What makes the headlines is stocks. But the real story of the Tel Aviv Stock Exchange in 2001 was bonds.

Stocks gained strongly in the last two weeks, but not enough to wipe out losses accrued until the shocker 2% rate cut by the Bank of Israel for January. Bonds, on the other hand, climbed both at the end of last year and the beginning of this one.

The underlying reason is the consistent erosion in interest rates over the last year. Short-term interest on shekel deposits slid from 8% as 2001 began to 4% as the year ended. Real medium- and long-term interest fell from a level of 5% or 6%, to 3% or 4%. The result was that 2001 ended with fantastic returns on bonds of all kinds, with yields commensurate to leverage (the bond's range).

CPI-linked treasury bills astonished with a 20% leap. Short- and medium-term bonds rose anywhere from 8% to 15%. Shahar-type unindexed shekel bonds gained 8% to 12%. Even the Bank of Israel's short-term loans generated real yields of more than 6%.

Bond investors are probably looking at the tables of average performance and smirking. Finally they're at the party too! "Finally, my investments in provident funds/"executive insurance" policies/ some other vehicle will make me double-digit yields in 2001," they grin.

Sorry, guys. We have bad news. The average Israeli investor in any of those "low-risk" vehicles probably missed the party in 2001 too.

These are the figures. Bank Leumi's biggest provident fund, Otzma, generated a real yield of 6% in 2001. Bank Discount's No. 1 provident fund, Tamar, ended the year with a real return of 5%. Bank Hapoalim's largest provident fund, Gavish, did even worse with a 4% yield.

How did these funds manage to achieve coupons of 4% to 6% in 2001, while most of the instruments in which they invested achieved double-digit returns? After all, most of the funds' assets were placed in bonds.

One's gut instinct is to blame the share component of the funds' portfolios. The general index of shares ended the year 8% down. But the shares component of the funds' portfolios is 15% to 20% at most. At worst, these stocks reduced the fund yields by 2%.

No, the real reason behind the poor performance of the long-term investment funds is that their managers peer at the world through short-term blinkers. What they have on the mind is the yield of next month, not that of years to come.

This short-term view led the fund managers to prefer short-term bills, shekel deposits or nonnegotiable bonds ¿ vehicles with minimal volatility that assure the investment manager peace of mind. But they generally bring lower yields over time.

The banks' fund managers can proffer plenty of explanations for their soggy performance. But there is one hard cold fact they can't wriggle out of: Why smaller funds run by private brokerages, such as Dovrat-Shrem, Analyst, or Capital Berger, achieve much better results over time.

The managers of underperforming funds are supposed to get their comeuppance thanks to market forces. But in practice, most savers are attached to their banks, funds or insurance companies with financial or psychological shackles.

The banks and their ilk have no incentive to mend their ways. They will continue to present low yields while raking in tremendous commissions for mismanaging the mountains of assets under their guard.

Even when investors eventually withdraw from this or that disappointing investment vehicle, they obediently choose another offered by the obliging bank officials. The money will stay in the bank.

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