Aberdeen Israel Fund, Inc. (NYSEMKT:ISL) was founded in 1992 by Credit Suisse (NYSE:CS) and later sold to the Aberdeen Group, a large investment management company based in Scotland with US offices in Philadelphia. The fund invests solely in securities linked to Israel and currently, as of Sept. 16, sells at slightly more than a 13% discount from net asset value.
The economy of Israel has been growing rapidly. Growth in the first quarter of 2011 was moderated, but remained impressive, growing at an annualized rate of 4.8%. Growth was boosted by exports, consumer spending and investments in fixed assets. Unemployment has declined to a record low. The Bank of Israel -- run by Stanley Fisher, formerly of Citi (NYSE:C) -- lifted its 2011 GDP estimate to 5.2% from the 4.7% reached last year. The bank also hiked its benchmark interest rate a quarter of a percent to 3.25% in May, but left rates unchanged in June. There is inflation primarily relating to housing and food costs, but the bank believes that the strength of the shekel would help temper inflation. It should be noted that housing demand is exceptionally strong, from both domestic purchasers as well as international and foreign purchasers.
ISL's six largest holdings are as follows:
Check Point Software: 13.4%
Israel Chemicals: 10.1%
Mizrahi Tefahot Bank: 9.3%
Teva Pharmaceutical: 8.4%
Bezeq Telecommunications: 7.9%
By sector, ISL's largest investments were in:
Commercial Banks: 19.2%
ISL is fully invested, with slightly more than 1% of assets in short-term investments, and it has no leverage.
2.8% of assets are invested in venture capital through existing venture capital funds. This is fine, but it is not enough. Israel is a start-up nation and a worldwide source for technological innovation. The closed-end structure of the fund should be used to take advantage of this and to have more of its portfolio in venture capital.
It is also unfortunate that Aberdeen itself lacks the expertise to truly maximize its investments in Israel. Analyst Exchange and Trading Services Ltd., is the-sub advisor to the firm, and receives an investment management fee of 0.30% from the management fee of 1.3% paid to Aberdeen. It is shameful that Aberdeen does not use a part of the remainder of its management fee to obtain the expertise to invest directly in the ventures, but instead uses external fund managers (at investors' expense) to invest in.
I would purchase ISL at a discount of 15%, as Israel seems to be growing stronger and stronger, and ISL is a decent way of gaining exposure. The shekel has been extremely strong, and this could hamper future export growth of Israeli companies.
Disclosure: I am long ISL.