The rapidly growing kosher investment sector, which now manages large sums, requires more serious analysis, together with the stigmas attached to it.
Kosher companies are companies with a heter iska, and which do not do business on the Sabbath. A heter iska defines loans or bonds issued by the company as a partnership in the company's business, and the interest as part of the profits, which means that the company is not violating the ban in Jewish religious law on charging or paying interest. A heter iska also legitimizes writing off debt in cases of business failure, as long as this is done fairly, because the loan is against profits, while any losses are shared by the two parties.
NIS 10 billion is already managed in kosher instruments. 80% of public companies in Israel are defined as kosher. One interesting aspect is that a smaller proportion of larger companies are kosher: 70% of the Tel Aviv 90 index companies are kosher, compared with only 60% of the companies on the Tel Aviv 35 index.
There are three approaches in Jewish law to investments in shares. The most stringent approach applied by the most extreme haredi (Jewish ultra-Orthdox) groups, holds that investing directly in shares of Israeli companies is forbidden, because a party buying shares in a company becomes a partner in that company. If the company desecrates the Sabbath, does not observe the Jewish laws governing interest, or violates other Jewish laws, a Jew holding shares in the company is a partner in the offenses against Jewish law committed by the company.
This approach hold that exposure to the Israel stock market is permissible only through financial derivatives that do not confer partnership rights in the company. Exposure to overseas markets is also permissible through direct share purchases, because it is assumed that only a negligible number of Jews are employed by the companies, compared with the total number of employees. With this approach, the investor receives the market return, no more and no less, like any other investor preferring the index to an active investment that attempts to achieve a better return.
There is also a more lenient approach that argues that buying shares is permissible if the relative amounts invested and holdings received do not give the investor any influence over the company, because in this case, there is little connection between the investor and what the company does.
A third approach, which lies between the first two, is becoming increasingly prevalent. In this approach, the public companies are classed as kosher or non-kosher according to two criteria: Sabbath observance and observance of the laws governing interest through a heter iska arrangement. Investment in the kosher companies is therefore permissible.
The kosher investment instruments currently available to investors include pension funds, advanced training funds, trust funds, exchange traded funds, provident funds, the Savings for Every Child plan, and investment portfolio management. Almost all of the major investment management companies in Israel now managed kosher investment instruments. Customers for these instruments are primarily haredim and hardalim (haredim who fully endorse the Jewish state).
The main problem with kosher investment instruments may be the lack of awareness of them on the part of potential investors. The rather rapid growth in the sector indicates that awareness is increasing, but there is still a great lack of awareness, a lot of work to be done, and great scope for positive activity and growth.
Another important problem is the impression that the potential return on kosher investments is lower than that of ordinary investments. This impression is incorrect. For example, kosher pension funds have the lowest returns, but this is not because they have a lower potential return. The main reason for the lower returns is that kosher funds are managed more conservatively than others, with most of their assets being invested in government bonds, which involve no questions of Sabbath observance or heter iska.
Funds that invest exclusively in government bonds are also classed as kosher. In an environment with a low interest rate and bull market in shares, their classification as kosher and their almost negligible returns lower the average return of the kosher funds, thereby perpetuating the erroneous preconception that the potential return of kosher instruments is lower.
Another possible reason, which is merely a hypothesis, is that investment companies regard investors in kosher instruments as a captive audience that does not have to be enticed with an attractive return. Managers of these instruments make less effort and settle for a low return and rather passive management.
The roll of kosher investment stars in recent years has featured Frutarom, Camtek, Hilan, and Direct Insurance, with an aggregate return of many times the investment in them. Among the kosher companies with large negative returns are Perrigo and Albaad Massuot Yitzhak. Ormat and Elbit Systems are examples of non-kosher companies with returns of many times the investment in them, while other non-kosher companies have also lost large proportions of their value, such as Teva and Gazit-Globe.
The Savings for Every Child plan is one of the best-performing kosher instruments. Most of the companies offering investment instruments on this track also offer a kosher instrument. Kosher advanced training funds are offered by most of the investment institutions that manage advanced training funds, and kosher provident funds are also available at most investment managers. The trust funds have a fairly large number of kosher exchange traded funds, but few active trust funds are kosher. There are also companies that offer kosher investment portfolio management.
