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The financial storm that has hit the money markets in Israel and the stiffening competition over investors' wallets since the beginning of this year, following the sharp drop in interest rates, have led to financial creativity among mutual fund managers. Ilanot Discount, the subsidiary company that manages the funds for Bank Discount, announced Sunday that it is launching a new fund called Ilanot Hasifa (exposure) to Commodities. The fund will be exposed to the Goldman Sachs commodities index and will in effect be an index fund. The fund will make investments by purchasing futures on the Goldman Sachs commodities index.

Sources at Ilanot say that investments in commodities should be an important component in any investment portfolio, in third place after stocks and bonds. The investment in commodities, which have open futures amounting to as much as a billion dollars a day, balances the portfolio and adds to its diversification such that the standard deviation is less than that of a portfolio without commodities.

An examination by Goldman Sachs (on which Ilanot based its research in this field) found that over a number of decades, a virtual investment portfolio of stocks and bonds that invested in commodities was less volatile and had greater capital gains. Thus by increasing the commodities component from 0 percent to 35 percent in a portfolio that originally consisted of 60 percent stocks and 40 percent bonds, the standard deviation was reduced from 12.1 percent to 10.6 percent, and the yield was increased from 10.8 percent to 12.4 percent per year.

Since Ilanot's new fund will be operating in capital markets worldwide, its assets will be linked to the dollar, meaning that any depreciation in the value of the shekel is good for it.

The dollar yield of the commodities index, which has been 10 percent since the beginning of the year, would translate into a 20 percent yield in shekel terms. The fund's drawback is that it is an overseas fund and therefore carries a 35 percent capital gains tax.

In addition to diversifying a portfolio and creating a new instrument on the local financial market that can be used by institutions and private investors, Ilanot feels that the new fund will also generate nice profits in the coming year. The commodities index that the fund will follow has so far registered a 10 percent yield in dollar terms, and Ilanot's analysts predict that this trend will continue in the coming months. The analysts claim that recovery forecasts for the global economy will lead to even higher prices for commodities due to increased future demand.

The demand for wheat is one example. Over the years the demand for wheat has grown, but global production capacity has not changed and demand is approaching production capacity, which means that wheat prices will rise. In the aluminum industry, full production capability is being utilized, so despite the drop in prices that began in 2000, there will soon be a recovery in demand and toward the end of 2003 prices are forecast to rise sharply.

An investment in commodities is actually a good defense against global inflation because price rises are also manifest in increases in the price of commodities. When there is renewed global economic growth, inflation is also liable to raise its head, say Ilanot sources, and an investment linked to commodities will provide the necessary protection.

The fund's manager says that the commodities index has a clear correlation of about 0.2 percent with bond performance. When a bonds portfolio has capital gains of minus 1 percent, commodities decline by 0.2 percent. This in turn contributes to the reduction in a portfolio's volatility.

The Goldman Sachs index reflects the trade volume of some 30 commodities traded on world bourses, including foodstuffs, energy, metals and other raw materials. Since the trade volume of energy products is so enormous, oil and gas constitute over 65 percent of the index. Fluctuations in energy prices therefore have the greatest effect on the yield of the fund. If prices continue to rise, the fund's yield will be positive, but a drop in oil and gas prices will bring the fund a negative yield.

Energy prices in the commodities market have flip-flopped in the past year, mainly since the terror attacks in September 2000. Following those events and the beginning of America's war against terror, oil prices have been sensitive to security developments. The war in the Middle East between Israel and the Palestinians also has a negative effect on the stability of this market.

Since the beginning of this year, the benchmark price of a barrel of Brent crude has risen by 20 percent and the commodities index, which Ilanot's fund will be following, has risen accordingly. Anyone who feels that the United States is moving toward a war against Iraq, and that such a war would cause a sharp rise in oil prices, should find this fund an interesting investment.

Sources at Ilanot say that investing via the mutual fund has advantages over investing independently in commodities. No minimum financial commitment is required for investment in the fund and it has high liquidity. A portfolio can therefore achieve diversification even with a small investment. Investing via the fund also does not require an understanding of futures, the provision of securities or the management of exposure.