| Yaniv Pagot, Senior Vice President of the Tel Aviv Stock Exchange |
2021 was a record year in the global mutual fund market, at the end of which the threshold of assets managed in mutual funds crossed the $ 10 trillion, after raising more than $ 1 trillion. The volume of mutual fund assets in the world has doubled since 2018, and it seems that this market is on its way to new peaks of assets, as the acceptance of mutual funds has increased, both in the US and in other developed markets, where the penetration of mutual funds is still low.
On the face of it, the prosperity of the global mutual fund industry is also reflected in Israel, since in 2021 the passive industry in Israel experienced an all-time record of assets and ended the year with a managed asset volume of NIS 174.5 billion, compared to NIS 140 billion at the end of 2020.
However, in stark contrast to the global trend, local mutual funds received redemptions of NIS 3.2 billion, while imitation funds raised NIS 11.7 billion – and the obvious question is, what do Israeli investors know about the ETF market that global investors miss?
On the face of it, the built-in advantage of a mutual fund, which allows investors to trade throughout the trading day, compared to an imitation fund, which does not allow it, should make investing in a mutual fund a material preference over a mutual fund. It is hard to imagine an investment manager who overwhelmingly waives the option to purchase a security during the trading day and decides to purchase this security sweepingly only at the closing price of trading, in a world where both types of products charge the same management fee. In the local passive fund industry, this way of conduct takes place before our eyes every day.
The attempt to explain the bleeding of the Israeli mutual fund industry and the flourishing of imitation funds, brings us back to Amendment 28. An amendment that came to ensure the resilience of the local investor, subjecting the mutual fund to the Mutual Investments Law, achieved the goal of investing in investors’ security. The basket and was a backbone for the blossoming of mutual funds.
The Strip, or in its popular name variable management fees, which was born in Amendment 28, impairs investors’ appetite for investing in mutual funds in Israel. This is an Israeli invention, which on the one hand comes to protect the investor who is protected to a certain extent from the fund manager’s underperformance against the monitoring index, and on the other hand allows the fund manager to earn considerable sums if he beats the ratio index. Because this issue is very complex and difficult to calculate, many investors prefer the alternative product, which is an imitation fund where management fees are clear and fixed.
Moreover, the fact that mutual funds are new funds, established after Amendment 28, allowed manufacturers to launch zero-hedged mutual funds in categories where they already had mutual funds, without risking loss of revenue – and thus the score of mutual funds jumped in passive mutual fund rating models. Used in the banking consulting system in choosing a passive product.
These models miss, to our understanding, the advantage inherent in investing in a mutual fund compared to an imitation fund and reinforce the preference of the imitating product over the basket fund, and they require a recalculation of the trajectory.
For bank advisers, whose number in the system is dwindling, and on the other hand their managerial challenges are growing, there is significant operational convenience in investing through hedge funds, rather than investing in mutual funds, due to the certainty in the execution of an imitation fund. If the advisers could get the quote directly from the market-made fund of the basket fund, from the very first shekel, the artificial advantage of the imitation fund would dissipate.
One of the common claims among anti-investment fund advisory systems is the poor quote quality of market makers, especially in times of crisis. The stock exchange monitors the market making of the mutual funds for the Securities Authority and the investor service. In our experience, it can be said that making the market is much higher quality than the regulatory requirements. However, in order to get the monkey of quote quality off its back, it would have been better for ETF managers to sign market making agreements with a number of market makers, thus ensuring the quality of quote in ETFs, but this issue involves a not-so-simple business decision. Low regulatory intent.
A passive product manager will prefer to manage a mutual fund in relation to the management of the mutual fund, due to the operational simplicity inherent in managing a mutual fund in relation to a mutual fund, and the fact that Israeli investors do not require a mutual fund solution. .
Not only Amendment 28 is responsible for the severe retreat of the domestic mutual fund industry. The domestic mutual fund industry suffers from a severe distortion, which stems from the restrictions of the Capital Market Authority on long-term savings managers in all that is said in the payment of management fees for investing in index products, investing in the flagship products of the Israeli stock market and bonds. The Capital Market Authority expects the Investment Manager for long-term savings, the object of exposure to assets listed for trading on the Tel Aviv Stock Exchange (TASE :), to purchase the securities directly, and does not allow him to pay from savers even minimal management fees for investing in most domestic market funds. While this limitation does not exist in all of the above in such a payment in respect of investment in foreign indices.
In such a world situation, manufacturers invest less resources in marketing mutual funds on local indices to long-term savings entities, while investment managers themselves do not increase exposure to the domestic market in a way that harms savers and liquidity in the markets.
The mutual fund industry is important for the domestic market, both in terms of liquidity, trading continuity, the ability to respond to events in real time, and in terms of international standardization. It is important to maintain fair competition between the products and to guarantee investors and unit owners diverse, transparent, liquid investment instruments and fair and balanced competition.
The current reality in the passive fund market in Israel is that without the regulators ‘help to correct the distortions, then the area of mutual funds will continue to fade, and it is not far off when the volume of mutual funds’ assets in Israel will overtake the assets managed in the domestic mutual fund market.
The author is a senior vice president of the stock exchange, director of the trading department, derivatives and indices. , Guidance, advice, opinion or recommendation to act in one way or another, including in everything related to making decisions in the field of investments or because of the presentation or commitment of the stock exchange and / or members of the stock exchange group and is not a substitute for personal advice based on each person’s needs and data.
Assisted in the preparation of the article: Nir Castro, Head of the Banking Distribution Division, Commerce Department, Derivatives and Indices