MassPRIM Israel Bonds Documentation
Download Cover Letter
Download Response (zip file)
The Request
I requested from the Massachusetts Pension Reserves Investment Management Board (MassPRIM) documents on Israel Bonds. See the cover letter for the full text of the request.
I modeled the request on this request by Christopher Sweat to the Illinois State Treasurer.
The Response
I will excerpt below the most interesting parts.
From the PRIM Board Minutes of October 5, 2006:
MR. MAVROMATES: Okay. The first item on Agenda, we obviously had Mr. Sperling here presenting Tom Lee. The State of Israel bond recommendation, some of the board members may recall in May 2001 this Board voted to restart the program that had been started by MASTERS in 1989 and '94, and we made a commitment of $5 million a year per year for a total of five years or an aggregate amount of $25 million. And the way that we organized the program, we tried the latter, latter meaning the maturities of each of the bonds are in separate years. One matures every year. And then the Board voted to roll those over as they mature. What we're missing now is we're missing a ladder for 2008. If you look there at 2007, 2009, '10, '11 and '13. So what we'd like to do today, and the Investment Committee supported this recommendation, is purchase an Israeli bond, currently a two-year bond, a $5 million bond that will mature in 2008. And then that way our ladder will be complete, and this thing will go in sort of a perpetuity, just rolling over continuously.
The current holdings for those that have an interest are in Appendix F, and one thing that's sort of astonishing to me is that most of the rates are in the 5.75, 5.85. And just for a point of reference, during those same time periods, the Lehman aggregate, which is an investment grade bond portfolio, the one-year return on that is 1.71, and three years 3.98, and five years 4.87. So this is where this bond would reside, where the current holdings do reside. They are currently rated A2, A- by Moody's and S&P. They have been rating for a while and staff and the Investment Committee recommend the purchase of a $5 million Israeli bond in the current calendar year.
TREASURER CAHILL: Any questions? Motion.
MR. AIKENS: We'll be up to 30 million; do I get that right?
MR. MAVROMATES: That's correct.
MR. AIKENS: How volatile are these bonds? I mean, when Hazbullah shoots off a rocket, do these bonds reflect that?
MR. MAVROMATES: The way it works is in this particular case we purchased a two-year bond, and you get interest payments along the way, and you get your principal back in two years. So you don't trade these bonds.
MR. AIKENS: Are they priced daily?
MR. MAVROMATES: Well, they're priced at book value. So at the end of it, you're going to get, if your face value is $5 million, you're getting $5 million in 2000.
MR. AIKENS: But I couldn't sell it to somebody else before that.
MR. MAVROMATES: No. It's like a, for lack of a better word, CD. It's like a two-year CD.
MR. BROUSSEAU: Are you saying the volatility of the bonds are not impacted by the geopolitical --
MR. AIKENS: No, because they're illiquid. It's like a CD.
MR. MAVROMATES: But to that extent, their credit rating has not changed. Israel's credit rating has not changed, even during those times or even times of conflict.
MR. SCHWARZENBACH: Can I just ask maybe an obvious question, why are we even discussing this? I'm sorry, maybe I don't understand something. This is a bond purchase. We don't discuss bond purchases in general, and I'm trying to understand.
MR. AIKENS: We're managing this; right?
MR. SCHWARZENBACH: This is direct held; that's the point?
MR. MAVROMATES: This is parked in, let's say, for example, Black Rock's portfolio and they manage the coupon name. So we don't --
MR. SCHWARZENBACH: But I'm just trying to understand why this even exists and why we even have it. And I'm not saying that we shouldn't be investing in Israeli bonds, but I mean, we don't talk about investing in German bonds or we don't talk about investing in, you know --
MR. MAVROMATES: I can't buy these bonds myself. I have to have approval. I'm trying to be as transparent as possible.
MR. SCHWARZENBACH: That's what I'm trying to understand.
MR. TRAVAGLINI: While we park them in Black Rock's portfolio, it's not the Black Rock PM making the buy decisions.
MR. SCHWARZENBACH: I'm trying to understand why do we have this portfolio separate from everything else. Is it because it's Israel?
MR. MAVROMATES: It's a legacy portfolio that was started in the '80s and '90s, and for whatever reason people thought it was a good idea to continue the program.
