After a dream year, the mutual fund industry is approaching NIS 400 billion, an increase of more than 50% from its low point, at the end of March 2020, when it stood at about NIS 255 billion. In 2021, the industry grew by almost NIS 70 billion, originating from new fundraising of NIS 28 billion and a growth of NIS 40 billion in the value of assets.
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Despite the surge in assets, which naturally increases the income of fund managers from management fees, some still chose to raise management fees at the end of 2021, in order to take advantage of the euphoria that has dominated the markets for the past year and a half. According to a Calcalist survey of 112 funds, there was an increase in management fees, out of 2,223 mutual funds (which include managed funds, successor funds and mutual funds). In other words, a rate of 5% of the funds raised the management fee for the new year, with an increase that will add NIS 38 million to the managers. For comparison, in 2020 150 funds (about 8% of the funds) raised the management fee towards 2021 and in 2019 164 funds (also about 8%) raised the management fee towards 2020.
Among the large entities, the leader is Harel Mutual Funds, with management fees being raised in 18 different funds. It is followed by IBI, which raises management fees in 17 different funds. In third place is Psagot, which has chosen to raise management fees in 16 different funds. Migdal Capital Markets has raised management fees in 14 mutual funds. Migdal’s fund company, which raised more than NIS 9 billion in 2021, enjoyed the highest fundraising this year.
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Right: Rani Zim, the controlling shareholder in Psagot Mutual Funds, and Ilan Raviv, CEO of Meitav Dash
(Meir Edri Amit Shaal)
Raising such management fees increases the income of the fund manager. Raising management fees in large funds, which raised a lot of capital when they were cheap, pays off especially for a manager. For example, the purpose of an investment house raises management fees in only 9 funds. Although due to the increase in management fees, the company will cut the largest coupon in 2022, amounting to NIS 9.2 million. The increase in management fees is done when in the background the investment house that controls the company, Meitav Dash, is in a legal entanglement. Last August, Tel Aviv District Court Judge Michal Agmon-Gonen ruled that Meitav Dash’s provident fund should return more than NIS 400 million to members. The ruling was made as part of a class action lawsuit filed against the investment house in 2015, claiming that Meitav Dash charged management fees in provident funds, in violation of the historic agreement between the provident fund manager and savers.
Alongside Purpose, another fund company that should benefit from the quantitative increase in management fees is Psagot Mutual Funds. Psagot, as mentioned, has raised management fees in 16 different funds and the company will cut additional income of NIS 5.5 million. The increase in management fees is made four months after the completion of the acquisition of Psagot Funding Company by Rani Zim and the Valio Capital One company he heads. Zim acquired the funds and portfolio management company of Psagot from the Altshuler Shaham investment house for NIS 405 million.
The industry attributes the decline in the number of funds raising management fees in the reform to reducing the number of funds introduced in 2021 by the Securities Authority, which led to the termination of the “successful method”
In Harel, too, led by Uri Shor, they did not hesitate to raise management fees in the large funds, with the largest fund in which management fees are raised managing NIS 1.4 billion (Harel 20/80). Therefore, the company will cut revenues by NIS 5.4 million more in 2022. The increase in management fees at Migdal Capital Markets will translate into revenues of NIS 2.7 million and IBI into revenues of NIS 1.65 million.
The well-known statement in the business world that when “it rains it rains on everyone” is also true of the world of mutual funds. Therefore, even the smaller entities in the industry want to take advantage of the fitness hour and raise the management fee in the few funds they manage.
For example, the Chopin Investment House raised management fees in the two funds it manages, Gavish and Alpha Tech raised management fees in two of the four funds they manage each. The management fee will total revenues of NIS 1.6 million in 2022. The increase in the management fee in Eilim, led by Amir Eyal, is taking place against the background of the launch of the company’s pension fund, which is scheduled to be established by April.
Along with raising management fees, some fund companies have also chosen to lower management fees, although their number is significantly lower than the number of funds that have raised management fees. In total, management fees were reduced in 35 different funds, which is reflected in savings of less than NIS 5 million for savers.
The reduction in management fees was done in funds with a relatively low volume of assets, apparently, in order to increase their attractiveness compared to competitors and support the flow of investors to the fund. Harel is also leading the way in reducing management fees, with a reduction in management fees by 15 funds and a potential waiver of income of NIS 670,000. Tachlit reduces management fees by 7 funds and waives revenue potential of NIS 2.4 million. Psagot also reduced management fees in nine of the funds under its management, giving up a potential income of a little over NIS 1 million.
The issue of management fees is the “soft underbelly” of the mutual fund industry. Over the years, executives who have shown excess returns to competitors have enjoyed high fundraising for the funds they manage and have taken advantage of this in order to raise management fees and increase their income. Managers argued in their defense that this was a simple case of supply and demand. That is, since they have shown an excess return compared to other competitors, they are supposed to earn higher fund managers’ salaries.
As stated, this year the rate of funds in which the management fee was raised is significantly lower than that which has characterized the fund market in recent years. In 2020 and 2019, the rate of funds that raised management fees amounted to 8% each year. The industry attributes the decline in the number of funds raising management fees in the reform to reducing the number of funds introduced in 2021 by the Securities Authority.
The reform, which stipulated that in each investment category, a fund manager would be allowed to launch only two funds, led to a reduction of about 100 funds. More importantly, this brings to an end the “successful method”, in which each fund manager would launch a number of funds in each category and in the successful category in terms of return, he would soon choose to raise management fees. Successful termination of the method has also apparently led to a reduction in the phenomenon of raising major management fees at the end of each year.
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