Pensions, liquidity and the right
funds at the right time
DAVID LINDSAY speaks to Valletta Fund Managements
Kenneth Farrugia about VFMs ongoing internationalisation
process, Maltas liquidity levels, the countrys equity and
fixed income markets and VFMs new products in this wide-ranging
Valletta Fund Management has consistently been, without
a doubt, Maltas pioneer in fund management. Formerly jointly owned
by Bank of Valletta and Rothschild, VFM recently saw Rothschilds
shareholding being absorbed by Insight Investments, which forms part
of HBOS the UKs fourth largest financial services group.
The change in strategic partner, VFMs Kenneth Farrugia explains,
has brought added value to VFMs operations particularly
in light of its internationalisation process and the pensions market,
which VFM is actively eyeing.
He explains, "The pensions problem is an issue that has been placed
high on Maltas national agenda and having such an experienced
player with established IT systems and products for the field will be
"Insight also shares VFMs internationalisation vision and
as such they will be channelling regional internationalisation business
through VFM, very much in line with the philosophy we had shared with
"In this respect were on the same track as we were before.
Were still exploring the Maghreb region and after 12 months weve
established good contacts. We now have a presence in Tunisia, weve
gone into Egypt and were looking closely at Algeria, Morocco and
VFM is actively looking at the entire spectrum these emerging markets
have to offer and has appointed a large Egyptian brokerage firm with
very good contacts in the Gulf region, which VFM is also looking to
Of primary focus to VFM is selling its own funds across the region and,
quite literally, structuring new funds for the region, such as the Mediterranean
Rim Fund, which, Farrugia explains, has been an outstanding success
in terms of performance. In fact, the fund has gained 25 per cent since
But despite VFMs enthusiasm for the emerging markets offered by
the Mediterranean region, Maltas fund management pioneers are
still moving along with, and working in parallel to, the domestic market,
which, Farrugia explains, offers significant potential.
He explains, "There is the pensions issue at hand and the fact
that Malta is now joining the EU is also very positive. Malta as a base
for fund administration is an excellent proposition for third party
promoters and fits into our business model.
"On the one hand we provide fund administration for third parties
and on the other we provide retail funds for the market. Weve
built our retail arm very strongly and today VFMs assets under
management are in the region of USD465 million. More than that, if you
look at our fund range today, nearly half are third party funds. So
were carrying administration for our funds and at the same time
were providing fund administration for a growing number of third
"The Maltese market still holds a great deal of potential and we
will keep rolling out funds that we believe offer opportunities for
"But for the time being we are building our core competence in
the bond market and this has been done extremely well. Despite
the obvious difficulties of the equity market last year, our suite of
products are relatively stable for two reasons: in the bond market we
have gone predominantly for investment grade bonds and, secondly, they
provide a reasonable rate of return."
But there and bonds and then there are bonds. Farrugia recalls the Argentine
bonds fiasco, when so many Maltese had purchased Argentine bonds because
they were sovereign, but, he reminds, Argentina is an emerging market
and there are always risks associated with the high 10 and 11 per cent
yields that were offered.
As far as the funds VFM launched last year go the Sterling and
Euro Income Bond Funds VFM had predominantly invested in investment
grade bonds, and with great success.
Farrugia comments on the bonds success, "Basically I think
we played upon what investors were looking for stability and
competitive return. The issues were popular, having attracted Lm80 million
from Malta, which is quite impressive even by international standards."
Does this, I ask, suggests that there really is a great deal of money
in Malta looking for an investment channel?
Farrugia elaborates, "If you look at the Central Banks quarterly
reports, you would see there is a significant amount of liquidity in
Malta. I think this is, in part is due to the fact that people are not
investing in the equity market in the same flows as they had in 1999
"Secondly, I believe we had a fair amount of repatriation of funds
with the Investment Registration Scheme, which also boosted the liquidity
of the Maltese.
"Thirdly, if you look at the fixed income market in Malta, the
government, which is obviously looking to cap public debt, is steering
away from issuing new bonds. We have had some new issues from government
this year, but not as many as in past years.
"The corporate sector obviously played its timing right and issued
a number of bonds on the market, which were taken up in, in some cases
within a matter of hours. However, the new bonds on the market are still
not matching the liquidity at hand."
VFM recently exceeded the 33,000 shareholder mark across its range of
funds, which represents an impressive market penetration and continued
growth is expected, particularly in terms of pension products.
Farrugia explains, "Now that there is a special funds act for pensions
in place, which has paved the way for occupational private pensions
schemes, this area of the market is expected to begin growing. However,
there are no tax benefits attached to the act as yet and, as such, these
products are not as attractive as they could be. However, if conditions
such as those that exist in the UK were implemented here, such as being
able to offset contributions against personal taxation, it would be
a great benefit. But I do think were heading in that direction.
"Everyone acknowledges the problem we have in dealing with the
welfare gap and the minister recently, quite adamantly, echoed this,
so I think well see a concrete roadmap for this problem drawn
up in the near future.
"However, at the same time we need to develop the local stock exchange
as well. Of course its good to develop a pensions programme but
then one must also ensure that the local stock exchange offers sufficient
instruments for pension products to diversify in, otherwise money will
begin flow out of the country. The market needs to be deepened, we need
more issues on the market so products can be diversified properly and
for more liquidity to be injected into the market.
