The Fund rose 2.5% (in AUD) and 2.4% (in USD) in the month of September.  By comparison, the Tel Aviv Stock Exchange 125 Index and the Tel Aviv Stock Exchange Small And Medium Cap 60 Index rose 2.3% and 4.2% respectively. This strong performance was in the face of falling global equity markets that struggled due to rising inflationary concerns, the likelihood of higher interest rates, and the implications for economic growth.

The upward trends in the Banking and Real Estate sectors continued during September, creating a headwind for the Fund’s relative performance. Pleasingly however the Fund’s two biggest positions, Priortech and Ilex Medical, both performed well and contributed significantly.  Both of these companies have been discussed in detail in prior monthly newsletters.

Top Holdings (alphabetically)

Airport City Ltd

Israel

Diversified Real Estate Activities

Ilex Medical

Israel

Health Care Distributors

Migdal Insurance & Financial

Israel

Multi-line Insurance

Priortech Ltd

Israel

Electronic Components

Telsys

Israel

Technology Distributors

Priortech, a semiconductor developer and manufacturer, rose 12% during the month. Semiconductors are becoming something of a national resource, with the US and China intent on being self-sufficient and supporting their domestic industries accordingly.  Europe is in a weaker position in this regard and is reliant on other countries’ manufacturing and supply.

In last month’s newsletter we wrote about Altshuler Shaham and our views on its acquisition of the provident funds business of its biggest competitor Psagot.  The outcome was reflected in the company’s results for the first time on the last day of August and the figures were very much in line with our more bullish expectations.  The stock responded accordingly.

We recently increased our exposure in Canon, another company we have written about in previous reports.  Canon is a holding company with 60% of its value coming from its ownership of ZIM Integrated Shipping Services, a leading carrier in the global shipping container industry.  ZIM has been a beneficiary of rising global freight prices and we expect it to distribute a significant share of its increased profits by way of a dividend over the coming year, which we, in turn, expect Canon to distribute to its shareholders.  Canon is trading at a meaningful discount currently and we expect this to narrow as a result.

STOCK IN FOCUS

This month we will discuss NICE Systems, a leading provider of both Cloud and on-premise enterprise software solutions.  It is another example of a technology stock that we have confidence in but that has contributed to the Fund’s underperformance year to date.

NICE’s products and services empower 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. Over 25,000 organizations in more than 150 countries, including over 85 of the Fortune 100 companies, are using NICE solutions.

The company recently released its second quarter results with revenues of US$456 million, a growth of 16% year-over-year, including Cloud revenues of $243 million, a growth of 32% year-over-year. The company also raised its full year 2021 guidance with total revenues expected to be in the range of $1,835 million to $1,855 million, higher than the previous guidance of $1,800 million to $1,820 million.

The potential we see in NICE is twofold:

• Transfer to the Cloud: many companies are in the process of changing from on-premise to Cloud IT infrastructure and services. This is a space in which NICE can take consistent market share from legacy players, with the broader market missing the opportunity due to erosion of older activities and incorrect pricing of Cloud activity.
• Digital: the company is investing in its digital products, aimed at businesses improving customer service calls. Digital transformation is still in the very early stages, but we believe that NICE has the ability to achieve the same outstanding success in Digital as they have in Cloud.

We expect the company to continue to beat revenue forecasts, accelerate growth in cloud activity and moderate the erosion of on-premise activity. The current market capitalization is $17.7 billion with the company trading at 10 times on sales and 22 times on EBITDA.  This market is at its beginning and is expected to grow significantly.  The company constitutes a one-stop shop relative to competitors with its most valuable asset, the data collected over two decades, providing a significant competitive advantage.

MACRO DEVELOPMENTS

The OECD forecasts have recently been updated with Israel expected to be the fastest growing economy among the 37 developed countries in 2021.  As we discussed in previous reports, Israel’s economy has remained resilient in the face of the COVID-19 epidemic because of its prevalence of high-tech industries. The Israeli economy has now grown by 109% since the beginning of the 21st century, compared with the average OECD economic growth of 41%.