The writer is one of the owners of Meitav Investment House. The article should not be considered a recommendation or a substitute for the reader’s independent judgment, or an invitation to make a purchase or investments and/or any actions or transactions. The information may contain errors and market changes may apply
The mutual fund industry for its size, and for the trends in the entry and exit of funds in it, is to a large extent a reflection of the inclination of the public’s heart. This phenomenon refers mainly to the active mutual funds, those that are managed, and only to some of the passive mutual funds – the mimicking funds, since the basket funds, which are also passive, reflect more institutional activity.
As a general rule, the public puts money into the active funds during a period of positive stock market, whether in stocks or bonds, and withdraws money from them in a period of declines, and certainly of a crisis, thereby fueling existing trends, for better or for worse.
2021 was a year of massive money inflow, NIS 25 billion, into the traditional active funds, while in 2022, the past year, NIS 27.4 billion went out of this part of the industry.
But these are general trends that hide interesting developments that have occurred in different, more internal parts of the mutual fund industry.
The financial funds
In 2021, NIS 6 billion left the financial funds, while in 2022 NIS 33 billion entered them. In this case the explanation is clear.
The zero interest rate in Israel caused money to be transferred to other funds, which specialized in channels that were perceived as more attractive, and when the interest rate began to rise along with inflation, the public turned to the financial funds, which began to provide a reasonable return with tax advantages and liquidity compared to bank deposits.
Within the category of monetary funds, the shekel monetary funds received the most funds, but the dollar monetary funds also benefited from the trend, due to the sharp increase recorded in short-term interest rates in the USA.
The total market share of all financial funds jumped within a year from 4.7% to 15.2% today, and if only the active industry is considered, it already constitutes 26%.
Shares in Israel and abroad
The trend in the stock markets in Israel and abroad in 2022 was negative. In Israel – a moderate trend until the last quarter of the year, and abroad, and especially in the USA, a sharp negative trend. From the funds that specialize in stocks abroad, NIS 1.4 billion went out in the past year. This certainly corresponds to the negative trend in the world, and especially in the US, in whose stock markets most of the assets of these funds are invested.
What is more interesting is that the funds investing in shares in Israel recorded a long period of inflow of funds despite the (moderate) negative trend. The public “grew up”, and assumed that in view of the accumulated experience, it is better to act here contrary to the trend, because of the relative attractiveness of the Israeli stock market.
But this trend broke in November, a break that continued both in December 2022 and January 2023, and these days as well. In the said period of time, the public withdrew from these funds an amount of more than a billion shekels.
It is difficult not to attribute this change to the event that took place in early November – the elections and their results – which created concerns among investors due to the composition of the government and its trends, concerns that greatly worsened with the presentation of the legal plan by Justice Minister Yariv Levin, and the permeation of the understanding that it would have negative economic consequences.
Currency: dollar-shekel
In 2022, a sharp devaluation of the shekel against the dollar was recorded, at a rate of about 13%. The devaluation resulted from the weakening of high-tech in Israel (for example, fewer exits), from the strengthening of the dollar in the world – against all currencies and not only against the shekel, and in particular, the devaluation was a result of the steep declines in the Nasdaq index, of about 30%.
This is because any change in the NASDAQ index by 1% up or down is expected to have a 0.4% effect on the shekel-dollar relationship, up in the direction of strengthening, appreciation, and down in the direction of devaluation. This is mainly due to policy constraints of the institutional bodies.
Although there were sharp increases in the NASDAQ in January, this connection was severed, and the public poured 600 million shekels into the dollar financial funds, which was added to the 700 million shekels poured in in December.
State bonds against companies
A phenomenon that is more difficult to explain is the gap that has opened between state bond funds and corporate bond funds in Israel.
For many years, the scope of assets of state bond funds was greater than that of funds specializing in corporate bonds. In the last two years there has been a change. The public withdrew funds from both types of funds, but much more (approximately NIS 3 billion more) from the funds that specialize in government bonds, and thus we reached a situation where as of the end of January 2023, the public is invested in corporate bond funds in the amount of NIS 24.5 billion, compared to NIS 20.5 billion Only NIS in state bond funds.
In this way, the public expresses a desire to receive a higher return on their money in corporate bonds, despite the greater risk.
General bond funds
The funds that specialize in bonds in Israel make up the lion’s share of the traditional active fund industry (ie, non-financial). They make up about 51.5% of the total assets of this part of the industry: NIS 83.3 billion out of NIS 162.9 billion (as of the end of January).
It is also the most diversified group in the industry in terms of its investment policy and options for investors. It has funds whose main assets are actually invested in government bonds. It has funds, and they are the majority, whose main assets are actually invested in corporate bonds. It has funds that have no shares at all and it has funds with an equity component ranging from 5% to 50%.
Therefore, every investor can find what they want, and since most investors allocate part of their money to stocks and part of their money to bonds, these funds provide a solution similar to managing an investment portfolio in an investment house, in a policy format of, for example, 75% bonds and 25% stocks, or any other distribution , up to a limit of 50% shares. In any case, only a small part of the public chooses to invest more than 50% of their money in stocks.
In this category there are also passive funds, but the amounts invested in them are tiny, which indicates that when it comes to managing two channels in one fund, the public clearly prefers a dynamic active fund over a mimicking fund, which is rigid in allocating its assets between stocks and bonds. This explains the The popularity of this category, which is what brought it to its size and weight in the fund industry.