5 SEPTEMBER 2001

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Funding the Mediterranean region

VALLETTA FUND MANAGEMENT RECENTLY LAUNCHED THEIR GROUNDBREAKING MEDITERRANEAN RIM FUND - INVESTING IN AND RETAILING THE FUND IN MEDITERRANEAN'S EMERGING MARKETS OF TURKEY, EGYPT, TUNISIA, MOROCCO AND MALTA. APART FROM BOOSTING THE REGIONAL ECONOMY AS A WHOLE AND PROVIDING A GOOD DISTRIBUTED YIELD TO INVESTORS, THE FUND ALSO MARKS THE FIRST STEP IN VALLETTA FUND MANAGEMENT'S INTERNATIONALISATION PROCESS. DAVID LINDSAY LEARNS MORE FROM ROTHSCHILD ASSET MANAGEMENT MANAGING DIRECTOR ROBIN FULLER ABOUT THE INITIATIVE AND ROTHCHILD'S LONG HISTORY WITH VFM.

What was involved in the setting up of the Mediterranean Rim Fund and how does it differ from the others offered by Valletta Fund Management?
This case involves a good deal of specialist investment management advisory work. The Mediterranean Rim Fund is quite interesting for us and - with Valletta Fund Management being the first of its type in Malta – it has considerably developed its range of funds, products and expertise over the past five years.
The Mediterranean Rim Fund is also very interesting because it takes us a stage further in a number of different areas. When we first started out here in Malta, we had straightforward feeder funds going into international funds, which was totally straightforward. That was followed up by the Malta funds, directly invested as opposed to being invested in other investment schemes and funds. In terms of pricing, settlements etc… it was further up the learning curve of product diversification.
Then with the Top 100 we launched our first international fund directly invested in international equities.
What market interest has the Top 100 received?
We generated some USD6 million in a couple of weeks. With the markets being at their lowest at the time of the launch, I think the Top 100 had a strong appeal with the household names it involved. The fund reflected the nature of the market at the time, which was very volatile. Accordingly, we felt we had to come up with a fund that appealed to the market at that time. That's why we chose the Top 100 fund.
How is VFM branching off toward new horizons with the Mediterranean Rim Fund?
In a number of respects. First of all, these other funds - apart from being managed here - are also launched and sold here. Rather than being invested in the major international markets, they were all invested locally.
The Mediterranean Rim Fund is different in several respects. Obviously, it's being offered to the local investor, but it's also being sold in some of the markets in which it's investing. Accordingly, we have distributors in Tunisia and Egypt who are selling it while also supporting Rothschild Asset Management in their investment advisory capacity.
Is this VFM's first step in its internationalisation process?
In that respect, yes. What had occurred to us was that if you look at it from the investors' point of view, they can obviously invest in global markets or they can invest in Malta in Maltese bonds and equities. Before this fund, if investors wanted to go into emerging markets funds, they'd end up in Asia, Latin America or maybe in some Eastern European countries. But they wouldn't be investing in those economies which are actually more closely related to Malta – such as North Africa and Turkey.
In terms of diversification, it would clearly make sense to diversify into economies which are related and have some trade relationship with you, rather than going after markets that are totally unrelated - such as in the case of Asia, where one has all the volatility and potential for return associated with an emerging market but is totally disassociated with the actual emerging markets on Malta's doorstep. Investing in those economies that are trading with Malta can also help to reduce volatility.
So there is a strong investment story for people in Malta and the surrounding countries that wasn't available beforehand. It seemed to us that it would provide for a good diversification for investors
Another determining factor in launching the Mediterranean Rim Fund was the fact that, up to now, we have concentrated purely on the Maltese market as regards retail. Effectively, part of our internationalisation process is the fact that we now need to get intermediaries in other jurisdictions and this is precisely the product that would take us in that direction.
This type of fund is not commonly found with other fund managers, so for those wanting to invest in the North African region, this offers a diversification aspect to that market.
This is undoubtedly part of VFM's internationalisation process because we're finding intermediaries and we're investing in these intermediaries' own countries.
This is precisely what VFM's main partners, Bank of Valletta and Rothschild, always had in mind.
The Maltese market has potential but ultimately it is limited, so if a company such as VFM really wants to grow, it has to grow outside of the confines of Malta.
Malta has been promoting itself as a hub for the region and this is a tangible step toward that ideal.
What's interesting about this product is that it has an appeal in the markets its targets. This was more than evident when we visited these countries to choose advisors and appoint distributors. We noticed that there was a large number of domestic funds on their markets. For example, you go to Egypt and you find funds investing in the Egyptian capital market, the same in Tunisia and in Turkey … but what you don't find is a regional fund addressing opportunities in the whole region.
Accordingly, we thought that such a fund would have an appeal to the citizens of these countries.
What is your view of the local market?
I think it's easy to be negative about the local equity market at the moment, it's obviously been very difficult for local investors but, nevertheless, that age-old adage that the equity markets are the best performing over the long term still rings true.
If you look at the progress the Malta capital market has made, it has been substantial. There's a stock exchange that has gone from practically nothing to a reasonable capital market and is fairly diverse in terms of the number of investors investing in the market. The local market has seen privatisations from the state and it has also witnessed initial public offerings come along as well, all of that will help to expand and add more depth to the local market.
