Half of Israel's Investment Billions Headed Abroad, Psagot Says

  • Largest investment house favoring foreign bonds over local
  • Hunt for returns will push more cash overseas: CEO Badash

Half of the assets controlled by Israeli money managers will soon be deposited abroad, according to the chief executive officer of the country’s largest investment house.

Sliding domestic returns are forcing portfolio managers to look overseas for alternatives, Psagot Investment House Ltd.’s Hagai Badash said. Half of Psagot’s investments in stocks are abroad and Israeli debt will fall to 70 percent of its total bond holdings this year from 75 percent last year, he said. The company oversees about 190 billion shekels ($48 billion).

“Today, when a new shekel enters the money-management industry, it’s now directed abroad, and not to Israel,” 41-year-old Badash said in an interview at his Tel Aviv office. “Looking three years ahead, Israeli institutional investors will eventually allocate about 50 percent of their assets abroad.”

The exodus of institutional cash will add to pressure on the Tel Aviv Stock Exchange, which has been battling a decline in trading volumes and a shortage of new share offerings since an upgrade to developed market status in 2010. Israeli institutions including insurance companies and pension funds held $84.2 billion, or about 24 percent, of their assets overseas as of November, the highest proportion since 2002, according to the latest data available from the Bank of Israel.

Bond Switch

The Tel-Bond 20 Index, a gauge of Israel’s largest corporate debt, declined for the first time in seven years in 2015 as the central bank cut interest rates to a record. Governor Karnit Flug has pledged to keep monetary policy “very expansionary” even as the Federal Reserve increases borrowing costs.

“If I can get a similarly-rated bond in the U.S. with a much higher yield, why should I keep the bulk of our investments in Israeli bonds?” Badash said.

Psagot’s local stock picks for 2016 include banks and insurance companies, given their low valuations, and companies in the technology sector, Badash said. Psagot is ranked the biggest Israeli investment house by the Globes Dun’s 100 report.

Israel’s banks trade at a price-to-book value of 0.7 compared with 0.9 for the MSCI World Bank Index, according to data compiled by Bloomberg. The TA-Insurance Index has declined 11 percent in the past 12 months, compared with a 7.5 percent drop in the MSCI World Insurance Index.

Both segments have been the subject of regulatory scrutiny and reforms in Israel.