years ago to eschew stocks and invest only in government bonds.

We have been tracking Shibolet's performance for years. Almost continuously over the last seven years, its yield has trounced that of rival funds, mainly ones run by the banks. Nor were the results indistinct. Shibolet generally yielded far more than the rest did, while undertaking far less risk. One had to wonder about that adage that over time, stocks yield more than bonds.

We freely admit that many of our readers, mainly those managing other people's money, do not like the annual column about Kurtzman or its conclusions. Even the Finance Ministry contacted us one year, furiously alleging that the analysis hindered their drive to reform the capital market and unleash pension fund money onto the stock market.

When the market turned bearish, the detractors claimed Kurtzman's excess yields did not reflect the true picture; just wait till the market picked up, they said. And when the market rebounded and Kurtzman's yields still beat the rest, especially over long periods of time, the argument was that the figures still did not reflect the true situation; one had to wait for the market to fully recover.

Well, that moment has clearly arrived. 2003 was the best the Tel Aviv Stock Exchange has even seen. The TA-100 index shot up 50 percent, the Tel-Tech-15 index almost doubled. It was clearly the year for aficionados of stocks, options and other risky paper.

And Kurtzman provident fund did lag behind the others. From the start of the year till October, Shibolet generated a real gain of 11 percent, while the largest five bank-run funds generated 14.5 percent. Kurtzman lost the race.

Do not gloat that his dogged methodology has failed, dear reader. Note the following fact. Shibolet may have underperformed in the bull market of 2003, but looking over a period of three, seven or ten years, it is far in the lead.

Since 1993, Shibolet has generated a real yield of 55 percent, compared with 34 percent by the five big bank funds. The best of the lot, Otzma, generated just 42 percent.

If you start the calculation seven years back, when the capital market crashed, you find that Shibolet still did best of all. And most importantly, the risks Shibolet undertook, as measured by fluctuation in its annual yields over the last decade, were 50 percent less than that of the bank-run funds.

Ergo, even if the bank funds dabbling in stocks, convertible debentures and other merchandise offered by Tel Aviv's companies manage to beat Shibolet in specific boom years, their performance almost certainly does not justify the higher risk they undertake compared with Shibolet.

And now for the conclusions

Bonds, mainly government ones, do look boring, mainly when stocks are roaring. But over time, good management of a government bond portfolio can generate very handsome yields indeed, sometimes more than the stock market can offer.

The Tel Aviv Stock Exchange has not excelled at creating real value over the last decade. Plenty of interested parties, managers, issuers, brokers and sundry traders have done well for themselves, and there are a few phenomenal corporate success stories. But your average investor has paid commissions through his nose, and received very little reward for his efforts.

The banks manage the real money on the capital market by controlling the really big provident funds, training funds and mutuals. They usually generate the least value for money. In many cases, the sheer size of the vehicle, the reward mechanisms for its management, and its short-term horizon do not encourage excellence.

Low management fees make a big difference over time. Sometimes they make all the difference. The American mutual fund Vanguard, which runs index-based funds and charges low management fees, has proven as much to tens of millions of Americans. So has Shibolet, since much of the difference in yield is due to its low management fees.

What next?

For seven years now, we have claimed time and again that Kurtzman's method works. We have to be more cautious about postulating the same during the coming decade for three reasons.

High interest rates were sky-high over the last 10 years, because of the government's irresponsible fiscal behavior coupled with the Bank of Israel's pitiless disinflationary policy. Together, their actions dictated high short- and long-term interest.

But if the Bank of Israel and Finance Ministry avoid repeating past mistakes, we should see lower levels of real interest in the decade to come. That will make it harder for bond portfolios to generate high yields.

Equating tax on gains made from local and foreign investments will gradually cause institutional money to seep out of Israel's tiny little market, looking for greener grazing fields abroad. It will ultimately reduce the fluctuation of their yields as they diversify and start using more sophisticated hedging mechanisms.

Smaller, mainly non-bank mutual funds, managed to outperform significantly the "mammoths" - Otzma, Gadish, Tamar and their (out-of) training fund brethren Kahal and Kinneret. Therefore, good, fast-thinking and mainly competitive management can generate better yields on the bond market over time.

Oh, we forgot the main point, which is that Kurtzman's success has not escaped the attention of the big boys. Two weeks ago, Migdal Insurance bought the management company running Shibolet. Now Kurtzman works for the biggest of them all, Migdal-Leumi. It will be interesting to see if the sea-change change in ownership will affect our man.