Growing exposure to value companies - contrary to consensus views

The Fund generated a net return of -3.1% in the AUD Class and -2.9% in the USD Class in June, compared to the Israeli Index (Tel Aviv Stock Exchange 125 Index) which returned -5.0%.

During the month, our growing exposure to value companies (which we wrote about in May) continued to weigh on the portfolio as growth companies continued to outperform. It is fundamental to our investment strategy that when opportunities arise we take advantage of them, even if they are against consensus and the current momentum. We believe that these positions will add significant value to our portfolio into the future.

Since inception (January 2018) to 30 June 2020, the Fund delivered a net return of 5.8% p.a. in the AUD class and 5.7% p.a. in the USD class, versus the Israeli Index which was down -1.2% p.a.

Top Holdings (alphabetically)

Audiocodes (Dual listed) Israel Information Technology

Electreon Wireless Israel Financials

Priortech Ltd Israel Information Technology

Solaredge Technologies United States Information Technology

Telsys Israel Information Technology

During June, relative to other global markets, the Israeli market experienced a strong sense of pessimism due to concerns regarding a second wave of Covid-19. During the month, Israel witnessed a worrying increase of new cases, rising to a level of 800 per day.  Unlike the first wave, this new wave is mainly within the younger population, which is reflected in the small amount of hospitalizations and severe cases, with many infected people being asymptomatic. Markets were also impacted by Institutional investor concerns about the dislocation of the performance of the stock market (which has had a significant run since March) and data showing a more significant impact on the economy.

Our growing exposure to value companies (which we wrote about in May) continued to weigh on the portfolio as growth companies continued to outperform. It is fundamental to our investment strategy that when opportunities arise we take advantage of them, even if they are against consensus and the current momentum. We believe that these positions will add significant value to our portfolio into the future.

We have become increasingly concerned about what we perceive to be an inconceivable volume of risk-taking which we think is ignoring the severity of the underlying economic situation.

Our downside protection strategy is ongoing and constantly implemented in the Fund. We manage this strategy actively and use various tactics to protect the Fund from declines in the market.

In March the Fund’s put options were deep in the money and reduced the Fund’s equity exposure significantly.  After the significant decline in March, we changed the strategy to protect the portfolio from a smaller decline in the markets and over a shorter term.

As of the 30^th June the breakdown was as follows:

• 21% of the equity exposure is protected from a decline of 1% (or more) until the end of August 2020
• 22% of the equity exposure is protected from a decline of 4% (or more) until the end of August 2020
• 13% of the equity exposure is protected from a decline of 2% (or more) until the end of December 2020

Stocks in Focus

NICE – Dually listed in the TASE and the Nasdaq (ticker NICE). 3% position in the Fund.

NICE is an Israeli based company and the world’s leading provider of both cloud and on-premises enterprise software solutions. Their software empowers organizations to make smarter decisions based on advanced analytics of structured and unstructured data. NICE helps organizations of all sizes deliver better customer service, ensure compliance, combat fraud and safeguard citizens. The company operates in two segments, Customer Engagement, and Financial Crime and Compliance. It offers CXone, a cloud native open platform that supports contact centres ranging from small single sites to distributed remote agents and enterprises, and a digital-first omni-channel customer engagement platform that supports various digital and self-service channels, which allows organizations to add and integrate new and emerging channels. The company also provides AI driven smarter processes and adaptive workforce engagement solutions. Over 25,000 organizations in more than 150 countries, including over 85 of the Fortune 100 companies, are using NICE solutions.

NICE offers the most complete software and infrastructure package in the industry and we believe that it will continue to take market share in the next few years.  The company released financial reports in May showing strong first quarter results driven by an accelerated 27% growth in cloud revenue. The company delivered double-digit growth in operating income and earnings per share with further expansion of their operating margins.

We believe that organizations are preparing for the next phase – the transformation to cloud and digital – and have now witnessed NICE’s ability to rapidly respond and manage changes that they thought would take years instead of days.  As the clear leader in both cloud and digital technologies in its markets, along with a strong balance sheet, strong cash generation and a keen focus on execution and profitability, NICE is in the best competitive position to provide the platforms that these organizations need to transform their operations.

Plus500 – listed on the London Stock Exchange (ticker PLUS.L). 3.5% position in the Fund.

Plus500 develops and operates an online trading platform for individual customers to trade contracts for difference (CFDs on approximately 2,800 underlying financial instruments in approximately 50 countries and 32 languages. Its trading platform is accessible from various operating systems, such as Windows, iOS, Android, and Surface, as well as web browsers. The company was founded in 2008 and is headquartered in Israel with subsidiaries in UK, Cyprus, Australia, Singapore and Bulgaria.

The Company’s competitive advantage is in its proprietary technology, which provides the ability to rapidly implement changes to both its trading platform and marketing activities, resulting in a highly attractive and dynamic customer offering.

The Company is the largest CFD provider in the UK, Germany and Spain and is the top-rated mobile platform among CFD traders in Australia. It is penetrating new territories and benefits from sharp rises in market volatility that attract new customers to the platform.

The Company is very profitable, with high cash flow and high growth. It has just released (July 7, 2020) an initial statement about its H1 2020 financial reports (which will come out in August) in which revenues in the first half nearly quadrupled to $564 million USD.  Plus500 said it had a record number of active customers in the three months to the end of June and that it had signed up 198,176 customers in the first half of the year, compared with 47,540 a year earlier.

The Company’s core policy is to return at least 60% of net profits to shareholders, through a combination of dividends and share buybacks, with at least 50% of this distribution being made by way of dividends. It declared a final dividend of $40.8 million for the year ended 31 December 2019 and a new share buyback programme was commenced in February 2020 to buy back up to $30 million of the Company’s shares.

Macro Developments

We are expecting a sharper decline in the second quarter GDP compared to the first quarter when the Israeli national accounts data is released in August. Looking ahead, the Bank of Israel has forecast a sharp decline in GDP this year of 5 to 6%. On a more positive note, the Bank of Israel estimates that there will be a continued surplus in (net) capital inflows into the economy in 2020. We believe this development, together with the factors listed below, will support the strength of the shekel for the remainder of the year.

• Continued increase in the surplus in the current account in the first quarter of 2020,
• Continuing relatively rapid increase in Israel’s services exports during the period of the coronavirus crisis, which increased 9% in April (compared to April 2019), and
• Initiation of natural gas exports in the first quarter of the year.