The proportion of the savings that the public held in their asset portfolio by means of institutional investors1 remained unchanged in 2004, and amounted to 37 percent at the end of the year (Table 5.1). The balance of institutional investors’ assets increased during the year—in a continuation of the trend of recent years (except for 2002)—and totaled NIS 559 billion at the end of 2004 compared with NIS 505 billion at the end of 2003. The increase was recorded largely among the mutual funds and to a lesser extent, among the other institutional investors.

For the first time in a decade, the provident funds recorded a positive accrual in 2004. Three are three main reasons for this change: (1) tax considerations—earnings on old deposits in the provident funds remain exempt from tax, while alternative forms of investment are taxable; (2) the improvement in the state of the economy, as a result of which the public have less need to withdraw money for current consumption; (3) the expectation of a further improvement in the funds’ performance.

The mutual funds continued to record a positive accrual, principally among the funds specializing in bond investments and those specializing in government bonds, although the amount accrued in all the mutual funds in 2004 was less than in 2003. This change was part of the adjustment of the public’s asset portfolio: During a period of low interest rates on deposits at the banks, the public were inclined to seek alternative fixed-income investments. The advanced study funds and the pension funds for new members also recorded a positive accrual.

In 2004 the mutual funds directed the majority of their investments to equities and to CPI-indexed assets, most particularly at the expense of their investments in unindexed shekel assets, a development that increased the tradability of the asset portfolio. This change resulted inter alia from the low yields expected on unindexed shekel assets due to the end of the process of cuts in the Bank of Israel’s interest rate and the abolition of the tax preference for certain shekel assets that was practiced until 2003 (Treasury bills and certain government bonds). In 2004 the other institutional investors2 chose to increase their investments in corporate bonds, shares and foreign assets, mainly at the expense of their investments in shekel deposits. Behind this change was the decline in interest rates in the economy and the search for alternative forms of investment that would yield a higher return, the consolidation of inflation expectations close to the center of the price stability target, the relative stability in the exchange rate of the shekel against the dollar, the growth in private sector issues, and the upturn in prices in the equities market at the beginning and the end of the year. Also contributing to the redirection of sources from the banks to the capital market were the tax reform, the pension reform, and the banks’ tighter credit extension policy that was reflected inter alia by increased investment in corporate bonds.

Savers’ awareness of the superior performance of the private provident funds during recent years over that of the funds managed by the banks, was apparent in 2004 from the much more rapid transfer of money from the banks’ provident funds and advanced study funds to private organizations. During 2004 the growth in the volume of assets managed by private companies encompassed the mutual funds as well. Even though the Bachar Committee’s recommendations have yet to be implemented, the very fact that they have been published and the interest that the public have displayed in the matter appear to have increased savers’ awareness of the relative efficiency of the private organizations.

Progress was made in a number of reforms relating to institutional investors in 2004. The most important among them is the reform of the capital market (the Bachar Committee’s report), which is centered on the separation from the banks of the ownership and management of the provident funds, the mutual funds and the underwriting companies.

Chapter 5: Institutional Investors - PDF file