Call to strengthen international marketing programme promoting Malta as a financial services centre

With financial services firmly on track to become Malta's 'third economic pillar', Valletta Fund Management (VFM) general manager Kenneth Farrugia last week highlighted the importance of strengthening the international marketing programme promoting Malta as a financial services centre.

"Over the past 10 years we have witnessed significant growth in this sector which is fast becoming an important contributor to GDP growth," he told The Sunday Times. "Looking at this in numbers, the financial services industry contributed three per cent to gross domestic product (GDP) in 1995.

"That has now increased fourfold to over 12 per cent and is turning out to be the fastest growing sector of the economy".

Over this period, Mr Farrugia said the Malta Financial Services Authority has been pivotal to these developments, led by a strong legislative and regulatory financial services framework, which, equally important, has been continuously updated to reflect the fast changing needs of the industry.

"The domestic market has been a significant contributor to this growth," he said. "However, the interest being expressed by a growing number of international operators and financial services firms to set up both funds in Malta as well as back office operations is becoming increasingly evident.

"In fact, I am confident in saying that today Malta has the necessary critical attributes in place to attract international financial services business. To strengthen this positioning, we need to intensify our activities in promoting Malta not limitedly as a tourist destination and as a high value added manufacturing base; we must dedicate the necessary resources to promote Malta as a financial services centre of repute outside our shores."

Maltese investors

When asked on his views on developments in the domestic market, Mr Farrugia observed that the Maltese investor has become increasingly sophisticated, due to a wider choice of investment opportunities. Investors tend to diversify their portfolio, which devolved out of the liberalisation of exchange control, which was not an option in the early days.

In meeting the changing demands of investors, the choice of investment solutions provided by VFM has today increased to 24 funds with asset classes ranging from cash to bonds, equities and, of late, also property.

The Bank of Valletta Group has very strongly positioned itself in this field by, among others, introducing specially trained, qualified personnel providing financial planning services from its branches. Moreover, a specialist, sophisticated private wealth management division was also set up aimed at servicing the needs of high net worth clients, a division that is gaining a strong reputation in the market for the quality services it provides.

This year, Valletta Fund Management is holding the tenth annual general meeting of its flagship La Valette Funds SICAV plc, which has today attracted over £271 million. "When the La Valette Funds SICAV was launched in October, 1995, it was the first SICAV to be licensed by the then Malta Financial Services Centre," Mr Farrugia said.

"Bank of Valletta plc (BoV) was the first bank in Malta to set up a fund management operation living up to its reputation as Malta's pioneer in its industry. In fact, on June 6, 1995, BoV entered into a strategic alliance with Rothschild Asset Management, now Insight Investment, a member of Halifax Bank of Scotland (HBOS) Group - a FTSE 100 company.

"Insight Investment today manages over £88 billion in investments for their clients and are one of the UK's leading investment management operators."

In 1995, VFM launched two sub-funds, investing in a selection of Rothschild funds. The success achieved with these two funds led VFM to widen its product range by launching Malta's first ever-domestic fund. The La Valette Malta Fund was launched on June 6, 1995, investing in a portfolio of equities and bonds, and has since quadrupled in value.

Additional investment funds were then launched under the La Valette Funds SICAV, which now consists of 17 sub-funds. Two other investment companies were also introduced: the Vilhena Funds SICAV, which today consists of six sub-funds; and the Wignacourt Funds SICAV, which has one sub-fund.

The level of investor interest in VFM's range of funds is reflected in the 45,000-strong client base positioning VFM as the largest fund management company in Malta.

A comprehensive range of euro-denominated investment solutions

Mr Farrugia went on: "In meeting the demands of investors, we wanted to make sure in these last years that, ahead of Malta's road map to membership of the European Union and eventually on the adoption of the euro, VFM would provide a comprehensive suite of euro-denominated products/funds.

"Today, I am pleased to say that VFM is the only fund management company in Malta to provide investors with a comprehensive choice of seven euro-denominated funds invested in the main asset classes: money markets, bonds (fixed income), equities and property investment solutions, which have proved to be very popular with our investors."

Mr Farrugia added: "For retail and institutional investors, we set up a euro money fund, consisting of an institutional and retail class, providing investors with highly competitive returns for their liquid assets. In the fixed income market, we also provide a choice of three investment solutions.

"Two of these funds primarily invest in investment grade paper, to include both government and corporate debt, while last week we launched a high yield euro-denominated fund investing in unrated and sub-investment grade bonds. The rationale behind the newly launched high yield fund is driven by the strong predilection of Maltese investors for high yield.

"Given the risk profile of this market, we have introduced an investment solution providing investors with a carefully selected portfolio of sub-investment grade bonds. In minimising the risks associated with these types of bond issues, this new fund will consist of a diversified portfolio of over 30 bonds issued by companies operating in a wide cross-section of industry sectors. The portfolio will be managed by Insight's highly rated fixed income team based in London."

