The Securities Authority demands that the composition of the banks’ funds meet the weight limit of 22.5% for each security; Itai Ben Zeev: “An arbitrary, unreasonable and unreasonable decision”
The Securities Authority, headed by Chairman Anat Guetta, informed the fund managers that they must act to ensure that the composition of the Banks Index is adjusted in a way that allows them to meet the minimum dispersal conditions by law. This is the beginning of April 2021.
The Tel Aviv 5 Banks Index of the Tel Aviv Stock Exchange is an index that includes the shares of the five largest banks in Israel. This is an exceptionally centralized index – beyond the low number of securities included in it, the weight of the two largest banks in Israel, Bank Hapoalim and Bank Leumi, is About 65% of it.
This is a high and unusual rate both in relation to what is accepted in the world and in relation to the rules that the stock exchange applies in relation to the indices it conducts, when investment indices that are monitored by passive investment products are required for a larger number of securities at a higher dispersion level.
In general, the law applicable to mutual funds and open-ended funds prohibits exposure of more than 25% of the fund’s funds to a particular security, and requires a minimal diversification of the investment in a number of securities. As part of the reform in the ETF industry that came into effect about two years ago, and out of a desire to allow the continuation of the investment products in the industry, the Authority issued a temporary directive allowing ETFs that have replaced ETFs to follow the banks’ index. This temporary provision will expire at the beginning of April 2021. At present, funds that monitor the banks’ index with a total value of approximately NIS 7 billion are managed.
On the one hand, beyond the limitation arising from the provisions of the law, such an exceptional concentration of an index is not desirable, on the other hand, it is a unique index for the banking sector, which is a centralized and established sector, which centers a considerable amount of public investment. Therefore, the Authority seeks not to prevent investment in it or to cause radical changes in it, but to bring about a balanced solution. Therefore, the Authority believes that changes can be made in the composition of the index that will allow the mutual funds to invest in it, while maintaining its position as representing the banking sector and while mitigating the risk resulting from the current concentration in it.
In light of this, the Authority informed the fund managers that in light of the expected expiration of the interim directive, they will have to ensure that the composition of the Tel Aviv Banks-5 Index and any other index monitored by a fund under their management, which overlaps in the composition of this index, They will be subject to minimum dispersal conditions, which include a weight limit of 22.5% per security, and in any case no more than 25% between the update dates of the index weights, and that the weight of the five major stocks in the index will not exceed 85% of the index composition. The index that will replace the banks’ index balances two values that should exist in the index – adequate distribution and representation of the activity to which it refers.
At the same time, the Authority reflected to the fund managers that since this is an index with exceptional characteristics, its decision in this matter does not set any rivets regarding the requirement for diversification required in other indices.
The CEO of the TASE, Itai Ben Zeev, responded by saying: Investors, fund managers and the capital market as a whole. This is another severe blow to the mutual fund market, following the reform of an industry that destroyed value on a large scale and all this while the corona crisis requires maintaining stability and not unnecessary shock in the market.
The decision was made retroactively after more than twenty years in which the index computer is published and is a necessary benchmark for the capital market. “We emphasize that the total value of the assets that follow the index is over NIS 73.5 billion, and beyond that it is a deep market with high marketability. The decision also contradicts the fact that the Securities Authority itself approved the index rules enshrined in the stock exchange guidelines.”