The funds industry has clearly slowed and needs to be replaced by new business, the chairman of the Malta Stock Exchange Joe Portelli has warned.

“There is no question about it,” he said, stressing that the time had come for capital markets to complement the island’s funds and captive insurance industries.

For Mr Portelli, it is a no-brainer. He believes it is no coincidence that Luxembourg is the second richest country in the world on a per capita basis and that its financial industry makes up a third of its GDP – seeing a clear link between the two.

“It is time for us to internationalise because the stakes are huge. I am very bullish on the idea that we can build one heck of a financial centre in Malta.

“If we had to choose between factories bellowing smoke or handsome office blocks with people in suits making significantly more money, isn’t the latter what we would choose?” he said.

The MSE recently published its strategic plan for capital markets, which includes a number of changes to its operation, but where the main thrust is to introduce completely new areas of activity.

“The capital market has been the neglected step-child over these last 25 years since the MSE was set up,” he said, adding that the recent Budget was “definitely capital markets’ friendly” but that this did not mean the MSE was losing its determination to in parallel improve local listings, which were also boosted by various Budget measures.

The Stock Exchange will only make €1,000 for each of these listings but the multiplier effect is huge

“The idea that an entrepreneur can make a few million euros by listing his company profits and not having to pay tax on them… if that is not a huge incentive to list then I don’t know what is. In fact, when we came out with the proposal, a businessman sent me an e-mail and said he had heard about the ‘15 to 0’ (15 per cent tax rate to zero tax rate) and lamented that he had just sold his company. He told me that had he heard about it, he would have listed his company instead.”

But Mr Portelli, who has over 30 years’ experience within the financial industry in the US and Malta, is clearly anxious to dream a bit bigger than boosting the number of local equities and of bonds.

“Previous chairmen have brought the MSE to where it is now, quite an achievement. But the domestic market is now limiting us. This is the first board that wants to internationalise Malta. Our vision is to compete with Luxembourg and Ireland.  They have 80,000 international listings and we have one. Every time an international bond lists, an international lawyer is going to charge €25,000 to do the offering documents. There is going to be an accounting company involved. With securitised products, there are trustees, special purpose vehicles etc.,” he explained, stressing that his focus was the Maltese economy and not the MSE’s income: “The Stock Exchange will only make €1,000 for each of these listings but the multiplier effect is huge.”

Although FinanceMalta has been actively pushing the Maltese financial industry, he sees no harm in the MSE also vying for more business in its own right: “We had a handsome sum for business development but hardly used a third of it!”

Another frustration for him is that the MSE currently does not list any securitised vehicles as interested parties are directed to the European Wholesale Securities Market – which is 80 per cent owned by the Irish, with only 20 per cent of the shares owned by the MSE.

The EWSM is a Maltese entity and is located in Malta, with a board of directors which meets here.

In theory the business – much of which originates from Maltese introducers – could be listed on the MSE but in practice, it goes to the EWSM.

One solution would be for the MSE to increase its stake but he admits that although this was brought up with the Irish, they are not interested.

“It is not easy being motivated about a project when you are such a minority shareholder,” he shrugged.

He once again stressed that this was not about getting business for the MSE but to futureproof the financial services sector.

If we are successful in promoting our capital markets, it will also help

“The current imputed tax system that we have now is so important to us that I cannot imagine we would allow it to go away lightly. The government has already made it very clear that it is a major strategic interest to us.

“But our strategy to bring capital markets to Malta would shield us in many respects. Why? Because these companies do not necessarily have to be here in Malta. What we want is for them to use the MSE as a listing venue for their shares and bonds – which does not require these companies to set up here.

“Having said that, if we are successful in promoting our capital markets, it will also help. It will clearly help our funds industry, our insurance industry and our corporate services industry. It is clearly a good thing. A rising tide lifts all boats.”

Exchange-traded Funds

Exchange-traded funds were not even envisaged when the MSE’s listing rules were written 25 years ago. However, there are now 6,300 ETFs in the world, with roughly $3.4 trillion in assets.

“Today, they are a very big thing and we need to allow local fund managers to manage and list them, but more importantly we need to allow foreign ETFs to list on the MSE,” Mr Portelli said.

