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Investment fund reforms come into effect July 1

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The big winners in long-term savings in Israel are those who directed their money into passive funds that track the S&P 500 and Nasdaq. The two leading US indexes returned 24% and 43% respectively in 2023, and so far this year they are up another 16% and 21%, leaving the main indexes on the Tel Aviv Stock Exchange, or any other domestic investment vehicle, a long way behind.

These are the savings products that have sprung up like mushrooms after the rains in the past 18 months, tapping into the trend of Israelis sending their money abroad, which became stronger last year as the government ramped up its judicial reform program, and later as the sabers raged. Of iron war. This phenomenon is still marginal in the long-term savings market in Israel, but has accelerated recently due to the exciting returns on these passive instruments (the Nasdaq is up 15% since the beginning of May alone).

The long-term savings market in Israel (pensions, savings funds, advanced training funds, executive insurance) manages about NIS 1.5 trillion, and the amount continues to grow by NIS 6-7 billion per month. Most of this money is managed through general investment paths, or age-based paths.

Funds tracking the S&P 500 currently account for about NIS 51 billion in retirement savings (versus NIS 10 billion at the beginning of 2023), and a similar amount of savings fund savings — about 7% of all Israelis' savings. At the end of April, there was about NIS 4 billion of retirement savings in Nasdaq-tracking funds, more than double the amount the previous year.

But now the Capital Markets, Insurance and Savings Authority, headed by Amit Jal, is reining in the risks, with a reform that would, among other things, limit exposure to the Nasdaq by 50% on passive investment paths. The current limit is 90%.

On July 1 (after a delay due to the war) the reform unveiled by the Globes a year ago will take effect. The aim is to bring order to the field of saving by standardizing paths and establishing a unified standard, making it easier for savers to compare different savings paths and the performance of the institutions that manage them.

The authority was concerned that negative paths were not sufficiently 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 pension companies and savings funds explaining the expected change in investment paths. But market sources admit that the public finds it difficult to understand the official wording of the notices dictated by the Capital Markets, Insurance and Savings Authority, and what will happen to their savings. The “globes” mark the changes.

The reform will mainly affect those whose money is managed on “exotic” paths, such as those tracking the Nasdaq, an index of US technology stocks. The main paths – the general path, the equity path, and the S&P 500 path – will remain unchanged. “The main changes lie in the new passive funds created in the last two or three years, which track various technology indices,” says Savings and Pension Funds CEO Mitav 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 path matches your needs and the risk you want,” he adds.

Itay Yaakov, executive vice president at Menorah Mivtashem for pensions and savings funds, says that passive paths are the fastest growing, and “whoever joins them makes an active choice” and realizes his investment.

Savers who invest their money in fixed income streams with exposure to equities of up to 15% or 20% will also be affected. “These paths will be combined with up to 25% equity exposure,” says Metaf's Oren. “But these paths were not that popular in the first place.” “70-80% of the money is in general or age-based streams.”

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

1. Actively managed paths, similar to what exists today (general, stock, by age).

2. Marketable investments are only (new) routes, in which there will be no exposure to alternative investments, which would reduce the “hidden” management fees that investment houses and insurance companies currently pay to external investment managers.

3. Passive paths, where it will be possible to track the S&P 500 index, or a combination of stock and bond indices.

4. Pathways compatible with religious law (Jewish halakhah, Islamic law) and sustainability (ESG) pathways. Here also there will be no material change.

The big change in the reform is that companies will no longer be able to offer passive investment paths on a single index, the only exception being the S&P 500, as we mentioned. “A lot of money has been invested in this path so that the authority can change it,” says Amir Ayal, head of the Infiniti Investment Group.

As for the rest, companies will be obligated to distribute invested funds across at least three indices, with no more than 50% in any one index (instead of 90% today), and no more than 60% overlap between indices. A minimum of 10% will also apply to each index, so it will not be possible to invest in two indices and comply with the regulations with a nominal investment in a third index.

But it is not certain that this goal will be achieved. Officially, investment management firms will shift money from the Nasdaq to other indices, but a pension fund manager we spoke to admitted that some companies, in practice, “will essentially continue to track the Nasdaq, but they won't call it.” “That.” He declined to go into details.

Yuval Ber-Even, portfolio manager at Migdal Group, says in this context: “Companies are making adjustments in accordance with the instructions contained in the circular on investment paths.” But he says the change will not be significant. “We determined the composition of this mix, and came to the conclusion that the top 10 stocks on the technology track are the same as those on this track in its previous form.” In Altshuler Shaham too, the change will not be fundamental. In his case, the path consists of the Nasdaq, Semiconductors, and the S&P 500. At Harrell, the picture will be similar.

What options are available to someone who wants exposure abroad?

“External exposure can be obtained through S&P 500-tracking funds, funds that invest abroad (stocks and bonds) and technology funds (stocks),” Per Even says. “There are funds that are completely exposed abroad or entirely to Israel,” says Yaakov of Minorah. “The new circular is only about risk levels from an asset type point of view. You can have a fund that tracks stock indices that is fully exposed to either foreign indices or Israeli indices, or a credit and bond fund.” located entirely abroad.

Does the reform make the situation easier for the public?

“The reform will not change much,” Oren says. “Comparing returns will only be possible for general funds and age-based funds. With passive funds, the differences will be very large and it will not be possible to compare managers.” , who believes that the reform actually complicates matters for savers.

“In any case, people mainly compare generic paths,” says Anat Knavo-Tavor, CEO of Altshuler Shaham Savings and Pension Funds. “The vast majority of savers will stay with these paths, and that is good.” Dozens of new routes have been opened, but in our view, increasing routes confuses customers and does not serve their interests.”

Ayal from Infiniti thinks differently. “Reform creates clear rules of the game,” he says. “The comparison between companies' returns on each path will be negative, without the public specifically caring which index the investment manager chose.”

Published by Globes, Israel Business News – en.globes.co.il – on June 20, 2024.

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


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