quarterly review q4 2014

1

Quarterly Review for Q4 (Oct-Dec) 2014

May 2015

Contents:

Introduction Update on fund flows by

1. Investment vehicle a. Summary b. Pension funds c. Provident funds d. Insurance schemes e. Mutual funds

2. Asset class

a. Portfolio structure by main asset classes b. Fixed income vs. equity c. Domestic vs. foreign

3. Institutional holdings in indirect investments

a. Holdings of mutual funds, by type of investment vehicle and by home bias

b. Holdings of ETFs/ ETNs, by type of investment vehicle and by home bias

c. Holdings of mutual funds and of ETFs/ ETNs traded overseas by asset class and by geographic focus

2

Introduction

The Israeli asset management industry has enjoyed rapid growth for the last decade – and this positive trend is set to continue into the future. As of December 31, 2014, the main institutional investors -- pension and provident funds and life insurance savings schemes -- had client assets under management (AUM) of some 1.27 trillion shekels 1 (equivalent to over $385bn). This compares to only NIS650bn under management at end-2008, more then -doubling in less than seven years. An additional NIS260bn in assets were managed by Israeli mutual funds, so that a broader definition of institutional AUM would show a total comfortably in excess of NIS1.54trn (c-$400bn). Recent years have witnessed a fundamental change in the asset allocation strategy of the Israeli institutional investment industry, which finds expression in a growing diversification towards investing overseas, especially in global equity markets. In early 2014, the value of Israeli institutions’ portfolio of overseas securities crossed the NIS200bn for the first time, with the bulk of it invested via mutual funds and ETFs. Praedicta’s research department expects this diversification trend to continue so that, by 2020, Israeli institutions will hold overseas assets in the order of NIS400bn.

In response to the growing interest on the part of foreign asset managers, such as investment houses and mutual fund managers, in the potential market offered by Israeli institutions, and in light of the ongoing reorientation of these institutions’ asset allocations – in particular, the increase in holdings of overseas assets – Praedicta publishes a Quarterly Review2 , which tracks developments and trends in the institutional investors’ portfolios, with particular attention to mutual funds and ETFs domiciled overseas. The structure of the reviews will be designed to provide information and updates on the following topics:

a. Key developments in the institutional investment sector as a whole b. Key data regarding total AUM and shifting patterns in asset allocations c. Institutional investment allocation to overseas securities d. Institutional investment in mutual funds and ETFs traded in overseas

markets.

1 The data in this review do not include assets in ‘nostro’ portfolios of the insurance companies,

as was the practice in previous Quarterly Reviews. 2 Institutions are required to publish detailed breakdowns of their portfolios on a quarterly basis,

and the review is therefore updated in line with the data publication cycle

3

Update on fund flows by

1. Investment vehicle3

a. Summary: AUM by investment vehicle, (NIS mn) Date/Investment

vehicle 31/12/2013 31/03/2014 30/06/2014 30/09/14 31/12/14

Pension 533,191 548,345 570,934 590,494 600,044

Provident 347,067 354,906 357,174 364,866 368,770

Insurance 279,143 286,938 293,685 302,167 306,088

Mutual 230,786 248,504 261,228 270,342 261,522

TOTAL 1,390,187 1,438 693 1,483,021 1,527,869

1,536,424

Total AUM posted a rise of NIS9bn in the fourth quarter of 2014 or some 0.6%,

less than the previous quarter. The effect of positive inflows and of rising stock

prices abroad was offset by the impact of the asset prices decline in the bonds

local indices.

AUM rose in all the main investment vehicle segments except mutual

funds, with mutual funds decreasing by 3.3%, while the pension segment

had the highest increase of NS10bn or some 1.6%.

The rise in pension funds’ AUM was, once again, much faster than that of

insurance vehicles (1.3%) and provident funds (1.1%).

b. Pension funds AUM (NIS mn)3

Date/ Pension Fund

Type 31/12/2013 31/03/2014 30/06/2014 30/09/14 31/12/14

Old 347,555 353,841 367,347 378,461 379,149

New 183,168 194,504 203,586 212,032 220,895

TOTAL 530,723 548,345 570,934 590,493 600,044

The growth in the pension sector was led by the ‘new’ funds, which gained

almost 4.2% Q-o-Q, while the ‘old’ funds added 0.2%.

