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August 14, 2017Israel: Strong Economy Under Allocated by Major Indices (4:44)
Steven Schoenfeld, Founder and Chief Investment Officer, BlueStar Indexes, discusses the strong fundamentals in the Israeli economy and why Israel may be under-allocated in most major indices.

Israel: Strong Economy Under Allocated by Major Indices

TOM BUTCHER: I'm here with Steven Schoenfeld, Founder of BlueStar Indexes, to talk about Israel. Steven, thanks so much for joining me.

STEVEN SCHOENFELD: Great to be here, Tom.

BUTCHER: Israel's not that large a country. Why should we be caring about it and, in addition, why should an allocation, a dedicated allocation, to Israel be worth talking about?

SCHOENFELD: Even though Israel is a small country geographically, it punches way above its weight in the global markets. If you look at its economy, it is one of the best performing developed markets, compared to all Organization for Economic Co-operation and Development markets. It has very stable macroeconomic policies; a government that is committed to economic reform; a growing population – which is quite rare in developed markets; and it has tailwinds from massive natural gas discoveries. So it is a very interesting economy. Equally important, Israel is home to a number, I would say scores, of world-leading companies, companies that are leaders in their sectors and are changing the world to a positive place.

As far as an allocation, Israel has over the last few years become unintentionally underweight in most investors' portfolios. That is because, when it was an emerging market, it was about 3.5% of the emerging markets universe. It is now less than 0.5% of the developed markets benchmarks. So most global index funds have less than 0.5% in Israeli equities. Many active funds have even less.

So investors should look at the actual opportunities in Israel and say: "Well, maybe we want a broader, deeper allocation." That is what BlueStar Indexes provides. If you use the stocks in our index, the weight in these global indexes would be closer to 1%.

BUTCHER: Going back to sectors, what do you consider to be the most important sectors and those sectors in which Israel leads?

SCHOENFELD: A popular nickname for Israel is the "Startup Nation". Israel, after Silicon Valley, has the most robust technology ecosystem of the world and you have Israeli companies in almost every area of tech that are leaders in their field. Whether it's hardware, software, internet of things, autonomous driving, or, my favorite sector, cyber security and actionable intelligence.

In pharma, Israel is well known for Teva1. But there are many other pharmaceutical, medical technology, and biotech companies in Israel. A company that is very interesting is Mazor Robotics2. It is the world's leader in spine surgery by robotics. This is the kind of technology that comes out of Israel. In addition, as an economy, Israel has financial services, industrial, and even consumer [companies]. Many investors may not know that a major player in the kitchen countertop market in the United States and around the world is Caesarstone3. It is an Israeli company listed here in New York.

BUTCHER: Looking at the market as a whole, how has it performed in the first half of 2017? What sort of exposure should an investor perhaps be considering?

SCHOENFELD: Israel has had a great first half of 2017. The broad index, the BlueStar Israel Global Index, is up about 15.5%. That puts it in the top tier of developed markets. And it has good, long-term history as well.

But we are very excited about the future, given a lot of the strong economic fundamentals. As I said before, Israel's weight in the standard global indexes is below the full weight because those indexes do not include Israeli companies listed worldwide. So if you use the BlueStar Israel Global Index, the weight would be more like 80 or 100 basis points, which would imply a dedicated overweight from a neutral position. And if you are optimistic about Israel, as we are, you might want to put an even higher allocation.

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