What Would You Do With NIS 100,000?
Pe'ilim's Investment Portfolio

"Globes" continues with its weekly feature outlining the investment portfolio recommended by various investment managers operating in the capital market. This weekly recommendation, we would remind our readers, is intended for private investors, rather than companies or organisations, seeking an investment for the short-term (a few months), the medium term (about a year) or the long term (upward of three years).

Our experts, all of them seasoned capital market investment managers, have been asked to construct a recommended investment portfolio for each of those three terms, giving detailed reasons. We have imposed no restrictions, recommendations need not even be limited to the capital market, and experts are entirely free to structure the portfolios as they deem best.

"What would you do With NIS 100,000?" is this column's leading question. Today's recommendations come from Yossi Lev, deputy general manager of Pe'ilim, Bank Hapoalim's portfolio management company.

Lev bases his recommendations on a number of macro- economic assessments for the coming year, whereby inflation will reach 9.1%, while devaluation will merely correspond to the slant gradient (6%). On the basis of these premises, Lev worked out what profits would be yielded by the various investment channels, and reached one sweeping conclusion: shekel channels are patently the best.

Shekel channels:
According to Lev, shekel channel investments are conspicuously preferable to any other, solid or share-based channel. The high real yields produced by these channels today, due to the Bank of Israel's restrictive monetary policy, vanquish all alternatives.

Shekel channels therefore carry by far the greatest weight in the Pe'ilim portfolio, in both the short and the medium terms, where they account for 60% and 45% respectively. Only in the long term does the risk of inflation in Israel prompt Pe'ilim to recommend reducing the shekel component to 20%. Pe'ilim's recommendation, while covering a broad cross-section of all shekel channels, nonetheless focuses primarily on the longer instruments - which is to say, three-year Shachar series.

Debentures:
Since it ascribes such great weight to the shekel channels, Pe'ilim's recommended investment in debentures is much lower. It is worth noting that Pe'ilim does not recommend any investment in short-term debentures. This is because, in its opinion, the yield offered by them is inferior to that offered by the shekel channel, especially for the private investor seeking a net yield.

A similar negative recommendation has surfaced in previous recommendations featuring in this column. Pe'ilim, however, is exceptional in that it does not recommend long-term debentures at all, even for long-term investors. "There is still a lot to be feared from long- term debentures", Lev explains, "both in view of the expected resumption of issuances by the Ministry of Finance, and because we are not sure that the process of withdrawal from the provident funds is over".

Pe'ilim accordingly focus on investing in medium-term (5-year) government bonds, and even then, only for long- term investors. They assess that the yields assured by these debentures (4.5%), are interesting, and that their lower risk level (compared to long-term debentures), warrants investment in them. Also recommended for investment are Kfirs, which bear variable interest. This is because they are low-priced, being traded at below their adjusted value, and because their most recent interest rate update was high.

Dollar linked:
Short-term devaluation prospects move Pe'ilim to recommended investing in dollar-linked channels (Gilboas), although they warn that Gilboas have a nasty habit of not covering the entire devaluation. "The trick with Gilboas", Lev explains, "is to buy them before expectations of a devaluation are aroused, and sell them while expectations are at their height. One must not wait for the devaluation actually to happen, because it will be followed immediately by a wave of disposal of Gilboas, which thereupon fall".

In the long term, inflation differences between Israel and the United States are such that, in the opinion of Pe'ilim, the prospects of the dollar's producing any real yield are nil. Dollar investment, therefore, is not recommended beyond the short or the medium term.

Convertible debentures:
Pe'ilim recommend convertible debentures of sound companies, that return a yield of 5% or 6%.

Shares:
As far as shares are concerned, Pe'ilim is not at all conservative. For the short and medium term, Pe'ilim is still leery about investing in shares, due to the high risk involved in the share market. For the long term, however, shares take pride of place, accounting for 50% of the company's recommended investment portfolio. "This is a fantastic opportunity", says Lev, "Over the next five years, the share market will yield, on average, at least 8%-9% annually in inflation-adjusted terms. And that is a conservative estimate only".

The feeling in Pe'ilim is that the entire future of a profitable investment portfolio depends on the share market, and they recommend paying attention to shares with a low market to equity ratio, a low P/E (market value to profit) ratio and with good growth potential. In their assessment, most of the companies meeting these criteria are to be found in Karam, but due to low marketability on Karam, investment there is sometimes too risky, and their recommendations therefore centre on a series of marketable Maof shares:

1. Bezeq: The telecommunications industry, especially the cellular sector, can be expected to grow. Pe'ilim pin a great deal of hope on plans for privatising the company and the possibility that control of Bezeq may pass to Cable and Wireless.

2. ICL (Israel Chemicals): ICL is expected to enjoy accelerated growth in the world chemicals industry. Dead Sea Works' profits too, are expected to be substantially boosted, following commencement of the marketing of metallic magnesium. According to Pe'ilim, most of the fruits resulting from the transfer of control of the company to the Israel Corporation have yet to be harvested.

3. Bank Leumi: The bank is trading at a market value about 30% lower than its shareholders' equity. It can expect major capital gains on sale of its non- financial holdings. As computed by Pe'ilim, the spin-off and sale of Africa Israel will yield Bank Leumi a capital gain of 10%(!) of the bank's market value.

4. Bank Hapoalim: This bank is trading at a market value 30% below its shareholders' equity. Very substantial capital gains may be expected from the sale of non-bank holdings (Clal, Koor, Poalim Investments).

5. Koor: The concern has holdings in profitable export companies (Makhteshim, Agan, Tadiran Telecommunications, Telrad). The bank can expect a potential capital gain from the issuance of Telrad.

6. Discount Investments: This company is being traded far below its asset value. Accelerated growth can be expected in Cellcom.

7. Elron: The company has holdings in high- potential high-tech companies.

8. Maof: Strictly for the sophisticated investor, Pe'ilim proposes an alternative to investing in shares. The same portion of the portfolio can be directed at putting together a Maof portfolio, composed of 85% short- term loans and another 15% Maof options, which ape the Maof index (one can acquire call options only, or deploy various strategies). The advantage of this form of investment in shares is that one can enjoy the entire extent of the rise, if any, of the Maof index, while limiting one's maximum loss (the 15% that is invested in options, and that one could lose). Pe'ilim, however, again warn that an investment of this sort should be made in consultation with experts only, since investing in Maof is complicated and risky.

Disclaimer:
The source of the above comments works in the investment industry and 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.

I.B.I Group Portfolio Guide
Ofek Portfolio Guide
Meitav Portfolio Guide
Singer-Barnea Portfolio Guide