July 12, 1999
by Edward Silver
It’s not as momentous as the election of a new prime minister, but the launch of the Amidex35 mutual fund is big news for Israel: It represents a simple way to invest in the country’s hyperactive technology industry, arguably the second-most vital in the world.
Investment bankers and venture capitalists are making pilgrimages to Israel, drawn by the ingenuity that has spawned such Information Age stars as Check Point Software Technologies (ticker symbol: CHKP), a world leader in network security; Mirabilis, the e-mail innovator recently acquired by America Online; and Comverse Technology (CMVT), a wireless voicemail giant now worth $5.4 billion.
The fund, introduced June 22 by TransNations Investments of New York, is based on the firm’s Amidex35 stock index, which tracks 35 large Israeli companies. With banks and retail chains as well as software and communications firms, the fund represents a cross-section of the Israeli economy. However, because tech stocks account for the lion’s share of market capitalization of the index, it offers a concentrated play on Israeli high tech.
From Jan. 1 through Thursday (the last day for which pricing was available), the index soared 34% in dollar terms, aided by the global rebound in emerging markets. Prospective investors can visit http://www.amidex.com.
Most of the fund’s stocks trade on U.S. exchanges, a bulwark against the trials of getting your money in and out of a small foreign bourse like the Tel Aviv Stock Exchange. Indeed, about 120 Israeli stocks are listed in the U.S. That’s second to Canada among foreign nations.
“Israel is a unique combination of an emerging market and a developed country,” said Amidex35 fund manager Boaz Rahav. “It has the prosperity of a developed country, but you have much more exposure to the [U.S.] investment community. Plus, these are export-oriented companies that sell their products to the United States.”
As a nation with little in the way of natural resources or low-cost labor, Israel has built its economy on intellectual capital. It has, for example, the world’s highest ratio of engineers to population. That is what U.S. tech giants are after when they set up research operations and buy up young firms there.
“When you buy an Israeli company, you are getting the most technologically advanced and educated work force in the world,” said Len Rosen, an investment banker with Lehman Bros.
Intel built its first plant in Israel back in 1974, and its MMX technology, now standard in its microprocessors, was developed there. But the real tech boom arrived in the wake of the Gulf War, as highly trained army engineers ventured out and became entrepreneurs. At about the same time, Israel welcomed 800,000 emigrants from the former Soviet Union, who added greatly to the nation’s technical prowess.
Venture capitalists invested $567 million in Israeli start-ups in 1998, a 32% jump over 1997, according to the PricewaterhouseCoopers Money Tree report.
Venture capitalist Guy Kawasaki, the former “chief evangelist” of Apple Computer, is planning a trip to Israel to get a piece of the action. “Looking at the quality of the deals,” he said, “it’s clear that Israel is a stunning source of high-tech entrepreneurship.”
The tech businesses in Amidex35 have survived the rigors of the start-up stage and for the most part are thriving in adulthood. Typically, they do their research and development in Israel and their marketing in the U.S.
A sampling: Galileo Technology (GALT), a player in the red-hot networking chip sector, has been the Israeli index’s best performer this year, almost doubling. Check Point is the world leader in firewall software, which controls access to computer networks. Amdocs (DOX), which writes telecom billing software, more than tripled its profit in the most recent six-month period. Gilat Satellite Networks (GILTF) is coming to be seen as a play on broadband Internet access. And Comverse Technology, which Lehman analyst Tim Luke calls a “phenomenal growth story,” has a virtual monopoly in voicemail for cellular phones. Its stock is up 56% this year.
“Amidex35 invests in cutting-edge tech companies, and the high valuations given to Internet stocks can help it,” said Eric Jacobson, who analyzes overseas funds for research firm Morningstar. “There’s also a lot of optimism in the country with Ehud Barak’s election [as prime minister in May]. If and when Israel comes to peace with its neighbors, it will benefit economically.”
On the other hand, any fund with a substantial tech weighting will be volatile, especially if some of the stocks are tied to an emerging market where liquidity can rapidly evaporate, Jacobson added. And with the index’s rise in recent months, a pullback wouldn’t come as a surprise.
But investors who aren’t fazed by volatility and want to get in closer to the ground floor have other options. This is a heady time for Israeli small-caps and start-ups, largely because global firms are becoming more acquisition-minded.
Cross-border raids have been numerous. Among them were the takeovers of Opal and Orbot Instruments by chip equipment king Applied Materials; Texas Instruments’ $350-million purchase of Libit, a cable-modem chip designer that had yet to generate revenue; Cisco Systems’ absorption of network software shop Class Data; and Deutsche Telekom’s deal for 20% of VocalTec (VOCL), a ballyhooed firm that develops software for Internet phone calls.
As a diversified portfolio with a large tech stake, the First Israel Fund (ISL) is similar to Amidex35, but there are two key differences. It is a closed-end fund, so it trades like an individual stock rather than fluctuating with the value of the stocks it holds, and it reserves a portion of its assets for small, private companies. Its performance this year has matched that of Amidex35.
Rosen of Lehman Bros. and Lior Bregman, an Israel specialist at CIBC World Markets, note that several Israeli holding companies have extensive stakes in high tech. So stocks such as Koor (KOR) and Elron (ELRNF) offer that exposure as well as diversification.
Bregman pays particular attention to the small Israeli outfits on Nasdaq. “As you go lower in market cap there are undiscovered stocks,” he said. He considers Orckit Communications (ORCT), a maker of digital subscriber line systems for speedy Web access, to be a bargain compared with U.S. peers such as Aware (AWRE) and Copper Mountain (CMTN). Software maker TTI Team Telecom (TTIL) and Gilat Communications (GICOF), a spinoff of the satellite firm, are also on his undervalued list.
Bregman wonders, however, how many Israeli firms will grow to global scale. Plenty have been taken over while still in their adolescence, and others–including digital printer powerhouse Electronics for Imaging (EFII)–have had problems managing their growth.
“One of the challenges is to see more major corporations growing in Israel,” Bregman said. “Israel is better at developing the technology than capitalizing on that know-how with managerial skills. The more U.S. companies come to Israel, the more they can get the skills to do global business.”
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The entire cybersecurity field only exists for about 20 years. However, the Start-Up Nation of Israel has already established itself at the forefront of this growing field. Why does it matter? The Israelis are stealing American technology, as reported by TruNews and Scotland’s MI6. We Americans are wondering when the US Military will take notice and put a stop to this espionage and theft of our livelihood.
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