Taking Stock / Moshe Pulls Out of Kahal

The Tel Aviv investment community is feeling feisty.

No, it is not massive influx into share-oriented mutuals, not this time. It is not the general public urged by the banks lifting the indexes this time around.

The main force behind the Tel Aviv Stock Exchange's surge in recent weeks is foreign investors. It is not specific to Israel: stock exchanges in most emerging markets have been rising on foreign money. The TASE's 18 percent yield in dollar terms pales beside the 50 percent to 100 percent returns generated by stock exchanges in Poland, Hungary, Peru, the Czech Republic and a whole bunch of other countries, including even Egypt.

But the brokers of Tel Aviv have another reason to feel perky. That is the rise of the non-banking money managers.

For the last 10 years, Haaretz has consistently pointed out that the provident and mutual funds run by brokerages, not banks, do better. This year, the public seems to have digested that fact.

The main change is in provident and training (keren hishtalmut) funds. From the start of 2004, the non-bank funds have raised NIS 2 billion, roughly the same amount as the banks roped in.

It was exactly a year ago that we related the story of "Moshe," whose employer chose to invest money for him in the biggest training fund of all: Kahal, which belongs to banks Leumi and Discount.

Kahal's banker warns Moshe

During the seven years when Moshe couldn't be bothered to extract the money from Kahal and shift it to a brokerage, he lost accrued returns of about 50 percent. He did try to get it out, but his attempts foundered, whether because of difficulties at the employer's end or at the bank's.

The last obstacle he encountered was an emotional phone call from his banker at Kahal, who warned him of the terrible risks he faced in the unruly, high-risk world of the brokerages.

But Moshe stood firm and took out his money. And so far, he's very pleased that he did. By November 2004, Kahal, which has NIS 7 billion under management, achieved a real return of 5.2 percent, while his new training fund run by that dangerous brokerage that Kahal had warned him against, achieved 7 percent. In December, a month in which stocks rose, that gap will probable widen.

The accrual pattern at the privately-run provident and training funds is much more significant than that of the privately-run mutual funds. That is because mutuals are a volatile, liquid business. The market rises and money comes in; the market falls and money flees.

But when you start a provident fund, you're gong to be depositing for about 15 years, if not more. And depositors in training funds usually keep it up for about six years.

That explains why the profession the market is buzzing about lately isn't "analyst," but rather "sales and marketing" for provident and training funds.

Maybe fifty, maybe 100 people have become provident and training fund marketers in the last year. They are joined by hundreds of insurance agents who also pitch provident and training funds and mutuals.

Up to a year ago, the insurance agents had no real reason to push these investment vehicles; they made far more from selling management insurance. But the insurance reform slashed their fees and they have to find new sources of income.

It is hard to name one single reason that caused the public's great flight from the banks' provident and training funds. It may be the combination of the higher yields of the private funds, with the broadening public debate over the Bachar reform, added to the Israel Securities Authority investigation into possible malpractice at Bank Leumi that may have made bankers more cautious about pitching their own financial instruments.

Joseph Bachar and Ilan Cohen, the directors-general of the treasury and Prime Minister's Office respectively, are dithering about submitting the Bachar team's recommendations for reforming the banks. But meanwhile, more and more organizations and companies seem to have grasped the advantage of taking their money out of the banking system.

But make no mistake. Market forces alone can't do the work for Bachar and Cohen. The capital market will remain the banks' captive for years to come unless radical reform, of the type the Bachar team is suggesting, is carried out. The capital flight from the banks' funds just goes to show what kind of decisions people are making, when they are not held captive by the banks.