The Bottom Line / Let's Do It Our Way

The New York State Common Retirement Fund and the pension fund for Californian public workers (CalPERS) are two of the largest funds in the United States.

The New York State Common Retirement Fund and the pension fund for Californian public workers (CalPERS) are two of the largest funds in the United States.

They manage between them some $250 billion, and bear the title of the world's two most famous institutional investors. Naturally, this pair set global standards for investment management.

These two funds chose to put more than $150 million in the Israeli investment fund, Markstone. This is indeed one up for the Israeli economy and for Markstone's managers, who succeeded in convincing these funds of the economic worth of investing in this part of the world, and under their fund's management.

Markstone presented itself as a fund managed according to the norms set in the U.S., including their charges - 2 percent annual management fees for 10-12 years, and 20 percent of the fund's profits - after 8 percent returns to the investors.

Now, if the two American giants say this is fine with them, then it's hard to disagree. On the contrary, there is every chance that their standards of management fees will transfer to Israel. The treasury's panel on the capital market that is looking into the matter of management fees paid by the institutional investor - duplication of management fees - is expected to release its recommendations soon. It is likely to swear in these norms as brought over by the U.S. funds to Israel.

Rumors have it that the panel will allow the institutionals to invest up to 10 percent of their assets in assets that charge management fees to others (double fees). The supervisor of the capital market in the treasury Eyal Ben-Chelouche responded to this, "I am not the supreme investment panel for the institutionals". If we understood correctly, then the rumors are too modest, and the treasury does not intend restricting the double management fees on institutions.

One should welcome the Israeli capital market taking up U.S. standards, but one should remember that the American grass is not always greener. In underwriting, for example, the American standards are lower than in Israel, both in terms of academic research and according to the wave of corruption cases that came to light at the end of the 1990s.

In the field of management fees too, maybe we shouldn't strive to copy the Americans. A pre-set charge of 2 percent over the next 10 years is already higher than that charged by most institutionals. If they should add on that 20 percent of profits fee too, then one reaches a scale of fees that is very difficult to justify economically. Apparently fund managers like to hedge themselves; if the investment is sound, they win on the profit angle, and if it isn't, then they have 10 years of fixed charges to fall back on. In effect, they have granted themselves call options on the profits without paying for them. Quite the opposite, someone else is paying for them. There is obviously some asymmetry going on here in the division of risk: the institutionals and investors are bearing all the risks, and the fund managers are enjoying the rewards.

American funds have done well for themselves in this respect, and good luck to them too. But why should the institutional investor in little Israel, with less experience, managing private funds and with no familiarity or contact with the big players on the market, be expected to take up those same risks?