Last week, the investment routes that follow the American S&P 500 index received the regulatory stamp that officially made them the kings of the index-following routes in Israel.
This happened after the Capital Market Authority noticed that savers in Israel are showing increasing interest in tracks that follow the Nasdaq index – which rose by 44% last year. The authority determined that the technology stock index is too sectoral, and prohibited long-term savings tracks from following it with exposure higher than 50%. This is within the framework of the reform circular in the savings routes that will come into effect on July 1st.
On the other hand, the S&P 500, an index that includes the shares of Wall Street’s giant companies (primarily the “Magnificent Seven” – Google, Amazon, Microsoft, Apple, Tesla, Meta and Nvidia), the authority left as they are.
Routes that yielded a return of about 30% per year
Investors in Israel, from large to small, “fell in love” months ago with the S&P tracks, and as of today, in all the savings products – from the pension fund, through the training funds and the various provident funds, 80 billion shekels are already managed in these tracks. This is more than 5% of the 1.5 trillion shekels that are managed in the new pension funds and provident funds.
And with the high returns achieved last year in the same routes, which reached 30%, it is certainly possible to understand why the Israelis who chose them ignored the risks associated with investing in one index, that seven stocks of technology giants are responsible for the majority of the return it generated, as well as its exposure to the dollar.
Although the latter functioned excellently and increased the yield of savers in the first part of 2023, it was in the tracks when the trend in the foreign exchange market reversed – precisely after the beginning of the war, when the shekel strengthened.
“The market share of the S&P 500 tracks will continue to grow and the reform of the tracks will further sharpen the exposure to the indices, not necessarily to the S&P but to the various indices or mixtures of indices,” says Hagai Oren, CEO of Meitav Gemel and Pensions. “We recognize a trend of An increase in exposure to passive products, not only to this index but mainly to it, and not only in Israel – this is a trend that stands out around the world of convergence and concentration to certain indices.”
Hagai Oren, CEO of Meitav Gamel and Pension / Photo: Yifat Par
“The market demanded, and we jumped on the bandwagon first”
Meitav’s provident and pension company is the pioneer of the adaptation that followed the American route, from the world of hedge funds and imitation funds to the field of long-term savings. The experience gained by the investment house was channeled in the Meitav provident and pension company to lead in returns, and it is ranked first among the entities that manage S&P 500 routes in the local capital market.
In the last 12 months, it achieved a return of 27.4% in the track that follows the S&P 500 in the training funds, a gap of about 2% from some of the competitors (and compared to an average return of only 11.5% in the general savings track and 19.2% in the equity track).
Also in January and February, Meitav ranked first when it achieved a return of almost 3.5%, and it is at the top together with Fenix (which holds the largest follower in terms of the volume of assets).
In a conversation with Globes, Oren provides a glimpse into the complexity of tracking the indices and explains what those who want to increase their exposure to the passive world need to know. “Following the S&P index came as a result of market demand and we jumped on the bandwagon among the first, right after Hellman Aldobi whose pension assets ended up being merged with us.
“In the beginning, the ‘covering’ of the index assets was done through the purchase of ETF funds, and at the same time we improved and drew capabilities from the extensive expertise of the Meitav Group in the field of monitoring and managing indices. We created a combination between the ability to utilize technological platforms developed at the investment house together with an advanced management method, which does exist in insurance companies but We were the pioneers to implement it within the investment houses – use of investment baskets.”
An investment basket works as follows: the managing company establishes an entity that makes the investments in a certain segment, such as an index or a group of shares, and issues participation units for each of the savings products. In this way, the investment manager can carry out the monitoring in a centralized way, at a lower cost of buying and selling the base assets (the shares that make up the index according to their relative weight in it), and with maximum efficiency when it comes to managing exposures, compliance with investment rules and internal restrictions.
“In the S&P 500 tracks, we manage NIS 9.2 billion, and combine sophisticated monitoring methods with our ability to operate through the investment basket,” says Oren. “To take advantage of the size and ensure uniformity, it is our uniqueness that allows us to lead in all products. We implemented the investment basket method about three years ago and this is reflected in an excellent return, but also in cost savings and minimizing exposure to errors and anomalies. This directs the investment managers to focus on the investments themselves and not To waste time and resources on splits and balances between different tracks.”
