This annual report marks the three-year anniversary of the establishment of our fund in Australia, a significant enough time frame for investors to understand Alpha’s investment management DNA.

We are pleased that many of the key elements of our investment thesis described at the outset of the fund have materialised, resulting in strong investment performance since inception. This includes significant structural changes that have occurred in the Israeli capital markets which will in our view, continue to propel excess value creation for many years to come.

Top Holdings (alphabetically)

Doral Group Renewable Energy R Israel Renewable Electricity

Fox Wizel Ltd Israel Apparel Retail

Mivne Real Estate KD Ltd Israel Real Estate Operating Companies

Priortech Ltd Israel Electronic Components

Telsys Israel Technology Distributors

The most notable events in 2020 were:

(1)  IPO of the Israeli Stock Exchange with the involvement of several Australian institutional investors;

(2) Steps taken to encourage private Israeli technology companies to IPO on the Israeli Stock Exchange (before they register for dual listing on the Nasdaq), bringing the number of offerings in 2020 to a record high;

 (3) Signing of the Abraham Accords with the Gulf States, substantially improving the geopolitical situation for the State of Israel and its relationships within the Arab world. This has resulted in increased opportunities for the economy in general and particularly for the High-tech sector, which now has substantial access to new markets and trade relations.

(4) Increased exposure to pre-IPO investments. In previous newsletters, we discussed the large potential of this segment, where we are particular well-placed to identify and access opportunities due to Alpha’s strategic holding in Israel’s leading underwriting company. During 2020 we completed four investments and we are confident of being able to execute more in 2021.

(5) Continuation of strong investment returns:

• The AUD class returned 5.2% for December and 12.8% for the year
• The USD class returning 5.5% for December and 18.1% for the year
• Since inception the AUD class has returned 12.2% p.a. whilst the USD class has returned 13.2% p.a.

2020: YEARLY MARKET REPORT

“2020 certainly was the best of times and the worst of times.”

Over the year equity markets proved once again that they can surprise in many ways – and often with excess doses and at breakneck speed. This was one of the most challenging years we have seen in our investment lives.

Moves to enter and exit a recession, matters that have taken years in the past, were compressed into a particularly violent few months. After a devastating fall in the markets early in the year, unprecedented fiscal incentives paired with the announcement of an effective vaccine earlier than expected, sent many global stock indexes to all-time highs by year-end. The need for quick decision-making has never been higher, complicated by the required shift to a remotely managed process.

This year will be remembered in the chapters of history as the year of Covid, with social remoteness, closures, curfews, cancellation of events, isolations, and restrictions. This environment had a significant impact on the Israeli economy and on equity markets, resulting in huge swings. Importantly, as an active manager, we were able to leverage the situation to benefit our investors by taking advantage of investment opportunities created by volatility.

Local indices plunged sharply from mid-February to mid-March, as a reaction to the restrictions and the first closure in Israel. The month of sharp declines amounted to a decrease of between 30%-38% in most indices, which gradually recovered with the introduction of Government relief.

Pfizer’s announcement of a vaccine in early November was a bright spot for investors, resulting in a rapid improvement in share prices. The impact was felt across the market, for example, at year-end, the real estate sector, which was one of the main contributors to the market’s decline, was trading only 8% lower for the year.

In line with global trends, Covid contributed to the prosperity of Israeli technology companies. High-tech companies, accustomed to telecommuting, not only proved to be immune to the difficulties, but also benefited from movement restrictions that required the entire economy to adopt immediate technological solutions, thereby directly increasing demand for digital and technological communication products. Online trading solution companies, as well as renewable energy companies (which are both included in the technology sector) also grew steadily throughout the year.

We exit this year with headlines about terrifying South African and UK mutations. In addition, on the horizon are concerns of government debt and deficits, the erosion of the value of money, the pushing of the financial system to increase risk levels, constant inflation in asset prices, and political instability.  However, as the dust settles, in our view, equities are the most sensible investment instrument in the economy, and we will continue to look for worthy investment opportunities with reasonable risks attached. Crises are often exploited by strong companies to increase market shares and solidify their positions – and this crisis is no different.

“Traditional economy” companies that have been able to quickly and efficiently adapt to the new online and digital world are likely to enjoy strong competitive positions post-Covid. A good example of this is Fox Wizel Group (Israel’s leading retail group, and a feature in this month’s top 5 holdings) which over the period has not only diversified and strengthened its traditional operations but has also built an effective online arm.

The world is changing, and Covid is accelerating the rate of change. Technology has become a critical and vital infrastructure for every business and is rapidly penetrating and disrupting even the more traditional sectors of the economy. Only companies with high management capability and flexibility of thought and operations will be able to adapt to the new world. In Israel, we have an abundance of such companies.

On the macro front

Covid has completely dominated the macro environment. Moves by the Government and the Bank of Israel (“BOI”) (to overcome the long and short-term effects of the crisis on the economy) have involved unconventional intervention not comparable to anything seen before. The BOI has been working on both the monetary and quantitative fronts. At the monetary level, interest rates have fallen to a low of 0.1%, encouraging capital raisings in the stock and bond markets. At the quantitative level, the BOI purchased NIS 85 billion of government bonds, an unusual step that has not been taken since the GFC.

The Government implemented a NIS 100 billion support plan, including a state bail-out loan fund for large businesses, grants for the self-employed and small business, an extension of the duration of unemployment benefits for D.C. workers (i.e. employees who have taken leave without employer compensation), tax exemptions on advanced study funds, and grants to help return workers to the workforce. Israel is one of the leading countries in the world in providing economic support for the economy, with the above actions accounting for approximately 7% of GDP.

Looking ahead to 2021 and beyond

Israel is clearly leading the world in vaccinating its population.  As of the end of December, about one million citizens had been vaccinated with at least the first of the required two vaccine doses.

The global economy is expected to slowly return to “normal” over the coming year, due to the rising rate of vaccinations as well as the implementation of support measures by central banks and governments, which should drive global growth, reduce unemployment and improve stock prices. As of the end of December, the global economy in 2021 is forecast (by the OECD) to grow 4.2-5.0%, following a negative growth rate of approximately 4.5% in 2020.

In Israel, the BOI’s revised macroeconomic forecast reflects a more optimistic outlook for 2021-2022, noting the fast pace at which the Israeli public is being inoculated which has the potential to quickly return the economy to a strong growth trajectory. The BOI forecast estimates the rate of decline in the GDP in 2020 was 3.7-3.9%. For the coming years, (2021 and 2022,) the BOI presents two scenarios, which are differentiated by the pace at which the Israeli population is inoculated i.e.

(1) “Rapid Inoculation” completed by May 2021 resulting in a 6.3% growth forecast for 2021; and

(2) “Prolonged Inoculation” completed by June 2022 resulting in a 3.5% growth forecast for 2021.

As of now, with the rapid pace of inoculations over the past weeks, it seems that Scenario 1 is significantly more likely – if not almost certain.

Encouragingly, for the 2022 year the BOI is forecasting growth in the range of 5.8-6.0% under both Scenarios 1 and 2.

Wishing all our investors a healthy and prosperous 2021.