Despite the domestic bias, the proportion of institutional holdings in shares abroad will increase

After in the previous article at the end of March we discussed the moods of the public regarding the decision between investing in shares in Israel versus the possibility of investing in shares abroad, this time we will refer to the entities that usually make the critical decisions for them – the institutional investors.

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It’s hard to believe, but there were days when the provident funds and pension funds “didn’t invest a dollar” in any shares abroad, and there was a very clear reason for that. For many years, tax discrimination prevailed between investments in shares in Israel and investments in shares abroad, which affected every investor regardless of who he was. Thus there is a 0% tax on capital gains from investments in Israel compared to a 35% tax on capital gains from investments abroad. Which left no incentive to invest abroad.

This distorted situation was corrected following the tax reform introduced in 2003 (the Rabinovitch Committee). The reform established a uniform rate of 25% tax on the real profit, whether obtained from investment in Israel or resulting from investment abroad. In addition, two years later, in 2005, a huge reform was carried out in the Israeli capital market, the Bacher reform, which transferred the ownership and management of the provident funds and training funds from the banks to the insurance companies and private entities.

Naturally, after decades of dry investments in shares abroad, the local entities still did not have an infrastructure of knowledge, and they went through a process of gradual learning and acted on the side of a thumb. The global financial crisis of 2008 accelerated the trend of going abroad. With the development of the Internet and the accessibility of information through digital means, the task was easier.

And yet, with the glamor surrounding the globalization process, investment managers in Israel, as well as the public, preferred local stocks. This is a very common phenomenon in many countries and is called Home Bias.

There is quite a bit of logic in this tendency to prefer the near, familiar and well-known over the foreign and distant. Indeed, investing in local stocks has the advantage of closely recognizing the macroeconomic conditions, and getting to know the companies, including high accessibility to their decision makers.

Alongside these, the strength of the economy and the expansion of transaction cycles in the local stock exchange may attract more foreign investors.

Another and significant consideration is the fact that the returns of the provident funds are in shekels, and a very large investment abroad, which is probably made in foreign currency (before hedging a part of it, which usually involves costs), may damage the shekel return, as has already happened many times.

Ran to the S&P 500 routes and then returned to Tel Aviv

But this domestic preference also has disadvantages. The main one concerns the size of the Israeli economy and market. In international terms, the local stock market was and remains very small in scope, in the variety of its companies, in the level of activity that takes place in it, that is, in the depth and liquidity it offers.

And there is no need to mention that the State of Israel is in the heart of a dangerous geopolitical volcano. So a strong home preference under these conditions is contrary to the basic principle in the investment world – of spreading risks.

Along with the learning process of the institutional investors, the understanding that the risks need to be spread between different markets – geographies and different sectors of the economy – and in recent years also the inclination of the public’s heart, three processes took place: the rate of investment in shares in general increased, the share of investment in shares abroad increased, and also the weight of abroad in the total investment in shares is consistently increasing.

Let’s take a look at the data:

● The total investment in stocks, in Israel and abroad together, stood at 23.8% in December 2011 and since then has increased year by year (except for two periods, in 2016 and 2022 due to sharp declines in the markets), and by the end of 2023 it has almost doubled to a level of 46.1%. Even since then it has only continued to rise, up to 57.2% exposure to stocks in December 2025.

● 2011 was the last year in which investment in shares in Israel exceeded the rate of shares abroad: 13% vs. 10.8% respectively. Since then the formations have reversed and the absolute rate of investment in shares in Israel has remained almost constant in the range of 11-13%. This is while the absolute rate of investment in shares abroad has steadily increased (except for the declines of 2022), from 12.5% in the turning point year (2012). Through 8.9% five years later, in 2017, and since then it has risen to the current level of 40.2%.

● The investment ratio between shares in Israel and abroad shows that the preference for “domestic” investment has weakened over the years. Thus, in December 2018 the proportion was 63% abroad and 37% Israel, and reached its peak at the end of 2024 when it stood at 78%/22% respectively.
This record was determined not only due to the decisions of the investment managers in the institutional bodies, but to a large extent as a result of a huge influx of funds from the public into the new routes that entered in the storm, which follow the American S&P index.
A turning point occurred in 2025, when the local stock market made a much better return than the P&S 500, and along with the strengthening of the shekel against the dollar – these caused the Israelis to take a step back, and withdraw funds from overseas routes in favor of local stock routes.

● If you want to neutralize the influence of the public on the investment mix between Israeli and foreign stocks, it is correct to look at what is happening in the training fund industry in a defined path – the general path where investment managers have a relatively high level of flexibility in investment decisions.

There the absolute equity component ranges between 44% and 48% (again, except for 2022 when it drops to 41.4%). And as for the proportion: it was 66%/34% abroad-Israel. It reached its peak at the end of 2023, the excellent year in the overseas markets, against poor performance in the year of the war in Israel (“Iron Swords”) to the level of 71%/29%.

Today it has gone back to a proportion of 63%/37% in favor of abroad, thanks to the extraordinary performance of the Tel Aviv stock market compared to the stock markets of the world.

Domestic bias in dimensions reminiscent of China

The intensity of the phenomenon of the home bias is usually measured according to the ratio of the rate of investment in the home stocks against the weight of the home stock market in the global stock index. Here we look very bad: the Israeli stock market makes up about 0.4% of the global one, while the rate of investment in local stocks among the institutions stands at 37%. In the USA, for example, the weight of the American stock market is about 50% and the domestic investment is 75%.

Countries that are closer to Israel in this respect are China, with a weight of about 5% and a domestic bias of 95%, or Canada with a weight of 3% and a domestic bias of 50%.

And looking to the future, it is indisputable that the current situation is not a situation of equilibrium. With globalization and without it, the direction is clear – an increasing proportion of holdings abroad at the expense of holdings in Israel. This is for all possible reasons, also due to the fact that we as Israelis often go out of our country on a physical level, to be interested in and get to know many places and cultures in the world. In addition, even in a desirable scenario of IPOs by large companies, the Israeli market will remain small compared to the strength of the funds that reach the institutional investors.

From this I estimated that within about a decade the average rate of investment in stocks abroad will reach about 85%, compared to 15% in Israel.

***This should not be considered a recommendation or a substitute for the reader’s independent judgment, or an invitation to make a purchase or investments and/or any operations or transactions. The investment house manages, among other things, mutual funds and provident funds. The information may contain errors and market changes may apply