When You Wish Upon a Star

High-tech fund managers are no longer engaged in the aggressive marketing that was highly fashionable early last year. Then, some 15 mutual funds splashed their wares across the pages of the newspapers and, with the help of investment consultants at bank branches, attracted massive public interest - and with it investments that lost 55 percent of their value in 2000 and another 45 percent in 2001.

The new TelTech fund that Harel Capital Markets investment house is launching (Harel TelTech 15) may not raise hundreds of millions of shekels, but it should be able to show a nice return and make it to the top of the newspaper yield tables in the next few years.

The launch of another mutual fund that invests in technology stocks seems very curious, especially in a period when the markets are in a slump and technology shares are being traded for below their equity value.

When the public returns to the stock market, the "star effect" - whereby the leading fund in each sector of the funds table is indicated with a star - should earn the fund positive media coverage and attract more investors than other funds.

In keeping with the fund's prospectus, Harel will invest at least 80 percent of it's assets in securities included in the Tel Aviv Stock Exchange's TelTech 15 index of technology companies, in accordance with their ranking in the index. On Monday Harel Mutual Funds CEO Doron Cohen said one of the things that prompted the company to establish the new fund was the potential in technology share prices at present.

Latent potential

Cohen feels that TelTech shares currently have more latent potential for profit than the shares in the other indexes on the bourse. Cohen is aware of the dismal state of the stock market, of the low turnovers in shares, and the condition of the companies that are traded on the TelTech 15 index. He feels, however, that these stocks are trading at attractive prices and that buying now will pay off in the distant future.

Harel's economic department has conducted feasibility studies on the Israeli economy and the shares of the companies included in the index and has reached the conclusion that the prices are right for long-term investment.

"The technology shares on the TASE are currently suffering from substantial underpricing," says Cohen, "thanks to the situation on world markets. The figures, however, indicate Israel's steadfast status as a technology-oriented country, mainly because of the latent talent in the work force." Cohen also notes the advantages of dual listing, which has been in effect for a year now, which enables companies that are traded on the Nasdaq to trade their shares on the TASE too.

Cohen feels that if more companies like ECI Telecom list with the TelTech 15 index, it will arouse more interest in the index. Jacada and Metalink, both of which took advantage of dual listing, were immediately included in the TelTech 15. Shares of other companies that have higher market values will be included in the Maof or Tel Aviv 100 indexes too and will attract even greater interest.

Cohen notes that Harel TelTech 15 will offer a solution for portfolio managers who are interested in returning to investments in technology shares. A study conducted by Harel into the behavior of the markets after security crises and terror attacks revealed that the markets tend to respond with sharp rises the following year. These rises, combined with the underpricing of the technology shares and the option to list technology companies on both the Nasdaq and the TASE are what led Cohen to launch the new fund.

Top table

Cohen even feels that it is advantageous for him to launch the new fund now, explaining that the fund will be marketed via its high ranking in the performance tables. Nowadays there are a lot of TelTech funds on the market, most of which were launched when the industry was at its zenith. The sharp drops in technology stocks, however, caused these funds to register negative yields of tens of percentage points in the past two years. Cohen believes that when the market begins to stabilize, Harel TelTech 15 will be at the top of the funds table, or at least in the upper ranks.

It seems that Harel has already tried this strategy, when it felt that the shares had reached rock bottom at the end of 2000. At that time Harel issued participation units in two technology-oriented mutual funds that have not yet enjoyed even one day of upward movement since they were issued.

The Harel Telcom fund, which invests in landline telephony companies worldwide, has shed 34 percent of its value since it was launched over a year ago. The company's Gvanim Globaltech fund, launched in December 2001, at the height of the capital market crisis and after the beginning of the current intifada, has shrunk by 43 percent.

The managers of TelTech funds launched at the beginning of 2000 explain that they were launched in response to the market's needs, and at the request of the investors. This explanation sounds all the more puzzling given the massive losses suffered by their customers - the ones who bought participation units.

It is true no one could have predicted the geopolitical events that have affected capital markets throughout the world, or the war atmosphere that developed in the Middle East in 2000 and in the U.S. in 2001. However, fund managers should have realized that the market values of the technology companies were unrealistic, as many economists did. Such analysis might have led them to launch the funds with somewhat less enthusiasm - or cancel them altogether.