Soldiers massing next to Gaza on Monday, Nov. 19, 2012.
Soldiers massing next to Gaza on Monday, Nov. 19, 2012. Photo by Nir Kafri
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Like the rest of Israel, the capital market was also caught off guard by the military operations in Gaza. Tel Aviv Stock Exchange indices, however, didn't show much of a drop at all Thursday and actually rose on Sunday.

Meitav Investment House, whose funds performed well over the past year, is taking the news of missile attacks in its stride while keeping an eye on developments.

"The market's risen nicely in the last two months and was ripe for some profit-taking anyhow," says Eran Stepak, Meitav's vice president for Meitav Mutual Fund Management.

"As long as the military operation remains limited in scope and duration, Israeli investors already know that its effect on the economy is limited. We're familiar with such situations: Israel's political and security risk is already factored in to securities trading on the exchange," he says.

The effect coming from markets abroad is generally greater.

"This is obviously only true if the situation doesn't degenerate," Stepak points out. "If the operation drags out or a ground incursion begins that could complicate matters, or relations with Egypt start seriously deteriorating, then everything could change rather quickly. In that case the stock market would react and could drop sharply. Right now this doesn't seem to be the situation."

Market strength has helped several of Meitav's corporate bond funds stand out lately: Meitav Astrategia Chachama managed by Sagi Fridman, yielding a 16.8% return in the year ended October 31, Meitav Ex Tel-Bond managed by Shai Asis with an 11.6% return over the same period, and Meitav Hizdamnuyot managed by Stepak, which yielded an 11.4% return.

"Israel's corporate bond market showed all the signs of collapse from May 2011 until a month and a half ago," says Stepak. "Volumes kept dropping, offerings dried up, private investors fled and mutual funds suffered continuous redemptions. As a result, bond prices fell increasingly lower."

How did you achieve your good results?

Fridman: "For one, we eliminated almost our entire holdings in IDB Holding a year and a half ago, as soon as our research department concluded the company was developing acute liquidity problems. When liquidity problems begin emerging in a business pyramid you want to avoid the top and descend to its lower levels [subsidiaries], where operational assets servicing the debt are located."

Where are today's opportunities in the corporate bond market?

Fridman: "The market moved forward a step and the opportunities clearly aren't what they were a month and a half ago. But there are still opportunities: We are still far from a boom situation. The primary market has begun waking up but we still don't have prospectuses piled high on our desks like in 2010 and 2011. Most companies still can't raise money or recycle debt. The market has become pricier but is far from expensive.

"The name of the game now - but not just now - is selectivity. Anyone closely familiar with the companies can make an educated choice of bonds and obtain excess returns. Choosing wisely is particularly important among risky bonds - those trading at high yields."

Asis: "You need to go after less familiar companies and smaller debt series up to NIS 200 million to NIS 300 million. The fund I manage focuses mainly on bonds outside the Tel-Bond indices. Investing in the stocks and bonds of such companies offers several advantages. First, there is less competition over their securities so the price might be better. If problems crop up in these companies it's usually easier to deal with them since they're relatively smaller, their debts aren't so large and the owners are more capable of helping them out.

"Some of these companies are less exposed to macroeconomic factors and more dependent on what occurs in their own industry. In any case, the important thing when investing in small companies is research and analysis. The better you know the company and its securities, the easier it is to price and to know where they stand on the risk/reward curve and whether they offer any opportunity."

You say you don't hold IDB Holding? What about its subsidiaries IDB Development and Discount Investment Corp. Where you do have a heavy stake?

Stepak: "IDB Development bonds are now trading between 50 and 70 agorot, and we think even more can be extracted from its assets: Maybe not everything, but more than according to its current price.

"Discount Investment Corporastionis a different matter. We believe the company is in a strong position and can service its entire debt from existing assets. This, obviously, is based on the assumption that Cellcom's situation doesn't suddenly change with its value taking a dive. Two to three months ago, when the market crisis got worse, some of Discount Investments' bonds dropped to unreasonable prices of less than 70 agorot. We thought that was an opportunity to buy. In the last two months, when the market changed course, the bonds underwent a strong correction - and now almost all trade at over 90 agorot."

 

Why haven't you joined the bondholders' representation appointed for IDB Development?

Stepak: "The representatives, first of all, need to receive all the necessary information from management. They need to know its plans: Which assets it intends to sell and which it intends to develop. We didn't want to join because this would have limited us in trading IDB securities, including those of subsidiaries, because of concern over the use of inside information."