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Portfolio Guide

6 Jul, 1997 17:58
ùìç úâåáä áîééìMerav Arlozorov

What Would You Do With NIS 100,000? Bank Hapoalim Group’s Mutual Funds Portfolio

The share market has risen 70% in the past year, in what became a period of very rapid recovery from the 1994 crash. The market raced ahead on the money of a handful of closely orbiting players: sophisticated investors, institutional bodies, foreign investors. The public, breath of life to the stock exchange, was keeping its distance and did not benefit at all from this advance.


Bank Hapoalim Mutual
Funds' recommendation
Instrument Investment Portfolio
Solid Flexible
Shekel 40% - 50% 15% - 29%
Index 20% - 30% 10%
Foreign
currency		 15% 15%
Shares 15% 50% - 60%

The public’s absence from the share market was most clearly demonstrated by the level of capital raising on the part of mutual funds. The market has posted a sharp recovery, and it is widely assumed today that the crash is a thing of the past. The risk of the market collapsing back to its quotations of six months ago appears slight. Yet mutual funds capital raising has been sparse on the whole, amounting to some tens of millions of shekels per month, or hundreds of millions over several months. Relative to the size of the mutual funds industry and its vast potential, capital raising has been negligible. In the United States, mutual funds are the public’s principal investment instrument. They raise money at a rate of billions of a shekels per month. The local low volume still attests to the depth of the crisis of confidence experienced by the public where the capital market is concerned.

This public wariness prompted us to seek advice this week from Francine Dadi, officer in charge of mutual funds of the Bank Hapoalim group, Israel‘s second largest group of funds. We invited her to contribute to this column and offer the public some guidance as to what to do, even so, with its money. Dadi, who manages billions of shekels worth of mutual funds, naturally recommends that the public consider going into the capital market, especially the share market, and most especially into Karam shares. The best way to do that, of course, is via mutual funds, says Dadi. "The investor who constructs a portfolio via mutual funds achieves a wide capital market spread, including in the derivatives (options and Maof - M.A.) market, at a cost which, when compared with the other alternatives, is quite low, and while maintaining full liquidity. Those investing through mutual funds obtain the benefit of investment portfolio management for any amount and for any term, while the portfolio is amenable to instant restructuring, at very low cost".

So far, the public has paid scant attention to Dadi and her colleagues, and it is hard to tell whether this is about to change. Dadi, at all events, is optimistic about Israel’s macro-economic position and about the capital market. She notes that the economic slowdown is causing inflationary pressures to moderate, and will in future enable the Bank of Israel’s key lending rate to continue to be lowered, along with a significant devaluation of the shekel. These, Dadi believes, will ultimately lead to the market’s "emerging from the deadlock, and expanding economic activity, provided the budget framework continues to be preserved after the new Finance Minister is appointed". Investment in most capital market instruments, especially the share market, thereupon becomes worthwhile.

  1. Shekel instruments: The present level of returns in these instruments, as against inflation expectations of 8%-8.5%, results in a situation in which shekel instruments continue today to assure a relatively high real rate of return. Dadi thinks it highly probable that returns in these instruments will decline, so that investors make capital gains, due to the economic slowdown.

  2. Foreign currency: The change of the slant mechanism, instituted two weeks ago, renders the foreign currency market more vulnerable to sharp fluctuations. Dadi recommends that investors protect themselves against that eventuality by purchasing Gilboa type dollar-linked debentures (government bonds), which today bear an attractive yield of 7%. She notes that, considering the devaluation potential, a relatively high foreign component is worth holding today.

  3. Index-linked instruments: a number of factors will affect index-linked investments over the coming month: the nominal interest rate will decline, more existing debenture series will be redeemed than new series are issued, while uncertainty will prevail as to the rate of decrease of inflation following the rise of the dollar. Dadi estimates that these factor will combine to ensure the continued decline of bond market yields. In this instrument, she accordingly recommends investing mainly in long-term debentures. Very solid investors, not wanting to risk their money, can build a portfolio of index-linked debentures by investing in Kfir-type (variable interest) debentures, which are being traded below their adjusted value and are expected to take capital gains in a rising market.

  4. Shares: Dadi claims that the share market price adjustment of recent months was warranted, and that, even after the correction, the share market is still trading at reasonable, even relatively attractive prices. "Even after the correction", says Dadi, "p/e levels on the TASE are low compared to the rest of the world, especially in view of the fact that Israel is defined as an emerging market, and attracts international interest".

Dadi considers that in the first quarter of 1997, the profitability of Tel-Aviv Stock Exchange companies was adversely affected by the Bank of Israel’s restrictive monetary policy. Present expectations are that the Bank of Israel will lower its key lending rate, debenture yields will be down and the shekel will be devalued against the dollar. All this should improve company profitability, and assure a continuing positive trend on the share market. Here she draws readers’ attention primarily to the Karam shares. "The correction in share quotations", writes Dadi, "has found partial expression only in the shares traded on the Karam index. The main reason for this is that foreign investors focused primarily on the major investment companies. Accordingly, a great many securities can be found on the Karam, that are being traded at attractive prices".

Dadi believes that ultimately, the general public, which has been only sparsely represented there so far, will start to take an interest in this market. As evidence of this, she points to the popularity of mutual funds that combine shekel investment with Maof option investments. As stated, her recommended investment portfolio will invest in mutual funds specialising in each and every field.

Specifically, she recommends that the portfolio’s shekel investments be made through the purchase of shekel mutual funds, or funds of that type that also combine Maof options. These are recommended for the flexible investor. For the index component of the portfolio, she recommends buying mutual funds that specialise in Kfir type or long-term debentures. The latter are recommended primarily for the flexible investor. For the foreign currency component, Dadi recommends investing in mutual funds that specialise in Gilboa-type debentures (for the solid investor), or mutual funds specialising in foreign currency investments in Israel and abroad, for the flexible investor. The share component of the portfolio, finally, should be obtained by purchasing mutual funds that specialise in shares, for the solid investor, and through share funds specialising mainly in Karam and in the export sector (for the flexible investor).

Previous Recommendations:

The above recommendations were made by a person/s working in the investment industry, who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk

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