Road to Israeli Reforms Paved With Gold

2005 was definitely a good year for emerging markets. Thanks to strong economic growth and low inflation rates, countries such as Hungary, Slovakia, South Africa, Chile and many more won incredible amounts of foreign investments from hedge funds and pension funds looking for fresh alternatives to grow their money.

Israel was no different. A combination of low interest rates, minimal inflation and spectacular growth in corporate earnings, coupled with extensive regulatory reforms in its capital market, attracted $10 billion in foreign investments in 2005.

Perhaps the most dramatic turning point was the reform in Israel's pension fund regulation, a move that undoubtedly will have significant long-term effects on its entire capital market.

Back in July, in a move that was dubbed the "big bang" of 2005, the Israeli government ruled it unlawful for a bank to manage mutual funds and provident funds.

Previously, 80% of the mutual funds in Israel were owned by the banks, as well as 73% of the provident funds, for an estimated total amount of 250 billion shekels, or roughly $55 billion.

Once the legislation passed, the newly released funds flew off the shelf like hot cakes. Huge insurance companies were the first to buy the assets, and next came the foreign hedge funds.

Basically, a giant chunk of money has moved out of the hands of the banks and into the hands of brokers, hedge funds and insurance companies, adding liquidity and trading volume across the securities markets.

"In the long run, the separation of asset management funds from the banks was a positive move for the Israeli market. Eventually the funds will attract more money as their return will grow," says Gabriella Ravid, CEO of Psagot Ofek, the largest investment house in Israel. (Previously owned by Israel's second-largest bank Leumi, Psagot Ofek was acquired last year in wake of the "big bang" by York Capital Management, the $7 billion New York-based hedge fund.)