On the equity side, VFM provide two funds. One indirectly invests in European equities, and, in 2004, for the first time in Malta, a multi-manager investment solution. Asked on the benefits of multi-manager funds, Mr Farrugia said: "Evidence shows that no one investment manager with their investment style will always be a top performer.

"As investment styles move in and out of favour, so do a manager's returns. So at VFM we introduced a 'manager-of-managers', more commonly known as multi-manager funds, to select and monitor some of the most talented investment managers. VFM's European multi-manager fund invests in a range of funds investing in European equities.

"Insight's strong multi-manager team of experts are involved in reviewing, selecting and investing in the best funds. This fund delivered over 26 per cent return in 2005, and over 46 per cent return so far since the fund's launch in June 2004," Mr Farrugia said. "Similar multi-manager strategies were concurrently introduced for the US and UK markets."

Property investments

The multi-manager concept was also extended to VFM's property fund, he said. This fund, another first for Malta, has been successful with just under €23 million invested since it was launched last October. This despite being a professional investor fund that necessitated a minimum entry level of €18,000 apart from other investor profile requirements.

In September, 2001, ironically a few days after 9/11, VFM launched the Mediterranean Rim Fund, the only one of its kind not only in Malta but also in mainland Europe. This specialist fund invests in North African and South-East Mediterranean markets. It is denominated in US$ and there is approximately a 50:50 split between bonds and equities.

The fund is up in excess of 80% over the past four years and a half years and has exhibited very low volatility. Growth in 2005 alone exceeded 20 per cent. "This new fund is not suitable for all investors due to the risks inherent in these markets," Mr Farrugia said. "However, investors seeking exposure to the southern bank of the Mediterranean may through this fund achieve a diversified exposure to a portfolio consisting of a balanced mix of bonds, predominantly issued by the governments in this region as well as equity securities.

"The geographic exposure of the fund includes investments in Morocco, Lebanon, Egypt, Tunisia, Bulgaria and Malta. Insight Investment manages the fund, along with a number of sub-advisers covering Malta, Egypt and Tunisia who provide research and recommendations to Insight Investment based in London."

International business dimension

Today, Valletta Fund Management manages and administers 13 companies consisting of 42 sub-funds. Three are proprietary - La Valette, Vilhena and Wignacourt. However, VFM also provides fund administration services to ten third-party investment companies, seven of which are foreign - Turkish, Czech and Swiss, with the other three belonging to local fund promoters.

Asked what is driving the interest of international fund promoters, Mr Farrugia said: "European Union membership has in no small way dulled the perception that Malta is still an offshore centre. Supporting Malta's financial services industry positioning in Europe are the peer regulatory reviews which have consistently shown that Malta has a very robust yet flexible regulatory framework.

"Accessibility of the Regulator and the eagerness of operators to develop their line of business in this industry is playing an important role in attracting international business".

Malta understandably faces a number of challenges. "Scale comes quickly to mind, this, given our size and the fact that we live on an island," he said, "which means that we do not enjoy the luxury of, say, Luxembourg, where employees commute from neighbouring countries to work there.

"So it is imperative that our education system be oriented in a way to ensure that we have the right supply of skilled labour to meet the growing needs of the industry."

Pensions

Fund management companies such as VFM will play a pivotal role in managing pension asset classes, which Mr Farrugia said are basically a different form of investment in investment funds, with the difference that contributions are locked up to retirement age and the added benefit of tax breaks applicable both on the pension contributions and also when the proceeds of a pension fund are converted to an annuity.

"The pension business is in my view the next big growth area for the asset management industry. The introduction of pension schemes necessitates that we address the absence of a sufficient number of instruments listed on the Malta Stock Exchange; otherwise pension providers may end up with a significant amount of money chasing a few instruments.

"A worst-case scenario may be the incidence of pension scheme contributions being channelled outside Malta, particularly when we adopt the euro, so currency risk issues will no longer come into play."

Going forward

Asked for his views on the growth of the financial services industry going forward, Mr Farrugia said: "The fund management business has been one the fastest growing sectors of the industry. I am very confident that Malta's financial services industry is set to continue flourishing at an even faster pace.

"Despite our small size, history shows that we have many a time achieved milestones, which were beyond our expectations. Maybe not in football, but the fast-changing international developments send out a clear message - financial services are no longer the monopoly of long-time established jurisdictions.

"What is imperative in the process is that our competitive edge should not just be translated into a matter of costs, or tax advantages, albeit we are also competitive on these counts. There are other important aspects, such as our highly prized skilled workforce, the fact that we are multilingual and are renowned for hospitality.

"More importantly, our unique values are reflected in our cross cultural features, which enable quick adaptation to the various opportunities that are emerging in this region, both northbound and southbound. Equally important is our positive 'can do' attitude to new business, which is a major advantage and, if we manage the opportunities that come our way in a professional manner, then we can look forward to the future with great confidence."