Crazy January

In January the Fund rose 1.1% (both classes A & B).  By comparison, the Tel Aviv Stock Exchange 125 Index fell -1.3% (in ILS).

Global stock markets opened the year in a storm, the Nasdaq dropped -9%, the S&P 500 -5.3%, and Dow Jones -3.3%.  “Crazy January”, as it has been called by some, also impacted the Israeli stock market, with a correction in the tech sector and broader market volatility.  We were pleased to register a positive return for the Fund amidst the turmoil.

The declines occurred due to rising inflation, which reached 7% in the US by the end of the year, a level not seen in almost 40 years.  As a result, investors’ expectations adjusted to the realisation that the Federal Reserve would likely raise interest rates between three and four times this year.

The month’s biggest contributors were the Fund’s holdings in Ratzio (Israel’s natural Gas exploration), which was up +17%, Fatal (Hotel chain), which was up 12%, and Kenon (see below), which was up +12%.

The main detractors in January were two of our Technology holdings on the Nasdaq, Tower Semiconductor, which was down -14%, and Nice System, which was down -16%, both due to the tech sell-off.

Top Holdings (alphabetically)

Airport City Ltd

Israel

Diversified Real Estate Activities

Alony Hetz Properties

Israel

Real Estate Operating Companies

Kenon Holdings Ltd

Singapore

Independent Power Producers & Energy Traders

Ratio Oil Exploration 1992 LP

Israel

Oil & Gas Exploration & Production

Telsys

Israel

Technology Distributors

The main macro and microeconomic factors that helped the Fund this month were:

1) The state of the Israeli economy – Israel is in a relatively strong situation relative to many other developed economies with lower inflationary pressure and lower interest rates. It has also benefitted from the significant amount of “exits” in Israeli Technology companies and the capital raising mechanisms.

2) Downside protection – the Fund is long-only but maintains an ongoing downside protection strategy, holding out of the money put options. This helped mitigate losses suffered during the month, despite a number of the Fund’s holdings being listed on the NASDAQ.  The options are now close to being in the money so, as we did during the financial crisis, we will roll them into a spread position a little further out of the money to continue to protect the Fund.

3) Value versus Growth – last year we shifted some exposure from growth companies to value companies, mainly through our Industrial and Banking positions. While this hurt the Fund last year, it has proved a moderating factor this year.   The below graph illustrates well the development and manner of Growth versus Value in the past 2 years.  The red line shows the return from an innovation-focused US ETF, the blue line shows Berkshire Hathaway’s return, a renowned value investor.

4) Stock selection – an example is our investment in Kenon. Kenon is the controlling shareholder of a company by the name of Zim – a publicly held Israeli international cargo shipping company, and one of the top 20 global carriers (dually listed in Israel and in the U.S, symbol ZIM).  This has been one of the largest positions in the Fund in the past year and, despite the recent market declines, the stock is at a record high. About 52% of the company’s fleet operates on the China-US line, which is still in surplus demand with relatively long contracts, ensuring a strong revenue stream for the company.

5) Selective investments in smaller more speculative stocks – many companies have declined over 70%, such as Wix, Lemonade, Hippo, Invision, and many others. The vast majority do not have a clear business model and therefore, despite the declines, we do not invest in them.  There are however better quality companies that have also fallen, an example is InMode (see further details below). We were looking for a convenient entry point and after the share price fell over 50% we instigated a position, which we will look to increase over time.

Stock in focus

InMode (listed on the Nasdaq symbol INMD) is a leading global provider of innovative medical technologies. InMode develops, manufactures, and markets devices harnessing novel radio-frequency (RF) that strives to enable new emerging surgical procedures as well as improve existing treatments. InMode has leveraged its medically accepted minimally invasive RF technologies to offer a comprehensive line of products across several categories for plastic surgery, gynecology, dermatology, otolaryngology and ophthalmology.

The main reasons that led us to this investment were:

• Proven management team with extensive business, scientific and technical experience and expertise – led by one of Israel’s leading entrepreneurs, who is also one of the pioneers of medical aesthetics and has completed a number of exits in this field.
• Worldwide regulatory approvals supported by extensive peer-reviewed published clinical data
• Demonstrated history of profitable growth

InMode is achieving consistent double-digit growth while maintaining operating profitability of around 45%.  Recently Inmode launched products in the field of gynaecology and is due to launch a unique platform in the field of nose and throat, thereby consistently increasing its TAM (Total Addressable Market). The company has significantly increased the strength of its sales over the past six months as a result of the high demand for its products.   It currently trades at a market value of $3.4 billion, nearly 19 times net profit, and has a cash surplus of about $400m.  We estimate that the pressure on the stock in recent months is due to the multiplier pressures on growth companies in general, creating an opportunity for the Fund to instigate a position in the stock.

Macro developments

Export of services from Israel – Services exports continued to increase in the last quarter of 2021. The estimated total services exports (excluding start-up companies) in the fourth quarter equaled US$19.1bn, reflecting 3% growth compared to the third quarter of 2021. At the same time, estimates of total services exports of the high-tech sectors (excluding start-up companies) equaled US$11.6bn in the fourth quarter, which was 4.5% greater compared to the preceding quarter.

The export of services of the high-tech sectors (which include computing services, R&D, communication services, and computer manufacturing), which account for 75% of total business services exports, has served as a substantial growth engine of the Israeli economy over recent years. This activity is characterized by high labour productivity and represents a main target for foreign direct investment (FDI) into Israel, a development that is expected to continue also in the future.

Looking ahead, services exports are expected to continue to support Israel’s GDP growth in the coming years with the support of global demand coming mainly from the developed countries, headed by the US. However, the International Monetary Fund (IMF) growth forecasts were recently revised downward compared to the forecasts from October 2021, against the backdrop of the continuing spread of the Omicron variant throughout the world and continuing disruptions to the global supply chains. The IMF also notes that the impact of the Omicron variant is expected to be concentrated mainly in the first quarter of 2022, and to start to moderate in the second quarter of the year.

MSCI global standard indexes –  As we mentioned in our last report, the MSCI announcement regarding the potential inclusion of Israel in its developed markets indexes is due later this month. We believe that the likelihood of a positive decision is high and could lead to a significant inflow of foreign funds into the Israeli Stock Exchange.