Ahead of Valletta Fund Management's international conference with the theme "Malta - Regional Developments and Opportunities in Financial Services", on October 8, VFM's assistant general manager, Kenneth Farrugia, answers questions sent to him by The Sunday Times

The theme of the international conference "Malta - Regional Developments and Opportunities in Financial Services" places a timely focus on Malta, well in time for the national Budget and six months ahead of joining the EU. Where has Malta reached in the development of its financial services; and what are the opportunities that we should be exploiting?

Malta's first steps to develop the financial services centre started in 1988 when the government enacted legislation that provided for offshore companies, both non-trading and trading, to operate here.

This seemed to be an interim strategy until such time that full liberalisation was introduced, removing the distinction between the offshore and onshore business.

A greater thrust in this direction came about in 1994, when the government enacted a comprehensive legislative package creating a regulatory framework for financial services and international business.

Naturally, this strategic direction of using Malta as a hub for financial services evolved out of the fact that we are in the Mediterranean, together with southern Europeans, belonging within the EU remit, and North African countries as members of the Arab League.

Without any doubt, looking back at the past eight years, the financial services industry has witnessed extraordinary growth. Just look at the number of international brand names operating in Malta today which in itself is a confirmation that interest in Malta has increased significantly widening the competitive landscape.

More so, I must add, that this industry is today contributing around 12% of Malta's GDP and employs over 5,000 persons.

Our opportunities going forward are closely tied to EU membership, which brings with it a two-way opportunity platform. On the one hand we have the opportunity to attract European businesses to Malta; on the other Maltese operators have the opportunity to export their services in the European mainland, as well as the emerging non-EU regions, with the latter using Malta as a gateway to the European marketplace.

In summarising these opportunities, the recent information on the Draft Financial Services Action Plan for Malta underlined potential areas of opportunities, ranging from the export of knowledge services to include fund management and fund administration services, registration of funds in Malta, trusteeship and trust management, captive insurance and the retail of investment products beyond our shores.

Is this the first conference of this calibre to be organised by VFM?

In essence, in September 1997, the then MFSC had organised its first financial services conference called Mediterranean Asset Management Conference. Valletta Fund Management had made arrangements for Rothschild Asset Management, its international strategic partner, to be one of the official sponsors of this conference.

The second Mediterranean Asset Management Conference was organised in 1999 where this time round Valletta Fund Management Limited was one of the official sponsors.

We strongly believe that Malta's EU accession will open up numerous opportunities for the financial services industry but this needs to be supported with a national branding campaign to enhance Malta's image.

With this in mind, we decided to do our share to organise a conference in Malta with the specific objective of promoting Malta's financial services industry, highlighting the opportunities that exist in neighbouring regions.

We have invited a number of distinguished international delegates to this conference, paving the way for networking opportunities.

Malta has been operating under the same regulatory regime for the past eight years. In the face of new realities (EU membership) what should Malta's strategy be and how do you believe we should be promoting financial services both within an EU dimension and outside this dimension (in tourism we have the MTA)?

I need to correct the first statement as on the legislative side, the local regulator has undertaken significant changes to the regulatory regime with the most significant one evolving the establishment and powers of the MFSA itself.

Among others, the passing of the Special Funds (Regulation) Act, which will help attract "second pillar" pension activity and the updating of the Malta Stock Exchange Act, which has been renamed as the Financial Markets Act. In addition, the Insider Dealing and Market Abuse Offences Act, together with amendments to reflect the new regulatory functions, were also made to the Banking Act, the Financial Institutions Act and the Investment Services Act.

Within this regulatory context, the EU Peer Review Process found Malta's standards of supervision very high, which is in itself an endorsement of the high regulatory regime that has been updated constantly since the MFSC was set up in 1994. In addition, the acceptance of Malta as a full member of the International Organisation of Securities Commissions in 2002 is another endorsement.

As to our strategic direction, on the EU front, the EU regulatory environment when viewed in the light of Malta's scheduled EU membership, brings new dimensions to our financial services industry. As from May 1, 2004, we will be operating within a wider marketplace, which is dynamically evolving due to the race for internationalisation.

