10% of trust funds invested in tycoon bonds
Was public exposure to power groups curbed as promised? ISA figures show trust funds hold 17% of economy's corporate bonds, whereas institutional investors hold 25% of bonds. About half of the bonds held by trust funds bear label of economy's 10 leading corporations
Prof. Shmuel Hauser, head of the Israel Securities Authority, guaranteed that "right now we have no risk a tycoon toppling the economy or jeopardizing pension savings."
According to figures presented by Hauser, Israel's corporate bond market is worth some NIS 300 billion (about $81 billion), a quarter of which is held by institutional investors.
The data led committee members to question who holds the remainder of the money if institutional investors only hold a quarter of the bonds. Hauser and Sarig offered no answer to the conundrum.
A week later, Knesset Member Zahava Gal-On (Meretz) delivered a letter to ISA requesting data on the segmentation of the institutional investments in negotiable bonds in Israel.
Gal-On stressed, "I wish to investigate concerns that the reduction of the pension fund and trust fund exposure to corporate bonds is done by means of transferring funds to pension funds which also belong to the institutional investors."
The MK further noted that "in the discussions, the identity of the bodies that hold some 75% of the bonds market in Israel, worth NIS 225 billion ($60 billion), was not disclosed. More specifically, suspicions are arising that the trust funds, part of which are owned by the institutional bodies, hold large volumes of the same bonds.
"If this is so, than these institutional bodies are possibly indirect holders of corporate bonds in volumes that by far exceed those reported, while disregarding the strict safety rules imposed by the commissioner of Capital Markets, thereby using trust funds as a safety net for investing in low rated bonds with high risk levels or in bonds that do not offer acceptable securities."
Minuscule exposure to tycoons?
Last week, ISA agreed to put the pieces of the puzzle together. Figures exposed by Calcalist for the first time, indicate that the trust finds, which as of the first quarter of 2011, managed assets worth NIS 160 billion ($43 billion), at the same time held NIS 40 billion ($11 billion) worth of corporate bonds which constituted 16.6% of the economy's bond market.
This means that in effect, the institutional investors hold not a quarter of the bond market but rather close to half. The total value of the corporate bonds market for March 2011 was NIS 264 billion ($72 billion).
Additionally, figures show that the lion's portion of the funds' corporate bond investments is in real estate and construction – 38%. The funds' exposure to investment and holdings companies – the same companies by which the tycoons reign over their diversified business operations through high leveraging – amounted to 19% at the end of March.
Another interesting figure indicates that although the funds hold bonds from 339 companies, 41% of the corporate bonds are linked to the economy's top 10 corporations or in other words, nearly half of the money that the funds invest in corporate bonds is in the hands of Israel's top 10 tycoons and of all of the funds' Investments – 11% are in corporate bonds of Israel's top 10 corporations.
Looking at holdings in shares reveals a similar picture – 49% of the funds' share holdings are in the companies of the economy's top dogs. This figure may serve as an indication to the level of centralization in Israel's economy as it demonstrate that 10 leading corporations hold much of the spoils of the companies in which the funds are invested, increasing the funds' dependence on the business and financial performance of these corporations.
Thus, for example, Nochi Dankner controls IDB Holdings, through which he controls a plethora of businesses such as cellular provider Cellcom; food retail chain Shufersal, internet provider Netvision, Clal Insurance and Clal Industries. These are the figures on the basis of which ISA's chairman claimed that the funds' exposure to the tycoons holds no risk.
The securities Authority also exposed an interesting mix of investments over the years of the various mutual funds. Apparently, the scope of exposure to corporate bonds has been on the climb in recent years peaking in the first quarter of 2011.
In 2007, the portion of corporate-bond holdings was 24%; in 2008 – an anomalous year that saw enormous withdrawals and plummeting bond values on the backdrop of the global crises – holdings shrunk to a mere 12% but have since regained footing and climbed to 21% in 2009, to 26% in 2010 and to 28% as of the end of March 2011.
The success of corporate bond investments over the past two years, led to significant offerings in the first few months of 2011.
Did wave of declines change picture?
It's important to stress that the aforementioned describes the state of affairs right before the recent stock market slides, culminating last August. Currently, things should be rather different following the wave of heavy withdrawals that swept the funds' sector.
Since the beginning of the year, the funds recorded NIS 19.2 billion ($5.2 billion) in withdrawals from traditional trust funds of which NIS 22.5 billion ($6.1 billion) were withdrawn in the past five months alone. Alongside the devaluation of the fund assets, traditional funds lost 20% of their assets. This means that currently, the aforementioned exposures are lower.
Gal-On told Calcalist that "the figures demonstrate just how much the public's trust fund savings are exposed to high risk levels as well as the centralization in Israel's economy. Nearly half of the funds' stock Investments are in the top 10 corporations, making the public disproportionately dependent on leveraged bodies, which have low equity and have already proven their inability to meet their financial obligations."
Gal-On, who is member of the Knesset's Finance Committee, said: "Supervision over trust funds should be tightened and in particular, we must examine with a fine toothed comb cases in which investment houses controlled by the tycoons are channeling investors' money towards dangerous investments in their own companies as well and their involvement in debt rolling and haircuts on the expense of the public."
Click here to read this report in Hebrew
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