Israel pension funds form top institutional investor

TEL AVIV Feb 5 (Reuters) - Eight Israeli pension funds have completed their merger into one entity, creating the country's largest institutional investor, the funds' general manager said on Tuesday.

The merged funds, now called Amitim, have 134 billion shekels ($37.1 billion) in assets under management, of which 85 billion shekels, or 63 percent, are invested in Israeli government bonds issued specifically for pension funds, Yael Andorn told a news conference.

Of the remaining 49 billion shekels in "freely invested" assets, 41.7 percent are in high-grade corporate bonds, 31.9 percent in government bonds, 24 percent in stocks and 2.3 percent in cash.

Amitim achieved a yield of 9.4 percent on the freely invested portion of its portfolio in 2007. It expects to increase its free investments to 78 billion shekels by 2011, when its total portfolio will amount to 137 billion.

According to government regulations, pensions funds must invest at least 30 percent of their assets in the special government bonds. Amitim Chief Investment Officer Gil Greshler said the fund will gradually reduce its investment in these bonds from the current level of 63 percent.

Regulations also limit pension funds to investing no more than 10 percent of their portfolios in stocks. Amitim has 7.6 billion shekels in Israeli shares, up from 6.6 billion at the end of 2006, and 4 billion shekels in stocks abroad, up from 2.3 billion at the end of 2006.

Andorn said, however, that the Finance Ministry is seeking to lift the restriction on the pension funds' investments in stocks in order to create a level playing field with other institutional investors. She said the ministry has submitted a proposal to parliament's finance committee.

"For us it is convenient that the ceiling on investment be lifted and then we can decide how much exposure we want in accordance with our obligations," Greshler told Reuters on the sidelines of the news conference.

Other Israeli institutions such as insurance companies no longer have limits on their investment options.

In 2007, Amitim expanded its investments in private equity funds. Its policy is to invest 1-2 percent of its assets in private equity, Andorn said.

Amitim has invested $200 million in alternative asset manager Hamilton Lane, $30 million in Harbourvest and $23 million in private equity group Apax.

"In 2008, if the new rules are passed, we will increase investments in the stock markets and various funds and change the mix of our real estate portfolio," Andorn said.

Amitim was formed from the merger of eight so-called "old pension funds" that were created in the 1950s shortly after the establishment of the Jewish State.

The merger was part of a sweeping reform initiated in 2003 aimed at overhauling the deficit-ridden pension fund system. The merger has led to annual cost savings of up to 50 million shekels and done away with the funds' actuary deficits.

Amitim has 175,000 active members but is closed to new members. But new pension funds have been formed.

($1 = 3.61 shekels)