In essence, an ETF is a fund that lists on an Exchange, as opposed to being open-ended, and it trades like shares. With a traditional open-ended fund, it could take two or three days to invest, and many funds have a minimum investment, which could run into thousands. ETFs, on the other hand, can be bought or sold in seconds, even online, for minimal cost. This is because they are ‘passive’, based on an index, and are therefore much more inexpensive to manage. Investors can also buy just one share and don’t need to invest thousands, meaning they are much more accessible for retail investors although professional investors would also find them of interest.

Although ETFs’ fact sheets give all the details of the fund, providing full transparency, these have various levels of complexity. ETFs come at various levels of risk, ranging from corporate bond ETFs to investment-grade bonds, and high-yield bond ETFs which invest in lower grade bonds. There are also inverse ones where the ETF will go up in price as something else goes down.

“We would like to give the chance to some investment managers to create ETFs here in Malta so people can invest in them and diversify,” he said.

To introduce ETFs, the Malta Financial Services Authority would need to change the listing rules.

“So it can be done very quickly. I know all the top people at the MFSA and they have been very receptive. We have meetings scheduled to discuss these points,” Mr Portelli said.

Real Estate Investment Trusts

If you are 30-year-old and have €20,000 to invest in real estate, there would not be many options if you wanted to buy a property. However, you could put the money into an REIT based on multiple properties.

“Instead of our example of a man or woman buying a flat, they could invest the money in this security, which would trade on the Exchange and which might have 20 properties all over Malta, ranging in type and locality,” he said.

Mr Portelli sees obvious advantages in spreading out the risk across various properties in different categories and different locations. He also believes that by enabling people to invest in real estate this way, it could reduce speculation.

There are roughly 35 countries in the world that have legislation for REITs. Usually, the owners put a number of properties in a vehicle, which they then list on the exchange. The terms are different from country to country. In the US and the UK, 75 per cent of the vehicle’s income has to come from rentals and 90 per cent of the rent has to be distributed as a dividend.

“This is not a speculative vehicle as the company only keeps 10 per cent of the rental income, which it can use to pay for maintenance and so on. Of course, the company enjoys the capital appreciation of the properties.”

There are many types of REITs, set up specifically for categories like hospitals, apartment blocks and commercial properties.

“Say you own a huge commercial property worth €10 million and you want cash to acquire another company. You can sell the entire property or just put half of it into a REIT. The REIT gives more flexibility if the owners want to monetise their investment, for whatever reason,” Mr Portelli explained.

In this case, the law would need to be changed as the Financial Markets Act would have to define a REIT and the conditions under which it can be established, something which he insisted would not be that hard to do, especially if the government intended to go ahead with the third category of proposed activity: Islamic finance.

Islamic Finance

Islamic Finance has been written about and discussed at various conferences. The MFSA is the only EU regulator that has issued formal guidelines on Sharia-compliant investments and FinanceMalta has issued guides on the topic. But it seems to have stopped there: Islamic finance is not actually in the rule books.

Mr Portelli admits he is bewildered: “All we are talking about is being bankers and financiers to people and companies interested in Islamic finance. Luxembourg and Ireland are both involved and have been for almost a decade. If it is good enough for them then it should be good enough for us. There is no reason why Malta should not be the Islamic Finance centre in the EU.”

He often hears the argument that there is no demand here – there are only around 9,000 Muslims said to be living in Malta – but he thinks that many people are missing the point. For a start, there are 20 million Muslims living in the EU and this number is set to grow. He pointed out that there was also growing investment in Malta from the Gulf and North Africa: Qatari investment in Banif; Tunisie Telecom in GO; and the American University.

“If we are seeing this investment from the Middle East and North Africa, then there is no reason why we should not in one way or another cater to Islamic finance.

“The funds industry is huge and lucrative and so is the ETF industry. Guess what? The Islamic Finance one is larger than both, and it is growing,” he said, clearly frustrated that his arguments were falling on deaf ears.

According to the IMF, Islamic finance assets saw double digit growth in the past decade and topped $1.8 trillion in 2013 – around one per cent of global financial assets. Sukuk issuance increased 20-fold between 2003 and 2013, reaching $120 billion.

Indeed, Mr Portelli believes that the best way to get into this sector would be to issue a sukuk, the equivalent of an Islamic bond, once the right legislation is in place.

He challenged the government to set an example by issue a sukuk itself, “even a small one”.

“There was talk in the past that the government would issue a sukuk but this died down because its bonds are already oversubscribed in minutes so there was not really any need for new instruments. But it would set the ball rolling…”