Why are the majority of Jewish funds and federations not investing in Israel?

For the first time in its history the Jewish Federation of Greater Metro West New Jersey will make a dedicated allocation to Israel equities. “The board felt that it is an overall investment with a reasonable return and with some heart and mission behind it,” Daniel Staffenberg, Chief Development Officer at the Metro West NJ Federation said of the board’s decision to invest in Israel using ISRA, which tracks the BlueStar Israel Global Index.

At first glance that might seem like a bit of ho-hum news. It’s not. To be sure many federations, such as Metro West, the Greater Miami Jewish Federation and United Jewish Endowment Fund of Washington, have invested in Israel by way of the Ness Negev Fund. The loan fund helps entrepreneurs looking to start, or expand, businesses in the Negev area.

However, seeking to maximize their investments — as is their mandate and fiduciary responsibility — the majority of Jewish funds and federations not only skip Israel, they may also be investing in countries that are overt or passive enemies of the Jewish state. All told, there is nearly $90 billion in endowment funds in Jewish organizations nationwide. “In the Jewish community there is generally no allocation to Israel. Even organizations that have the stated goal to support Israel don’t have investments there. Jewish endowments must insist Israel-related investments be reviewed,” said Scott Shay, co-founder and executive chairman of Signature Bank.

He’s not alone in calling attention to this issue. More than a dozen people interviewed for this article said that aside from a few organizations that hold a small allocation to Israel bonds, most aren’t putting their money where their mouth is. And, they said, that needs to change if organizations not only want fight the Boycott, Divestment and Sanctions (BDS) movement, but help strengthen Israel.

For example, last September, Qatar, which funds Hamas, received a larger share than Israel in global investment portfolios, including in most of the endowments of Jewish communal and pro-Israel organizations, said Joseph Levin, chief investment strategist and partner at BlueStar Indexes. This occurred because in late 2016, Qatar and the UAE were added to the main Emerging Market benchmark used by most institutional investors, explained BlueStar Indexes. So at that time, many Jewish-affilated endowments became investors in these two markets since their managers added them.

Aside from Qatar, more Jewish or pro-Israel investors have the bulk of their portfolios in United Arab Emirates, Malaysia and Indonesia than in Israel, wrote Levin in a piece for eJewishPhilanthropy.

But there is a remedy. “The antidote to divestment is investment. If Israel is in your mission statement it should be in your portfolio. Full Stop,” Levin said. Levin said organizations have a fiduciary responsibility to review their investment policy statements and determine how much Israel is in their portfolio. Equally, they must also check whether they are investing in companies or countries that are working against a pro-Israel mission.

Upping the ante

Based in New York, BlueStar was founded in 2011 on the premise that investing in Israel isn’t just a feel-good thing: It’s financially sound. It offers a family of indexes with a long history so investors can assess an allocation to Israeli stocks. In short it’s a “double-bottom line” return, said Steven Schoenfeld, BlueStar’s Founder and Chief Investment Officer.

Aside from the much ballyhooed tech industry, most sectors of Israel’s economy, including public equities, fixed income, private equity, private debt and real assets are worthy of consideration, Schoenfeld said. “But we also think that Jewish and pro-Israel investors should ‘follow their heart’ to open the door to considering an investment in Israel, and then do the investment analysis. The empirical data of the past 10, 15 and 20 years of Israeli equity performance makes the case, but the fact that such an investment is also good for Israel is a bonus,” he said.

Signature Bank’s Shay too said he encourages investors to consider a wide swath of Israeli investing beyond the start up arena. “I definitely do not encourage anyone to invest all of their funds in Israel. I would think that an allocation of 5% would be sufficient for most Jewish endowments. This would be a major achievement as the current percentage invested in Israel is closer to 0 than 1%,” he said.

However, getting organizations to follow suit takes time, said Michael Lustig, chair of UJA-Federation’s Impact Investing in Israel (i4). Last year Lustig spoke about this before the Jewish Federations of North America Investment Institute. “I’ve been advocating for this for two years but a combination of inertia, a lack of understanding, and it not being the focus of investment committees means they [UJA] are not intentionally invested in Israel,” said Lustig, who also sits on the boards of Hillel International and the Jewish Communal Fund.

However, in considering this issue Metro West’s Staffenberg said it’s important to note federations act with caution for a reason. “We have a responsibility to be wise with the gifts our foundations get. We do want to recognize Israel, and we are mission based. But it’s only in recent years that there are new ways to invest in Israel. We are stewards for communal money and our investment committees devote hundreds of hours a year to this issue,” he said. Additionally, Metro West’s vote “was not in response to any article. This was something we’d been thinking about for a long time,” Staffenberg said referring to Shay’s aforementioned piece.