What is the technical meaning of sticking to the mix of weights determined by the index’s editors, and where, if at all, do you have discretion?
“In these routes, discretion is not reflected in the index weights. You try to manage the tracking of the index in the most accurate way, with as few tracking errors as possible, and while reducing costs to the minimum possible.
“You must find the cheapest ways of hedging (buying the underlying assets of the index, RU) and also create flexibility in the ability to hedge – know how to switch in time between basket funds and contracts. Measure with a finger on the pulse the margins and gaps between the various hedging methods, the cost structure and the viability of which tracking asset to hold, and change the nature of the holding as soon as a change is detected.
“Monitoring indices is a profession, and accordingly one must specialize in this field and use, among other things, the advanced infrastructures and tools built by the group and harness them for the benefit of the colleagues. A passive product is a dynamic product in its management. Although the investment is essentially passive, the management is very dynamic.”
“We do not trade at the individual asset level”
How will you behave if it is expected that a stock will jump – such as Nvidia, or before index update dates, when companies leave the index or enter it?
Oren explains that the passive money manager has no such discretion: “We do not enter into such events. In general, in indices, because of the working method of the baskets, we do not trade at the level of the individual asset and do not try to predict what will happen with it. The systems adjust the weights (retroactively, R” f) while relying on computerized systems”.
In contrast to the active routes, in the passive ones the timing of the “hedging” has an effect on the yield, at least on a monthly level.
“That’s right. There are differences between the various operators on the closing day of the month, so we may see differences between the managing companies in a single month. There are companies that make adjustments on the 31st of the month and there are some that do it on the 30th. In January, for example, the difference is reflected even in the differences in the time when the adjustment was made And not at today’s level.
“That’s why we have to look at the returns in longer terms, because any gap in a certain month is closed immediately on the first trading day of the following month.”
“The savers come from all corners of the population”
As mentioned, the Capital Market Authority decided to leave the S&P 500 routes without intervention, and here the question arises as to whether they are sufficiently spread out and whether following one route is suitable for long-term savings.
Who is the savings in S&P routes suitable for?
“The savers come from all corners of the population, from veterans to qualified and sophisticated customers. We also see this in the pension funds, including in selected (“default”) funds, where we recognize a trend of colleagues moving to the passive routes in general and the S&P in particular.
“So there is no profile for a particular customer. Here it is worth noting that in terms of risk management, it is necessary to spread the risk and save on this type of route alongside diversification and spreading the savings on other routes as well.
“At the end of the day, studies prove that it is very difficult to beat the indices over time. But in my opinion, passive management should not come in place of active management, but alongside it. The complex of active management alongside passive management allows for flexibility and spreading risks and thus ‘enjoying both worlds’.”
Do the Israelis do this combination?
“There are two trends here – private customers want more exposure to passive products, but specifically in the worlds of distribution there is a trend towards combinations – between active and passive management or a combination of several passive routes.
“In the distribution channels, both consultants and agents put a lot of thought into diversification and risk management; not necessarily to take a client and put him in a route with exposure to the Nasdaq index, but to produce a correct mix of a certain exposure to the Nasdaq, to the S&P 500, to the route General or for the bond track that has become very interesting in recent months.
“This trend will increase with the entry into force of the Capital Market Authority’s new circular on July 1st, and this will further sharpen the importance of guidance, pension advice and dynamic risk management.”
What does anyone who wants to follow the index need to know?
“If a consumer wants to follow a certain index, he should pay attention to a number of principles: the first is that the body he wants to save with has proven expertise in the field. In addition, the body must be one that does not stop investing in technology and tools that will allow improvement of the follow-up along with advanced risk management.
“The saver should also know that this is not a ‘stupid’ product, it is indeed passive but very sophisticated and requires expertise and a lot of active and dynamic management within the index itself, which requires flexibility and continuous updating. Although there will not be differences in returns of 10% between the entities, this optimization can generate an excess return Or added value to colleagues over time.”
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