Transffering the Management of the Provident and Mutual Funds From the Banks

The paper reviews the performance of bank and non-bank mutual funds in Israel. The issue is of particular interest because of legislation (the Bachar Reforms) that required the banks to divest the mutual funds under their control. The legislation was designed to reduce the banks' influence in the local capital market and introduce new additional intermediaries in these markets. It was also understood, that the legislation would tend to reduce conflicts of interests and bring about better returns for investors. The banks sold off their mutual fund holdings, in fact quite a bit ahead of schedule and in that sense the reforms can be viewed as a success. On the other hand, the data indicate that the relative performance over time of the non-bank funds has been poor and no better than bank fund performance. The published data on non-bank performance tends, however, to (mistakenly) show otherwise, in part because of survivor-bias problems - i.e. the surviving funds perform better than the funds that close and for which returns are no longer reported. In sum, the performance data as well as the fact that these funds are required to pay the banks additional marketing fees as well as costly regulatory requirements in Israel raise doubts as to whether the non-bank funds will be able to provide satisfactory returns over time.