November 17, 2011
Buffett points the way
A quick guide to investing in Israel
Warren E. Buffett is the second-richest person in the United States (after Microsoft’s Bill Gates), so when he purchased an Israeli-based stock not long ago, investors throughout the world sat up and took notice. What made it more newsworthy is that it was Buffett’s first major foray into overseas investing. Up to that point, he said he could always find good stocks here at home.
Then the Sage of Omaha’s company, Berkshire Hathaway, paid $4 billion for an 80 percent share of Iscar Metalworking, and he said at the time that he was looking for other low-priced jewels.
What drew him to Israel, Buffett said, was its brainpower.
“If you’re going to the Middle East to look for oil, you can skip Israel. If you’re looking for brains, look no further. Israel has shown that it has a disproportionate amount of brains and energy.”
For other investors looking to invest in Israel, but with perhaps not quite $4 billion to invest, there is a goodly variety of choices.
Israel’s economy actually has been doing well compared to those of many other countries, in part because the country did not have a credit bubble.
Andy Brown of Aberdeen Asset Management, which runs First Israel Fund, admits that inflation is something of a worry, but he argues that Israel’s “long-term fundamentals are strong. Israel has a young, growing, healthy population.”
Brown believes that a good time to invest in Israel is when political unrest has made stock prices a bargain.
STOCK INDEX FUND
The Amidex35 Israel Mutual Fund consists of the 35 largest Israeli companies. It is a unique combination of stocks that trade on either the U.S. or Tel Aviv exchanges — the Tel Aviv Stock Exchange, the New York Stock Exchange, or Nasdaq (where smaller stocks trade).
Why “35”? Because 35 stocks have been found to provide 60 percent of the return of all Israeli stocks.
Why “Amidex”? It is a combination of a word for “friend” and “index.”
The fund is no-load (no sales charge), but if you sell within a year, there is a redemption fee.
Minimum first investment is $500, with $250 for follow-ups; for automatic investments, only $100.
For more information, call (888) 876-3566.
Amidex is setting up other index funds, such as the Cancer Innovations & Healthcare Fund.
Index funds over the years have done better than 70 percent or so of actively managed funds. In his book “What Works on Wall Street” (fourth edition, 2012), James P. O’Shaughnessy claims this is because index funds do not change their strategy. On the other hand, John Bogle, who started the Vanguard Group, attributes the success of index funds to their low expenses.
A CLOSED-END FUND
Unlike Amidex35, the First Israel Fund (ISL) does not issue new shares.
A limited number of shares trade among buyers and sellers. It is a “closed-end” fund, not an “open-end” one, such as Amidex35.
The advantage of this is that if shareholders decide to sell out, en masse, the fund does not have to raise cash to meet redemptions by selling its holdings, perhaps at hurtfully low prices.
The fund is not an index fund. The managers buy and sell Israeli stocks. It is a concentrated fund, with 75 percent of its assets in its top-10 holdings. The fund is overweight in information technology, particularly the stock Check Point Software. It is underweight in cyclical sectors, such as energy.
As with other closed-end funds, First Israel trades at a discount to its underlying value — right now, around 12 percent. Of course, shareholders may wind up selling their holdings at the same or a larger discount.
The fund trades on the New York Stock Exchange.
For more information, call (866) 839-5205.
First Israel Fund was launched in 1990 by Credit Suisse Asset Management, and it is headquartered in Philadelphia.
iShares Israel is an Exchange Traded Fund (ETF) — an index fund that trades as a stock. ETFs traditionally have very low expenses. In the case of this fund, expenses come in at 0.61 percent.
The fund follows an index called the Morgan Stanley Capped Investable Market Index. It was launched in March 2008.
iShares Israel holds 83 stocks but is tilted toward Teva Pharmaceuticals, which has 23 percent of its assets.
For more information, call (800) 474-2737.
For investors interested in buying individual stocks, whether in Israel or elsewhere, Teva Pharmaceuticals may be a good bet. The Value Line Investment Survey rates its timeliness “above average,” and its analyst writes: “Despite the inevitable slowdown in the Copaxone franchise, we think Teva can still prosper in the years to come, assuming its growth strategy succeeds.” (Copaxone is a drug against multiple sclerosis.)
Amdocs Limited is rated average by Value Line, which writes that the stock “has decent 3- to 5-year appreciation potential.” The company provides information-system solutions.
Check Point Software is also rated average, and Value Line writes that the stock has “minimal appreciation potential out to 2016.”
Elbit Systems (defense electronics and electrical optical systems) “is a suitable choice for conservative, income-oriented investors with a long-term perspective.”
Ormat Technologies (alternative energy) is ranked below average in timeliness, but the stock, writes Value Line, may “appeal to patient investors looking for less risky (nonsolar) exposure to the alternative energy sector.”