Local capital market needs to be fostered

If there is anyone who knows the local fund management business, it is Kenneth Farrugia, general manager of Valletta Fund Management (VFM), a subsidiary of the Bank of Valletta plc. He was with the company since its inception and speaks to The Sunday Times on VFM's tenth anniversary about its growth prospects.

Kenneth Farrugia spelled out all the key dates of Valletta Fund Management from memory. Having joined Bank of Valletta, VFM's parent company in 1985, gaining experience in a branch for three years and spending six months at BoV's foreign exchange bureau at the airport, he spent five and a half years at the bank's Securities Centre. He was then selected to form part of a small project team tasked by then chairman Dr John C. Grech to set up VFM.

Mr Farrugia stressed the strong pedigree of its shareholders; Bank of Valletta plc and the Halifax Bank of Scotland (HBOS), which owns 40% of VFM through its assent management subsidiary, Insight Investment.

"HBOS is a FTSE 100 company and it adds credence to our organisation, particularly when promoting Malta and our organisation outside of Malta," he said. The HBOS link was predated by the alliance with Rothschild in 1995 (Rothschild sold their asset management business to Insight Investment in 2003).

"We were just starting out at the time, and the fund management business was new to Malta. We were in fact the first client of the MFSA. Today there are a number of operators on the market and over 380 funds authorised for distribution. There were just two in 1995!"

"It was a very interesting period with a rather steep learning curve because fund management was a new line of business and we wanted to learn quickly to start operating immediately in order to benefit from the first mover advantage.

"In fact, we started the process to set up VFM after the 1994 financial services legislation was enacted in November. We had travelled to Rothschild offices in Guernsey to get first-hand knowledge on their operation and the systems, processes and procedures that we were to mirror in our new operation in Malta.

"After just six months, we set up the company, with our remit then being to introduce the company's first products on the market within three months. Which we did on October 2, 1995, launching Malta's first ever collective investment company, the La Valette Funds SICAV plc."

The company originally had Igino Xuereb as general manager. Charles Borg, today a director of VFM, and former general manager of the company, took on operations and HR, while Mr Farrugia took over the marketing function. The Finance Department was run by an expatriate for the first six months and was then replaced by a local manager.

When Mr Xuereb was given a senior executive appointment at BoV in 1999, Mr Borg was appointed general manager and Mr Farrugia assistant GM. Just three months ago, Mr Borg was appointed as executive head in the office of BoV's CEO, Tonio Depasquale, with Mr Farrugia being appointed as general manager of VFM.

VFM's two major lines of business are reflected in the company's strategy to provide proprietary investment solutions to its customers as well as the provision of third-party fund administration services.

"This past decade has been marked by interesting events and achievements," Mr Farrugia said, referring to the proprietary products. "Over these years, we have introduced a comprehensive range of proprietary funds investing in both the domestic and international bond and equity markets.

"VFM has built a name for introducing innovative investment funds investing in the domestic market. Just to mention the La Valette Malta Fund, way back on June 6, 1996, Malta's first ever fund investing in the domestic capital market. Today this fund has almost tripled in value.

"This was followed by a number of 'firsts' for VFM and Malta's fund industry, such as income-paying funds - which were later augmented by the introduction of additional funds distributing income monthly, quarterly, six-monthly and yearly.

"VFM was also the first company to come out with equity income funds. So we quite actively followed in Bank of Valletta's footsteps to be the leader in our respective line of business."

Today, VFM manages four investment companies and seven third party companies. Its three proprietary SICAVs are La Valette, Vilhena and Wignacourt. VFM is also fund manager of Global Funds SICAV plc.

On the fund administration side, Mr Farrugia said that "in terms of fund administration services, VFM is the administrator of two domestic third-party SICAVs (investment companies), together with five other SICAVs registered in Malta by promoters based in the Czech Republic, Switzerland and Turkey.

"The company is currently finalising two new fund administration mandates managed by international fund promoters. In total, VFM manages and administers 11 investment companies comprising 37 funds with over 41,000 accounts.

