Israel Investment Advisors (IIA) at 10: How We Started the Fund

As Israel Investment Advisors (IIA) marks its 10th anniversary, it is worth recalling how the fund began.

Brian Friedman wanted to start a fund dedicated to investing in Israeli stocks years before he actually did. As an economist, portfolio manager, and scholar of Israel’s political and economic history, Brian recognized the opportunities not only to be a part of Israel’s growth story but to support Israel through investment in its capital markets. But while Brian bought Israeli stock on his own, he recognized that Israel’s status as a socialist state slowly transitioning to a privatized economy meant that large-scale investment was not yet viable.

Two catalysts changed that. One was the actions of the Bachar Committee in 2005, which began breaking up banking monopolies and allowing increased competition and capital flow in Israel’s financial industry. The Israeli economy prospered. Within two years, conditions seemed right for Brian to launch the fund. But the 2008 worldwide financial crisis put the brakes on his plans.

The other trigger came on June 30, 2010, with Israel’s upgrade from MSCI’s Emerging Markets (EM) index to its Europe, Australasia, and the Middle East (EAFE) index of developed economies. On the surface, this looked like a promotion, a reward for Israel’s economic success. As it turned out, however, it was a demotion or even worse, a divestment but not for political reasons. In the EM index, Israel had been a modest-sized fish in a small pond, with Israeli companies representing 2.9% of the index. But in EAFE, Israel became a minuscule fish in a much bigger pond, representing just 0.01% of the index. As a result, Israel was no longer on the radar of many international investors, and capital flowed out of the Tel-Aviv Stock Exchange.

Brian recognized this moment, when investors were not focused on Israel, and when investment capital was flowing away from there, as the time to take advantage of the undervalued Israeli market and buy in. Despite the market’s illiquidity or perhaps because of it and some long-term vision, Brian and his partners launched the fund on August 1, 2010.

While the trading volume on the Tel-Aviv Stock Exchange has not returned yet to its pre-June 30, 2010 level, IIA has seen its optimism vindicated by a decade of Israeli economic expansion. In addition, ongoing financial and economic policy reforms have made Israeli industry less monopolistic, more competitive, and well-suited to experience similar growth for years to come.

Read more about Israel’s growth story here.