A big part of
Israeli people invest their money in mutual funds. This kind of investment
makes it possible for people to invest in the capital market without
professional information and expertise. The aim of this work is to try to
estimate mutual funds performance in Israel and define factors that have an
influence on Israeli mutual funds profitability by using modern capital market
theory models. In the first part we examined mutual funds performance by
comparing the observed returns of mutual funds to their normative returns -
returns that mutual funds are supposed to yield according to their risk level. The
sample includes monthly observations for 85 stocks from Tel-Aviv stock exchange
and 72 mutual funds for the period of 1993-2004. The funds had been chosen by
their risk level and by whether they were owned by a bank or private owners. For
most of the funds the performance was below the expected theoretical return.
These results are somewhat surprising and oppose the expectation about mutual
funds that their managers are able to get higher returns. In spite of generally
uninspiring results, we noticed consistently better-performing funds (within
our sample). The mutual funds that stood out are “Analist Gmisha”, “Analist
Stocks”, “Psagot Megama”, “Psagot bonds plus”, “Pekan Dukas”, “Dikla Solidit
Bonds”. In the second part of the work, we tried to identify differences in
Israeli mutual funds success by using multivariate analysis techniques. To
define the number of factors that generate the fund returns, we examined the
funds’ monthly returns by using the “principal component method”. As a result,
we found four factors which jointly influence the funds’ returns, at different
rates. That is to say: the power of factors’ effect is not identical.
Therefore, we tried to rank the factors according to relative significance for
the individual funds. We found one dominant factor for all of the sample mutual
funds - the “market factor”, which is strongly correlated with the General
Stock Index. Also, we found that “fund size” was a factor, but only for the
“government bonds” group of funds. The mutual funds performance evaluation with
different methods had shown the existence of more negative results (below
normal) than positive results (above normal). In spite of that, the mutual
funds are still making it possible for a private investor to diversify his
capital into different channels but not at the highest attainable efficiency.
