Nearly two years ago, a special committee formed by the Israel Securities Authority and headed by Prof. Yishay Yafe submitted a report according to which investments by the financial institutions failed to beat the return on the S&P 500 Index, which is made up of the 500 largest companies traded in the US.
The report brought the wrath of the financial institutions down on Prof. Yafe. They argued that the committee’s conclusions were based on mistaken comparisons. But an examination by "Globes" of returns of advanced training funds and pension funds shows that the investment tracks with exposure to the S&P 500 Index have generated much better returns in the past eighteen months than the equities tracks of the provident and pension funds.
In the year between March 2022 and February 2023, three of the five advanced training fund tracks with the best returns were those that tracked the index, the average return of the three being 5%.
The picture is similar for the pension funds. For all the institutions that offer a product tracking the S&P 500, that product gave one of the best returns, beating almost every other product.
Although the return dipped slightly in March, the average for the investment management companies offering this possibility being a negative 0.33%, the start of the year has still been very positive for products that track the S&P 500, the index having risen 7.7% in the year to date, with a 0.6% rise in April so far.
This comes at a time when the local stock indices have fallen. The Tel Aviv 35 Index is down about 4% for the year to date, and the Tel Aviv 125 Index is down by more than 5%. Any exposure to the S&P 500 at the expense of the local stock market would therefore have boosted returns.
The result is clear: between January and March, products tracking the S&P 500 yielded returns of over 7.3%, while active equities products in the advanced training funds sector posted an average return of just 1.5%, while in pension funds (the track for those aged 50 and under) the average return was 1.9%.
According to sources in the financial institutions, however, the gap in returns is not a result of poorer management, but is solely due to the weakening of the shekel against the US dollar, in which trading in the S&P 500 Index takes place. The shekel has weakened by 4% so far this year.
"In the results test, the S&P 500 track recorded a better return than the equities tracks for one reason only - it is 100% exposed to foreign currency," a senior manager in the saving industry explains.
"Were it not for that, these tracks would not have made better returns than others, because over time they have not proved themselves against regular equities tracks. The returns gap is a consequence of the currency, not the instrument.
"Other indices have made better returns since the beginning of the year. But at this point in time, this track is certainly performing better than the equities tracks, mainly because it excludes investment in shares in Israel, which have performed much worse in the past few months."
Indeed, while the S&P 500 has risen by 7.7% for the year to date, as mentioned, the Nasdaq index has shot up by almost 19%. In France, the CAC 40 is up 17% this year, and the Euronext 50 is up by more than 16%, more than double the rise in the S&P 500.
The same source says that if advanced training fund or pension fund savers had been able to invest in a product that invested in euro-denominated assets, they would have received even better returns than on the dollar-denominated S&P 500, since the euro has strengthened against both the dollar and the shekel lately. Nevertheless, the source says that in the end the S&P 500, which represents the global economy, is the right index to track.
Published by Globes, Israel business news - en.globes.co.il - on April 24, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.