There are currently three concerns rating companies as kosher or non-kosher. The most veteran one is represented by Rabbi Aryeh Dvir. The second is "Halachic Return Rabbinical Committee, a concern composed of various haredi groups, led by the Gur Hassidic group. The third is the Keter Institute for Torah Economics, which is identified with religiously observant Zionism. The reason that these agencies concern themselves only Sabbath observance and heter iska, without examining other elements of Judaism that involve investments, such as the prohibitions against stealing and failing to pay a day employee's wages the same day, and the general commandment, "Do what is right and good," is that assessing these matters is more difficult, and decisions to approve or disapprove a company are in many cases subjective. Sabbath observance and heter iska, on the other hand, are easy to check and to comply with.
Interpersonal matters
Psagot Investment House last month announced the launching of a responsible investments covenant. Investment portfolio management company IBI has had portfolio management with measures of corporate responsibility for some time. A number of years ago, on grounds of fairness, Mifal Hapayis - Israel National Lottery decided not to invest in the bonds of companies that wrote off their debt and did not repay the money. Aviv Risk-Hedged Fund Management (managed by me) manages private funds that invest in funds with fair practices.
When we talk about responsible investments or investments in companies with fair practices, we are talking about criteria of Judaism that extend the concept of "kosher" investments to investments that comply with Jewish law. Responsible investments, corporate responsibility, and fairness - these are merely different names for the Jewish commandments: "Do not steal," "Do not withhold an employee's wages," "Do not commit theft," and the all-encompassing commandment: "Do what is right and good."
When Psagot launched the covenant for responsible investments, Barak Soreni, its CEO, said that his investment house's considerations were and would remain first of all considerations of the return. This statement was probably aimed at the general public, so that it would be worry that Psagot's considerations of corporate responsibility would have a negative impact on its return. There is general worldwide recognition, however, that considerations of fairness are financially good for an investment portfolio, and are likely to result in a higher potential return at lower risk.
Prof. Michael Porter, who visited Israel not long ago, is one of the most prominent gurus in US investment management in the past 20 years. Porter argues that corporate responsibility should be based on the principles of real capitalism: striving for productivity and creating value - not value for the shareholders and executives, which he thinks is short-sighted and destructive, but a "shared value" for the company and all of the players in the environment in which it operates.
A senior director at Deutsche Bank asserts that analyzing the environment, society, and corporation governance, should be part of any serious investor's investment process, and part of the activity of any company that cares about the value it is creating for its shareholders. He knows what he is talking about; Deutsche Bank assembled over 100 academic studies examining the effect of fairness on companies' business and share performance.
85% of the studies showed that fair companies have better business results. 89% of the studies reported that these companies also had better share performance, and all of the studies showed that companies that practice fairness raise capital at lower cost, because the market regards their risk as lower.
Jim Collins and Jerry Poras, authors of the bestseller, "Built to Last: Successful Habits of Visionary Companies," also wrote that they had not found that maximizing the shareholders' wealth or maximizing "the profit" were the decision motive or the main motive in the history of most visionary companies. Actually, for most of the visionary companies, business was always more than purely economic activity - more than just a way to make money. They wrote that core ideology went beyond economic considerations.
You can call it corporate responsibility. You can call it fairness, Judaism, or commandments governing relations between people. The differences between these concepts are small; in general, they refer to the same thing. In the end, it all boils down to the Jewish commandment, "Do what is right and good." There is worldwide recognition that in the long term, it leads to a better return at lower risk. In Israel, we still have to get used to it.
By the way, the world needed many studies to prove that fair practices also eventually pay off financially. In Judaism, the full commandment states, "Do what is right and good in the sight of the Lord, that it may go well with you." It seems that everything was already written ahead of time. Even non-religiously observant investors seeking a higher return in the long term should invest according to the Jewish principle of "Do what is right and good."
Investments tailored to Jewish religious law are obtained by integrating kosher investments with responsible investments. Kosher investments already exist. Responsible or fair investments also exist - fewer, but they exist. Now all that has to be done is to combine them.
In making only kosher investments, we give up 20% of the public companies. In responsible investments, or fair or Jewish investments, we earn potential for a better return in the long term, as we have learned from many studies.
Observers of the Jewish commandments can find in investments that comply with Jewish law an attractive potential return while acting according to their faith and values. A first fund that invests according to Jewish law, including both kosher investments and fair investments, already exists. Managers in the sector talking about an attractive potential return already exist.
My prediction is that kosher investments and responsible investments in Israel will both grow and expand. There are signs here and there that they will be integrated. To the extent that this occurs, the other investment managers will be unable to content themselves with conservative investment management in order to supply demand from a captive audience. They will have to work harder to provide a return and remain attractive in this investment instrument, too.
The writer is an economist, CEO of Aviv Asset Management, which manages funds that invest in fair companies and funds that comply with Jewish religious law.
Published by Globes, Israel business news - en.globes.co.il - on July 7, 2019
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