Putting stock in 'Israeli ingenuity'

For some years now, Wall Street has been creating new mutual funds to satisfy almost every possible investment taste.

One of the latest is the AMIDEX35 Mutual Fund. It invests in Israel - the long-besieged, but dynamic, Middle East nation.

Starting operations in June, the fund has only about $3 million in assets to manage so far. That's paltry by mutual-fund standards.

But Boaz Rahav, the portfolio manager of AMIDEX35, has been meeting institutional investors and journalists to explain why anyone should put money into Israeli stocks while peace with the Palestinians and some neighboring nations remains an issue.

His sales pitch hangs on two points:

First, the no-sales-fee mutual fund invests in thriving Israeli companies, mostly high-tech, that are listed and traded either in Tel Aviv or in New York.

Second, these companies should prosper, partly because the Israeli economy is in "great economic shape." Further, Israel will do well economically even if the current negotiations do not produce a final peace deal.

"Israel has little dealings with its neighbors on the economic side," says Ron Tira, a partner in TransNations Investments, the Tel Aviv money management company that set up AMIDEX35. In fact, Israel's government has been talking of setting up a kind of Berlin Wall of barbed wire between Israel and Palestinian lands.

The AMIDEX35 fund is based on the American Israel Index created by TransNations and now calculated by Bloomberg L.P., a New York financial-information firm. It invests in the stock of Israel's 35 largest companies, and is the only open-end fund investing solely in Israeli stocks.

A Chicago firm that tracks mutual funds, Morningstar, lists 56 open-end mutual funds that invest in a single nation. Twenty-nine of these are Japan funds; the remainder invest in 19 other nations.

There are 26 other single-nation closed-end funds, whose shares are traded on exchanges, but are not redeemable with the fund itself.

All these share the extra risk of concentrating their investments in one country. In contrast, regional or international funds invest in several markets.

The AMIDEX35 fund selects stocks among 680 mostly small companies listed on the Tel Aviv Stock Exchange, and 120 firms listed on the New York Stock Exchange or other US stock exchanges. The American-headquartered firms make most of their sales in the United States or elsewhere outside of Israel. But they also may have an Israeli origin or management, and probably conduct manufacturing and research and development in Israel.

Their most significant part is "Israeli ingenuity and human resources," says Mr. Rahav. "Israel is very unique. Fifty percent of the Israeli capital market is traded outside of Israel."

Among the top 10 holdings of AMIDEX35, for instance, are Check Point Software Technologies, a provider of security measures for the Internet listed on the NASDAQ; Comverse Technology, a maker of communications systems and software, also on NASDAQ; and Amdocs, a provider of customer billing and order management listed on the NYSE.

Such companies have had "hot stocks," says Rahav.

Rahav was an economist in New York for Israel's Ministry of Finance. He's used to selling Israel to foreign investors.

The country, he says, has a gross domestic product, or output of goods and services, of about $100 billion. Per capita GDP is some $17,000, which is in the range of Spain or Ireland. Israel's population is about 6 million.

What makes the country attractive from an investment standpoint, he says, is a lively 4 to 5 percent average real growth rate per year in the 1990s. It also has a free-market arrangement with both the US and the European Community.

Moreover, Israel has been moving from European-style socialism to a purer capitalism. Many state-owned enterprises - banks, utilities, public transport - have been deregulated or partially or completely privatized.

"It's an ideal place for corporate headquarters," Rahav says, wearing his promotional hat.

Inflation has come down from a triple-digit level in the mid-1980s to 8 percent now. The budget deficit has shrunk. Defense-related spending, about 30 percent of the budget in the early 1980s, is now 10 percent.

The economy has shifted from being dominated by the production of textiles, shoes, oranges, and other farm goods toward high-technology products. Often these stem from Israel's sophistication in the output of high-tech military goods.

AMIDEX35 is too new to have a meaningful performance record or a rating by companies that track mutual funds. The index itself is up 46 percent this year.

But Rahav maintains that his fund should benefit from the fact that Israeli stocks are mostly far cheaper than American stocks and that Israel has started an economic upturn, while the US economy may be nearing the end of an expansion.

He expects the fund will be attractive to American Jews with their "natural bias" to Israel. He also is telling managers of international mutual funds that they can put a small portion of their portfolio into Israeli stocks through AMIDEX35 without the need to research Israel firms.

"It's the simplest way to invest in Israel," he says.

The minimum initial investment for a regular account is $10,000.

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(c) Copyright 1999. The Christian Science Publishing Society