The increase in the price that the Israeli consumer has felt in his pocket in recent months, starting with loan repayments, through food products to electricity and water rates, does not miss the capital market either. At the beginning of the week, local mutual fund managers will increase the management fees they charge investors in dozens of funds, including funds that achieved a negative return, meaning that even though the clients lost money and the incomes shrank, the funds do not give up their incomes.
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These are mutual funds that belong to all types, from financial funds that have become this year’s hit and that compete with bank deposits, and have benefited from the Bank of Israel’s increase in interest rates, to active funds that invest in bonds and stocks.
In the financial funds, the management fees are the lowest, but in some of these funds, the rate of jump in the management fees is also the highest, reaching hundreds of percent. For example, in Harel they raised the management fees in the financial fund from 0.02% to 0.1%. The analyst raised the management fee from 0.03% to 0.14%. However, these are still among the lowest management fees in the industry.
On the other hand, in Mor Caspit for example, which started with relatively high management fees, the management fees increased from 0.14% to 0.19%. Even in Kesem, quite a few funds raised prices, after about a year ago they launched a marketing campaign in which they offered dozens of funds with no management fees at all.
As mentioned, this increase was also made in traditional active funds, where the upfront management fees were higher, due to the need for closer management of investments in order to achieve a higher return. Management fees in funds specializing in shares were until the last increase around 1.2% and jumped to the 1.5% area. In funds that are divided between bonds and stocks (for example 10/90 or 20/80 funds), the management fees have increased from the 0.5% area to about 0.7% and there are funds where the management fees already reach 1%.
Sources in the market estimate that following the increases in management fees, the funds’ revenues will increase by approximately NIS 100 million in the coming year. The fund managers are allowed to raise prices once a year, on January 1st, and every year they do increase in dozens of funds. The fund management company that does not traditionally do this is Altshuler Shaham, which will not increase rates this time either.
The managers claim that for a large part of the funds the management fees charged today are loss-making (sometimes due to marketing considerations of attracting investors before raising the management fees). This is at a time when, according to them, they have recently had to deal with a rate increase in their payments to third parties.
For example, the distribution fee paid to banks, which are the almost exclusive channel for end customers, is 0.1% of investments. In addition to that, an operating fee for the operating bank is 0.01%, as well as a creation fee paid to the Real Estate Authority, of 0.01% for every shekel that comes in. Thus, the funds pay about 0.12% to external parties for the management of the fund even before the prospectus fee and the fund management fee that is also paid to the Authority N.E.
Beyond that, they mention that the stock exchange recently raised rates to track its indices – an increase that is relevant to about a fifth of the funds’ assets – those that follow indices. The exchange itself claims in response that this is a minimal rate increase and in any case the fees it charges are lower than the norm in the world.
At the same time, service providers also raised prices, such as software companies or cyber protection, which are needed to operate the business and protect customers, so that in order to maintain a profit they had no choice but to raise rates.
The big problem from the customers’ point of view is that the management fees increase after the customers have already invested their money in the fund. This is in contrast, for example, to the world of provident and pension, where the management fees are protected from adverse changes for at least five years from the moment the client started depositing money.
In the case of the fund industry, bank advisors announce the increase in management fees through electronic messages or mail in an envelope, rather than a direct phone call, when most of the public prefers to ignore these mail messages.
The funds raised NIS 33.7 billion last year
Beyond the issue of management fees, there is no doubt that the past year was the year of financial funds. The increase in interest rates made this product attractive after years when these funds offered zero interest rates in line with the zero interest rates of the Bank of Israel that dominated the economy in recent years. Now, after Governor Amir Yaron raised the interest rate by 0.5% on Monday, it already stands at 3.75%.
The rise in interest rates led financial funds, which enjoy tax benefits and liquidity compared to bank deposits, but also embody a somewhat higher level of risk than those deposits, to raise an amount of NIS 33.7 billion in 2022. These fundraisings brought the proportion of assets of financial funds from about 4% at the beginning of the year to about 13.6% at the end of December.
