Fund betting Israeli oasis is no mirage: Past offerings counted on Jewish community, which wasn't buying

"Most of the American investment banks with active Israeli desks are looking into" venture capital investing and mergers and acquisitions, says Boaz Rahav, 30, chief investment officer of Transnations Investments LLC, which last spring launched Amidex 35, a no-load mutual fund that invests in Israeli stocks. Amidex 35 is intended to tap the demand among retail investors, including members of the large Jewish community in the United States, for exposure to Israel, which has "emerged as a promising economy" in recent years. If previous attempts to do so are any indication, the firm faces an uphill battle. Several years ago, New England Investment Cos. LP liquidated an Israeli fund because it had a hard time drumming up interest among investors, despite a gain of about 15% in the fund's first year. When the $20 million fund was liquidated, New England and portfolio manager David G. Herro were its largest shareholders.

Times a changing?

"This has been tried time and time again and it just never seems to work. (The New England Growth Fund of Israel) didn't work because there was no market on the buy side for it. We took it to the Jewish community and they said they were interested. They weren't," says Mr. Herro, a portfolio manager with Chicago-based Harris Associates, which ran the fund for New England - now known as Nvest LP. "Times change and times are different, but we certainly did not have very good luck with it," despite the marketing muscle of New England, adds Mr. Herro. Mr. Rahav - who served as chief economist to the Israeli finance ministry in New York before joining Transnations - believes times have changed. He says the Israeli economy has been bolstered by dozens of new businesses, including tech firms, that have been launched in recent years by immigrants from the former Soviet Union. "A lot of immigrants were math-and physics-oriented. You couldn't find any MBAs, but the government provided them with mentors, support and financing. You can now see many of the end results," says Mr. Rahav. Israel, he says, boasts almost 300 technology start-ups a year, second only to the United States. Its economy also has benefited from the peace process as more government resources have gone to the private sector rather than to defense, says Mr. Rahav. In addition, many companies that were once state-owned have been sold to private investors. That includes Bank Hapoalim, Israel's largest bank and one of the fund's biggest holdings. "In the '90s, Israel went through a shift from a socialist environment to pure capitalism. One of the results of that was a strong privatization effort by the government," says Mr. Rahav. Amidex 35, which hold $4 million, tracks an index of 35 stocks launched by Transnations in January. To create the index, which is up about 30% through Sept. 30, the firm sifted through 680 companies trading on the Tel Aviv Stock Exchange and 120 Israeli companies trading on U.S. exchanges in an effort to mimic the entire universe of Israeli stocks. The fund's top 10 holdings range from Check Point Software Technologies Ltd., a fire wall software technology firm that trades on the Nasdaq, to Bank Leumi, Israel's second largest commercial bank, which trades on the Tel Aviv Stock Exchange. Through Oct. 8, the Morgan Stanley Capital International Israel index was up 14.42% for 1999. It has beaten MSCI's barometer for developed markets - the Europe Australasia Far East index, which gained 9.49%. But it has underpeformed MSCI's Emerging Markets Index, up 37.55%, thanks largely to Asia's rebound. Wooing and keeping investors is a concern for open-end single country funds, which suffer if investors sour on a particular market or are lured by gains in another market. "Open-end single country funds are problematic, especially for a smaller market like Israel," says Bill Rocco, an analyst with Chicago-based fund tracker Morningstar Inc. That's why, he says, most single country funds are closed-end. Managers of those funds don't have to sell holdings to meet redemptions. "It's not an accident that most single country funds are closed-end," he says.