Taking Stock / No Such Animal

Here is an open secret that the person managing your holdings in provident and mutual funds, or your personal portfolio, is not likely to tell you.

He has no clue how to achieve high yields in the years to come. He has no idea how to match the yields achieved in the last few years.

Investment managers shiver in mortification when a new client ambles into the office, armed with a few hundred thousand shekels and one modest request: "I want a conservative portfolio," the client explains. "I don't want to take big risks, I'll settle for say, oh, 10 percent returns a year."

If you say that to your investment manager and he sits there dumbly, that's because he has good reason. And if he allows you to leave feeling that your request was a reasonable one, then at best he's stupid, at worst he's a crook.

Figures from the mutual fund industry show that this year, the public routed almost all its investments in the sector to "solid" funds investing in bonds.

Bigfoot and your portfolio

Incredibly, mutual funds investing in bonds achieved extraordinary returns in recent years, and in this one too, gains that wouldn't have shamed a mutual investing in higher-risk stocks. That explains why people feel there must be an animal with low risk and high returns.

But there isn't. They are wrong. The high returns the bond funds achieved were the result of a dramatic turn of events, one unprecedented in speed and scope: the decline in interest rates. When interest drops, bond prices climb.

What the people don't understand, and sometimes neither do the people managing their money, is this: It's over. The process is over. In stocks, theoretically at least, the sky is the limit but that is not true of bonds. At the end of the day they pay the principal and interest, no more.

For bonds to rise more, interest rates have to drop from 3 percent at present to 2 percent or even 1 percent. Is that possible? Yes. Is it likely? No.

Ergo, at the prevailing low rate of interest, it will be very very hard for the managers of provident and mutual funds and portfolios to achieve high returns.

That is why we have been seeing investment managers haring for the most esoteric offerings of corporate bonds. Their hunger for returns is howling and they're willing to take ever-growing risks in order to appease it.

But that won't solve their whole problem. It does increase their potential reward, but it also increases the risk of the portfolio.

It is time for you to have a frank conversation with the person managing your investments. If he confidently prates of double-digit returns in the years to come, we suggest you find somebody else.

Or you could send him to us, to explain how he means to do it, so we can publish his marvelous strategy of how to achieve high return with bottom-crawling interest rates and share prices in the stratosphere.

Kelner, ethics champion

Avigdor Kelner, the chairman of Channel 2 franchisee Reshet, launched a frontal attack on defiant director Mody Friedman, who decided to jump ship and take the top job at Channel 10, where in fact he'd worked before joining Reshet.

Kelner, who is also the chief executive at Polar Investments, delivered a lesson in ethics to Friedman, saying that what he was doing is wrong.

It is lucky for Kelner that television people don't hang out with capital market people. If anybody on the stock market had heard Kelner preaching about ethics, he'd be rolling on the floor with laughter.

Kelner would do well to place a chart of Polar stock performance over the last decade, coupled with a table of his salary over the years, and a list of the related party transactions he's carried out. Then he'd be spared embarrassing headlines, and lessons in business ethics.