The amendment to the Capital Markets, Insurance and Savings Authority circular “Investment Tracks in Provident Funds”, which will come into force on January 1, 2024, removes the overseas track from the shelf. All existing tracks that specialize in exposure to overseas indices will be consolidated into tracks made up of exposure to Israel and overseas, whether stocks, fixed income, or mixed.
The exception is the S&P 500 Index, which will be the only single index remaining as an investment track for the provident fund companies outside of the Tel Aviv Stock Exchange. So far this year, the S&P 500 has risen 17%, but it has been outstripped by other indices such as the Nasdaq 100, which has risen by about 40%.
Funds tracking the S&P 500 achieved returns of over 20% in the twelve months from July 2022 to June 2023, while returns for general stock funds were about 9%.
On the other hand, funds tracking overseas indices carry risks that savers ought to be aware of. They have 100% currency exposure. One of the reasons that funds tracking US indices have done well recently is the depreciation of the shekel against the US dollar. This could reverse if the political tensions in Israel arising from the changes in the legal system ease, and the shekel strengthens.
Furthermore, the S&P 500 Index consists solely of stocks of companies incorporated in the US, and is thus very much affected by what happens in the US economy. This may be the strongest and most influential economy in the world, but geographical diversification can moderate falls such as happened in 2022.
Finally, although the S&P 500 is not as technologically biased as the Nasdaq 100, it is still significantly skewed towards a sector that took a big hit in 2022. It consists of the 500 largest companies in the US, but its return derives from the behavior of a small number of stocks.
Sources inform “Globes” that people in the long-term savings market have complained to the Capital Markets, Insurance and Savings Authority about the new situation being imposed on them, particularly in the light of the high demand for overseas investment tracks because of the underperformance of the local stock market. The ISA has shown understanding of the complaints, and may make changes to the circular, which was published last September by the then head of the Authority, Moshe Bareket, just before the end of his term.
The main aim of the current amendment was to enable the public more easily to compare pension and provident fund tracks. This was in accordance with the conclusions of the Yafeh committee, headed by Prof. Yishay Yafeh, which among other things dealt with the fees paid by the provident funds and pensions companies to external investment houses in order to obtain extra returns on investment overseas, fees that are ultimately imposed on savers and affect their returns. The financial institutions rejected the committee’s conclusion that these extra fees did not produce extra returns.
Under the circular, from the start of next year, the pension and provident companies will have to offer investment tracks such as those that invest in marketable securities without fees representing direct expenses, or index-tracking funds with reduced external management fees. They will also be able to offer actively managed funds with management fees dependent on returns.
As mentioned, the circular also disallows funds wholly exposed to overseas markets. A company could decide that a passive fund investing in stocks will have almost 100% exposure (subject to declaration of its investment policy), so that there will be no great difference in the investment mix from the current situation. Still, such a fund will not be exclusively focused on overseas investment and will be subject to the decisions of the management company, so that it could change its exposure, which will not simply be a matter of the investor’s choice.
Will that satisfy savers who want to increase their overseas exposure? In five months’ time, when they are left solely with the S&P 500 (unless there are changes to the circular in the meanwhile) we’ll know.
Concern at Tel Aviv Stock Exchange
The Tel Aviv Stock Exchange (TASE) has been following the proposed changes by the Capital Markets, Insurance & Savings Authority closely. The TASE, which in recent years has seen the financial institutions accelerate the channeling of savers’ money to investment overseas, recently spoke out against the trend of greater investment in funds specializing in the S&P 500 Index, and even called on the government to cancel tax benefits for those investing in such funds.
At the moment, it is not clear in what direction the financial institutions will go – whether they will turn their combined investment tracks into tracks mainly investing overseas, reducing still further their investments in Israel, or whether the TASE will benefit from the move, and more of the Israeli public’s money will be invested in Israel.
Published by Globes, Israel business news – en.globes.co.il – on August 7, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.
