BoI: Institutional investors ‘herd behavior’ endangers economy

The Bank of Israel has criticized the similarity in institutional investors’ asset portfolios and its implications. The Bank of Israel said, “The high similarity in the domestic portfolio derives from, among other things, the relatively small amount of potential assets for investment, but, apparently, also from the herd behavior in the investments of institutional investors.”

The Bank of Israel sees dangers in this lack of diversification, “Alongside the size and concentration of institutional investors’ holdings in the domestic capital market, it is important to examine the extent of diversification of their asset portfolios and to measure the level of similarity across them: thus, in a case of a significant shock, considerable similarity in asset portfolios is liable to serve as a pass through channel from an idiosyncratic event to a systemic one.

“An analysis of the extent of similarity in (tradable) asset portfolios of institutional investors in Israel indicates that it is very high. In contrast, the extent of similarity in (tradable) asset portfolios abroad is markedly lower, though it is still high relative to existing benchmarks.”

The Bank of Israel found that the amount of long-term savings managed by institutional investors reached NIS 2.2 trillion – 132% of GDP as of July 2022. There are 11 entities that concentrate 90% of the assets managed, and of those, 4 entities alone concentrate 50% of the assets.

The Bank of Israel concluded, “In view of the many possibilities for investment abroad and in view of the consistent increase in the scope of assets, there should be continued encouragement of geographically varying the asset portfolio and of examining the extent of effectiveness of existing regulation.”

Published by Globes, Israel business news – en.globes.co.il – on February 7, 2023.

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