“A Coffee Shop in a Slaughterhouse” September 10, 2013

BlueStar Israel Equity Update September 2013 – Tishrei 5774

Israeli Global Equities were down in August. Despite the broad-based rally in Israeli Global Equities in the first three weeks of the month, geopolitical risks dragged down global equity markets, including Israel, especially in the final few trading days of the month. Geopolitical risks are inherent in investing in Israeli equities and must be factored into one’s analysis. In a regional military conflict energy input costs will rise and both domestic and international trade routes may be blocked. Additionally, if Israel is engaged in a serious conflict, a large portion of its population may be called away from work for reserve duty. As of the writing of this column, President Obama and Russian leader Vladmir Putin seem to have come to at least a short-term understanding on how to deal with the use of chemical weapons in Syria. However, it appears to us that geopolitical risks will continue to weigh on Israeli Global Equities for the foreseeable future. The lack of finality in the global response to Syrian use of chemical weapons, the continued instability in throughout the region, and the needed high alert level of the Israeli defense Forces help us draw this conclusion. Shrewd investors will recognize that most geopolitical-driven market pull backs are temporary price dislocations unconnected to the future earnings power of companies and the broader economic situation of a country or region. We believe that the positive tailwinds of the pick-up in economic activity in Developed Economies; better-than-expected Israeli GDP; increased discretionary spending by Israelis; a pro-active and export-oriented monetary/currency policy by the BoI; a strong banking sector; greatly improved government budget conditions; on-target inflation expectations; and the pick up in global technology expenditure by individuals and corporations, will outweigh geopolitical events. Israel is an island of both economic and geopolitical stability in the middle of a region in great turmoil – or as one political analyst graphically put it, “a Coffee Shop in a Slaughterhouse>’

BIGI (BlueStar Israel Global Index) Performance Versus the TA-100 and S&P 500 Indices Since 2010

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These are not recommendations to buy or sell any security © 2013 BlueStar Global Investors, LLC

This monthly column produced by BlueStar Global Investors discusses Israeli equities traded worldwide. The relevant benchmark for our review is the BlueStar Israel Global Index (“BIGI” or BLS:IND on Bloomberg), which we believe represents the complete opportunity set of Israeli equity investments. Israel has one of the most resilient economies in the world and its technology sector plays an integral part in the global technological revolution. Yet few are aware of the global footprint of Israel’s companies in other sectors, and fewer still know how to make their knowledge of the Israeli economy actionable. This column helps investors gain insight into the macro forces (including the geopolitical environment under which Israel’s economy operates) and the individual company investment opportunities that have contributed to global Israeli equities’ outperformance of U.S. equities by more than five-fold over the past two decades. The opinions expressed in this column are those of BlueStar Global Investors, LLC and should not be interpreted as a recommendation to buy or sell any security. Readers should consult with a financial professional before investing.

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Q12010

Q22010

Q32010

Q42010

Q12011

Q22011

Q32011

Q42011

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

TA-100

S&P 500

BIGI

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BIGI August 2013 Performance and Biggest Gainers and Losers

Israeli Global Equities--as measured by BIGI--outperformed broad developed market and emerging market equities in August. In August, Israeli Global Equities continued closing the performance gap vs U.S. equities, which we expect to continue going into Q4 2013 and 2014. Considering the geopolitical risk environment, with both Syrian and Iranian threats against Israel, we are impressed that Israeli Global Equities outperformed other global benchmarks such as the S&P 500 and MSCI EM in August. We believe this performance is reflective of the relative strength of the Israeli economy and the positioning of its largest companies from a sector perspective, as compared to many other developed and emerging market economies (higher weighting in technology and health care stocks). We expect investors to increasingly recognize Israel’s relative strength. Notice the difference in performance between the three Israel equity benchmarks in the table above. The underlying strength of the domestic Israeli economy is reflected in the outperformance of the TA-100 (which has a higher weighting in the financials sector) vs BIGI. However, we believe that companies with a global footprint (which constitute a higher weight in BIGI), will outperform going forward.

