Israel’s vibrant economy, driven by a hot bed of technology companies and a steady stream of foreign direct investment, is garnering increased interest as a wealth management centre. As the country faces many challenges from within, Israeli money has moved across hostile borders to settle in more stable regions, particularly in the US.
The Israeli domestic remains very active: HNWIs have, over the past years, outperformed the global market and significantly increased their wealth. The HNW population stands at about 74,700 individuals sharing an estimated US$362 billion. WealthInsight, a global wealth consultancy, has predicted stellar growth for the coming years as the total number of wealthy Israelis is forecast to rise by 29%, to reach over 96,600 in 2017. Their wealth is also set to grow by 35% to reach US$489 billion. The family office industry in Israel is estimated to make up over 40% of local wealth management, far higher than the global average of 13%.
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Globalisation has given Israel’s HNW market a shot in the arm. From an inward focused market, it has grown into an important international player, investing abroad but also attracting foreign assets, mainly from the Jewish community around the world.
A report by the Bank of Israel finds that non residents’ net direct investment in
Israel via domestic banks totalled about $1 billion in February 2013 alone, while residents have invested about $170 million in net direct investments abroad.
Seeking stability
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By GlobalDataDespite its high performing economy, Israel remains threatened as one of the most volatile region in the world. As conflicts have undermined the country’s ability to maintain security, Israelis have been trying to find a balance in their investments, mostly to ensure part of their money was in a safe place.
This has meant asset preservation has become one of the major drivers for Israelis’ investors, keeping wealth managers on their toes.
"The driving force behind asset allocations is risk management because most of the assets are looking for the preservation of their values," says David Kimche, President of Israeli multi-family office KimFO, which manages several hundred million dollars for less than 10 families.
"Our asset allocations emanate primarily from risk management and we try and ascertain the appropriate level that should be attributed to each asset pool and from that, we derive the expected return over time," says Kimche.
"The general challenge today relates to risk management. Risk management is both financial, whether it is market risk or credit risk or things related to financial assets, or whether it is legal, related to tax planning or tax exposure of our clients in various domiciles in different countries," he says.
Stable economy, fragile region
The state of Israel has been in alert since its creation, surrounded by hostile borders in a volatile region, still in the throes of the Arab Spring. The opening last month of the natural-gas pipeline flowing from the Tamar offshore field to Israel power plants has, however, reassured Israel’s position as one of the most powerful countries in the Middle-East. Israel is less and less reliant on foreign energy supplies, a great factor of economic growth.
"From a geopolitical point of view, it is and probably will remain for some time, relatively fragile. Economically, Israel is doing very well and very recently, for the first time, is becoming less dependent on imported energy. This is clearly an additional boost to the economy of the country," says Stephen Kamp, Managing director and deputy head of Latin America and Israel at Julius Baer.
"But as much as Israelis are confident in the economic health of their country for other reasons, many will want to have some assets placed in offshore centres like
Switzerland. It is simply based on common sense to have some money in a different country characterised by economic and political stability, whether it is Switzerland or London or other places," he adds.
"Israel becoming energy independent and maybe in the future energy exporter will have a tremendous positive impact," says Eran Goren, managing partner at Fidelis Partner, an Israeli multi-client family office with assets under management of about $300m.
US-focused
Israel ties with the US are not a secret. The American market is by far its largest economic partner with large amounts of assets moving from Israel to the US and vice-versa.
David Kimche says that most of KimFo’s clients are connected to Israel but are not Israeli per se. They have homes there but do not necessarily spend most of their time in Israel. It is a similar situation at Fidelis Partner where two-thirds of clients are ‘internationals’.
The US is offering great growth and recovery prospects. A much ‘dollarised’ economy, Israel concentrates the bulk of its assets allocated abroad on the US market.
"Looking at Nasdaq, apart from US companies, the highest number of foreign companies listed are Israeli companies," notes Stephen Kamp.
"We are very US biased. The US holds the largest allocations. Israel comes next.
We always have some investors who are strong home buyers because they know the companies and the market," says Goren.
Outside their traditional links with the US, some emerging markets are becoming very attractive to Israelis’ investors.
"In Israel, over the last three or four years, there has been more products allowing easy access to emerging markets. But people have gradually increased their exposure to emerging market realising how a legitimate and exciting asset class it is," says Goren.
Singapore and Hong Kong are places of interests for any private banker or wealth manager worldwide, but surprisingly, the Japanese market, due to promising reforms and recent regulations, is seen as the next place to invest. Wealth managers at KimFo are hoping drastic monetary easing, instigated by Japan’s new central bank governor Haruhiko Kuroda, will put an end to 20 years of economic stagnation following the implementation.
