Mutual funds to indicate risk profile

New ISA regulation another attempt to improve transparency.

The mutual fund industry must begin advertising its funds with a new profile classification disclosing the fund's risk exposure to shares and foreign currencies according to a new Israel Securities Authority directive aimed at boosting transparency and for the public to make informed assessments. "The mutual fund industry has embarked on often very creative advertisements of their mutual funds giving them, for example, nice names of flowers. "However, these ads can often be misleading to the public," said ISA spokesperson Ori Katzir. "Therefore the ISA decided to add a new classification in the form of a code to the names of the funds, which will help the public to judge and compare funds according to their risk level." Currently, mutual funds are heterogeneous, which makes it difficult to compare them with each other mainly due to the lack of information and the freedom in the specifications of mutual funds. For example, the yield of a fund that invests in Europe or the US is included in the same group as a fund that invests in emerging markets. Another difficulty in assessing the risk level of mutual funds pertaining to the current classification is the trend of these funds being named according to the dominant weight of investment of their assets. For example, a fund is classified as a shekel, bond or share fund because at least 90 percent of assets are invested into the shekel, in bonds or shares, respectively. However, in practice, the structure of the shekel fund might consist of 95% investment in shekel and 5% into options on the Tel Aviv-25 share index, which might increase exposure to risk. Therefore, in many of these mutual funds ostensibly offered as a substitute for solid makams or pakams, a lot of very non-solid investments could be found about which the public is not always aware. Starting January 1, the publication or advertising of mutual funds will be subject to a new classification to enable investors to simply and easily understand a mutual fund's risk level. That classification will create more homogeneous groups of mutual funds through the addition of a new code to their names unveiling exposure to stocks and foreign currencies. Each mutual fund will have a minimum and maximum exposure profile to stocks and foreign currencies on the basis of a sliding scale rated A to F for foreign currency, and 0 to 6 for stocks. For example a fund rated with an A has a 10% exposure to foreign currencies and a fund rated with an F has an exposure of over 200%.