Within the EU marketplace, this has brought the need to integrate the EU's financial markets, which should result in significant benefits for financial services businesses, investors and consumers.

In fact, in May 1999, the EU Commission launched the Financial Services Action Plan (FSAP). This was followed up with the Lisbon Summit, held in March 2000, where all heads of state and government set a target date of 2005 for the FSAP to be completed.

Supportive of these activities are the recent research reports released by the Commission, which reveal that the EU-wide real GDP will directly increase by 1.1% - or €130 billion in 2002 prices over a decade or so. This will also positively impact on total employment, which is also expected to increase by 0.5% and businesses will be able to get cheaper finance.

The integration of EU equity markets will also reduce the cost of equity capital by 0.5% and a 0.4% decrease in the cost of corporate bond finance is expected to follow. On the investor front, investors will benefit from higher risk-adjusted returns on savings.

The bottom line is that this will result in cheaper capital for Europe's businesses and should provide renewed confidence, more economic growth and, more importantly, more jobs.

The end result will be an overhaul of legislative and regulatory regimes to meet the needs of this new paradigm. Of course this will provide a significant boost to the proliferation of new and innovative products, as cross border marketing becomes easier.

We should capitalise on our experience platform and geographic position within the Euro-Med region to export our services to both developed and emerging financial services industries in our neighbouring regions.

We are relatively new entrants to this industry and we must consistently promote Malta as an excellent jurisdiction to do business in. In addition, in promoting this industry seminars and conferences should be organised in countries where we feel operators would look favourably at Malta as an alternative base to relocate or set up new business.

Conferences such as the one Valletta Fund Management is hosting should be organised periodically in Malta. This will provide networking opportunities where foreign operators can have a first-hand feel of our country and its entrepreneurial spirit.

How has VFM fared within the current fiscal regime and how is it making the most of the cyclical nature of the markets in which it operates?

As with every operation, our external environment to include political, economic, social and technological developments all in their own ways affect the operations of any organisation.

In essence, in parallel with the benefits of the 15% final withholding tax regime applicable on income-bearing funds invested in Malta, classified as prescribed funds, are exempt from capital gains tax and bond investment income earned by a collective investment scheme is only taxed at 10% on the income derived.

On the other hand, funds investing in overseas instruments, classified as non-prescribed funds, are liable to a flat tax rate of just 15% on income and gains where applicable.

As to the cyclical nature of markets, Malta is relatively a new entrant in this industry, but despite its young history - just eight years - this industry has overall witnessed tremendous growth which has been characterised by a bull market in the autumn of 1999 and the first quarter of 2002 and the onslaught of a bear market, now running into its fourth year, although we are seeing the world's economies on the mend.

Nonetheless, I would describe the history of our industry as "interesting times" where over the past few years we have witnessed ample evidence of its dynamic and evolving nature, which has been affected by economic and political issues, corporate scandals, wars and terrorist attacks.

This has led to the international scenario being characterised by acquisition, integration, market downturn and above all swift product development to the likes of hedge funds, absolute return funds and varying degrees of capital-protected funds to meet investors' changing investment needs and above all appetite for risk.

At VFM we have been likewise very swift to lead the way in this field, launching new, innovative investment products that proved to be very popular. Enough to mention the La Valette Sterling Income Fund, launched in April 2002, which has reached £24.7 million in such a short time.

Our funds under management and administration have today reached exceptional levels and shareholders in our funds exceed 34,000.

Can you give me some background information on VFM's growth and achievements since its inception; are there any plans to export its services abroad?

We went through a hyperbolic learning curve, which quickly led us to an experience platform. Rothschild's presence within the company and Bank of Valletta's established leadership position in the marketplace has significantly contributed to the pioneering position we are in today.

We strongly feel that there still exist significant growth opportunities on the domestic front and we are gearing ourselves to take up these opportunities as they arise. We also went through considerable change, which however strengthened our position.

On the other hand, we are positioning ourselves to embrace opportunities in the international marketplace and have been exploring niche areas within the EU and non-EU dimensions to export our fund management and fund administration capabilities overseas.

