The result was a sharp decline in trading volumes on the TASE. Had Israel been included in global indexes as its true weight—roughly 75 to 80 bps—some of this impact might have been mitigated.
The diminution of a single country also shortchanges investors with a regional rather than global perspective, and, in particular, tactical investors who follow a country-driven asset allocation model because they are getting less than full exposure to their preferred market or markets.
BlueStar’s BIGI benchmark was created to address this underrepresentation in accordance with a proprietary methodology created by index professionals in consultation with a broad range of interested parties.10 The methodology for determining whether a company is Israeli is described below.
Companies consider many factors in choosing an exchange on which to list their shares, including cost of and access to capital, liquidity and marketing/brand awareness. Due in part to inefficiencies in the domestic Israeli equity market, a desire to be more accessible to their perceived investor base and major markets for their products, many Israeli companies choose to list their shares outside of Israel, primarily in the U.S. Despite this, the companies can be characterized as Israeli—and therefore allocated to an Israeli index—based on other quantitative and qualitative criteria. To achieve the highest possible level of index “completeness,” the BIGI benchmark considers a company to be part of the Israeli global equity universe if it meets at least one quantitative criteria and/or at least two qualitative criteria from the following lists:
- The company is listed on the TASE;
- The company maintains tax status in Israel;
- The company is headquartered in Israel; and
- The company generates at least 50 percent of its revenues in Israel or at least 50 percent of its operating expenses are derived from operations in Israel.
- The company was founded in Israel;
- The company has significant management, operational, logistical or R&D facilities in Israel;
- A majority of the board of directors or at least two senior executives are domiciled in Israel;
- The company’s business results would be materially altered without its Israel-located assets. These may include, but are not limited to, intellectual and human capital, patents, licenses, etc.; and
- The company is a subsidiary of a non-Israel operating entity of a quantitatively defined Israeli company.
The result is not only more inclusive and complete numerically (BIGI currently has 114 constituents compared with the 53 of the MSCI Israel index), but also reduces concentration and provides a more balanced and accurate representation of the Israeli economy’s composition (see Figures 2a, 2b and 3). The total “missing market cap” of Israeli companies within the top 10 BIGI constituents alone is $49.4 billion, over half the market cap of the entire MSCI Israel Index.