Source: BlueStar Global Investors LLC

Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms

Global Equity Benchmark Comparison: August 2013

Top Global Israeli Equity Gainers and Losers: August 2013

Benchmark August 2013 Performance

BIGI -1.86%

TA-100 -0.81%

MSCI Israel -4.48%

S&P 500 -3.13%

MSCI EAFE -1.96%

MSCI EM -2.54%

Top-Performing Israeli Stocks June August 2013 Worst-Performing Israeli Stocks August 2013

Compugen Ltd 84.60% Delek US Holdings -17.82%

Caesar Stone Sdot Yam Ltd 28.73% ALLOT COMMUNICATIONS LTD -16.61%

Audiocodes Ltd 27.68% DSP Group -14.77%

Stratasys Ltd 21.00% 888 Holdings Plc -14.20%

PROLOR Biotech Inc. 18.50% Syneron Medical Ltd -13.84%

Given Imaging Ltd 16.56% MELLANOX TECH -13.65%

Evogene Ltd. 12.79% Israel Chemical Corp -12.84%

Koor Industries 11.35% Brainsway Ltd. -11.74%

Discount Investment Corp 11.13% Silicom Limited -11.54%

Mazor Robotics Ltd. 9.84% Gazit Globe 1982 Ltd -10.93%

Israeli Sector and Equity Performance

Our top-down analysis paints a bullish picture of Israeli Global Equities. Our analysis is driven by a few fundamental assumptions and observations: that there is an economic rebound in Europe and stronger than expected economic growth in Israel’s other largest trading partners; that we are entering into a cyclical rebound in the technology sector; that the strength of the shekel and future lower energy costs has/will dramatically increase Israeli consumers’ purchasing power and the government’s credit worthiness; that policy makers (both monetary and fiscal) will continue acting in a pro-market, prudent, yet accommodative manner as Israeli leadership has done over the past several decades; and, lastly, that Israel has one of the most well-capitalized and stable banking sectors and declining public debt despite what some perceive to be an over heating housing market. Unfortunately for U.S. investors without an Israeli brokerage account, investing in some individual Israel Global Consumer stocks is not an option. The best way to get broad exposure to Israeli equities is through ETFs. That said, some of the best known Israeli consumer stocks, including Strauss Group (STRS:TASE) and Osem Investments (OSEM:TASE), have reported very strong revenue and earnings growth driven by both cost-cutting measures and increased domestic demand despite slightly decreased export demand in the last quarter. Though the broader Consumer Discretionary and Consumer Services sectors were down in August, they have been strong over the past few months and are indicative of the strength of private consumption in Israel and a strong economy. Health Care stocks continued to lead Israeli global equities higher for the third month in a row. Health Care stocks, while anchored by Teva (TEVA: NYSE, TASE) and Perrigo Co (PRGO: NYSE,TASE), were lead higher in August by some of the small cap BIGI constituents. Compugen (CGEN: NASDAQ,TASE),

