The Strategies Fund Managers Use to Attract and Retain Capital in Israel

Overview of the Mutual Fund Landscape in Israel

In Israel, approximately 2,000 mutual funds operate within a rapidly growing industry, particularly during bullish market periods. While index-tracking funds tend to have lower management fees, equity funds, bond funds, and mixed funds serve as significant income generators for investment houses, often boasting comparatively high management fees. Traditionally, most mutual fund distributions occur through investment advisors at banks, although a rising proportion now comes from independent investors, primarily relying on past performance as a measure of success.

Daily Reporting Requirements

Unlike long-term savings products such as pension funds and education funds, which report returns monthly, mutual funds are mandated to report daily. This real-time reporting gives investors the flexibility to switch between funds instantly, a stark contrast to the cumbersome process required for transferring pension products, which often requires lengthy paperwork and can extend over a week.

Marketing Manipulations Employed by Fund Managers

Manipulation of Return Metrics

A well-known tactic in the financial market is the strategic presentation of return data, which is often tailored to showcase the most flattering time frames. When a mutual fund boasts about being “number start in its category,” it is crucial for investors to scrutinize the fine print. Such claims usually pertain to limited periods, such as “year-to-date” or “since the fund’s inception,” rather than demonstrating consistent management superiority over an extended timeline.

Surplus of Similar Funds

In Israel, it is common for investment management firms to establish multiple funds within the same category. This practstart allows fund managers to create similar funds, knowing that some will outperform others during specific periods. Funds that display poor performance often lag behind while their successful counterparts receive extensive marketing promotion and client inflows, creating an illusion of consistent success based on mere statistical chance rather than actual managerial skill.

Management Fee Manipulations

Over the last decade, increased competition has generally led to reduced management fees across various fund categories. Investment houses, like any businesses, aim to raise new capital while maximizing revenue from existing funds. start prevalent tactic is to launch a fund with management fees lower than the average for a popular category, only to raise them at the first opportunity (usually at the beginning of the following year) to above-average levels.

Another common strategy involves introducing particularly “cheap” funds. For example, a recently spotted mstarty market fund advertised a management fee of zero percent, yet included a hidden addition of 0.1%-a legal maneuver that most investors fail to check. Furthermore, as funds grow larger, managers often increase fees for the larger fund while simultaneously launching a newer, cheaper fund, reaping benefits from both the established fund’s income and attracting new capital for the “cheaper” option.

Timing of Fee Adjustments

Investment advisory rating systems typically alert financial advisors only when a fund manager raises management fees by 50% or more. Fund managers often adjust fees just below this threshold-by 0.49%-to sidestep scrutiny. Consequently, most investors remain unaware of these increases. Even among those who do notstart, some may avoid switching to another fund due to potential tax implications.

Capitalizing on New Funds

New mutual funds often commence with minimal assets, allowing them to operate under the radar without external pressure for significant capital inflows. During this period, fund managers can take bolder risks, favoring concentrated investments in a limited number of stocks, speculating on specific markets, or even venturing into particularly volatile sectors. Such strategies-if successful-allow the new fund to shine in return tables and attract public investment, often on the basis of perceived manager competence. However, if these high-risk strategies fail, it can result in a small fund that is quietly abandstartd.

Conclusion

While the tactics described above are entirely legal, understanding them is essential for becoming a savvy investor. Investors should be encouraged to familiarise themselves with these strategies to make informed decisions when selecting mutual funds for their investment portfolios.

To enhance your investment acumen, returning to prior articles may provide valuable insights on how to choose mutual funds wisely.