How exposed is the long-term savings portfolio of the Israeli public, which reached NIS 2.2 trillion last July, to a systemic shock that could lead to a significant damage to yields? A joint study by the Bank of Israel and the Securities Authority, published this week, highlighted the very high degree of similarity (about 60%) in the asset portfolios in Israel of the institutional bodies, the managers of the public’s pension funds. The same is true for their investments abroad, although less so.
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The high degree of similarity in the local portfolio, as the study states, “is due, among other things, to the paucity of potential assets for investment, but apparently also to herd behavior in the investments of the institutions.” The findings revealed, among other things, that the majority of the tradable portfolio in the pension savings in Israel was invested, as of the end of 2020, in 240 out of 1,000 possible securities in Israel. The portfolio of provident assets managed by the institutional managers was invested in 400 out of 1,200 possible securities. This is a continuation of the climbing trend in the similarity indices of the pension and provident investment portfolios.
The fact that the financial assets in Israel held by the institutions are quite similar exposes the industry and savers, the study claims, to the danger that damage to the values of specific assets could turn into a system-wide shock, that is, the fear is that in the event of financial instability, entities with similar holdings will act in a similar manner, Which could deepen a potential crisis.
The Capital Market Authority is not moved by the similarity in the cases: “limited supply of solid companies”
The concern expressed by the Bank of Israel and the Israel Securities Authority over the similarity between the investment portfolios of the institutional entities in Israel, to the point of 60% identity and more in the structure of the portfolio, was ignored by senior officials of the Capital Market Authority, the regulator responsible for long-term savings entities
The concern expressed by the Bank of Israel and the Israel Securities Authority over the similarity between the investment portfolios of the institutional bodies in Israel, to the point of 60% identity and more in the structure of the portfolio, was ignored by senior officials of the Capital Market Authority, the regulator responsible for long-term savings institutions.
“There is a natural tendency of institutional bodies to invest in stable, sustainable corporations characterized by financial strength, as is appropriate and expected from those who invest money for the long term,” said Barry Caspi, Senior Deputy Commissioner of the Capital Market, recently. “The investments are focused on the aforementioned investment segment, and what can be done if not every stock in the market is relevant to the institutional investor,” he added in a discussion on the subject held at the ‘Fair Value’ forum.
Caspi, who recently announced his departure from the Capital Market Authority, also referred to the Bank of Israel and Israel Securities Authority data, according to which the similarity between the investment portfolios also spilled over to the foreign component, and explained why the Capital Market Authority is not concerned.
According to the data, the index of similarity of the stock and bond components in the institutional portfolios abroad is between 20%-30%, while in England, the index of similarity between financial entities ranges from 1% to 7%, and in insurance companies in the USA it reaches to 12%
“As someone who cares about the pension system, I think that the higher similarity of the Israeli institutional portfolios in the US, compared to the lesser degree of similarity of American institutions there, should not cause us concern,” Caspi said.
“I do believe that the significantly low degree of similarity abroad (compared to the degree of similarity in the local market at a rate of more than 60%, RW), actually indicates that the similarity in Israel does not stem from some ‘original sin’ in the form of structured monolithicity, or characteristics of investments that indicate about a lack of competitiveness. The degree of similarity among investments in Israel stems from the fact that the supply of investments in companies that are strong and stable is very limited,” he explained.
Yael Regev, a senior advisor to the Commissioner of the Capital Market, said in the discussion that “They tend to say that the fact that there is a ‘market portfolio’ that causes high imagination is a bad thing, but in theory there is an optimal ‘market portfolio’. The expectation in the end is that the institutions will not significantly deviate from some A ‘market portfolio’ is optimal, because in the end we want to maximize the return of the partners,” said Regev. “Obviously, we need to diversify and diversify, but we don’t expect everyone to invest in a completely different place.”
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The Bank of Israel and the Israel Securities Authority concluded the study by saying that “the continued geographic and sectoral diversification of the asset portfolio should be encouraged.” It should be noted that already today most of the institutions’ new marketable investments (about 70%) are made in overseas securities.
“We reached this situation because of significant consolidation”
The institutional bodies do not reject the findings, but claim that it was the regulatory actions in Israel that led to this situation: “It is true that there is a lot of similarity between the long-term savings portfolios,” says a senior institutional official, “but it should be understood that we have reached this situation following a very significant consolidation in recent years, in which The insurance companies have become financial giants, while the power of the investment houses has decreased significantly, and above all the number of players in the financial management market in Israel is small.”
