The Bank of Israel will invest 10% of the state’s foreign currency reserves in foreign equities in 2016, as the central bank seeks to get a better return on its money in an era of record-low interest rates.
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With reserves at $90.5 billion at the end of January and likely to continue growing, that 10% constitutes a considerable portfolio. It exposes the bank to more risk — and potentially to higher returns — than its traditional holdings of top-rated government bonds.
Under a policy adopted by the bank’s monetary committee three weeks ago, 84.5% of reserves will be kept in foreign government bonds and another 5.5% in foreign corporate debt. Last year the Bank of Israel invested in corporate bonds on a trial basis, buying exclusively American debt rated BBB or above.
The bank only began investing in stocks in 2012, when it set a cap of 3%, and it proved to be successful.
The policy of holding shares or corporate bonds, which only became possible after the new Bank of Israel law was passed six years ago, is likely to be expanded. In 2014, the committee authorized the holding of up to 8% of reserves in equities. In 2015 the ceiling was raised by another percentage point.
The central bank hedges the risk of stock investing by buying shares in blue-chip companies only. Its portfolio is managed by an outside firm, which conducts a passive strategy of investing only in the best-known and most liquid shares. At the end of 2015, 5.5% of reserves were held in U.S. stocks, 1.4% in German shares, 1.1% in Britain and 0.2% in France.
Last year, the bank took advantage of rising Asian markets and invested in South Korean, Japanese and Hong Kong shares, too.
As a result, its return in 2015 was more than $800 million, or 1.28%. (Reserves were $86.1 billion at the end of that year.) That was close to the average of the years following the global financial crisis in 2008, but was much lower than the pre-crisis years. Returns were 6.91% in 2007 and 5.95% in 2008.