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(photo credit: Courtesy Photo)
Despite the downward trend in world markets over the past week, Prisma's Dov Kotler is optimistic that the positive sentiment in the country's mutual fund industry in the first two months of this year will continue amid lower interest rates and markets that are poised to move up again following a moderate correction.
But rolling into March, Israel's mutual funds industry was hit as world markets tumbled and Tel Aviv stocks suffered together with share prices worldwide, and the public redeemed hundreds of millions of shekels from mutual funds.
"We have not seen large withdrawals over the past few days, what we saw were transitions from one channel to another, shifting stocks into more conservative shekel vehicles, but we don't expect the Israeli mutual fund industry to be damaged severely," Kotler told The Jerusalem Post in his first interview since he took over as CEO of Prisma last year after leaving Union Bank. "We believe that the markets are experiencing a moderate correction after which we are optimistic that the Israeli market will be up again as macroeconomic data is strong. However, the determining indicator will be the US macroeconomic data published in the coming months."
Prisma, Israel's largest investment firm with assets of over NIS 50 billion under its management resulting from key purchases it made from Bank Hapoalim and Bank Leumi last year, was launched by venture capital fund Markstone Capital Partners on April 1 last year. In less than a year, Prisma has more than tripled its work force from 60 employees to 190 and Kotler revealed that the firm was expected to have 230 employees by the time the transfer of the Poalim provident funds is finalized.
"Prisma was established as a direct result of the Bachar reforms," said Kotler, who switched to the capital markets industry after 29 years in banking. "We faced a lot of challenges - more than we expected."
Since its inception, the Prisma investment firm has swallowed bitter pills in the form of massive redemptions and heavy withdrawals in the third quarter of 2006, in particularly from PKN Plus and most recently from the Lahak mutual fund management companies, which Prisma bought from Bank Hapoalim last year. Meanwhile, profits dropped 70% against the second quarter to NIS 1.4 million, compared with NIS 4.6m in the previous three months. At the end of the third quarter, PKN was left with NIS 11b. in assets, compared with NIS 16b. when Prisma bought the firm in April last year. The third-quarter withdrawals cost Prisma NIS 10m. in revenues, which amounted to NIS 47.3m. in the quarter.
Last year, Israel's mutual funds lost some NIS 20b. in assets as the public withdrew its money. Many of the withdrawals were triggered by events such as rising interest rates that impaired funds targeting bonds and fixed-income shekel vehicles. Also, share prices dropped, emerging markets tumbled and the war in Lebanon curtailed some of the public's appetite for investments.
Kotler argued that most of these events were history, and that the negative trend has reversed.
"We managed to stabilize the redemption rate of PKN, which decreased from 4% to 5% to 0 in the beginning of this year, but we still need to stabilize Lahak and the Poalim and Leumi provident funds," he said. "At PKN, we replaced the majority of investment managers, who then achieved much better results."
This month Prisma will be undertake the biggest merger in the Israeli mutual fund industry by combining PKN and Lahak's 150 mutual funds into 80 to 90 funds.
"This will create better management and the ability to bring better results," said Kotler.
In addition to the mutual and provident fund market, Prisma is also planning to enter the pension fund market.
"We are negotiating a solution to have an interest in a pension fund with Ayalon," said Kotler.
Ayalon Insurance Company Ltd. manages two pension funds, Pisga and Magen Zahav, which it bought from Central Union of Cooperative Societies.
Ayalon manages about NIS 3.8b. in pension insurance assets, while Prisma's Poalim and Leumi provident funds manage about NIS 30b. in assets.
"I am positive that Prisma's portfolio will soon include pension products including provident and pension funds and financial products including mutual funds, portfolio management, and exchange traded funds after we close all the deals," said Kotler.
To spur competition in the insurance sector, the Insurance Commissioner Yadin Antebi recently released a draft capital market reform that would allow people to shift money accrued in pension plans between companies and between different types of pension vehicles such as life insurance plans, pension funds and provident funds at any time.
"I believe that in 2007 we will see money shifting from one company to another in the provident and pension fund industry," said Kotler.
Summing up the successes and failures of the Bachar reforms, Kotler said the reform had been a great success but that it had failed to take care of or to reform the distribution channel of financial products, which were still 95%-channeled through the banks, which charge a so-called distribution fee that is paid by mutual fund managers.
"We have to create an alternative to provide a direct channel in the mutual fund industry through building an Internet Web site for direct purchase and through the expansion of branches across the country," Kotler suggested.
Kotler added that a new initiative by the Israel Securities Authority to set up a Web site through which the public could buy and sell units in mutual funds, without paying any distribution fees, could be the first step into reforming the distribution channel.
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