February report

The Fund returned -4.5% (Class A, AUD) and -4.2% (Class B, USD) in February, while the TA 125 Index returned -5%.

Global share markets fell back in February following the strong gains made in January. Global bond yields rose when US Federal Reserve Chair Jerome Powell spoke about the need to continue raising interest rates.

Israel’s share market weakened upon elevated political uncertainty which had not been anticipated by markets. This aggravated the impact of weaker global forces on sentiment, although signs emerged at the end of February of a possible political compromise.

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.

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.

Mizrahi Tefahot Bank Ltd

Israel

Diversified Banks

Mizrahi Tefahot Bank Ltd. is a full service bank. The Bank offers corporate, private banking, and retail banking customers in Israel and internationally, a full range of financial services and products, including mortgages.

Oil Refineries Ltd

Israel

Oil & Gas Refining & Marketing

Oil Refineries Ltd produces refined crude oil products. The Company provides a variety of products used in industrial operation, transportation, private consumption, agriculture and infrastructures. Oil Refineries also provide power and heat services (electricity and steam) to industrial customers, as well as infrastructure services (storage, pumping and truck loading of fuel products).

Payton Planar

Israel

Electronic Components

Payton Planar Magnetics Ltd. is an Israeli high-tech company that designs and manufactures planar transformers. The Company produces transformers that are significantly smaller and lighter than conventional transformers and operate at 98% efficiency and at cooler than normal temperatures.

Market Review

Annual inflation in Israel increased to 5.4% in January from 5.3% in December, above market expectations that it would remain unchanged. Inflation rose 0.3% month-on-month, ahead of the 0.1% market forecast. This reflected rising services inflation in Israel, global supply-demand imbalance, and the impact of China’s re-opening on price levels.

However, there are signs that Israel’s wage pressures are moderating and global supply chain issues are being resolved. This should help contain inflationary pressures over the next few months.

High domestic services inflation, the tight labour market, the weaker shekel, and – most importantly – rising inflation expectations are expected to lead the Bank of Israel to increase interest rates by 0.25% – 0.50% at its next meeting. The market is currently pricing in a 0.5% hike from the current 4.25%. It is now forecast to peak at 5.02%, which is a full 1.0% above market expectations of a month ago.

Global credit rating agency ‘Fitch’ maintained Israel’s A+ credit rating with a ‘stable’ outlook – the country’s highest ever. The agency noted the country’s current account surplus, decline in debt to GDP ratio, strong ability to meet its financial obligations, strong 6.4% GDP growth last year, and expectations that inflation will slow to 3.0% by the end of 2023. It noted that political developments and any potential impact on the judiciary would be closely monitored.

Portfolio Commentary

The Fund’s main contributor to relative returns in February was the overweight position in the semiconductor sector, including the holding in Camtek, which develops surveillance products.

The Fund’s main detractor from relative performance was its exposure to the real estate sector, such as Electra Group (diversified) and Medipower (retail). Those companies with the highest exposure to rising interest rates saw the greatest level of underperformance. However, the market is seeing increased dispersion between companies.

While the real estate sector remains under pressure in the short term, the Fund’s holdings are well positioned to create value over the medium term. The Fund has no exposure to residential real estate which faces particular challenges in this economic environment.

The Fund took the opportunity to increase exposure to financials during February to 16.5%, as these stand to grow earnings in the higher interest rate environment.

The Fund continues to hold companies in the Value segment of the portfolio that have strong balance sheets and net cash positions that leave them less sensitive to rising interest rates. FMS is a global group that specialises in advanced ballistic protection technology, which holds 35% of its market value in cash, delivers strong profits, and remains debt-free.

During February the Fund shifted most of its portfolio protection towards the Israeli market index, to protect the holdings from short-term volatility in the local market. The Fund has maintained some longer-dated contracts on US markets to provide longer-term protection from the impact of any global recession.