"We allocated more than usual to that market for the time being. They have taken a step that will have a positive impact on Japanese equities. We also identified some companies that would benefit from a weaker Japanese Yen," says Kimche.
Spreading the risk
Well known for their great entrepreneurial spirit and business acumen, Israelis are seen as highly sophisticated.
"Their knowledge of products is high. They are very demanding," says Julius Baer’s Kamp.
Kamp sees Israel as a breeding ground for talent.
"There has been a phenomenal growth over the past year in Israel. There is the immigration factor of wealthy families moving or returning from abroad, but there is also a lot of new wealth being generated. We are talking of a country with the highest number of start-up companies being created; it invests hugely in research and development," he says.
Goren says he does not know a single client without a sound financial understanding. "Most of them being successful businessmen, they understand the basic concept of investment, the cost of funding and the principle of taxation."
Financially educated and successful entrepreneurs, Israel’s ultra-rich tend to go for well-diversified portfolios. "People have realised the benefit of diversification, both in terms of market and currencies," says Eran Goren.
Foreign powers vie for influence
Thanks to a strong economy and a well-regulated market, Israel has seen, over the past decade, many foreign banks opening offices there. The name call includes Barclays, BNP Paribas, HSBC, Citibank and the four main Swiss players, namely UBS, Credit Suisse, Pictet and Julius Baer. The top private bankers have spotted the opportunity to expand their business in the Middle-East as well as strengthening their relationship with existing customers moving to Israel or wanting to invest there.
"Our role as the Israeli representation is to represent the Israeli client internally and ‘market’ him or her to the bank’s different divisions, giving them access to every corner in the world through our massive presence in the global markets," says Ori Goldfarb, head of Credit Suisse’s Private Banking business in Israel. Credit Suisse private banking opened its Tel Aviv office in 2007 and it has, since then, proved to be a very active business.
As for the Julius Baer, the group opened its Israel’s unit last year which is set to benefit from the acquisition of Merrill Lynch international wealth operation.
"There is a unit in Tel-Aviv as well that we have to integrate after the opening of our investment advisory unit. We have to integrate those two units and ensure stable growth as we are very committed to this market and we believe in it," says Kamp.
In return, wealth managers admit exposure to the European market is underweighted at the moment as the crisis is still affecting the market.
Although Fidelis Partners says they have zero exposure to the Swiss market, David
Kimche says that since the Swiss franc does not suffer from the Eurozone troubles, they have allocations to certain Swiss companies that they think are attractive.
"One of the sector we had identified quite a long time ago and we still have in the equities’ portfolio is the luxury sector," he says.
Challenges from within
Being such a dynamic and interesting market, Israel has attracted many institutions keen to get a slice of the market, but could it be in danger of being overbanked?
"There is a lot of new wealth being created there so it is clearly a market that is very interesting for us and for other banks to the point that it is becoming a little bit overbanked today," says Stephen Kamp from Julius Baer.
With all those local and foreign banks investing in human and financial resources into this market, some might find it hard to compete.
However, as Goren explains, the Israeli market is a favourable ground for family office structures, more than private banks, as the world is becoming a much more complex place to invest and manage money.
"More markets, more currencies, more volatility, people with wealth have to rely more on tailored advice. Interest rates are high, markets are booming. The complexity in the market is the main driver for UHNWIs to seek a solution like family office in order to fill the knowledge gap of global market, currencies issues, taxation complexity. It is a market that is set to grow," says Goren.
Overall, the Israeli market has proven its acute international outlook. But now, globalisation has made it tougher to manage money than it has been for many years.
Family offices, the future?
Wealth managers have found it challenging to offer the most up-to-date and balanced portfolio across diverse jurisdictions to their clients.
"One of the challenges of the private banking sector and family offices in particular, is the tax regime. We are now seeing certain countries trying to implement new taxes or special taxes on the wealthy and this is an opportunity as well as a risk.
You have to create an appropriate structure that would protect the assets against this," says Kimche.
"As people with substantial wealth realise, there are important issues related to wealth that they need professional advice for. I think that will be the opportunity for family office over simple investment advisers," he adds.
The ability to identify the specific requirements and needs of a family and to offer tailored advice rather than a standardised approach is the advantage offered by a family office over a regular wealth managers and private banks.
This high concentration of family wealth might be where the real opportunity exists for wealth managers in Israel looking ahead to 2020. And with HNW wealth set to grow by an estimated $50bn in the next five years, there’s a plenty to aim for.