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which is a drug discovery company engaged in developing bioinformatics hardware and software, rose an astonishing 84% in August on news that it established a collaboration and licensing agreement with Bayer for cancer immunotherapies. Given Imaging (GIVN: NASDAQ,TASE) rose by 16.5% in August. As we shared last month, Japan’s Pharmaceuticals & Medical Devices Agency approved the use of Given’s ingestible pill-sized camera for diagnosing colonic diseases. Also, the FDA approved the marketing of one of Given’s other products in August. These events, we noted, were a catalyst for Given Imaging’s stock and a potential inflection point for the company’s financial performance going forward. Lastly, Mazor Robotics (MZOR: NASDAQ,TASE), which develops robotic surgical guidance systems, rose by 10% in August. We believe there is still upside potential for Mazor’s stock, even as the stock hits $17/share as of the writing of this column. Our fundamental view on the Information Technology sector remains the same as it has been over the past few months -- see last month’s column for an overview of our outlook. However, we must make note of the poor performance of DSP Group (DSPG: NASDAQ) despite our recently expressed bullish views. DSP Group’s stock was down by nearly 15% in August after it reported poor financial results in Q2 2013 and reduced its 2013 outlook. Despite the drop in the company’s stock price and this reduction in outlook, we believe there is still a turnaround in place at the company as it has improved operating efficiencies and is poised to take advantage of a new product offering despite a steadily declining legacy business. Even if no major turnaround ever materializes, we are still comforted by the fact that the stock trades closely to its book value. We see a tradable range between $6 and $9 per share and would be buyers on a breakout above $9 caused by a fundamental catalyst. There have been two major additions to the BlueStar Israel Global Index over the past few months. First is Stratasys (SSYS: NASDAQ), which is a leader in the emerging 3D printing industry. Stratasys announced that UPS stores will use Stratasys 3D printers to offer 3D printing services to retail customers, architects, and entrepreneurs. The company raised full year 2013 guidance and is focused on leveraging the combined sales force of Objet and Stratasys. The company also announced it will be holding a four million share secondary offering (10% of current outstanding shares) in early September. Secondly, Opko Health (OPK: NYSE,TASE) has completed a merger with Prolor Biotech and is now one of the ten largest TASE-listed companies. It is dual listed on the NYSE and TASE.

Sector (As Defined by FTSE)

August 2013

Health Care 0.07%

Industrials 0.01%

Information Technology -0.02%

Utilities -0.02%

Telecom Services -0.07%

Consumer Discretionary -0.16%

Consumer Staples -0.17%

Materials -0.39%

Energy -0.42%

Financials -0.69%

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Israeli Sector and Equity Performance

Energy sector highlights in August include:

• The decision on Israeli natural gas imports will be reviewed by a panel of judges

• Delek Group revealed plans for gas exports, including plans to export via pipeline to Jordan, Turkey, Egypt, and the

Palestinian territories

• Delek group plans to acquire 100% of its publicly traded subsidiary, Delek Energy, and will establish a new publicly-

traded company called Delek Royalties which will receive profits from Avner and Delek Drilling

• The start of gas production from the Tamar site has improved operating results at Avner and Delek Drilling

• A small prospect next to the Tamar reserve is expected to hold .7 trillion cubic feet of gas

• Woodside CEO said it will wait to hear Israeli court’s opinion on natural gas exports before deciding whether to invest in

the Leviathan field or not

• Natural gas powered trucks are likely to become more commonplace in Israel

• Shemen Oil announced signs of oil and gas at the Yam 3 site

The sharp appreciation of the Israeli Shekel through June 2013 has been partly attributable to speculation that the commencement of natural gas deliveries to Israel and the future of the Oil & Gas sector will cause Balance of Payments surpluses. This and other analysis in our autumn 2011 essay on the effect of Israel’s natural gas industry on the rest of the economy and region-- “The Economics and Politics of Israel’s Offshore Energy Discoveries”-- remains valid, and we encourage readers to revisit that article by clicking on the link above. Energy independence alone will be a boon for the Israeli economy, by way of sharply reducing net exports, and Israeli Global Equities. Anything above and beyond energy independence by way of exports would, in our opinion, be icing on the cake and further propel Israeli economic growth and stability. It should be noted that the natural gas industry, which is part of the Energy sector, is expected to contribute 100 bps to Israeli GDP growth in 2013 and 50 bps to 2014 growth. It was expected up until recently that the remaining components of GDP, especially government expenditures, may be weaker than in the past several years. For that reason, we have been suggesting a long- term overweight in the Energy sector which would be a prudent way to insulate one’s Israel Global Equity exposure from weaker-than-expected economic growth. Things have changed in August as non-energy related GDP growth is now expected to be in-line with the growth rates of previous years; this means that the 100 bps boost to GDP from the energy industry will be an unexpected 1% boost to 2013 GDP. Nonetheless, we still believe that this sector will become a cornerstone of the Israeli economy going forward and that its weighting in local equity benchmarks will increase as the market cap of the underlying stocks increase.

