After years of conservative and prudent management, the Bank of Israel is dramatically changing Israel's foreign currency balance policies and will soon begin investing some of its large foreign currency balances in foreign markets.
Calcalist learned Thursday that the Bank will kickoff its stock market activity with a $1.5 billion stock purchase on Wall Street, which is 2% of its foreign currency balance.
The decision to initially perform a US stock purchase by no means indicates a lack of confidence in Europe's markets but stems from the up to snuff performance of US markets, said a senior source in the Bank.
An a later stage, Israel's Central Bank will increase its stock holdings to about $7.5 billion, or 10% of its foreign currency balance, with additional purchases in European and global markets.
The Bank will invest in a largely diversified portfolio, which will be overseen by two external investment managers selected by via tender – Swiss investment bank UBS and large US management firm BlackRock.
In order to keep dealing costs at a minimum, the investment managers will create an index tracking model based on an existing stock basket chosen by the Bank rather than on a tailored stock basket.
Experience shows that tailored stock portfolios' performance falls short compared with established stock baskets. The model will include 1,500-2,000 stocks and will be based on some 2,500 stocks of medium to large cap stocks among them the world's largest technology corporation, Apple.
The move aims to improve the yield to risk ratio of the Bank's foreign currency balance investments mainly on the backdrop of very low yields that the Bank is currently able to gain from its US bond investments. The Bank's revenue from foreign currency balance management last year amounted to about $800 million which constitutes a low 1.24% yield.
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