"Funds under management exceed €600 million. The number of investors holding shares in the funds managed by VFM is in itself a sign of trust that investors have placed in the fund management capability of the company, driven by our strong belief to put the interests of the investor first."

Looking back at developments over the past decade, Mr Farrugia observed that the Maltese investor has learned the importance of diversification, with the market demanding "more sophistication".

When commenting on perceptions by investors on investing in capital markets, Mr Farrugia stressed that, "contrary to what many people think, investing in capital markets is quite easy and VFM's range of investment funds make these markets more accessible.

"If you look at the investment levels of our range of funds, one can start investing in most funds from a low minimum of Lm250. More so, one can immediately invest on a monthly basis from just Lm20 a month."

The markets have passed through three distinct phases, he observed: "There are many clients, who have been with us from the beginning, who went through a bull market, then a very long bear market - the worst one in decades, accompanied by very low interest rates - and over the past two years we have been witnessing the markets recovering from the lows registered over 2000 to 2002. "

Asked for his views on the local market, Mr Farrugia said: "Just looking at the valuations of the large cap companies listed on the Malta Stock Exchange, there are a number of valid fundamental reasons for the positive performance they have registered last year and over the first quarter of this year.

"First and foremost, the market has been driven by the very strong results delivered by the two dominant banks, with this positively impacting their valuations. Then there are, and will always be, a number of external factors that periodically impact capital markets.

"In Malta's context, one may mention the sale of Government's shareholding in two of the listed companies. Such announcements invariably leave their mark on movement of share price valuations both on the upside and sometimes because of the prevailing uncertainty on the downside."

On pensions, Mr Farrugia said: "With the onset of pensions in 2006, I feel that there is an urgent and dire need to develop Malta's capital market. It is clear that to date there has been very low interest expressed by family-owned companies to look to the Exchange to finance their business plans.

"Of course, with pensions planned to be introduced in 2006 there are not enough instruments on the Malta Stock Exchange for these pension flows to be invested. It would be a real pity that the absence of sufficient instruments drives a significant amount of these pension flows to foreign capital markets."

A further area VFM is exploring is the marketing of its funds overseas. "When Malta joined the EU we automatically became a country that could benefit from the single passport, through the Undertaking for Collective Investments and Transferable Securities Directive (UCITS)," Mr Farrugia explained.

UCITS are simply collective investment schemes authorised under the UCITS Directive, UCITS being the acronym or brand name for these European-based funds. "When a product is UCITS-certified, all you need to do is to notify the regulator in the EU country where you wish to do the promotion that the UCITS scheme is registered in Malta and, following a short period, promoters of such schemes may promote and distribute such schemes in this respective country."

Mr Farrugia said: "Today, Malta has become a very attractive jurisdiction for the registration and provision of back-office services. Malta's EU accession has gone a long way in removing doubts on its robust, modern regulatory framework.

"In fact, Malta's reputation as a fast growing financial services jurisdiction is gaining momentum and it has become an attractive location for the registration of international investment funds. This spells out opportunities in the legal, accounting and back office areas.

Malta's financial services industry is very competitive when compared to other existing EU financial jurisdictions, both in terms of cost and the fact that it is multilingual. Its small size should be more deemed as giving it a competitive advantage rather than a disadvantage as, in a short time it succeeded to enact a very flexible yet robust regulatory framework that has been endorsed by a number of EU peers.

"We have found the MFSA, Malta's sole financial services regulator, as being very approachable, pro-business and accessible when needed and this is an important feature for international fund promoter," he added.

Looking ahead to the next 18 months Mr Farrugia sees a bright future for the financial services industry. "We have registered very good performances for our customers across our range of funds, both bonds and equities, and it is in our plans to be very active participants in the forthcoming pensions business.

"In my view, Malta's financial services industry is well on its way to registering significant growth in the years to come, and with the unreserved support of Bank of Valletta Group and the Halifax Bank of Scotland, Valletta Fund Management is well positioned to continue being at the forefront in these developments."