You can see the same thing happening in these other Mediterranean markets as well but there still are a stage behind, despite the fact that some of the stock markets involved are some of the oldest in the world. However, they have been rather lacklustre since the Second World War.
But now things are changing and in most of these countries you can see various programs for the sale of state assets, which does encourage private individuals to do the same thing - to offer their family companies while also attracting entrepreneurs to launch IPOs on the market. The process heightens awareness, as it is a case of the government marketing the capital market to the public. It has an effect on both the private and public sector.
Having said that, the current difficulties in the local market somewhat masks the considerable progress that has been made and we see that that same process is in its infancy in these other Mediterranean markets. The further development of the capital markets and the attraction of more investors is making it an attractive place to invest in.
How is the Fund broken down and could you give a ballpark forecast on its return?
The fund will be investing 60 per cent of its assets in the fixed interest market so we can approximately gauge what level of income we are going to receive from there. But then, we have the 40 per cent exposure to the equity market and that depends on the growth element of the public sale.
Another good feature of the fund is that we will be distributing the income to investors - a first for VFM. Basically we'll be distributing all income that the fund will generate to the underlying securities - on the bond element and even equity dividends. This will be distributed to investors on a regular basis.
The reason for this approach is that within the culture of the Maltese and those other countries that we are targeting are people who like to receive some element of income that, for example, goes along with their salaries. It's more of a marketing aspect. Additionally, when we were talking to brokers and intermediaries, we found that they were all in favour of this solution.
Obviously we cannot give a targeted total return, which would be the culmination of capital and income, but we can target the income, which would be at some eight per cent. Now that has added features, apart from immediately seeing a return on an investment as opposed to having it accumulate, in that it does make it a slightly more defensive form of investment fund as well by receiving a return even if you don't subsequently decide to reinvest.
This tends to be what investors revert to in times of difficult trading conditions, which is what we have at the moment. In quite a lot of these markets the equity yield is still pretty high, which is why we can have funds with a 40 per cent equity exposure and still have a target income of around eight per cent.
So it's attractive to people who want to invest early and it also means that we're not really going for the growth end of the market and growth type stocks, which are also the most volatile element in the market.
Have you noticed a sway in investor interest toward the fund market from the equity market of late?
Like everywhere else we experienced a downturn in the market, which diminished investor sentiment. When markets were performing extremely well, obviously the funds were performing extremely well, as the funds were selling by performance.
Particularly in a small market like Malta's, in which there is a lack of depth, the trend can become dangerous. When markets were corrected there was a panic sentiment so effectively, it's not a question of the wrong fundamentals of the companies but one of people selling because their expectations were not met.
We feel that the situation has helped us in the sense that the market has now subsided and people are awaiting a boost. The companies are still performing relatively well and we do need some kind of a boost for the market to start moving upwards again. We're not expecting an upward trend along the lines that we had a year and a half ago, but we do expect a rise.
Maltese investors really don't differ that much from investors elsewhere in the world in that they tend to buy on historic performance, but that's not the time to buy, the time is now when the markets are low - at the moment there is a better value than there has been over the last couple of years. But it is the usual practice for people to wait to see that something had appreciated substantially before they buy it.
So, from an investment management point of view, we're very comfortable in offering this fund. It may be that we don't raise a large amount of money at the outset but we will certainly raise enough to have a diverse portfolio and we're confident that now is a good time to combine these assets with performance.
What other internationalisation processes are in the pipeline?
We are working on the administration side as well, which could be a lucrative business for VFM. Come rain or shine, the income generated from back office administration is always there.
At this moment in time, all administration services for third parties is being done by VFM, apart from HSBC funds. So that I would say is a significant pursuit.
Our next step is to begin promoting a similar service to foreign parties. That is goes in hand with the process.
As regards retailing funds and funding intermediaries abroad, we have started with two intermediaries for this fund and we will have an additional intermediary later on and we'll see how it goes and expand in due course.
I think what we have to do through this fund is be there for our investors, any company that does not is doomed. So we have to listen to what they want. There are a number of potential ways forward but let's listen to them and to how they react to this particular initiative and try to meet their demands. There are number of ways that we can do that but we must be guided by their lead.



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