Mutual fund reform – 150 bonds will be written off – the capital market

More than 150 mutual funds are on their way to being delisted in the general bond category in the mutual fund industry.BizPortal inspection. These funds will be liquidated following the agreement reached by the Securities Authority and the Mutual Funds Association, under which fund managers will not manage more than two mutual funds in the category.

Managing a large number of mutual funds in the investment category is a well-known marketing element among fund managers. Managing multiple funds with a different mix of bonds and equities allows the fund manager to present at least one fund that has yielded an excess return compared to competitors in the market.

For example, in a year when there is a price surge in the bond market, mutual funds that are exposed to unrated or low-grade bonds will show a better return than funds that are exposed to high-credit-rated bonds. In years when there is a crisis in the credit and bond market – a reverse process will occur. If the fund manager holds many funds, he will always be able to present a fund with an excess return over most of the industry and modest his funds that yielded a missing return.

The general bond fund category is the largest and accounts for about a quarter of the market
Not for nothing the example we mentioned is in the field of bonds. The general bond category is the largest in the mutual fund industry. According to data from the Securities Authority, the category manages about NIS 77 billion, which is about 23% of the entire industry. The phenomenon of multiple funds managed by the same manager is particularly prevalent in this category (although the phenomenon also exists in the stock market).

The general bond category is divided into categories according to the exposure to equities. The new agreement between the Securities Authority and the Association of Funds and Investment Houses stipulates that the rate of exposure to equities will be clearer, and that within the sub-categories fund managers will not be able to manage more than two funds. Manage some of the larger investment houses from ten different funds, and the situation is particularly acute in the 90/10 funds (up to 10% exposure to shares, 90% exposure to bonds).

The agreement also provided relief to the investment houses that manage several funds in the same category. Managers will be able to leave the funds managed by Hosting, ie funds in which the fund manager is not part of the investment house, but only uses the existing investment house platform. In addition, the investment houses will be able to keep the funds in which cooperation is made with a bank regarding recommended investments. Most of these funds cooperate with the Bank

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152 funds will be liquidated or merged
Of these, by analyzing the four sub-categories of the general bond category: excluding equity exposure, 10% limited exposure, 20% limited exposure, 30% limited exposure and 50% limited exposure, we find that 152 funds The trusts of various investment houses will have to merge or be delisted from the stock exchange, with the record being written off in the 90/10 sub-category, about 86 mutual funds by Psagot, Meitav, Harel, Migdal, Kesem Excellence, Yellin Lapidot and Altshuler Shaham.

Banks will have to change their rating systems
In addition, the Securities Authority also reached agreements on changing the rating system in banks. The bank’s customer advisory departments are still the largest source of funds for the purchase of mutual funds. The advisor is usually supported by the bank’s original internal rating system. The Authority strives for the rating systems to rely on a longer measurement range (alongside other elements of investment such as the Sharpe Index). This is to bring an end to the same phenomenon of “star funds”. Funds that excel over a period of one year, as we initially explained.

Absurdly, relying on longer-term banks may increase short-term fund volatility and a desire to increase risks, from the idea that risks pay off over time. This situation is likely to be temporary.

Managed funds have shrunk by NIS 25 billion this year – but the industry is still double since 2008
The managed mutual funds decreased by NIS 25 billion this year. This is a decrease of about 14% of the managed capital. Most of the redemptions came in March, when about NIS 40 billion was redeemed at its peak. These are unprecedented redemptions in relation to the size of the industry, which today is twice the size of the pre – crisis of 2008.

The total funds managed at the beginning of 2020 amounted to NIS 188 billion, compared with NIS 163 billion towards the end of the year. When you take into account the imitation funds and the mutual funds (the passive funds – which follow indices), you get an industry that is larger than NIS 300 billion. This is the most prominent short-to-medium-term investment instrument. It will be interesting to see how the reform will affect fundraising when on the one hand it increases confidence in the industry, on the other hand it will impair the ability of investment houses to advertise fund achievements in the short term.