Israeli Investors Shift Billions Abroad as Mutual Fund Assets Equalize

Mutual fund assets in Israel and abroad have reached a rare parity, with both categories holding approximately 167 billion shekels as of early September. This marks a significant shift, as Israeli equity funds were nearly 10 billion shekels larger at the start of the year. Over eight months, this gap has been eliminated, indicating a substantial movement of Israeli investor capital overseas, driven by either higher returns abroad or new investments in foreign funds.

The mutual fund industry is a key savings and investment channel for Israelis, reflecting investor preferences. The equalization between domestic and international equity funds signifies a change after a period where the Tel Aviv Stock Exchange offered a clear advantage. The reasons behind this shift are being analyzed, with potential factors including market performance, new capital inflows, or a combination of both.

Data from August reveals this trend is not solely due to performance differences but a tangible outflow of funds. Israeli equity funds saw redemptions of about 1 billion shekels, while foreign equity funds attracted 2.4 billion shekels, creating a net shift of 3.4 billion shekels abroad in a single month. This trend is particularly pronounced in passive funds, with foreign equity ETFs and index funds raising 2.1 billion shekels, contrasted by 800 million shekels in redemptions from Israeli equity funds.

Industry experts attribute this outward movement to several factors. In the short term, sentiment in Israel has been impacted by geopolitical events and unmet expectations following Iran's actions, despite positive domestic interest rate trends. Conversely, strong performance in global technology companies, despite geopolitical risks and high oil prices, is attracting investment. Long-term, institutional capital is increasingly favoring foreign equities due to the limited capacity of the Israeli market to absorb large sums managed by pension and provident funds, which are growing rapidly and lean heavily on passive, index-based, and international products.

This shift is not limited to institutional investors; retail investors have also embraced international diversification, driven by a change in mindset away from the traditional "home bias." Local political processes and technological uncertainty in Israel are accelerating this trend, with investors prioritizing geopolitical and political factors over purely economic ones. While the weakening dollar against the shekel initially made foreign investments less attractive, a subsequent slight strengthening of the dollar and interest rate differentials have led to a renewed preference for dollar-denominated foreign funds.

Looking ahead, the market is at a crossroads. A potential improvement in Israel's domestic situation could draw capital back, while continued uncertainty or superior foreign market performance could further accelerate the outflow. Meanwhile, money market funds, which offer daily liquidity and returns tied to the Bank of Israel's rate, remain the largest category of mutual funds, though declining interest rates in Israel may eventually push more investors towards equity funds.