-9.00%

-7.00%

-5.00%

-3.00%

-1.00%

1.00%

3.00%

5.00%

7.00%

9.00%

2005 2006 2007 2008 2009 2010 2011

Net Exports %GDP (Excludingdefense, ships, and aircraft)Net Energy Imports % GDP

Net Exports % GDP lessenergy imports % GDP

Source: BlueStar Global Investors; BOI

Israeli Net Exports as a Percent of GDP with and without Fuel (2005-2011)

Israeli Financials stocks were the greatest losers in August as Israeli banks and holding companies tend to get hit the hardest during geopolitical risk-events. We continue to believe that the Israeli banking system (along with the booming energy industry) will be a cornerstone of Israel’s economic and equity market strength and stability going forward. In addition, many Israel Financials stocks are holding companies with operating subsidiaries in a variety of industries and are thus tied closely to overall economic performance in the country. Several Israeli banks reported earnings in August: both Bank Hapoalim (POLI:TASE) and Bank Leumi (LUMI:TASE), Israel’s two largest banks, reported increasing net profits and core capital adequacy ratios of 9.2% and 9.3% respectively. First International Bank reported single-digit revenue growth and a core capital adequacy ratio of 9.82%. Israel Discount Bank and Mizrahi Tefahot Bank reported profit changes on a year-over-year basis of +59% and -3.8% respectively and core capital adequacy ratios of 9.1% and nearly 9% respectively.

The BlueStar Israel Global Index has been trending well from a technical point of view. Technical analysis of the BIGI price index (BLS:BB) can provide useful insight into Israeli Global Equity market participants’ desire to buy or sell Israeli Global Equities. We began conducting technical analysis on the index in early 2012 and we have witnessed the development of many of the price-levels and chart points that have played a crucial role in BIGI’s recent breakout. In the six year chart on the following page, we see that long-term support for BIGI is represented by the thick red line which occurs near the 195 index level. The zone between 195 and 205 has been established as a major technical zone dating back to the pre-financial crisis days in 2007. The most recent test of the 195 level, in late spring 2012, helped us form the upward channel, represented by the two upward sloping solid black trend lines, which has proven to be a major source of support for the upward trend which began in late 2012. The long-term outlook for Israeli Global Equities first became bullish as the index re-entered and eventually broke through this channel in Q3 and Q4 2012. Additionally, the thin solid green line, whose origin dates back to mid-2007, has also been a key technical indicator over the past six years, acting mainly as resistance for Israeli Global Equities. This resistance line was broken in June/July 2013, but the index sequentially dipped below this line upon the rumor that the U.S. would conduct military strikes in Syria. The long term technical view on Israeli Global Equities will continue to be solidly bullish so long as it remains above the aforementioned upward channel which originated during the financial crisis. After breaking an important downward trend line (just prior to Operation Pillar of Defense), represented by the downward sloping black trend line in the shorter- term three year on page 8, BIGI reached short-term resistance at the 220 level. The market sell-off during Operation Pillar of Defense to the 200/205 level confirmed that this is a significant medium-long term resistance level for BIGI. At the time, the 205 level coincided with the lower line of an upward channel, represented by the two upward sloping black trend lines. This proved to us that this channel/trend lines could be relied upon as strong support. We waited patiently as BIGI consolidated following the rebound from the lows during Operation Pillar of Defense between the two dotted thin red lines. Finally, after the third test of the lower band of this consolidation zone, which coincided with the aforementioned black trend line, the index broke out above the upper band of the resistance zone. We viewed this breakout as a major one – which we’d been anticipating for many months and which confirmed our bullish bias towards the market. However, as noted above, the rumor of an imminent U.S. strike on Syria caused a sharp pull back in global equity markets including Israeli Global Equities. This broke the index back into the aforementioned consolidation zone and briefly below the lower band of the upward channel which originated during operation pillar of defense nearly one year ago. We believe that the lower band of the consolidation zone/the 225-228 level (dotted red lines) is still major short-term support and, given our bullish fundamental outlook, we are calling for the index to reclaim the 245 level in the near term barring any further geopolitical risk events. Based on both the six-year and three-year charts, originating in 2007 and 2010, respectively, as the index decisively broke above the resistance line at around 238, we still expect BIGI to reach the 300 level by the end of 2013 or beginning of 2014 – most likely after hitting resistance between 255 and 260 and a consolidation between 270 and 280. In the very near term (2 weeks to 2 months), our outlook remains bullish, and we believe the pull back during the end of August was the sort of buying opportunity we discussed last month. Though the dip below the lower band of the upward channel (black trend lines) on the three year chart tested the bullish case we continue to believe that the risk parameters for those with a short-term time horizon should view a daily close below the 225-228 area, which would currently indicate a break below both the lower band of the recent support zone (dotted red line), as a sell signal/initial stop loss. If this occurs, then a weekly close below the 220 level, from which BIGI broke out in December 2012, would be a secondary stop-loss level. For those with a longer-term view, a break below the 220 level should act as a warnings sign or initial stop loss. A weekly close below 195, however, would shift the longer-term outlook dramatically and any rallies should be sold. Given the decisive breakout early in this quarter, we consider the probability of a major drop like this (to the 195/200 level or below) quite unlikely, especially as key global markets have recovered strongly following the late-spring/early-summer ‘tapering scare’ regarding U.S. monetary policy. Our technical outlook for Israeli Global Equities is solidly bullish and, now that an ETF is tracking the BIGI benchmark, investors have an efficient vehicle to implement their views.