According to him, “the place where the most diversity should be created is in saving for retirement, but that’s precisely where it doesn’t happen. In the end, the similarity in the investment portfolio in Israel is great because everyone squints at everyone else’s portfolio, and the place where diversity is created after all is the non-tradable portfolio.”
The long-term savings institutions in Israel, it is claimed in a study by the Bank of Israel and the Authority, are so afraid of bad returns that they prefer to resemble each other in order to stay close to the systemic average, even at the cost of weaker returns than they can achieve.
Another institutional source claims that it was the regulation in Israel that led public savings managers to this reality: “In the test of the result, the investment portfolios are relatively similar in their behavior,” he says. “One reason for this is the limited supply of properties suitable for investment in Israel. But another part, which is considered the ‘elephant in the room’, is that in Israel an unusual system has been created that allows the daily movement of pension savers’ money, and obliges the entities to publish returns frequently. There is no other place in the world where you can transfer a pension every day. We met colleagues from North America who were completely amazed.”
According to the same source, “For the investment manager, it’s like running a marathon and being measured every 100 meters. This means that no institutional body wants to be very different from the other, because the money could run away tomorrow.”
“The main similarity is in the rate of exposure to stocks”
Guy Mani, the chief investment officer at Meitav, believes on the other hand that the findings should be looked at in a slightly different way. In a conversation with Globes, he points out that “the main similarity among the institutional bodies is in their exposure to shares, which is around 40% of the pension investment portfolio.”
Manny mentions that according to the research data, the proportion of holdings of assets abroad jumped from 10% of total pension savings to 25% at the end of 2021. This trend is positive in Manny’s eyes: “More institutional bodies have tilted their portfolios abroad, and this A bias that is done in a significant dispersion.”
Guy Mani, chief investment officer at Meitav Dash / photo: Yeh’ach
At the same time, according to him, the exposure of the institutions to non-tradable investment avenues has increased in recent years. According to him, “This is a whole world, most of which is abroad and not in Israel. For example, if we have 4% of the non-tradable portfolio that is invested in infrastructure, then these are diverse international projects. Solar fields, wind energy, construction of power facilities and more.” He adds that the same increasing exposure in non-tradable investments, also called alternative investments, has already crossed the 20% threshold of the total long-term savings of the institutions.
Therefore, according to him, it is not correct to strongly claim similarity in investments. According to Manny, “I believe it is incorrect to say that ‘everyone is the same’. While it is correct to say that the rate of equity exposure is similar, there is a huge variation in the non-tradable investments. In fact, each of the different segments of the non-tradable investments has different layers. In investments in Israel itself, this is true There is a high exposure to Israeli government bonds, but this is our country and this is where we live. And yet, we allocate a significant portion abroad.”
The main problem, Manny agrees, is in the institutional investments in Israel: “The institutional bodies mainly focus on investments in shares of companies of the Tel Aviv-125 index, and from that in papers that still have a sufficient degree of liquidity, so it comes out more or less the same papers.
“And yet, the weight of institutional investments in shares in Israel is decreasing. I don’t think that we should encourage going abroad, because it is already being done. We diverted a lot of money abroad in recent years, even after the declines recorded in the past year. The weight of investments abroad has increased, and we don’t need to come with any kind of encouragement for this.”
“In Altschuler they don’t know the concept of herd”
The director of provident and pension investments at Altshuler Shachem, Erez Wilf, believes that the right way to deal with the phenomenon is simply to examine the extent of the correct investment rate in Israel. Altshuler Shachem, the largest investment house in Israel, is known among the institutions as the one that invests a major part of the assets under its management abroad – which cost it a significant loss of returns in 2022, and is expected to increase its return at the beginning of this year.
Wilf points out that “in the end, it’s a matter of alternatives and diversity. In Israel there are companies that reflect the local economy, mostly banks, real estate, and also some high-tech companies. There should be a representation of part of Israel in the case, but in a way that is proportional to the world. Part of risk management is to spread the saver’s long-term savings.
Erez Wilf / Photo: Eyal Yitzhar
“At Altshuler Shaham, we don’t know the term ‘herd’. In long-term investments, there is a world map and it is correct to spread the cake in a very global way. We try not to be biased towards one country or geography, understanding that the world is dynamic.
“Risk management is a complex and important part of investment management, and in order to be a good risk manager, you have to downplay looking at others, because then you become a leader and not a leader.”