Until the dust has settled

The Fund fell -6.2% (Class A, AUD), -5.9% (Class B, USD) in September, outperforming the TA 125 Index which fell -9.1%.  Our relatively cautious approach in the face of recent gains proved the right one as most major indices declined significantly during the month.  The Fund currently has an equity exposure of around 65% mainly due to our downside option protection strategy.

The main detractors this month were Aloni Hetz (property & investments), which was down -20% due to its exposure to the UK and the instability in that market, and Bank Hapoalim, which was down -13%.  Our exposure to the semiconductor sector also detracted through our position in Camtek, which was down -9% due to global concerns regarding shortages and supply chain issues.

Top Holdings (alphabetically)

Bank Hapoalim BM

Israel

Diversified Banks

Bank Hapoalim B.M. attracts deposits and offers personal, corporate and institutional banking services. The Bank offers corporate finance, cash management, foreign exchange, investment advice, loans, securities brokerage, custody services, investment banking, foreign trade financing, and treasury services. Bank Hapoalim operats in Israel, the Americas, and Europe.

Camtek

Israel

Semiconductor Equipment

Camtek Ltd designs, develops, manufactures, and markets automated optical inspection and metrology systems. The Company provides software solutions for the semiconductor industries, enabling manufacturers to improve yield and lower their production costs. Camtek serves semiconductors industry worldwide.

Check Point Software Technologies

Israel

Systems Software

Check Point Software Technologies Ltd. develops, markets and supports a range of software and hardware products and services for information technology (IT) security and offers its customers a network and gateway security solutions, data and endpoint security solutions and management solutions.

FMS Enterprises Migun

Israel

Aerospace & Defense

FMS Enterprises Migun Ltd. manufactures ballistic panels and sheets for military protective gear and vehicle parts. Among the Company's customers are security forces in Israel and abroad.

Medi Power

Israel

Diversified Real Estate Activities

Medipower (Overseas) Public Co. Limited operates as a full-service commercial real estate firm. The Firm owns and manages retail properties, shopping centers, and residential developments. Medipower serves customers worldwide.

While the Israeli economy and stock market are relatively well placed, they are not disconnected from the rest of the world, and this became evident in September.  The economy is strong and performing well compared to other OECD countries, and the stock market has not fallen as far as many others this year, however the economic issues driving global financial markets impacted the Israeli market this month, namely:

• continued increase in interest rates and inflation
• Russia – Ukraine war and the deepening energy crisis in Europe

These factors have increased the risk in financial markets, however, we are not convinced they are fully priced in, despite the sharp declines we’ve seen since the beginning of the year.  Fortunately for Israel it is relatively independent with respect to energy, a point we will return to in the Macro Developments section below.

Of course, the world will continue to advance and develop and this event, even if it takes another year or two, will end and we will see a return to global growth.  Until the dust has settled the risks will remain elevated, we will focus on companies that are best placed to get through this environment, while seeking opportunities created by the pricing volatility.  The volatility also allows us to actively manage the protection strategy – protecting the portfolio from a severe decline while reducing costs and seeking short term profits.

Stock in Focus

Ilex Medical is one of the leading companies in Israel in the medical diagnostics field. It specializes in marketing, selling and supporting equipment, disposables, and reagents to laboratories and healthcare establishments in Israel.

We sold our position in Ilex at the beginning of the year after a sharp rise in the share price following a period of record profitability during Covid. We did not expect the company to achieve similar results in 2022 and indeed the company published very weak reports in the second quarter.  It was unable to adjust its expense structure given the significant decline in revenue from Covid-19 testing and other supply chain difficulties. Questions were also raised regarding the company’s future capital allocation in light of the accumulation of cash amounting to hundreds of millions of shekels during the crisis.

The market severely punished the company, and the stock lost half of its value, falling below its pre-Covid price despite the surpluses it had accumulated.  We believe it is now attractively priced and have built back a position in the stock of about 3%.  We believe it will show improved results in 2023 and will benefit from its recent acquisition of AMG – an advanced medical genetic laboratory. Incorporated with Ilex Labs, this power couple will provide high-quality advanced genetic diagnostic and cancer screening services.

Macro Developments

The Bank of Israel increased interest rates by 0.75% to 2.75% and raised its forecast to 3.5% percent for the third quarter of 2023.  It also raised its growth forecast for 2022 to 6% (versus +5% in its previous forecast in July) but reduced its forecast for 2023 to 3%.  The bank stated that “Economic activity in Israel remains strong, and according to National Accounts data GDP has been above the trend line for the past three quarters. The labour market remains tight.”  Inflation is expected to reach 4.6% in 2022 and be 2.5% in 2023.

As mentioned above, Israel is relatively independent with respect to energy.  This sector has developed greatly in recent years and benefitted form the discovery of a large reservoir of natural gas in its economic waters.  This transformed Israel from a country that was almost completely dependent on energy imports to one that can meet all its energy needs and even export to neighbouring countries.  Equally importantly, Israel’s Electric Company signed a 15-year fixed price agreement with the natural gas companies (Israel’s electricity sector is based on approximately 70% natural gas).  This has ensured that gas prices remain stable and explains the moderate influence of the recent energy crisis on inflation in Israel.  To put this in perspective, Russia’s limitation of gas supplies to Europe created a situation in which gas prices were recently 13 times higher than those in the US.