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Schoenfeld: 'ISRA' Israel Index First Of Many

Olly Ludwig


With this week’s launch of the Market Vectors Israel ETF (ISRA), investors are getting broader and deeper access to one of the most dynamic economies in the world than they have had so far using the $75 million iShares MSCI Israel Capped Investable Market Index Fund (EIS). And with an annual expense ratio of 59 basis points, or $59 for each $10,000 invested, ISRA is also cheaper than EIS.

Perhaps it shouldn’t be surprising that the benchmark on which ISRA is built constitutes genuine innovation. After all, the ETF’s index was created by Steven Schoenfeld, one of index industry’s most knowledgeable figures. Schoenfeld’s classic tome “Active Index Investing,” published in 2004, is must-reading for any die-hard indexing nerd.

Schoenfeld told IndexUniverse.com Managing Editor Olly Ludwig that his firm, BlueStar Indexes, has ambitions to develop benchmarks that go well beyond Israel that canvass the entire eastern Mediterranean. Sure, the dream is predicated on hopes for peace in what is a dangerous neighborhood. But it’s hard to deny that the payoff could be big for investors with an appetite for risk and an awareness of how successful Israel’s economy already is.


IndexUniverse.com:Is it safe to say that this is a more diversified fund than what the competition has served up so far?

Schoenfeld: The BlueStar Global Israel Index (BIGI) is designed to capture the most diversified and most investible universe of Israeli companies irrespective of where they are listed.

IU.com: The cap for an individual holding in ISRA’s portfolio is 12.5 percent versus 25 percent for the MSCI Capped Israel Index, yes?

Schoenfeld: That’s correct. We capped it at 12.5 percent for a number of reasons. Some of the local Israeli benchmarks have a 10 percent cap. Right now, it’s only Teva that’s capped, but there have been periods—for example, when the fertilizer and agriculture boom was raging a few years ago; in the U.S. and Canada you had Agrium and Potash; and in Israel, you had Israel Chemicals.

It wasn’t like Teva, but it would have been above the cap. We want to have a cap in order to maintain diversification. Investors have said over and over that they don’t want to have single-stock risk. Teva is a great company, but it’s subject to the vagaries of the FDA and other uncertainties and its own corporate ups and downs, so we feel we picked the right level.



IU.com: It’s not just single-security risk you control, is it?

Schoenfeld: You have a lower concentration ratio. Concentration ratio is the weight of the top 10 stocks in an index. So the BIGI index has a concentration ratio of less than 50 percent; and the broadest local Israeli index, the TA 100, is at 58 percent; and the MSCI Israel is at 68 percent.

IU.com: Let’s take a step back and talk about the investment thesis for Israel itself.

Schoenfeld: Israel is a small country, but it has a very large global impact. Israeli companies are operating all over the world; many of them are pioneers in their industry and leaders in the technology. Especially when Israel graduated from emerging to developed, it lost a little in the very large developed-market benchmarks and universe. So you have to look at the full global footprint of Israeli equities, and you get to see a very dynamic investment thesis.

IU.com: We’re talking about industries like information technology, drip irrigation, nanotechnology that are on the leading technological edge?

Schoenfeld: BIGI is about 30 percent information technology, which includes leading companies like Check Point, which developed the concept of the firewall; Amdocs, which is the leader in automated record keeping—it serves almost all the cellphone carriers; VeriFone, which is the point-of-sale payment system that you see in the back of cabs in New York or at Whole Foods when you swipe your credit card.

So it’s a whole range of technologies. Also the world leader in 3D printing, which is about as hot a technology as you can get, is an Israeli company:Stratasys. Israel does have health care beyond Teva; it does have leading-edge agri-tech and defense tech and biotech companies. If you look down the list of our index, you’d see that it’s a really good mix of household names that you might not have known were Israeli, and cutting-edge companies that you might have heard of and you understand the space.