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Market Trends- Technical Analysis

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Market Trends- Technical Analysis

Source: BlueStar Global Investors LLC (January 1 2007- Sept 6 2013)

Source: BlueStar Global Investors LLC (January 1 2007- Sept 6 2013)

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Source: BlueStar Global Investors LLC (Jan 1 2010- Sept 6 2013)

Market Trends- Technical Analysis

Source: BlueStar Global Investors LLC (Jan 1 2010- Sept 6 2013)

Economic & Fundamental Outlooks

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The deterioration in Israeli economic fundamentals over the past few months has substantially reversed in August and early September. The consumer confidence index fell in July to 70.3 points and the PMI (purchasing managers’ index) rose by 1.6 points but remained below the 50 point mark in July: the export demand component indicated expansion in July after two months of contraction, but domestic demand fell in July. The government budget deficit, one of the greatest risk factors at the end of 2012 and throughout 2013, continued its downward trend which began in June to 3.8% of GDP in the 12 months ending July 2013. The fall in the deficit is mostly due to increased tax revenues, which is partly attributable to higher tax rates, but also to increased economic activity. The target deficit-to-GDP ratio for 2013 was 4.65%. We believe that Israeli government officials will be able to reduce taxes or forego planned tax increases, and increase government expenditures or forego planed expenditure cuts next year. This is a strong tail wind for the Israeli economy and its capital markets going into the final quarter of 2013. Additionally, Moody’s rating agency reaffirmed Israel’s A1/(P)A1 rating with a stable outlook in August. A jump in private consumption in Q2 2013 boosted Israel’s annualized Q2 GDP growth to 5.2% on a year over year basis after just 2.7% growth in Q1 and expected full year 2013 growth at just 3.9%. There was a 6.7% increase in private consumption, 1.2% increase in exports, and 8.3% increase in public consumption. The Bank of Israel kept its policy interest rate for September unchanged at a record low 1.25%. The main considerations behind the decision were that inflation expectations, though rising slightly in the past month (indicative of economic growth), are still within the target range, increases in domestic demand are offsetting declining exports, and the labor market remains stable. Additionally, to support Israeli manufacturers and exporters, the Bank of Israel has been intervening in the foreign exchange markets to reduce upward pressure on the shekel resulting mainly from natural gas production. The shekel weakened against both the Dollar and the Euro in August, a positive sign that exports can pick up in the second half of 2013 and going into 2014. The Israeli government introduced a new methodology for calculating GDP which has boosted 2013 GDP by NIS 66 billion to NIS 1.03 trillion. The changes made include adding investment in R&D to the intellectual property products item and the removal of financial brokerage services. Companies raised NIS 2 billion in debt in July, probably due to the low interest rate environment. The largest debt raises were by low-rated companies. Investors helped Israeli mutual funds raise a net NIS 6.5 billion in July. Foreign investors sold a net $310 million in TASE-listed government debt in July but have bought a net $320 million in TASE-listed stocks throughout the first half of 2013. TASE executives continue facing low trading volumes and threats of further de-listings due to over regulation. Both Israel Chemicals and NICE CEOs are threatening to delist from the TASE. It also appears that Delek Energy will be delisted and swallowed up by parent company, Delek Group. Delek Royalties will be a new company listed on the TASE which will allow investors to gain exposure to and take part in the profitability of Delek Group’s oil and gas partnerships, Avner Oil and Gas and Delek Drilling. Also in August, Opko Health merged with Prolor Biotech, and is now dual listed on the TASE and the NYSE using the ticker “OPK.” M&A activity seems to be picking up a bit and the pipeline for Israeli IPOs in the second half of 2013 and 2014 looks strong.

