NIS 1.075 trillion. That is the total amount of assets under management in Israeli long-term savings accounts as of year-end 2013. These are the general public’s savings, managed by the new and old pension funds, in the policies managed by the insurance companies, provident funds, and advanced training funds that invest in capital markets.
These are vast amounts, most of which consists of the general public’s retirement savings. These sums will continue to grow at a high rate, thanks to a tremendous and steadily increasing flow of the general public’s money designated for investment by the financial institutions that manage the savings - and, through them, come to finance companies, and other investments.
In 2013, deposits and premiums transferred by savers to the financial institutions for management totaled NIS 70.9 billion. The net total (deposits and premiums minus withdrawals and claims) was NIS 29 billion.
These funds, along with the billions of additional shekels that were already in existing investment channels, which were released when these investment came to term, are seeking new investment opportunities. This is a challenging task for investment managers at the financial institutions, because of the huge sums, and especially today, when interest rates are at historic lows, and most investment instruments are at record highs.
One of the responses that the Israeli institutional market has chosen over the past decade to answer to these challenges is to move a steadily increasing portion of our pension investments overseas, in both relative and absolute terms. This is a multi-year trend that already has momentum, and it is possible that it will continue to strengthen.
In effect, each and every pension saver in Israel today is invested, through the financial institutions, in an ever-increasing number of foreign stocks, including shares in giant companies, whose products we know well as consumers: Google, Apple, Visa, General Electric, Volkswagen, and more.
Over recent years, financial institutions have been moving more and more money overseas, primarily to developed countries. A “Globes” survey of Ministry of Finance data indicates that as of the end of 2014, 26.2% of financial portfolios managed by financial institutions (excluding old pension funds and advanced training funds) were in foreign assets or foreign currency. In other words, for more than a quarter of the total portfolio managed by financial institutions that manage the public’s long-term savings (excluding institutions with a majority of assets in State of Israel debt), yields are determined outside of the Israeli market.
Much more than in the past
This rate is almost twice what it was five years ago, in July 2009, a few months after the beginning of the global financial crisis (which was much more severe abroad than in Israel). At the time, overseas and foreign currency investments accounted for 13.8% of the portfolio, which came to NIS 44 billion. Ten years ago, in July 2004, before the Bachar reform (wherein Israeli banks were required to sell their funds), the rate was much lower: just 5.4% of our pensions (NIS 11 billion) were invested in non-Israeli, non-shekel-denominated assets.
The move abroad is not made uniformly - not in terms of the investment instruments, and not in terms of the individual preferences of the financial institutions. The five big insurance companies (Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), Harel Insurance Investments and Financial Services Ltd. (TASE: HARL), Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5), and Menorah Mivtachim Holdings Ltd. (TASE: MORA) divert a larger percentage overseas and into foreign currencies (30.6% of the portfolio as of the end of July, compared with 20% and 11.2% five and ten years ago, respectively).
The new pension funds, most of which are managed by the five large insurance companies, have 27.7% in foreign assets, compared with 13.7% in July 2009, and 0.7% in July 2004.
20% of provident fund portfolios are invested in foreign assets, compared with 9.5% and 3.7%, in July 2009 and July 2004, respectively. Provident funds are the investment channel with the greatest variation between the financial institutions: there are some that invest more of these funds overseas (certainly in terms of percentage of portfolio), while others believe more in the local market.
There is also great variation in activity in foreign investment channels. It seems that the financial institutions’ migration abroad takes place mainly in their stock portfolios - directly, and via ETFs and mutual funds. In order to fully understand Israel’s institutional exposure to global stock markets, we examined the investment portfolios of 21 financial institutions belonging to the 12 largest institutional groups in the market - insurance groups, investment firms, and Amitim funds - which together manage NIS 855 billion, which constitutes 80% of the entire market (and an even higher percentage of overseas and foreign currency investments).
Our examination indicates that, as of the end of the first half of 2014, Israeli financial institutions held a total of NIS 58 billion in overseas stock-based ETFs, 6.8% of the portfolios managed by these institutions.
Why ETFs?
Why is most of Israeli investment abroad in ETFs? A senior investment manager explains, “Our ability to analyze many specific stocks abroad is very low. After all, Israeli institutions don’t have very large teams dedicated to this. Therefore, I believe it is preferable to choose investment managers who specialize in overseas markets. This is done through ETFs in efficient and competitive markets, like the US, or via mutual funds in less liquid and efficient markets.”
The same institutions diverted an additional 5.6% of their portfolios, NIS 48 billion, to mutual funds (stock-based, bond-based, and others) abroad. In addition to these investment instruments, the same financial institutions, which make up the majority of the local institutional market, directly held foreign stocks abroad totaling NIS 19.3 billion, which constitutes 2.3% of their total portfolio.
In looking at the distribution of directly owned stocks in the portfolios of Israel’s large financial institutions, it appears that 73% is invested in Israeli stocks on the local market, 8% in Israeli stocks traded abroad, and the remaining 19% in foreign stocks.
The top foreign players in your pension fund
These days, when the top stories in the global stock markets revolve around the multi-billion-dollar IPO of Chinese Internet giant Alibaba, there is no need to explain the importance of Internet companies in global financial markets. So, it is not surprising that the stock that stars at the top of Israeli financial institutions’ foreign stock portfolios is Google, in which local institutions are invested to the tune of more than NIS 773 million, which represents 0.07% of the public’s total institutional portfolio.
The next two most popular foreign stocks in Israeli institutional portfolios, like the first, represent sectors favored by Israeli institutional investment managers: drug giant Novartis, and banking giant Citi Group.
In general, there are a few sectors that appear more than others in the foreign stock portfolios of Israeli institutions, and they include technology companies that market their products directly to end users, such as Google, Apple, Samsung, eBay and Yahoo! (which provide indirect exposure to Alibaba as well); banking giants, such as Citi, Bank of America, Wells Fargo, and JPMorgan Chase; insurance companies like AIG, Swiss Re, and Metlife; drug manufacturers, such as Novartis, Pfizer, Merck, GlaxoSmithKline and Sanofi; as well as energy companies and auto manufacturers.
Published by Globes [online], Israel business news - www.globes-online.com - on September 29, 2014
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