And by us going broad and deep and including Israeli companies—whether they’re listed in Israel, New York, London or elsewhere—we capture this full opportunity set.

IU.com: How do you respond to investor objections about the geopolitical risks that are inherent in a country like Israel?

Schoenfeld: Israel is definitely in a rough neighborhood, and there are lots of geopolitical risks. But Israel is a resilient nation; it has a strong and well-managed economy—it managed the 2007-2009 financial crisis extremely well. It had one of the shallowest recessions and the earliest exits from the recession. And in a world of sovereign debt downgrades, Israel was upgraded over the last few years, and its GDP growth is among the highest of all developed markets and many emerging markets. In the last three years, it’s been around two times the OECD average.

The reality is that just as Israel as a country is resilient, its companies are resilient. And when there are security threats—whether it’s missiles from Hezbollah in Lebanon, or Hamas in Gaza, Israeli companies’ port shipping agents still know how to deliver the goods. Whether it was in’06 with Hezbollah in Lebanon, and both the ’08 and ’09 and 2012 mini-conflict in Gaza, you might have had a few short-term blips, but Israeli companies continue to march forward.

In addition, one of the things that distinguishes BIGI is that because we have a larger proportion of non-Israel-listed Israeli companies, we are also further diversified. Also, most of the leading Israeli companies, except the ones that are really domestic like a bank or the supermarkets, get 60 to 70 percent of their revenues outside of Israelis. For some, that number is 90 or even 95 percent.

In BIGI, we even have foreign subsidiaries of Israeli companies. So, for example, Alon USA or Delek US are huge refiners and operators of convenience stores in the United States, so they have almost no political risk connected to Israel.



IU.com: The competing index from MSCI can’t quite make that claim because it’s much more local-market focused?

Schoenfeld: MSCI's methodology, as well as FTSE's and other global index families, needs to be consistent for 50 or more markets, and by their well-developed rules and guidelines, most Israeli and Israel-linked companies listed outside of Israel are constituents of those markets. BlueStar--in contrast--explicitly develops its universe of stocks from an Israeli-content perspective, building on our extensive database on corporate structures and our insight on the Israeli capital markets. We thus incorporate more than $35 billion in 'missing market cap'--key Israeli tech companies like those I mentioned previously, as well those in other sectors, like SodaStream, CaesarStone and Ormat Technologies. Ormat is the global business platform for Ormat Industries, a leader in geothermal power generation, and has built plans in countries as diverse as Chile and New Zealand.


IU.com: I’m sure BlueStar isn’t just a one-trick pony. So, please speak about what else the company is thinking about in terms of new investable indexes.

Schoenfeld: We built BlueStar to ultimately be an Israel-Mideast-Mediterranean specialist. We started with Israel because we see a real investor need for better benchmarks for Israel. We also have prototypes for other regional indexes that would include countries in the region that we aspire would have peaceful relations with each other. We hope the Palestinian Authority would choose the path of peace because they have the potential for a robust economy, and we would love to introduce products for the Israel-Palestine-Jordan economic area.

And we also have a number of tech and sector plays. We are working on a bigger, better, broader tech index, and we’re also working on an index that will help investors capture the potential for the energy revolution that is happening in the eastern Mediterranean.

IU.com: There’s a lot of gas there, right?

Schoenfeld: Turkey, Cyprus, Greece, Israel—and hopefully Lebanon and Egypt. It’s mostly gas, but with the rapid evolution of technology, there are a lot of hopes that there will be economically viable reserves of oil as well.

IU.com:It’s certainly a very interesting region of the world, and it’s interesting to see bona fide changes in the world of indexing that push the ball forward.

Schoenfeld: Helping investors get comfortable with their hopes and fears about Israel is a stepping stone to getting them comfortable to investing more broadly in the region. And I do believe that if countries take the path toward peace, there’s huge potential for economic cooperation, and foreign capital is going to be part of that.


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