Taking Stock / The Economy's True Story

One by one, the dignitaries stepped up to the stage. Teva Pharmaceuticals CEO Israel Makov, Delek Automotive chief Gil Agmon, Harel Insurance Investments manager Yair Hamburger, Clal Industries and Investments CEO Avigdor Kaplan, and Lipman Electronic Engineering leader Isaac Angel came to take certificates of appreciation from the Tel Aviv Stock Exchange, which was honoring the management of the five companies that created the greatest value for shareholders in the last decade.

The certificates were a nice touch as the TASE celebrated its 50th birthday. After all, that is its main purpose, even if many forget it - to create real value for investors over the long run.

Most of the best performers on the TASE, vis-a-vis share price, are companies with excellent, creative, ambitious management that sometimes also excel at relations with shareholders belonging to the general public. There are also plenty of companies whose business is flourishing, yet most of the profits go straight to the management or substantial shareholders.

Yet the list of the 10 companies that created the greatest value for shareholders in the last decade does not tell the real story of the TASE, or of the Israeli economy. Nor do the speeches delivered by their beaming managers. What is the real story?

1. Teva Pharmaceuticals (TASE, Nasdaq:TEVA) is the biggest creator of value on the market, with a yield of 606 percent and a market value of NIS 66.5 billion. But the truth is that the giant drugmaker doesn't belong there, it belongs in an entirely different league. In the last decade, Teva drummed up more than NIS 50 billion. Take the amount generated by all the other big manufacturers listed on the TASE, multiply it by three and Teva still generated more.

The sad truth is that Teva is the exception that attests to the rule; it has nothing in common with the local exchange or the Israeli economy.

Teva may be registered on the TASE, but the majority of its shareholders and operations have long been located elsewhere, in New York. Companies of Teva's league cannot afford to settle for trading in Tel Aviv.

2. Delek Automotive (TASE:DLEA) hasn't created billions in value like Teva, but behind its 875 percent yield in the last decade, or 26.3 percent in annual terms, stands a story of first-rate management. Gil Agmon took a small vehicle agency and turned it into a tremendous profit machine, even though the brand it imports, Mazda, hasn't done particularly well in these 10 years.

Yet it is disappointing that the company that generated the highest yield on the stock market in the last decade is a car importer. With all due respect to the field, car import isn't a sector that contributes real value to the economy. The value Agmon created is mainly value that the other car importers lost. Moreover, most major car importers in Israel don't make much over the years, mainly because of the sector's structure, where their profits are mainly from spare parts, at the expense of consumers.

3. If Yair Hamburger of Harel Insurance Investments (TASE:HARL1) was the only representative of the insurance sector on the list, one could settle for admiring how he took a bitty little agency, floated it 20 years back, and turned it into a half-billion dollar investment powerhouse, enriching shareholders, managers and interested parties as he roared along.

Asked to sum up the secret of his success in two sentences, Hamburger formulated an interesting explanation in one: "The group managers, which are the secret of our success, managed to channel the needs of their egos from themselves to success." Short and sweet, sharp as a razor.

Though Harel has achieved a real yield of 153 percent over the decade, bringing it to third place, we cannot ignore the fact that the Top 10 list has three more insurance companies: Clal Insurance (TASE:CLIS), Menorah Holdings 1 (TASE:MORA1) and The Israel Phoenix Assurance Company (TASE:PHOE).

Meaning, there's something to be said for the sector. And if you keep an eye on the insurance business, you know what it is - the life insurance business has been gorging itself for years as the government allowed it to charge the public insanely high premiums, while concealing the true level of their take.

4. The true story of value creation on the TASE does not lie in some celebratory brochure the exchange publishes for its birthday. That truth lies in the value that the entire exchange generated.

In the period the TASE checked, from December 1993 to September 2003, the TA-100 index generated an aggregate dollar yield of 37 percent. In the same period, the S&P-500 generated 125 percent.

In the TASE's defense, one could say the examination began in December 1993, when the market was booming, so it began from an unfairly high point. But even if you change the dates to the start of 1993, extending through the start of 2003, you get very measly results, indeed. The TA-100 index generated minus 12 percent while Wall Street generated 95 percent, because of outperformance of Wall Street companies, where the average return on equity was double that achieved by Israeli companies.

5. Maybe Kobi Abramov, of the TASE's research department, should carry out another study. How much value did the TASE generate for shareholders over 5, 10, 20 and 30 years, compared with leading markets in Europe and the United States?

Then Abramov, an economist, can explain why the TASE management, which is supposed to take care of the interest of Israeli investors, strongly supports maintaining skewed taxation rates on investments here and abroad. It is that very difference, the low tax on gains made at home, that strongly gives Israelis incentives to choose the local exchange, even though it has such difficulty generating value over time.