A Q&A with one of Israel’s leading equity fund managers.
Sagi Ben Yosef, Alpha LTI
Q. What does Alpha LTI invest in?
A. Alpha LTIs investable universe includes listed and pre-IPO companies that can change the world with disruptive technology or processes, or a completely new approach to an existing business model.
The focus is strictly on Israeli companies listed either in Israel or on different exchanges around the world, mainly the U.S. We typically invests in about 25 to 30 companies with an average market cap of USD$400 million, though sometimes investments are made in companies with much larger and smaller market caps. We aim to achieve a return of at least 50 percent over a period of three years, resulting in a long-term target return for the fund of 15 percent per annum.
We have a particular focus currently on semiconductors (you can find many Israeli semiconductor companies on the NASDAQ and Israeli stock exchanges) which is in demand in the automotive industry as well as in the cloud, mobile, IOT, and crypto sectors. Renewable energy (otherwise known as cleantech) also plays a big role in the fund as it is seeing continued significant growth as more countries and governments set defined objectives for clean energy use by 2030.
Q. What is the Alpha LTI approach?
A. Alpha looks to find Israeli companies with competitive technological advantages, either high-tech companies or what we refer to as low-tech companies, with cutting-edge technology.
We typically invest in mature companies that have a product and a global market advantage due to cutting-edge technology and Intellectual property. Our sweet spot is companies that fly under the radar, with low analyst coverage that trade at significant discounts to their true value and therefore have the prospect of earning outsized returns for our investors.
About two years ago, the Tel-Aviv Stock Exchange was listed and began to pursue a growth agenda. This continues to be very positive for Alpha because it has resulted in a surge of IPOs and increased interest in pre-IPO capital raisings. We are very well-placed to participate in these due to strong relationships across the domestic market.
Q. What’s the strategy?
A. An important advantage is a unique portfolio construction approach that incorporates three different strategies – value, growth, and special situations – into a single fund.
These three strategies are not implemented in equal weights but are determined based on the opportunities in the market at any point in time.
- Value. Valuations are paramount in this strategy and investments will generally be into industrial companies with a distinct technological advantage. Investments will be made with a strong margin of safety when comparing the price to valuation.
- Growth. This strategy provides access to the Israeli innovative edge – focusing on companies with significant and exponential growth potential- many of these are listed on the NASDAQ.
- Special situations/pre-IPO. Although the smallest allocation of our portfolio is made with ‘special situations’, these investments provide the potential for the highest return, often through investments in corporate actions that can have significant upside. This is the only strategy in the fund where we invest with a short-term outlook (of up to 12 months).
We believe that in today’s constantly changing environment, implementing these different strategies in one fund allows our product to deliver our best ideas and the best of what the Alpha platform has to offer. Unconstrained, we can be flexible and react quickly, and benefit from dedicated fundamental research in existing and new companies for the fund.
Q. And what about protection?
A. The strategy is long-only but mitigates beta risk with downside protection. This policy of hedging downside exposure, which we sometimes referred to as the fourth strategic pillar, not only protects the value of the portfolio, but it also allows Alpha to make investments when equities are severely oversold and cheap. We implement these hedges by buying long-dated, out-the-money put options on the index.
Whilst we have a high degree of confidence in the long-term valuations of the portfolio companies, we recognise that in times of severe market dislocations, market valuations are likely to be negatively impacted. The approach is to protect the portfolio against falls of more than 15 percent. In order to achieve this, Alpha deploys an active hedging strategy and rolls approximately 25 percent of our hedges every quarter.
A key benefit of having this downside protection is that it provides the fund with liquidity in the event of a market crash and enables us to confidently take advantage of the great opportunities that present themselves in times of crisis. Alpha does this by both specific stock selection as well as increasing their weights in the growth section of the portfolio.
In the last three years that the Australian fund has been operating, there have been two large market drawdowns – and in both instances, Alpha has performed strongly on a relative basis. We were able to take advantage of the downside protection strategy – using the money from the put options to buy equity and adjust option strategies. Both worked very well.
Q. Who is Alpha LTI?
A. Alpha LTI was founded in 2005. The team is made up of founders and partners with extensive expertise, specialising and focused on the Israeli capital markets. As founders, three of us have worked together for over 20 years and today we are considered one of the “go-to guys” in the Israeli market.
In fact, our first fund “Alpha Value’ is one of the best performing equity funds in Israel since its inception. Modest FUM of $AUD500m allows Alpha to participate in smaller off-market transactions on our own as well as to co-invest in larger off-market transactions.
Q. When did Alpha arrive in Australia?
A. It was early 2018 when Alpha LTI initiated a joint venture in Australia to form the only vehicle of this kind – an Australian unit trust that offers Australian Investors access to an on the ground fund manager with expertise in investing in Israeli companies.
A major benefit for Australian investors is the ability to diversify their global equity exposure by including Israel as an additional (and important) part of their global asset allocation. This means investment in sectors and companies which are either hard to find or do not exist on the Australian Stock Exchange, in particular hi-tech and specialised sectors such as semiconductors, cybersecurity, cleantech, aerospace, automotive, and others.
Alpha’s 16-year track record supports our belief that active management is a fundamental advantage when investing in a market like Israel which is typically very difficult for ‘outsiders’ to access.
Q. Why does having local fund managers make a difference?
A. Alpha is right here on the ground in Israel, right in the middle of the action.
We also hold a large strategic share in the largest Israeli underwriter, which allows us to have access to significant deal flow for pre- IPOs equity raisings.
Deal flow is increasing as a result of the new focus on getting companies to list on the Tel Aviv Exchange, and we are in the right position to benefit from this.
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