Amidst significant geopolitical and global economic challenges, Israel’s economy continues to outperform its OECD peers, as well as many

Emerging Markets. The long-term attraction of Israeli stocks remains intact, and the global nature of Israel’s equity market makes it naturally

diversified despite regional tensions in the Mideast. We continue to believe that a broad selection of Israeli stocks provides exposure to both

global and domestic economic growth. Such broad-based Israeli equity exposure potentially offers ‘the best of both worlds’ -- Developed

Market stability, and the demographics and growth potential of an Emerging Market.

BlueStar Israel Global Index

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These are not recommendations to buy or sell any security © 2013 BlueStar Global Investors, LLC

Israel vs Global Benchmarks Long Term Performance Israel Benchmark Sector Exposure (June 2013)

U.S. vs Israel Equities (1997 – June 2013)

Sector BIGI MSCI -

EIS

FTSE

Israel TA-25 TA-100

Info. Technology 30.5% 10.2% 7.1% 5.4% 8.9%

Health Care 26.3% 24.5% 48.6% 20.6% 23.8%

Financials 18.6% 31.9% 21.4% 33.2% 31.7%

Energy 7.1% 4.5% 3.9% 14.3% 10.9%

Materials 6.6% 12.3% 8.5% 11.7% 9.7%

Telecom. Services 3.3% 7.3% 5.2% 9.5% 6.5%

Industrials 2.8% 4.9% 2.7% 2.5% 4.6%

Consumer

Discretionary 2.3% 0.6% 0.4% 0.0% 0.8%

Consumer Staples 2.1% 3.9% 2.2% 2.7% 3.2%

Utilities 0.5% 0.0% 0.0% 0.0% 0.0%

YTD

6/28/13 1yr. 3yrs. 5yrs. 10yrs. 15yrs.

ACWI 9.18% 6.98% 15.85% 20.94% 16.55% 17.02%

EAFE 13.14% 9.51% 18.30% 22.98% 18.20% 18.03%

MSCI EM 9.69% 11.45% 20.86% 27.78% 24.02% 25.00%

S&P 500 7.69% 6.74% 13.57% 18.42% 14.58% 16.15%

MSCI

Israel 8.05% 10.87% 19.58% 21.46% 18.93% 24.50%

TA-100 8.20% 10.02% 19.15% 24.86% 21.92% 24.72%

TA-25 8.72% 10.67% 19.71% 24.73% 22.09% 24.97%

BlueStar 5.57% 6.90% 19.05% 23.76% 20.35% -

Overall, we maintain our medium- and long-term bullish outlook for Israeli Global Equities, especially after the recent break out. Positive sector-driven, geopolitical, and macroeconomic developments, along with our technical analysis view of the global Israeli equity market, lead us to remain bullish on global Israeli equities in the medium-long term. We see a positive risk-reward relationship despite the ever-present geopolitical currents in the Middle East. We assign a higher probability of Israeli Global Equities breaking upwards in the near-term, though volatility will continue to be present until the timing and pace of the tapering of global monetary expansion is clear. We remain very cautiously optimistic in the near term.

Source: BlueStar Global Investors