During the three-month period ending March 31, 2012, the American Israeli Shared Values Capital Appreciation Fund rose 11.51%. This compares to a 5.52% increase in the benchmark Tel Aviv 100Index and a 12.59% advance in the benchmark Standard & Poors 500Index during the quarter. The average increase for both indices during the period was 9.06%. For the three-month period the Israeli stock market continued its relative under-performance versus the S&P 500 . It is likely that the Israeli stock market was negatively impacted by investor unease about the possibility of an Israeli strike military strike against Iranian nuclear facilities and the possibility of reprisal attacks against Israel. However, as sanctions appear to be hurting the Iranian economy and the war rhetoric subsides, we expect the Israeli market to post better relative returns.
Stocks ended 2011 in a positive fashion and continued their strong performance into early 2012. We believe this strong performance was due to a change in investor sentiment triggered by numerous U.S. economic reports that suggest that the U.S. economy is expanding. Widely followed economic indicators such as initial and continuing unemployment claims, consumer confidence, manufacturing activity, and new home purchases, all point to a gradual economic recovery in the United States. While most economic data in the U.S. has been positive, Chinaís rate of growth appears to be slowing, Europeís long-term debt and budgetary problems remain unsolved, as well as the budget deficits and high levels of government debt in the United States. Nonetheless, market participants chose to focus on the positive, all part of a declining investor aversion to risk. While we take issue with the marketís fickleness, we are in agreement with the current mindset. Last summer and fall, when stock prices dropped sharply, we argued that equities were undervalued, particularly when compared to other investment options, namely U.S. Treasuries, and investment grade corporate bonds. We continue to believe that stocks are attractive and should continue to perform well barring some exogenous shock from geopolitical events combined with sharply higher energy prices.
Meanwhile, Israelís economy continues to grow at a faster rate than most developed Western economies and is expected to average 2.5% growth in 2012. The U.S. is expected to experience economic growth of just over 2% this year. Israeli unemployment at the end of December stood at 5.9%, down from 6.6% a year ago but up from 5.6% at September 30th. In the U.S., the unemployment rate is 8.3%, down from 8.8% six months ago. Israelís economic growth stands in contrast to the European Union where annualized GDP growth is flat to contracting in most member countries. In response to the slowing economies of Europe, the Bank of Israel cut its benchmark lending rate three times between September 26th andthe end of January in order to spur economic activity and counter headwinds from the European slowdown. The benchmark rate now stands at 2.5%. The Israeli central bank is comfortable lowering rates given the benign inflationary environment there - Israeli inflation slowed to 1.7% in February, its lowest level in four years.
Winners and Losers
With the Fund up nicely in the first quarter, there were numerous significant advancers and just a few noteworthy decliners. Many of the Fundís larger gainers were concentrated in the Technology and Financial sectors. During the three month period, shares of EZchip Semiconductor and Clicksoftware Technology rose 52% and 33% respectively after both companies reported fourth quarter earnings that exceeded investor expectations. Shares of Verifone Systems rose over 48% after reporting better than expected earnings and an announcement from MasterCard Inc. that it intends to upgrade merchantsí electronic point-of-sale payment systems. In the Financial sector, the Fundís shares of Bank of America and JP Morgan Chase rose over 72% and 39% respectively after both companies demonstrated adequate capital levels even in the event of a material economic slowdown.
The Fund was not without detractors during the quarter. Notable under-performers during the period included Cellcom, and Partner Communications and Elbit Systems. Shares of Cellcom Israel and Partner Communications fell 24% and 14% respectively during the quarter. These normally defensive stocks were hit hard after reporting sharply lower profits following an Israeli Ministry of Communication decision to open the Israeli mobile phone service market to increased competition. Given the reduced profitability in the Israeli mobile communications market, we question whether there will be as many new entrants as some fear given the likelihood of low returns for new competitors. Elbit Systems declined 5% during the three-month period as investors continue to be concerned about the companyís growth prospects as most of it military customers face budgetary pressures.
We remain convinced that U.S. and Israeli equities are undervalued in the current slow growth environment, with interest rates and bond yields at near-record lows. It is likely that some of the recently strong U.S. economic data is due to an unusually mild winter and warm spring which pulled forward construction activity and provided northern consumers a cash stimulus in the form of significantly reduced heating costs. However, there is enough data to suggest that the U.S. economy would be in expansion mode regardless of the weather. Stocks are responding to increasingly favorable economic conditions and mostly positive fourth quarter earnings reports and management outlooks. We would be surprised if stocks did not go through a period of weakness as some investors may seek to lock in profits following four months of virtually uninterrupted advances. However, as we have stated before, stocks remain inexpensive based on various measures such as price to earnings, price to cash flow, or price to free cash flow, particularly when compared to other investment options such as U.S. Treasury and investment grade corporate bonds.
Lastly, I wanted to make you aware that effective April 1, 2012, the Fundís Board of Trustees has reduced its management fee and activated its 12b-1 fee for an effective rate of 1.49% to investors. will continue to NOT have a sales load fee. We are eager to deliver superior investment returns and increase the Fundís size. Reducing investor expenses is a step toward that goal.
Thank you for your continuing investment in the Fund. As always, please feel free to call, write, or email with any questions or comments.
Very truly yours,
Jamia C. Jasper
Founder and Portfolio Manager
AmerIsrael Capital Management, LLC 207 East 83rd St., Suite 3|New York,†NY 10028 |Tel:†(212)†327-1345| www.AISHX.com| email@example.com