MR. SCHWARZENBACH: Again, I'm not trying to say we shouldn't. I'm just trying to understand why we continue -- we wouldn't do this today. To start from scratch today, we wouldn't go out there and sit there and say that we wanted to do a portfolio.
TREASURER CAHILL: We might. It would be something that the Investment Committee would decide like the ETI program. It's a program in country specific borrowing or lending, and if the Investment Committee with the support of the Trustees decided to do it, we would do it, but I think the idea is that because it's a program separate from the way we do our other investing, it should come up separate.
MR. SCHWARZENBACH: I agree with that. I understand that.
TREASURER CAHILL: And that's why we do it. And as we said, it's something that previous Treasurer's have done and we've decided to continue it and then fix the hole that was there, which I think makes a lot of sense.
MR. AIKENS: Would it be highly unlikely for this type of instrument to be in any of our fixed income manager portfolios?
MR. MAVROMATES: Well, it has the characteristics of investment trade bonds.
MR. AIKENS: So we might have a hundred of Israel, for all we know?
MR. MAVROMATES: Well, no. They don't trade publicly. In other words, we have other dollar denominated non-US bonds in our portfolio now.
MR. AIKENS: All we're trying to do is look at the concentration in the State of Israel, and so I'm leaping to the conclusion that our fixed income managers would not have --
MR. MAVROMATES: They would not have that. We do have equities, obviously, and even a lot of Israeli stocks are listed on the NASDAQ. It's a good point. We don't have any concentration in Israel.
TREASURER CAHILL: Is there a motion?
MR. McSHERRY: Move.
MR. CESAN: Second.
TREASURER CAHILL: Motion is made and seconded. All those in favor say aye.
THE BOARD: Aye. (Unanimous.)
TREASURER CAHILL: Opposed? The ayes have it.
(VOTED: That the PRIM Board approve the purchase of a $5 million State of Israel Bond maturing in 2008; and, further, that the Board authorize the Executive Director to take all actions necessary to effectuate this motion.)
The following is from the PRIM Board Minutes of May 22, 2001:
E. State of Israel Bonds
Mr. Mavromates reported on the State of Israel bonds. Between 1989 and 1994, the former MASTERS Trust purchased about $26 million in face value bonds. All of these holdings were transferred to the PRIT Fund when the Funds merged in 1997. Since that time, about $15 million of these bonds have matured. As of the end of April, PRIM held about $11 million of these bonds. The bonds are used for infrastructure projects in Israel and must be held to maturity. They have an investment grade rating and are currently rated A- by S&P and A2 by Moodys. The Investment Committee recommends a commitment of $5 million dollars per year over the next five years. The total commitment total over the next five years is $25 million - $11 million of that will come from the proceeds of the maturing bonds PRIM currently holds.
The Board took the following action on a motion made by Mr. White and duly seconded by Mr. Amato.
Voted: That the PRIM Board renew, upon maturity, the current holdings of State of Israel Bonds, and when necessary commit additional funds to achieve an investment of up to $5 million per year over the next five years; and further, that the Board authorize the Executive Director to take all actions necessary to effectuate this motion.
The following is from the Investment Committee report for the October 5, 2006 meeting IC Board package agenda 100506.doc:
B. State of Israel Bonds Recommendation
Between May 1989 and May 1994, MASTERS purchased $26 million in face amount State of Israel Bonds. All of MASTERS’ holdings were transferred to PRIT as part of the merger effective January 1, 1997. In May of 2001 the Board voted to re-start the purchase of State of Israel Bonds initiating a program to make a $5 million per year purchase of State of Israel Bonds for a period of five years. PRIM currently holds $25 million in State of Israel Bonds, maturing in $5 million increments in the years 2007, 2009, 2010, 2011, and 2013. A summary of the current program is contained at Appendix F. The Board also voted to purchase additional bonds using the proceeds received upon maturity. For example, in 2007 a $5 million bond will mature and the proceeds will be used to purchase another $5 million bond that will mature in 2012. In order to complete the ladder of the current program, staff and the Investment Committee recommend the purchase of a $5 million bond in 2006 with a maturity in 2008. Therefore a bond will mature each calendar for the next five years and thereafter. The State of Israel Bonds is currently rated A2/A- by Moody's and Standard & Poors.