3 Source: Bank of Israel, based on Ministry of Finance

4

c. Provident funds AUM (NIS mn)3

Date/ Provident

Fund type 31/12/2013 31/03/2014 30/06/2014 30/09/14 31/12/14

Provident &

Severance 204,233 207,855 207,582 210,612 210,960

Advanced Training 142,834 147, 051 149,592 154,254 157,810

TOTAL 347,067 354,906 357,174 364,866 368,770

Advanced Training funds once again expanded by 2.3%, on the other

hand, Provident and Severance funds increased by 0.2%.

This confirms the sharp slowdown in the rate of growth of Provident and

Severance funds over recent years, as savers have switched to the new

generation of pension funds.

d. Insurance schemes (NIS mn)3

Date/ Insurance Scheme 31/12/2013 31/03/2014 30/06/2014 30/09/14 31/12/14

Profit sharing 201,509 209,106 214,902 222,460 226,125

Guaranteed returns 77,634 77,832 78,783 79,707 79,963

TOTAL 279,143 286,938 293,685 302,167 306,088

Profit-sharing insurance schemes continued to generate growth in the

fourth quarter, posting a 1.6% rise in AUM.

The guaranteed-return category lagged again, with only a 0.3% advance -

- less than in Q3.

5

e. Mutual funds4 (NIS mn)

Date/ Fund type 31/12/2013 31/03/2014 30/06/2014 30/09/14 31/12/14

Money market 61,080 59,452 58,342 57,995 54,047

Equity 16,917 19,924 20,663 21,643 21,622

Fixed Income 151,134 167,548 180,808 189,140 184,734

Fund-of-funds 1,645 1,566 1,511 1,564 1,115

TOTAL 230,778 248,488 261,317 270,342 261,519

AUM in the Israeli mutual fund sector decreased in the fourth quarter,

this was the first decrease in the past year, both in absolute terms - a

decrease of NIS9bn -- and in relative terms, with a decrease of less than

3.3% in total AUM.

Fixed income funds had a major role in the decrease, but in percentage

terms this sector lost 2.3%.

Equity funds, on the other hand, had the smallest decrease in comparison

to the other funds, decreased by NIS21m, or0.1%.

Money market fund assets shrank by some NIS4bn, much more than in

the previous quarter.

4 Source: Israel Securities Authority; data rounded to nearest million, differs marginally from

Bank of Israel data cited above

6

2. Asset classes5

a. Portfolio by main asset classes (NIS mn)

Asset class Change in

value Q4/ Q3

Value of holdings,

31/12/2014

Share of

overall

portfolio

Value of

holdings,

30/09/2014

Share of

overall

portfolio

Domestic Gov't

bonds 1.34% 529,394 44.68% 522,370 44.62%

Domestic Corporate

bonds -6.59% 126,747 10.70% 135,691 11.59%

Domestic Equities -4.14% 91,249 7.70% 95,191 8.13%

Securities listed

overseas 3.98% 246,361 20.79% 236,937 20.24%

ETFs/ ETNs traded

in Israel 4.39% 32,508 2.74% 31,142 2.66%

Other assets 6.25% 158,680 13.39% 149,339 12.76%

TOTAL

INSTITUTIONAL

HOLDINGS

1.22% 1,184,939 100.00% 1,170,670 100.00%

The composition of the institutional sector's securities portfolio during the

fourth quarter was influenced by price trends (fall in domestic corporate

bonds) , but also by currency movements-- primarily continues sharp fall

in the shekel, which boosted the value of overseas holdings.

This latter development is clearly reflected in the rise in the portfolio

share of ‘securities listed overseas’

The shares of domestic government bonds and of domestic corporate

bonds in the overall portfolio declined by 0.83 percentage points.

Domestic corporate bonds had comprised 10.7% of the portfolio, less than

September 30st, 2014.

5 The analysis in this section relates to assets managed by all provident funds, all pension

funds and profit-sharing insurance schemes, but NOT to assets managed by mutual funds

or guaranteed-return insurance schemes, or to other insurance company funds and reserves

7

The increase in holdings of domestic equities continued as in the previous

quarter.

