10 – 18 January 2001

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Charles BorgInterview with Charles Borg
Valletta Fund Management General Manager
Pioneering investment in Malta – Valletta Fund Management

Back in 1995, Maltese investors had but one choice with which to make their savings work for them – interest on bank accounts. Now, thanks to the initiative of one Maltese company, the Maltese investor has some 300 alternatives on the Exchange alone, while many others have discovered the benefits of investing in overseas markets. David Lindsay speaks to Valletta Fund Management General Manager Charles Borg.

What were the origins of Valletta Fund Management?
Valletta Fund Management is an alliance between Bank of Valletta and Rothschild, BoV owns 60 per cent of this company while Rothschild own another 40 per cent. We started off in 1995 and now we are approaching our sixth year of operation in June.
We started out very humbly with two funds, with which we decided to begin operations with a fund to fund structure, which effectively means that we invested in a number of third party Rothschild funds, in varying proportions. We did that specifically for a reason. First of all, we believed that we needed to take advantage of the learning curve, to learn how to manage these funds and how to carry out the investments. We started off with the easiest funds to manage, with fund to fund and feeder funds.
Those were the foreign funds. Then we branched off into local investments, being the first to offer local funds investing in Maltese equities and bonds. We began with the La Valette Malta Fund in 1996, which was comprised of 60 per cent Maltese equity and 40 per cent Maltese bonds. These direct investments varied greatly from the feeder funds we were previously offering.

How much competition did Valletta Fund Management have at the time?
In 1995 we had no competition whatsoever, except from the banks, who offered banking products such as fixed deposit accounts and saving accounts etc… The stockbroking community did offer us some kind of competition, however, our target customer was not the stockbrokers' customer, who tend to be more sophisticated and hold a higher net worth. We aimed purely at the bank customer.
Therefore, in 1995 we did not have very much competition, however, Mid-Med Bank at the time took up the issue as well – launching their own company and products as well – so competition effectively started from there.
Business between 1995 and 2000 has been extremely good. Initially, our problem was not competition, it was the culture prevalent among Maltese investors. This was in the sense that Maltese investors at the time were not really sophisticated enough to utilise this type of vehicle and preferred sticking with a bank deposit.
If I had to go to an individual who has Lm20,000 sitting idle in a savings account and tell him to place his funds in a fixed account offering double the interest the savings account offered, he would undoubtedly jump at the opportunity.
However, if I had to advise the same investor to invest in an equity market in the UK, one in which I cannot guarantee a return of six or eight per cent, it could go up to twelve or likewise down to minus three – he would shy away immediately.
That was our main problem we were faced with at the time - the cultural barrier. Now, however, that barrier has been overcome.
As we started growing, competition commenced from our main competitor, then Mid-Med Bank, now HSBC, and still our main competitor. Despite the competition, we both performed well.
We were assisted in no uncertain terms by a boom market, both locally and abroad, up to March 2000. If one had grown accustomed to returns of three or five per cent and were faced with an investment in a Maltese equity market which rendered on average 30 per cent per annum – that investor would certainly go for it. Consequently, we didn't need to advertise, the boom advertised itself. Our competition faired similarly well.
Additionally, the stockbroking community became interested and started importing their own intermediaries and fund managers, but they had opted for a different avenue – choosing only the intermediary path, which basically all stockbrokers and financial intermediaries in Malta have also chosen.
However, we didn't want that. The group was large enough and was obviously looking beyond that – toward having its own company, its own funds and marketing these funds abroad. Accordingly, Valletta Fund Management was set up.
We found a partner, Rothschild, who assisted us in no small way in setting up our own funds and learning how to best deal in them. They were chosen from amongst other competitors. In fact, Valletta Fund Management is the only company in Rothschild's portfolio that it does not wholly own.
We decided not to go the full subsidiary route with Bank of Valletta and to draw in some expertise. Bank of Valletta decided to go with Rothschild, who wanted someone to represent their own interests in Malta, while developing business in the Mediterranean region. Rothschild ended up not taking a mere five per cent token stake in the company, but instead took a 40 per cent stake – with which they have been quite active.
The company has done well and their interest has increased, they are assisting us in developing our international activities - as Rothschild want to extend their services through Valletta Fund Management to the entire Mediterranean region.
Effectively we started off with specific problems related to the investment culture, then moved on to more sophistication as investors became increasingly accustomed to different investment practices, also thanks to our competitors, which at the moment stands at some 300.
However, I remember well how in 1995 the only two funds licensed and registered in Malta were the two offered by Valletta Fund Management. Now, five and a half years down the line, there are 300 bonds on the Exchange being offered by a multitude of players. Suffice it to say that we have some big names in Malta, which is good for the industry in itself.
In fact, one of the most attractive points about the Maltese market is that it has succeeded in enticing these fund management players into Malta. Through intermediary status, that's true, not through the likes of Valletta Fund Management in terms of setting up a specific company - investing and having experts brought over to Malta, by Rothschild, to assist in setting up the company. Now the company has grown, is fully Maltese-run and has contributed to the economy as well.

