Mutual funds market on the verge of change

There will be new kinds of mutual funds, funds can be bought online, and foreign funds will be marketed in Israel.

With a series of no less than 15 legislative amendments, the Israel Securities Authority is bringing the mutual funds sector into the 21st century. We expect to see among the changes new types of mutual funds, user-friendly and clear prospectuses, and the possibility of buying mutual funds online. The Securities Authority met mutual fund managers yesterday to present the changes expected in the sector.

The main changes expected in the coming year are as follows:

1. New mutual funds. The first new type of mutual fund will be composite funds, which are comprised solely of mutual funds. A fund manager can create a composite fund from among the company’s own funds, but in this event, the composite fund may not collect a management fee, in order to prevent double billing. On the other hand, these composite funds will pay no distribution charges. Alternatively, a fund manager can create a composite from other companies’ mutual funds, including foreign funds, and charge a management fee of up to 0.5% of assets managed.

Another new kind of mutual fund are money funds, which are designed as an alternative financial instrument to bank deposits. Money funds are considered sound funds that can invest in short-term securities of up to one year and in non-marketable securities of up to one month.

Because of the lack of transparency characteristic of hedge funds, the Securities Authority will limit specialized mutual funds to investing in hedge funds that provide regular information about their composition. Sales will be published at least once a month, and money can be redeemed at least once every three months. A specialized mutual fund will be different from ordinary mutual funds, and prices will be determined by supply and demand (similarly to stocks), rather than by the value of the fund’s assets, as is the practice with the other funds.

The Securities Authority also classifies as new options mutual funds, defined as leveraged funds. The Securities Authority has expanded the leveraging options of these funds up to an overall exposure of 800% of the basic assets. It said, “This level is considered high compared with the accepted level in the mutual funds sector in the Western world.”

In addition to new kinds of mutual funds the Securities Authority is trying to revive index funds, which have gone into eclipse in favor of exchange traded funds (ETFs). The Securities Authority has decided that index funds may invest up to 20% of their assets in a single security, up from the current ceiling of 10%. This will allow index funds to accurately monitor additional indices.

An important change is that index funds will not have to pay distribution fees, which are currently 0.8% of assets managed. This will enable them to lower management fees, and compete against ETFs, which have negligible management fees. The question now is whether a bank will be motivated to market a product from which it gets no revenue.

2. Online purchase of mutual funds. Until now, it has only been possible to buy mutual funds through a bank, but this is about to change. Last year, the Securities Authority and the Mutual Funds Association launched an initiative allowing for the purchase of mutual funds online. “The goal of the initiative is to create a direct link between consumers and producers, thereby lowering costs for both parties, says Mutual Funds Association chairman Roy Vermos, who also serves as CEO of Psagot Ofek Investment House Ltd..

3. The foreigners are coming. Amendment 13 stands out among the slew of proposed amendments. This amendment includes several clauses, the most prominent of which is the clause allowing international companies to market their mutual funds in Israel. “The good of investors, requires increasing competition in the mutual funds market, which the entry of foreign mutual funds will bring about,” said Securities Authority chairman Moshe Tery.

4. New classification. Each mutual funds will have a mandated maximum exposure profile to stocks (including marketable stocks), and foreign currency, according to a scale.

5. User-friendly prospectuses. The new prospectuses will include a mutual fund’s key details, including its type, investment policy, and management fees. A prospectus will have a second section, which will give details about the fund manager and other mutual funds that he/she manages.

The Securities Authority plans to carry out a broad audit of mutual fund management companies. It will pick a particular subject and examine how each company handles it.

The Securities Authority plans to send the proposed amendments to the Knesset Finance Committee in batches, in the hope that at least some of them will be enacted and come into effect in the coming months.

Published by Globes [online], Israel business news - www.globes.co.il - on May 2, 2007

© Copyright of Globes Publisher Itonut (1983) Ltd. 2007

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