Holdings of overseas securities reached the 21% level of the total

portfolio (we assume it will reach 25% in the next coming years).

Holdings of ETF/ETNs, some of which track foreign equity indices, posted

an increase of 4.39% over the quarter.

The rise in the value of ‘Other assets’ was mainly in the "cash and equivalent"

category (5.5 NIS bn).

8

b. Fixed-income versus equity

Holdings as at end-Dec 2014 (NIS mn)

Pension Provident Insurance Total

F. I. 88,844 209,128 400,450 698,422

Equity 74,815 97,819 110,430 283,065

Other 54,832 59,455 89,165 203,452

Total 218,491 366,403 600,045 1,184,939

Holdings as at end-Sept 2014 (NIS mn)


F. I. 90,743 208,109 398,499 697,352

Equity 75,862 101,681 107,159 284,703

Other 48,704 55,076 84,836 188,616

Total 215,310 364,866 590,494 1,170,670

Percentage changes in holdings during fourth quarter


F. I. 0.49% 0.47% -2.09% 0.15%

Equity 3.05% -3.80% -1.38% -0.58%

Other 5.10% 8.05% 12.58% 7.90%

Total 1.62% 0.42% 1.48% 1.22%

Significant differences are apparent between the three main types of

institutions as to which asset classes to prefer. However, in no asset class

was there an absolute decline in holdings by any institutional category.

Insurance schemes showed a clear preference for other investments

(preference for Real-estate investments and private loans), with their

portfolio in this area growing almost 13%.

The equities asset class in Provident and Insurance schemes showed

negative growth in the fourth quarter whereas the Pension funds had a

positive growth.

9

c. Domestic versus foreign

Holdings as at end-Dec, 2014 (NIS mn)

Allocation Pension Provident Insurance Total

Domestic 493,076 294,723 150,779 938,578

Foreign 106,969 71,680 67,712 246,361

Total 600,045 366,403 218,491 1,184,939


Domestic 82% 80% 69% 79%

Foreign 18% 20% 31% 21%

Holdings as at end- Sept, 2014 (NIS mn)


Domestic 491,018 292,940 149,730 933,689

Foreign 99,476 71,926 65,580 236,982

Total 590,494 364,866 215,310 1,170,670

Allocation Insurance Provident Pension Total

Domestic 83% 80% 70% 80%

Foreign 17% 20% 30% 20%

The long-term trend for institutions to gradually increase the share of

their portfolios invested remains intact, with increases in the second,

third and fourth quarters after a reduction in the first quarter of 2014.

The overall increase in foreign portfolios in the fourth quarter was 3.9%,

with pension funds standing out via a 7.5% increase, while overseas

holdings of provident funds decreased by 0.5% and insurance schemes

rose about 3.2%

10

On the other hand, domestic portfolios rose 0.5% overall, with provident

funds a raise of 0.6%, pension funds’ domestic holdings rose by 0.4% and

those of insurance schemes 0.7%.

Although the foreign share of insurance scheme assets did not increase,

it remains at a much higher level than the other institutional categories,

at 30% of total assets.

11

3. Institutional Holdings in indirect investments6 a. Holdings of mutual funds, by type of investment vehicle and by

home bias

Mutual Fund holdings as at end- Dec 2014 (NIS mn)


ForeignMutual 25,947 12,271 11,440 49,659

100% 98% 99% 99%

DomesticMutual 20 260 110 390

0% 2% 1% 1%

Total 25,967 12,532 11,550 50,048

Mutual Fund holdings as at end- Sept 2014 (NIS mn)


ForeignMutual 24,971 13,136 11,703 49,809

100% 98% 99% 99%

DomesticMutual 20 267 95 381

0% 2% 1% 1%

Total 24,990 13,403 11,797 50,190

Israeli institutions’ holdings in foreign mutual funds fell slightly in the

fourth quarter of 2014, by NIS0.5bn -- or 0.5% -- overall.

Much the fall was recorded in the provident sector, where holdings of

foreign mutual funds plummeted by almost NIS1bn, or over 8% of the end-

December total.

