The funds with an appetite for Strauss

David Fingold
David Fingold

David Fingold, who manages global equity funds at the Bank of Nova Scotia's investment arm, explains the attraction of Israeli companies Strauss and Elbit Systems.

Figures from the Tel Aviv Stock Exchange research department show that foreign parties at interest currently hold Tel Aviv -listed shares worth an aggregate NIS 65 billion, representing 8.7% of the market cap of the local stock market. Of this amount, NIS 17.5 billion represents shares in real estate company Azrieli Group Ltd. (TASE: AZRG), held by a Canadian company owned by the Azrieli family.

It recently emerged that a Canadian concern is also a party at interest in major Israeli food and coffee company Strauss Group Ltd. (TASE:STRS), after the Bank of Nova Scotia reached a 5% holding in the company through its investment arm 1832 Asset Management (henceforth 1832). The current market value of the Strauss shares held by 1832 is NIS 620 million, with the share price at a peak after climbing 30% so far this year, giving Strauss a market cap of NIS 12 billion.

1832, it turns out, is a longstanding shareholder in Strauss, in which it first invested thirteen years ago. Investigation by "Globes" further discovered that besides Strauss, it also holds shares to a similar value in another Israeli company - defense giant Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT).

Altogether, then, 1832 holds shares in two Israeli companies worth an aggregate NIS 1.2 billion. In the past, it was a shareholder in Frutarom and Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), with holdings that can be estimated at a few hundred million shekels each.

Focus on quality, competitive advantage, and balance sheet strength

Talking to "Globes", David Fingold, who manages several of the global equity funds at 1832 Asset Management, says, "We came into Israel as early as 2002, and we have had holdings here for a long time. Most firms can't invest beyond Israel's weight in the MCSI indices, but we don't care about Israel's weight, and Israel accounts for a larger share of our investment portfolio than its proportion in the indices."

What do you look for in your investments

"We invest all over the world, in mature companies that are market leaders and that present growth. We began investing in Strauss in 2006, and six years ago we invested in Elbit Systems. The investments in these companies, as well as the investment we made in Frutarom that has since been realized, have a common denominator - they are in companies with substantial global activity and with advantages over their competitors in the markets in which they operate. We focus on high-quality companies, with competitive advantages and strong balance sheets, that are also good generators of cash. We're value investors, and we look for growth in the companies we go into."

What potential do you see in Strauss?

"We have held Strauss shares for many years, and over the years we have seen changes taking place there and decisions made at the company that have helped it to grow while being stringently conservative with its balance sheet, despite having aggressive global competitors. Another thing in connection with us, is that in building our portfolio we also need defensive investments that won't be badly affected in times of recession, and the products that Strauss makes are of this kind."

Commenting on Strauss's Sabra business, which markets chilled salads, particularly hummus, in the US, and which Strauss holds together with US food and beverages giant PepsiCo, Fingold says: "We have seen Strauss bring Israeli know-how in chilled salads to the global market. Today, people are looking for healthy and tasty food, and for natural food products, so Strauss entered a significantly growing category, and Sabra has shown appropriately good performance."

What about the coffee business, which accounts for about half of Strauss's revenue?

"This is a category with long-term potential. Strauss is in the right countries and the right markets, and you have to remember that coffee is a business in which besides growth, customers tend to be loyal."

"The cycle at Elbit is connected to global arms procurement"

According to up-to-date figures on the Bloomberg website, through 1832 the Bank of Nova Scotia holds about one million shares in Elbit Systems, representing nearly 2.5% of the company and about 5% of the global portfolio of the funds for which Fingold is responsible. The current market value of this holding is some NIS 560 million, and like Strauss, Elbit Systems too is at a peak, after a 30% climb in its share price, giving it a market cap of some NIS 25 billion.

What made you invest in Elbit Systems?

"Elbit is a good investment for the long term, and we went into it with good timing, in accordance with our projection that global defense spending would bottom in 2015. Elbit is a company capable of developing technologies organically, and it has also demonstrated that it can carry out acquisitions well, improve the profitability of the acquired companies, and bring them up to Elbit's average profitability level over time. Elbit also operates in growing segments such as unmanned systems, radios and cyber, and apart from that, the fact that Israel is in a 'dangerous neighborhood' creates a need for Israel to be very creative in defense, and this industry will remain strong here."

Fingold adds about the company controlled by Michael (Mikey) Federmann: "The cycle at Elbit is not connected to the state of the economy, but to the state of global arms procurement, and it can be seen that militaries in both Europe and America continue to arm themselves and in particular need upgrades for their old equipment."

He also mentions automation at Elbit, and says that the company "is doing a good job of making its equipment easy to use, making soldiers' jobs as easy as possible."

As mentioned, besides Strauss and Elbit Systems, 1832 was also a substantial investor in Israeli food ingredients and flavors company Frutarom, until it was sold to IFF, and also invested in the past in generic drugs giant Teva, entering in 2006 and exiting in 2010.

In retrospect, you made the right decision on Teva.

"The Teva story is an important lesson on the need to keep holdings in defensive companies. As long as companies' balance sheets are conservative, there is no cause for concern. After it was an amazing market leader for twenty years, and made generic drugs better than its competitors, Copaxone became too important in the business, and together with some acquisition deals it made, and the growth of its debt, that changed the company's risk profile, and so we exited the position.

"When we examine a company, we're focused on its credit position, and we think that the equity shareholders should research the company's debt better than anyone else, because they will be the big losers, more than the bondholders and the banks, in the event of a collapse."

"Investment in the US has been good for Canadians"

Altogether, David Fingold’s team at 1832 Asset Management manages assets worth over five billion Canadian dollars. The US accounts for the largest slice of the portfolio, which, as mentioned, has a global spread, and includes investments in Switzerland, Japan and other countries. As far as the US is concerned, Fingold says: "Most investors in Canada look at the US negatively, influenced by acts and statements of politicians, but all in all investing in the US has treated Canadian investors well over the years."

In talking about the way the funds he manages operate, Fingold mentions Warren Buffett's Berkshire Hathaway as having a similar investment strategy. "One of the things unique to us, which differentiates us from our competitors, is that we hold many investments for a long time, with a duration of more than five years, which is similar to Buffett's investment method. If investors seek long-term results, they need patience."

Nevertheless, Fingold adds, "If I need liquidity, I can sell big stocks like McDonald's and Microsoft. When I build an investment portfolio, I can't just put ten-year holdings in it, so I keep about half the amount of the fund highly liquid, with investment in blue chip stocks, in case clients make redemptions."

1832 invests only in public companies, in accordance with the investment rules that apply to it. "There are many interesting companies to choose from, and our advantage as portfolio managers is that we can decide which of them we want to invest in."

Fingold, who relates that even as a youth he started dealing in investments as a hobby, started to work at the company in 2002, then under its previous owners, the Goodman family. "The most enjoyable thing in my work," he says, "is the opportunity to gain access to businesses and to become a partner of the companies. The investments I make with my own money are within the fund, so there is no difference between the results I present to my clients and my personal situation"

Concerning the company's name, Fingold relates that when the Goodman family sold its fund business to the Bank of Nova Scotia, the company had to change its name, and 1832 was the year in which the bank was founded. "That is how the name came about, but the customers know us as Dynamic Funds."

Published by Globes, Israel business news - - on July 28, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

David Fingold
David Fingold
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