Ever since the Israeli market was classified by MSCI as a developed market instead of an emerging market in June 2010, the Tel Aviv Stock Exchange has not managed to recover from the contraction of foreign investor activity. This is one of the main causes of the substantial decline in trading volumes on the exchange in the past couple of years. A small step towards bringing foreign investors back was taken today, when Market Vectors ETF Trust launched an exchange traded fund (ETF) on Wall Street that tracks the the BlueStar Israel Global Index (BLSTR), compiled by BlueStar Global Investors LLC, headed by Steven Schoenfeld. The special feature of this ETF, which will be traded under the ticker symbol ISRA, is that it does not track the Tel Aviv 25 Index, or any other Tel Aviv Stock Exchange index, but is rather composed of leading Israeli companies in general, regardless of the exchange on which they are listed.
"BlueStar was founded with the idea of exposing investors to the investment opportunities that exist in Israel," Schoenfeld told "Globes". "The index is constructed in such a way as to reflect the potential of all Israeli companies, which are highly global. If Mellanox were to leave the Tel Aviv Stock Exchange today, it would remain an Israeli company, and investors want to be exposed to it."
Schoenfeld has 29 years experience working with institutions in the areas of ETFs and asset management. He has worked with some of the largest asset management companies in the world, among them BlackRock. In 1993, when Israel joined the emerging markets index, Schoenfeld worked at IFC, the financial arm of the World Bank, when it first constructed the index tracking the emerging markets, and he made sure that Israel would be part of it. He has written and edited several books on the subject, and, in his last job, which he left in 2009, he was global asset manager for Northern Trust, where he oversaw a $300 billion portfolio of managed assets.
"After I left Northern Trust, I wanted to take all my experience and do something challenging," says Schoenfeld, "After Israel switched from the emerging markets index to the developed markets index, I realized that something active had to be done to bring investors back. In the course of my work, I formed connections in the Jewish community. In the US and Canada, there are nearly $60 billion belonging to Jewish investors who make investments all over the world, from countries like Brazil and Japan, to countries that are not friendly to Israel, like the Gulf states and Turkey. In Israel, by contrast, their investments amount to very little."
Schoenfeld relates that, when the events of the Arab Spring broke out in 2011, one of the Jewish institutions in the US examined its financial exposure to Morocco and Egypt. In the course of the discussion, the question arose of the exposure to Israel. It turned out that this entity had more money invested in Arab countries than in Israel. "No institution will make an investment out of Zionism. There are investment committees, and every investment made has to be justified to them," he points out.
Since there was no product that enabled Jewish bodies to invest in Israel, in 2010, Schoenfeld founded BlueStar, and from August 2011 the index composed of Israeli companies began to be published. In the past two years, Schoenfeld, who shows considerable expertise on what is happening in Israel, has appeared at the General Assembly of the Jewish Federations of North America, and has harnessed his entire range of connections to promote the cause.
One of the people helping Schoenfeld market the product is Eli Groner, Israel's Minister for Economic Affairs to the United States. "I can tell you that when I tour Jewish communities in the US, I am asked a great many questions, and I usually have an appropriate answer. But there is one simple question that is hard for me to answer: 'How can we invest in the start-up nation?'", says Groner, talking to "Globes". "It doesn't suit them to invest in venture capital or in a specific stock, and the index that BlueStar has compiled represents an opportunity for the ordinary investor to invest in Israel. This is another small addition to the link between the Jewish people and Israel."
Among others with an interest in this move are heads of the Israeli financial system, among them Israel Securities Authority chairman Shmuel Hauser, who welcomed the initiative allowing foreign investors to invest in local companies. "The launch of an ETF on the US market based on Israeli companies listed on the Tel Aviv Stock Exchange and on US exchanges will increase the exposure of investors round the world to direct investment in Israeli companies," Hauser told "Globes".
"The product's potential is very high"
The BlueStar Israel Global Index that Schoenfeld compiled is made up of 93 Israeli companies. Alongside the companies listed in Israel and the US are two Playtech Cyprus Ltd. (LSE:PTEC) and 888 Holding plc (LSE:888), which are listed in London, and even Cinema City, which is listed in Warsaw. "If an Israeli company makes an offering in Shanghai or Hong Kong, we will put it in the index," says Schoenfled.
BlueStar's approach to the Israeli companies in the index is inclusive, and so companies like Perrigo Company (NYSE:PRGO; TASE:PRGO) and LivePerson Inc. (Nasdaq: LPSN); TASE: LPSN), which are not originally Israeli but are listed in Tel Aviv, are in. The same applies to VeriFone Holdings Inc. (Nasdaq: PAY), which delisted its shares from Tel Aviv several years ago, but which still has development activity in Israel as a result of the acquisition of Lipman. Delek US Holdings Inc. (NYSE:DK) and Alon USA Energy Inc. (NYSE:ALJ), Israeli fuel refining and marketing companies active in the US, are also in the index, and Schoenfeld points out that "many people don't know that these are Israeli companies, and when we talk to them about investment in Israel, we mention to them that these companies generate employment in the US."
The weighting of each company on the index is set according to its market cap, with the quantity of floating shares in the hands of the public also being taken into account. The investment committee, manned by people with experience of running ETFs, among them the person behind the compilation of the MSCI indices, examines the composition of the index every six months.
The company with the highest weighting on the index is Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), with 12.75%, the maximum weighting allowed. In the distribution among sectors, computing and technology stand out, amounting to 30% of the total. Pharmaceuticals represents 26% of the index, while the financial sector, composed of banks and insurance companies, represents 19%.
The ETF is being launched by Van Eck Global, the fifth largest ETF company in the US, through Market Vectors. Market Vectors has a large range of ETFs, and the Israeli ETF will come under the international brand, where it will find itself alongside countries like Poland, Colombia, Vietnam, Egypt, and others. The average value of assets managed in these funds is about $50 million. The ETF will charge a management fee of 0.5%, similar to the fees charged by ETFs on other countries.
"We are happy with the partnership with Van Eck, and our discussions focused on the potential for bringing a flow of money to the ETF from the investment community, including investment institutions, investment advisers and private investors. We wanted to ensure a good start to trading in the ETF, and we have commitments to invest of more than $10 million from investors, an amount that we hope will grow in the coming months." As for the medium and long terms, Schoenfeld has high aspirations: "We know that the product's potential is very high, and hope that, within a year, the ETF will manage $100 million, and that within five years we will reach $500 million."
Schoenfeld hopes that, in the future, an ETF will be launched in Israel on the BlueStar Israel Global Index, enabling Israeli investors too to be exposed to the totality of Israeli companies. In this context, he mentions a further advantage of the index: "On Friday, there is still trading in an index of Israeli companies, which gives an indication of how investors are viewing Israel, at a time when the local stock exchange is closed."
Published by Globes [online], Israel business news - www.globes-online.com - on June 26, 2013
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013