Investment fund reforms come into effect July 1

Investment reform  credit: Shutterstock, Eyal Izhar  processing: Tali Bogadnovsky
Investment reform credit: Shutterstock, Eyal Izhar processing: Tali Bogadnovsky

The new rules are intended to make comparison between fund managers easier, and to limit exposure to single indices such as Nasdaq.

The big winners in long-term savings in Israel are those who channeled their money to passive funds tracking the S&P 500 and Nasdaq. The two leading US indices yielded returns of 24% and 43% respectively in 2023, and so far this year have risen by another 16% and 21%, leaving the main indices on the Tel Aviv Stock Exchange, or any other local investment instrument, a long way behind.

These are savings products that have sprung up like mushrooms after rain in the past eighteen months, exploiting the trend of Israelis sending their money abroad, which grew stronger last year as the government promoted its judicial overhaul program, and later with the outbreak of the Swords of Iron war. The phenomenon is still marginal in the long-term savings market in Israel, but it has accelerated recently because of the exciting returns on these passive instruments (the Nasdaq has shot up 15% since the beginning of May alone).

The long-term savings market in Israel (pensions, provident funds, advanced training funds, and executive insurance) manages about NIS 1.5 trillion, and the sum continues to grow by NIS 6-7 billion monthly. Most of this money is managed on general investment tracks, or age-dependent tracks.

Funds tracking the S&P 500 Index currently account for about NIS 51 billion in pension savings (versus NIS 10 billion at the beginning of 2023), and a similar amount in provident fund savings - altogether about 7% of all Israelis’ savings. At the end of April, about NIS 4 billion of pension savings were in funds tracking the Nasdaq Index, more than double the amount a year previously.

Now, however, the Capital Markets, Insurance and Savings Authority, headed by Amit Gal, is applying the brakes, through a reform that, among other things, will limit exposure to the Nasdaq index to 50% on passive investment tracks. The current limit is 90%.

On July 1 (after a delay caused by the war) the reform revealed by "Globes " a year ago will come into effect. The aim is to bring order to the area of savings by consolidating tracks and setting a uniform standard, making it easier for savers to compare the various savings tracks and the performance of the institutions managing them.

The Authority was concerned that the passive tracks were insufficiently diversified, certainly those tracking the Nasdaq, exposing savers to losses in the event of a sharp market downturn.

In recent months hundreds of thousands of savers in Israel have received letters from the pensions and provident fund companies explaining the expected change in the investment tracks. Market sources admit, however, that the public is struggling to understand the official wording of the notifications, which was dictated by the Capital Markets, Insurance and Savings Authority, and what will happen to its savings. "Globes" sets out the changes.

The reform will mainly affect those whose money is managed on "exotic" tracks, such as those that track the Nasdaq, the US technology stocks index. The main tracks - the general track, the equities track, and the S&P 500 track - will remain unchanged. "The main changes are in the new passive funds set up in the past two to three years, that track the various technology indices," says Meitav Provident Funds and Pension CEO Hagai Oren. "Although there will be no change for most of the public’s savings, this is a good opportunity to take a look and examine whether your track matches your needs and the risk you want," he adds.

Itai Yaakov, deputy CEO at Menorah Mivtachim Pensions and Provident Funds, says that the passive tracks are the fastest growing, "and whoever joins them makes an active choice," and is aware of his or her investment.

Savers whose money is invested on fixed-income tracks with up to 15% or 20% exposure to equities will also be affected. "These will be consolidated with tracks with up to 25% exposure to equities. But these tracks were never all that popular in the first place," says Meitav’s Oren. "70-80% of the money is in the general or age-dependent tracks."

From now on, the fund managers (investment houses and insurance companies) will be obliged to uniform offer savings tracks with uniform names in the following categories:

1. Actively managed tracks, similar to what exist today (general, equities, age-dependent).

2. Marketable investments only tracks (new), in which there will be no exposure to alternative investments, which should reduce "hidden" management fees which the investment houses and insurance companies currently pay to external investment managers.

3. Passive tracks, on which it will be possible to track the S&P 500 Index, or a mix of stock and bond indices.

4. Tracks compliant with religious law (Jewish halakhah, Islamic sharia) and sustainability tracks (ESG). Here too there will be no material change.

The big change in the reform is that companies will not be able to offer passive investment tracks on a single index, the sole exception being the S&P 500 Index, as mentioned. "Too much money has been invested in that track for the Authority to be able change it," says Infinity Investment Group chairperson Amir Ayal.

For the rest, the companies will be obliged to spread the money invested over at least three indices, with not more than 50% in any one index (instead of 90% today), and not more than 60% overlap between the indices. A minimum of 10% for each index will also apply, so that it will not be possible to invest in two indices and comply with the regulations with a token investment in a third.

It is not certain, however, that this aim will be achieved. Officially, the investment management companies will divert money from the Nasdaq to other indices, but a pension fund manager with whom we talked admitted that, in practice, some of the companies "will continue mainly to track the Nasdaq, they just won’t call it that." He refused to elaborate.

Yuval Beer Even, a portfolio manager at Migdal Group, says in this context: "The companies are making adjustments in accordance with the instructions in the circular on investment tracks." The change, however, will not be great, he says. "We mapped out the composition of this mix, and came to the conclusion that the ten largest stocks on the technology track are the same as on this track in its previous format." At Altshuler Shaham too, the change will not be substantial. In its case, the track is made up of Nasdaq, semiconductors, and the S&P 500. At Harel, the picture will be similar.

What choices are there for someone who want overseas exposure?

"Overseas exposure can be obtained via S&P 500 tracking funds, funds investing overseas (equities and bonds) and technology funds (equities)," says Beer Even. Menorah’s Yaakov says, "There are funds exposed entirely overseas or entirely to Israel. The new circular is only about levels of risk from the point of view of the type of asset. You could have a stock index tracking fund that is entirely exposed either to foreign indices or to Israeli ones, or a credit and bonds fund that is entirely overseas."

Does the reform make the situation simpler for the public?

"The reform won’t change very much. Comparison between returns will only be possible for the general and age-dependent funds. With the passive funds, the variances will be too great and it will not be possible to compare managers," says Oren, who believes that the reform actually complicates matters for savers.

"In any case, people mainly compare the general tracks. The vast majority of savers will remain with these tracks, and that’s fine," says Anat Knafo Tavor, CEO of Altshuler Shaham Provident Funds and Pension, adding, "Some companies have announced the opening of dozens of new tracks, but, in our view, having more tracks confuses the customers and doesn’t serve their interests."

Infinity’s Ayal thinks differently. "The reform creates clear game rules," he says. "The comparison will be between the companies’ returns on each passive track, without it mattering to the public precisely which index the investment manager chose."

Published by Globes, Israel business news - - on June 20, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Investment reform  credit: Shutterstock, Eyal Izhar  processing: Tali Bogadnovsky
Investment reform credit: Shutterstock, Eyal Izhar processing: Tali Bogadnovsky
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