What is the way forward from here?
Apart from that, we're not going to stop here. What we are aiming at is developing into new areas, into direct investments, even abroad, particularly in the Mediterranean region. We call it the internationalisation process.
We are internationalising our business, which was the main objective to Rothschild's coming to Malta. By internationalisation we mean that, first of all, we mean to set up investment funds which are both sold and invested in abroad. This will be accomplished by approaching overseas fund promoters and offering our services in managing that fund for them. They would give us the fund structure and we would carry out all the back office work for them, all the hassle. All they would have to do is market the fund and advise on it, provided they have the expertise. If they don't, they could use Rothschild as the advisor. That is the value that we want to bring to Malta. We have already carried out similar activities in Malta.
Effectively, Valletta Fund Management is not aimed solely at selling its own retail products – our systems are robust and sophisticated enough to take on new business.
It's a simple matter to go to a foreign bank and say ‘We have these products, sell them for us and we'll give you a commission.' But that's not exactly what we want to do at the moment. We will arrive at that situation but not at this stage.
The future is undoubtedly down this avenue, as the market in Malta, at one point or another, will become saturated. However, there is still large room for growth in Malta, pensions is maybe one of these areas.
We are still in the very early stages in Malta, as the industry itself is only five and a half years old. Having said that, we aim to start paving the way to begin exporting ourselves overseas in order to not be fully dependent on the local market.
We will, of course, still be very much involved in the local market, on which we plan to launch new funds and remain as active as we have always been over the last five and a half years, but we plan to devote more time to internationalising our business.
I feel that there is a good deal of potential, we travelled overseas a couple of times and the results have been encouraging. Besides, it's good business acumen to take the plunge in these markets, as the competition is far wider on an international scale.

In terms of the Maltese investor, do their interests lie more in the local or foreign markets?
Looking back to 1998 and 1999, the local investor was very eager to invest in the local market, particularly with the matter of HSBC taking over Mid-Med, the ripple effect, and with equity prices shooting upward. So we were seeing significant interest from investors who even had money abroad. In fact, there was a large repatriation of funds.
There was a great deal of interest and if you take a look at the fund sizes, they range in the tens of millions. Our major growth took place in the last two years when there was a huge attraction to invest in the local market via funds, which is obviously a safer way to invest as you are subject to a far greater spread.
Effectively, a fund has many benefits, diversification is only one of them, and expertise of management. An example of this would be that since March of last year, the market shot upward just after the HSBC take-over and, during this last year, it has been drifting downward.
But individual equity markets went down between 10 and 20 per cent each. However, a glance at fund performances shows how diversification minimises risk. Funds over the same time frame had only depreciated between three and seven per cent.
It's interesting to note that after 1995, investors had no choice whatsoever in where to invest their money. There was no product to meet the needs of the long-term investor. We introduced these products and we found that we had to educate the public and even the banks at the time as to what these products mean to investors.
Investors are now building portfolios whereby they leave some money in the bank, they put some into fixed interest investments to generate supplementary income and then the rest is put into investment funds. Within our fund range, one can create a portfolio of funds as well, spread out locally and overseas. Starting in 1997 and 1998, if you look at the local portfolios, most of them would have been bond-denominated but when the market staring going up and investors began looking at the differences between the bond and equity markets, they started to slowly switch over.
We noticed the trend and we regarded such behaviour as a sign of sophistication, which is healthy. Now we're even seeing people including in their portfolios international capital markets.
In the second, third and fourth quarters of last year, the both the foreign and local market drifted, particularly abroad – which pushed down all the prices. So that was the first time that local investors saw a downturn to their investments.
Despite the fact that Maltese equities have dropped significantly in value over the last twelve months, if you look at the balance sheets of these Maltese companies, they have had record profits – so I don't think that the equities' current prices justify the value of the companies.
I wouldn't say that they are undervalued, but I would say that they present a good long-term buying opportunity. If people were flocking to the Exchange in January 2000 at the prices at the time, they should be flocking today.

The Business Times, Network House, Vjal ir-Rihan San Gwann SGN 07
Tel: (356) 382741-3, 382745-6 | Fax: (356) 385075 | e-mail: editorial@networkpublications.com.mt