6 The analysis in this section relates to assets managed by all provident funds, all pension

funds and profit-sharing insurance schemes, but NOT to assets managed by mutual funds

or guaranteed-return insurance schemes, or to other insurance company funds and reserves

12

In contrast, the pension sector rose its holdings by some NIS1bn, or some

4%, while the decline in the insurance fund sector was relatively slight, at

NIS247m, or more than 2%.

Holdings of domestic mutual funds remain negligible in relation to the

total size of institutional portfolios. Recent quarter had an overall decline

in all sectors.

b. Holdings of ETFs/ ETNs, by type of investment vehicle and by home bias

Holdings as at end- Dec 2014 (NIS mn )


ForeignETF 33,121 22,228 22,213 77,562

72% 58% 87% 70%

Domestic ETN 12,922 16,198 3,387 32,508

28% 42% 13% 30%

Total 46,043 38,426 25,600 110,070

Holdings as at end- Sept 2014 (NIS mn )


Foreign ETF 30,771 21,569 22,573 74,913

71% 58% 88% 71%

Domestic ETN 12,625 15,465 3,011 31,100

29% 42% 12% 29%

Total 43,396 37,034 25,583 106,013

Unlike foreign mutual funds, foreign ETFs benefited from large inflows

from most categories of Israeli institutions during the fourth quarter.

Overall, the increase amounted to some NIS2.6bn, or 3.5%; the pension

sector leading the way with an increase of almost NIS2.5bn, or 7.6% in

13

the quarter. The provident fund sector increase was of NIS650mn,

equivalent to 3% from end-September total. On the other hand, the

Insurance sector recorded a decrease of NIS350mn, or 2.5%.

Domestic ETNs also saw inflows, although only of NIS1.4bn -- equivalent

to 4.5% growth in the quarter. The lion’ share of this came from the

provident fund sector, which increased its holdings of domestic ETNs by

NIS700mn, or 4.7%, while insurance and pension funds holding increased

by NIS300mn, or 12.5%, and 2.3% respectively.

Despite the larger inflows into foreign ETFs, the balance between foreign

and domestic holdings was hardly changed, except for a ten percentage

point increase in the foreign holdings of the Insurance schemes, pension

funds continue to have much the largest share of foreign ETNs in their

ETF/ETN portfolio.

It is worth highlighting that a) in contrast to their avoidance of domestic

mutual funds, institutions invest meaningful sums in domestic ETNs; and

b) many domestic ETNs actually track indices of foreign equities and bonds

and may therefore be used to gain exposure to overseas markets. In 31-

12-2014 13.2 (NIS bn) was invested in domestic ETN that tracks indices of

foreign equities (11.7 NIS bn at 30-09-2014).

14

c. Holdings of mutual funds and of ETFs/ ETNs traded overseas, by asset class and by geographic focus

i. By asset class

Asset class breakdown as at end-Dec, 2014

Asset class breakdown as at end-Sept, 2014

The composition of Israeli institutional investors’ holdings in foreign

mutual funds and ETFs/ ETNs by asset class continued to be dominated

by equity-oriented vehicles.

The dominance of equities actually increased in the fourth quarter, with

a two percentage point increase to 81%.

The increase came entirely at the expense of both commodity and fix

income investments, which shrank from 2% to 1% and 18% to 16%

respectively.

2%

79%

18%

1%Commodity

Equity

Fixed Income

Other

15

ii. By geographic focus

Geographic focus as at end-Dec, 2014

Geographic focus as at end-Sept, 2014

Numerous changes took place in the fourth quarter with respect to the

geographic focus of Israeli institutional holdings in mutual funds and

ETFs.

4%

2%

23%

30%5%

2%

34%

Asian Pacific Region

China

EURO Countries

Global

Japan

Other

U.S.

16

Investment in instruments focused on the US markets rose by six

percentage points, to 40% of the total, while instruments tracking Japan

and China markets gained one percentage point each, to 6% and 3%

respectively.

These gains came at the expense of instruments tracking European and

Global markets, which lost four percentage points each. Their shares fell

to 19% and 26%, respectively.

For more information, please contact: Philip Zelichenko

Mail: mailto:[email protected] Phone: 972-546885503

Please also visit our website:

http://www.praedicta.com/pages_eng/default.aspx?menu=home

mailto:[email protected]

http://www.praedicta.com/pages_eng/default.aspx?menu=home

quarterly review q4 2014

Documents