We have already started to taste the success of our endeavours and have managed to attract a €7.5 million fund managed by a foreign fund promoter to Malta for which we are providing fund administration services.

In addition, we also launched a product investing primarily in the north Africa and south east Mediterranean region providing a blend of bonds and equities. This fund has delivered over 24% return.

The new EU reality will widen these opportunities.

VFM has a strategic alliance with Insight Investment. How is this progressing and will recent personnel changes affect Insight's performance?

Insight Investment was launched last September as the asset management arm of the HBOS Group, the fourth largest European financial services group. Since then, Insight has already positioned itself as one of the UK's largest investment managers with over £67 billion in assets under management as at June 30, 2003.

Insight's shareholding in Valletta Fund Management is one of our strengths and complements our strategy to grow our business, both on the domestic and international front. At the investor level, more than ever this also means that they can trust us to be there for their financial future as the shareholders behind VFM are there for the long haul.

Last February, following the acquisition of Rothschild Asset Management, Insight Investment took over Rothschild's shareholding in VFM. Insight quickly unveiled the detailed membership of its equity and fixed income teams after having undertaken an in-depth review of its teams and processes to ensure that its team is able to achieve its strategic objectives.

As a result of the integration of Insight and Rothschild Asset Management investment management capability, Insight chose the best investment professionals from two strong teams. This teamwork approach brings out the best and ensures consistency across portfolios.

Excellent human resources, having extensive experience across both bonds and equities, today support Insight's investment management capability. In fact, Insight's equity team has an average of 14 years' investment experience among its senior members.

I can say this with great confidence as a few months ago we travelled to London to meet the advisers of all our funds managed by Insight. Their set-up is, to say the least, impressive.

Insight has set up a platform, which reflects broad and deep research capability in UK and overseas equities, where the structure is based on a team approach and is split into product categories, allowing the team to focus on specialist areas.

On the other hand, its Fixed Income senior team members have an average of 16 years' investment experience. Having spoken personally with these advisers, and evaluated their historical performance, we believe that by investing in our range of funds, our investors will be availing themselves of the investment management skills base and capability of a market leading team of fixed income and equity investment professionals.

Ultimately, our objective as fund manager is to deliver consistent, superior and repeatable performance in all asset classes and product categories. We strongly believe that the key success factor, in allowing us to do this, is the quality of the investment professionals supporting our fund management activities.

The second key ingredient is ensuring that the investment process gives our clients and their advisers confidence and is indicative of our ability to add value. A commitment to the continuing development of our process is a core component of our philosophy and one of the key elements of this is a focus on understanding and managing risk.

In line with its commitment to maintain a strong, dedicated in-house research capability, Insight last month added further talent with the recruitment of two sector fund managers to its equity research team.

The team of experienced and independently-minded research specialists provides Insight with detailed stock research across Insight's investment universe.

In the final analysis, Insight as our advisers are committed to creating effective investment solutions that are designed and engineered to meet individual client needs across a wide range of client types.

With all this in mind, we strongly feel that the appointment of Insight Investment as adviser to all our funds did not simply come about as a result of the Rothschild's acquisition but more so due to their disciplined, research-driven process.

What should Government be doing to make Malta a more appealing location for the fund management industry to operate?

Over the past decade, governments have always expressed unanimous commitment to ensure that Malta's legal structures and regulatory standards in financial services meet the best international standards. The end results are that we have been able to attract substantive international interest in this sector.

The promotion of Malta as a reputable financial services centre is paramount to develop this industry as an economic pillar and the set-up of the MFSC, which in turn devolved in the MFSA as Malta's sole regulatory authority, mirrors the regulatory practices taking place overseas.

I feel that the fact that the Government has set up the MFSA as an autonomous body should keep the finance industry dynamic, alert to new opportunities and consistently improving its standards.

However, I feel that making Malta an attractive jurisdiction for the fund management industry and financial services in general is not the sole responsibility of Government. Of course, we will need to maintain and improve these standards and this level of interest going forward.

I am very confident that all those involved in this industry have a vested interest to see this industry flourish.