Investment managers are extroverts by nature. They brag about their achievements, boast of their own unique investment methods, and talk endlessly about their successes. Amir Eyal, founder and CEO of Herzilya-based investment house Infinity Group, is no different. The conversation with him rapidly develops into a monologue in which the word "I" crops up repeatedly, in one context or another.
But in contrast to the others, Eyal is not all talk. He also delivers results. Infinity topped the returns tables in 2007 for provident fund managers, with an average return of 13.2%, against the market average of 8.91%. But Eyal's achievement is especially noteworthy since Infinity's funds have been the leaders not just in the boom years, but in the down years as well. Since the beginning of 2008, Infinity has led the rankings with a year-to-date return of 0.84%, at a time when most provident funds have recorded negative returns, with the average negative return on the market reaching 1.45%.
"All the asset management by investment managers in Israel is one big bluff," rules Eyal. "The emphasis should be on the manager, not the investment, and the management should be tailored to the customer's needs. The method of managing all the investments in one basket is wrong. A manager should divide the customer's assets into two portions, fixed income-based and equity-based, and the equity-based portion should be hedged."
Globes: How do you work?
Eyal:"I don't pretend to be able to control returns at times of uncertainty. I am creative and I do it another way. Tell me who you are, and I'll tailor the product for you. Pension savings such as a provident fund is an investment portfolio with a tax break, and an investment portfolio is personalized by its very nature. You need to invest the customer's money according to the financial profile and investment mix that is suited to him, and not fit the customer to a general asset pool where the manager uses the same investment method for everyone. In the US, they call this an Individual Retirement Account (IRA)."
The Ministry of Finance Capital Markets Division has already given the go-ahead, and IRAs will soon be available in Israel. In the meantime, "I am already building IRAs on the basis of existing legislation," says Eyal, and he then elaborates. "I take two investment tracks; the first is entirely fixed income-based where I invest in bonds rated A and higher, and in government bonds. My goal is to obtain the maximum shekel return in real terms. In the second track, the investment consists of equities only, with the Tel Aviv 100 Index as the benchmark, which suits customers living here. I invest in this track through a provident ETF that I created myself."
What is a provident ETF?
"It is known that investment managers are unable to beat equities indices over the longer term, so I created an ETF that beats the market and creates optimization at the individual level. We have software that buys Tel Aviv 100-listed shares for the equity-based provident fund, according to their exact weighting on the Index, like an ETF does, and then changes the allocation of assets according the volatility. Why be a wise guy? I have a simple, clean way of working and I beat everyone, and with a bit of luck with investment timing, as I had last year, I can beat the index as well."
Does the method work?
"My method works. Ever since revaluations were cancelled, I've been in first place in provident fund returns. And I have remained first during both the gains of 2007 and the falls of 2008."
Still no need for intervention
Eyal points to another advantage that the method offers customers - low management fees. Since there are two types of funds, differential management fees can be charged according to the asset type, with management fees on fixed income-based funds naturally lower than those on equity-based funds.
According to data produced by Gemel Net, a platform developed by the Ministry of Finance Capital Markets Division, which conducts a monthly analysis of provident fund performance, Infinity charged, on average, a management fee of 1.46%, with 1.33-1.39% charged in fixed income funds, and 1.63-1.76% in equity funds. "With my method, the customer can both measure performance easily, and see a return that is relative to the risk," says Eyal.
At the technical level, how does the twin-track investment method work?
"The customer chooses the track he wants to invest in out of four alternatives - an equity-free track; a conservative track with an equity component of up to 20%; a classic track, which is similar to a regular provident fund - with up to 35% in equities, and an aggressive track with up to 100% equities. Each customer has two balanced funds - equity and fixed income.
"I divide customers into two categories - those who do understand, and those who don't. The informed, sophisticated customer changes the proportion between equity and fixed income in the fund as he sees fit. One form, and within two days he either increases or reduces the equity component."
Unfortunately most customers don't understand. How do they know what to do?
"I don't think you need to change the asset allocation regularly, just once every so often. We contact each customer once a year and we deal with some customers once a quarter. The agent who brought the customer contacts him, gets his feedback, and changes the track accordingly."
Supposing it was an excellent year, and the equity track recorded a handsome profit. The asset allocation will be out of kilter because the equity component has increased.
"Correct, and that's when I step in. After all, if the equity component grows, the risk is greater, and that's not what we intended. Therefore, every year, the profit from the equity portfolio is transferred to the fixed-income portfolio, under the 'dividend out' method, like the sale of an asset whose price has gone up. I notify the customer, 'we have earned such and such on equities, I am moving the profit into fixed income investments.' My gain is twofold - I have locked in the profit, and also reduced the exposure to a risky asset."
What happens when the markets are falling, as they are now?
"Nothing. We'll only act if something critical happens. If the market is falling, it doesn't necessarily mean that I have to buy or sell, and I don't have to immediately reduce the equity component. This is pension savings, and the change in asset allocation will be determined by the customer's needs. There is one fixed trend - reducing the equity risk over time. The older the customer is, the less shares he'll have. The American rule of thumb is 100 less the customer's age."
What did you do during the crisis of the last few months?
"I remained with the same proportion of equities. The situation was not cardinal enough for me to intervene in the asset allocation. We will not increase or reduce the proportion of equities according to the state of the market."
"They haven't yet discovered my philosophy"
Infinity manages NIS 3.5 billion in assets, nearly all it in managed portfolios. Its provident funds were established in 2005 and have grown slowly, and had reached NIS 58 million by the beginning of 2007, and then Eyal started growing. By the end of 2007, the assets had grown to NIS 245 million, and then by a further 51% to NIS 370 million in 2008.
You have had a handsome growth rate, but you are a provident fund manager managing a few hundred million shekels in a NIS 270 billion market.
"They haven't discovered my simple philosophy yet, and when they do, we'll be managing NIS 10 billion. I am optimistic because I have where to grow."
How are the funds marketed?
"It's no secret that the insurance agents are the ones driving the market. We began working with agents a year and a half ago, and we now work with 300 small agents. I would rather have a lot of agents each bringing something, than one large agent bringing me hundreds of millions. I pay them up to 50% of the management fee. I don't pay agents to prostitute themselves like the insurance companies do, but I see them as equal partners and give them their share."
Is the commission they get enough to sell Infinity?
"In the past, the agents raised money not according to returns or creativity, but according to whoever paid them more. But the agents of today are in a different class, and they understand finance. They no longer get caught up in honey traps or sell on behalf of anyone who will give them a trip to Japan. Their understanding has grown. It's no longer just a case of 'sign here and switch fund'."
At one time, you were negotiating with Bank Leumi on a sale of the managed portfolios.
"That's right, but I don't work there. I'm not selling and I have no reason to sell.
"In portfolio management, we work objectively and with an open architecture. I will include any product from any producer in our portfolios. We are the only entity that doesn't have mutual funds so I don't have any conflict of interests in the money I manage, since as everyone knows, the only place you'll find Chinese walls are in China."
Published by Globes [online], Israel business news - www.globes-online.com - on July 7, 2008
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