This growth stands in stark contrast to the rest of the industry. The total assets of all the funds shrank during 2022 by about 30 billion shekels, a decrease of about 7.5% and it stands at the end of 2022 at 369 billion shekels. According to Shawn Ashkenazi, director of consultant relations at Meitav Investment House, the negative return “contributed” to a decrease in value of approximately NIS 39 billion due to the declines in the markets and against it the inflow of funds amounted to approximately NIS 9.3 billion.
The traditional active funds suffered a massive outflow of funds in the amount of approximately NIS 27.4 billion, while the passive funds actually raised an amount of approximately NIS 3.8 billion which was divided between the imitation funds with a mobilization of approximately NIS 800 million and the basket funds with a mobilization of approximately NIS 3 billion.
Analyst’s year: increased her assets by 150%
The month of December did not differ in its main trends from the last few months with an outflow of funds from the traditional active funds in the amount of approximately NIS 4 billion, an outflow in the amount of approximately NIS 1.4 billion from the passive funds and a tremendous raising in the financial funds, in the amount of approximately NIS 6.9 billion. So last month the industry raised about NIS 1.5 billion.
The person who led the fundraising in the financial funds is an analyst, who since the beginning of the year managed to raise a significant amount of more than NIS 9 billion and in December alone almost NIS 3 billion. How significant are these recruitments? Analyst began 2022 with assets of only NIS 5.4 billion, and at the end of the year it stands at NIS 13.5 billion, an increase of 150%.
“We have been working in financial funds for many years, since the beginning of this world,” says Alon Agushevitz, CEO of mutual funds at the investment house. between the different channels. Should you invest in deposits with a variable or fixed interest rate, how to adjust the investments to the expectations of an interest rate increase, you need to create good relations with the banks in order to obtain a good interest rate.”
He adds that when the banks did not pass on the interest rate increase to deposits, the investment house began to invest in MKAMs, because it was recently in support of the Bank of Israel that began issuing MKAMs, a step designed to promote the increase in interest rates on the public’s deposits.
“This investment produced excess returns on bank deposits. This is an expertise in itself just as expertise in shares is needed. Sometimes it is about small nuances but this is the meaning for the client, which will allow him to obtain an excess return.”
The small entities were able to raise in the active funds
According to him, “Everyone who compares returns sees that our funds have excess returns and we are in first place in all time periods – one, two and three years. Even when we raised management fees, they are still among the lowest in the industry, and when the return on financial funds stands at 3.4%, and will rise after the interest rate increase, perhaps also At 3.6%, management fees of 0.1%-0.2% no longer constitute a significant weight on the internal yield of these funds,” explains Agushevich.
Alongside an analyst are among the biggest recruiters the financial funds Harel (NIS 7.3 billion), Meitav (NIS 5.1 billion), Psagot (NIS 4.8) and Mor (NIS 3.6).
Excluding the fund raising, the biggest raiser is Forrest, who raised NIS 1.6 billion last year, when apart from Moore, who became a significant player at the top, there are no large entities, only Ilam, with a raise of NIS 102 million and Tamir Fishman with NIS 90 million.
The reason that the small entities were able to raise funds in the active funds is that until a few months ago the Israeli market was significantly better than the American market, and as a small entity they can manage the exposure in the local market with small investments, with each successful transaction being significant to the fund’s return.
These are investments that the big entities cannot invest in, among other things due to liquidity difficulties.
When the market as a whole achieved good returns the small stocks stood out even better, but when the market weakened this would become a disadvantage, and those investments would perform worse than the market as a whole and would be a weight for those small entities.
At the moment, the change in the trend in which the local market shows a lack of returns compared to the major markets abroad has not yet been reflected in the funds, mainly because the banks’ rating systems recommend funds not according to their composition but according to their results a year, two or three years ago.
Redemptions of about NIS 8 billion to Altshuler Shaham
And finally, the list of the largest mutual fund pods is led by Altshuler Shaham, which ended 2022 with redemptions of approximately NIS 7.65 billion, and excluding the fundraising in the financial funds, the other funds of the investment house redeemed approximately NIS 8.4 billion.
Harel and Meitav ended the past year with handsome positive fundraising of NIS 3.8 billion and NIS 2 billion, respectively, but excluding the fundraising in the financial funds, they end the year with redemptions of more than NIS 3 billion each.
The investment house Yelin Lapidot, which has no financial funds, redeemed about NIS 1.2 billion in trust funds last year.