A changing landscape

Part of the reason Israel has been overlooked is because Jewish endowments weren’t familiar with the Israeli investment landscape and Israeli investment managers weren’t familiar with the Jewish endowment system and investment process, said Alon Ozer, Chief Investment Officer at the Greater Miami Jewish Federation. Several things needed to change, including the growth of a hedge fund industry in Israel. Additionally, there are tremendous infrastructure investment opportunities in Israel that endowments didn’t even know about three years ago, Ozer said.

Jewish endowments, Israeli investment managers and the Israeli government are starting to collaborate more often, he said. Whereas in 2009, there was only one small panel discussing the Israeli economy at the Federation’s biennial Investment Institute, every conference since has devoted attention to the issue. “To say that federations ‘boycott’ investments in Israel is just not correct. The Foundation of the Greater Miami Jewish Federation has more than 10% of its portfolio invested directly in Israel and we have very strong investment guidelines like many other Jewish endowments,” Ozer said.

In 2016, the Miami Federation had its first investment mission to Israel, dedicated to the interests and needs of federation investment professionals. JFNA and Israel’s Ministry of Finance organized the trip. Ozer said that for most federations it’s not that they don’t want to invest in Israel, it’s that they lack the expertise and resources to do the necessary due diligence. “It’s difficult to get the consultants and investment advisors that smaller endowments use to do the work for something that is just a small portion of a portfolio of one or two small clients. It’s just not economical for them. It doesn’t mean that endowments shouldn’t push for it, of course. Someday there may be a solution that would change all that and allow many Jewish endowments to join this initiative,” he said.

Spreading the word

The investment issue came to Shay’s attention through his work at Signature Bank and because of his role as chairman of the investment committee of the Elah Fund, a private equity fund that invests in Israel’s north and south. He said he believes the issue has more to do with investment strategy and ignorance on the part of Jewish organizations rather than malice on the part of consultants. 

“I don’t think it’s because of anti-Semitism. I really don’t think that’s the case. Often when I ask the question of about investing in Israel I’m met with a blank stare,” Shay said.

Most Jewish endowments rely on the advice of investment consultants to determine where to invest. Larger Jewish endowments tend to invest in private equity and hedge funds. Decisions are made completely separate from their mission and grant making priorities. Additionally, fund managers often undervalue Israel, skipping an allocation to Israel entirely since it’s a tiny country and a minuscule percentage of developed world benchmarks, said Julie Hammerman.

Hammerman is the executive director of JLens, a network of 9,000 individual and institutional investors that deliberately invests in social justice, environmental preservation — and perhaps most significantly — Israel. “Institutional investors have tremendous power. It is a missed opportunity to not put investment capital to work in a mission-aligned manner, whether to support Israel, or other social and environmental concerns that are important to the Jewish community,” Hammerman said.

Nevertheless, with 8 million people, Israel is a small country with a small economy. It’s a blip on the radar for many consultants. That’s because when Israel was promoted to developed market status in 2010, it joined other developed economies such as Japan, Germany, Canada and the UK, said BlueStar’s Schoenfeld. Yet while the size of its stock market remained the same, it was much smaller in size relative to these large economies. So instead of a 3.5% share of the emerging market index, it now only has between 0.40% and 0.50%.

Israel’s weight in the Developed Market index was also constrained because unlike the BlueStar Israel Global Index, which counts Israeli companies listed outside Tel Aviv, most of the global indexes only include Israeli companies listed in Tel Aviv, Schoenfeld said. “So as we at BlueStar like to say, Israel went from being a medium-sized fish in the emerging market lake to being a tiny minnow in the developed market ocean. And when a market is a tiny minnow, it’s easy for global investors to ignore, or have a tiny percentage holding,” Schoenfeld said.

So, unless an organization specifically asks their investment committee or financial consultant to invest there, it’s not going to happen. Aside from overlooking Israel because of its size, there are instances where a strategy of social impact investment can hamper investing in Israel.

About 20% of investment capital in the US is mission-based. That means some investors will avoid companies that, for example, traffic in blood diamonds, weapons, tobacco, or even coal and fossil fuels. It also means “controversial” Israel gets overlooked. “Most people who are focused on social impact funds tend to avoid companies that are socially deleterious. And that’s a good thing, but here’s what’s happening,” Shay said. “Those same groups also tend to avoid Israel because they think it’s preferable to avoid controversy. It’s not BDS heavy, they just want to appeal to the broadest measure possible. But it’s another way Israel tends to get excluded.”

That’s why it’s important to align investments with values, Hammerman said. It helps Jewish funds and federations become more attractive to their younger donors and legacy givers. It also helps ensure that organizations aren’t involved in companies or countries that run counter to their pro-Israel mission. “Jewish organizations and funds should want to invest in Israel. It’s a strong economy, and supporting Israel helps support the mission of many Jewish organizations,” said Hammerman. “Philanthropy is not the only way to strengthen Israel, increasingly Israel needs investment capital as well.”

Cathryn J. Prince