"Developing the Exchange further is of paramount importance. We
need to create a market for these products through introducing a wider
array of instruments both on the fixed income side and on the equity
side, in tandem with developing the pensions legislation. In that way
we will be hitting two birds with one stone: developing pension products
for the Maltese while at the same time developing the local market so
these pension products can invest in the local market."
The local markets, particularly the equity market, have been hard hit
of late but Farrugia remains confident they will pick up again.
He explains, "It has been a challenging time for many fund managers,
but I have seen market conditions easing, even on the local side. If
you look at the Exchanges quarterly statistics, you will notice
that the last quarter of 2002 was the first quarter, after a multitude
of quarters, in which we had positive results in the index, the same
goes for the first quarter of 2003 and even now we will most likely
have a positive return for this quarter as well. This augurs well and
we are seeing a certain level of support of prices on the Exchange.
"However, I always say that when investing in a fund, especially
in Malta, its useless to just look at the face value of the prices
of the components of the fund - you have to look at the funds
portfolio and the companies it is investing in."
There has been virtually endless talk of developing Malta as a regional
financial services centre, I ask Farrugia how he sees Malta filling
this role and how EU membership could facilitate the vision becoming
"From the fund management point of view," Farrugia explains,
"EU membership is a very positive step because we will gain direct
access to the European market. For example, on the fund administration
side we often receive enquiries from people interested in setting up
fund administration activities in Malta and licensing their funds in
Malta. However, the problem invariably arises that if they want to market
their products in Europe, with Maltas status as a non-EU member
they would have to seek approvals from each jurisdiction in which they
wanted to market their products.
"What happens now with the single passport Maltas
financial services practitioners will enjoy with membership, is that
they will be able to license their funds in Malta, have them administered
in Malta and market them freely across the EU.
"The MFSA has been quite proactive in this respect and theyve
aligned our legislation with that existing in the EU, so there will
be no significant changes to implement. The transition, from our point
of view, will be a seamless integration.
"Secondly, the perception of Malta will also change. EU membership
automatically implies that there are good standards in Malta and I think
market makers will look more favourably at the local market once Malta
is an EU member."
In the short term, VFM expects to continue looking closely at the pensions
issue, while also continuing to launch new, innovative products still
lacking from VFMs portfolio such as funds dealing with European
equities, European bonds, and the Far East.
But any new fund launched by VFM will follow on the heels of the recently
launched Monthly Income Fund, the first fund of its kind denominated
in Maltese liri.
Farrugia explains the concept behind the fund, "On one hand we
looked at whats happening in Malta, where there is a lot of liquidity
and on the other we looked at the bond market in Malta, which is small
and is already well-serviced the by our other products.
"So the alternative would be to invest in the foreign bond market,
which of course creates currency risks. What we did was to look at the
perspective of the investor, who would, from a currency standpoint,
want to mirror the Maltese liras currency basket, which is comprised
of 70 per cent euro, 20 per cent sterling and 10 per cent dollar. We
looked at the bond market in Europe, which we know is growing from our
experience with our euro and sterling bond funds, and came to the decision
to launch a bond denominated in Maltese liri that would invest in investment
grade bonds in the same proportions as the lira currency basket.
"We then looked at the distribution options and, given our experience
in distributions and our fully fledged distribution systems, we decided
to go for the monthly distribution.
"I think this product filled a market void, by being the first
of its kind denominated in Maltese liri. Its a one stop shop for
investors. Firstly, its suitable for investors seeking regular income
flows since it pays out on a monthly basis. But secondly, investors
who traditionally invest in the local market can now diversify in the
foreign market with a single product, whereas if you wanted to diversify
overseas before, you would have to buy a variety of bonds to link to
the Maltese currency basket and there are costs associated with this.
And if the basket changes, as it did last year, you would have to adjust
your exposures accordingly. So we created this single product to meet
these needs and the response to the product has been very good.
"Obviously, were launching our products where there is a
demand for them and demand for equity products has been very weak over
the last few years. However, a recent report said that for nine consecutive
weeks the inflows of US equity mutual funds have exceeded the outflows.
Thats a good sign. I dont think were out of the woods
yet and perhaps well have to wait till the end of the year to
ascertain what level of growth we will see in the States, which is a
good gauge being the strongest economy, and in Europe as well.
"But I think that of all the uncertainties weve been faced
with economic, political and accounting - the accounting scandals
were the final blow to investor confidence. Its a major problem
when you cannot rely on the accounts to ascertain whether share prices
are overvalued or undervalued. What happens is that it spirals itself
to other companies irrespective of whether they have good corporate
governance themselves and the sentiment spreads across the whole market.
These accounting uncertainties were a real worry and there was a fear
of contagion in Europe. So companies are now making sure their accounting
is transparent, fair and reflects what everyone expects from them."
But is there a real correlation between what happens on the international
markets and the Maltese market, I ask?
"Lets put it this way, on the fixed income side, I think
we are converging with whats happening abroad, particularly in
Europe. Considering that our basket is comprised 70 per cent of euro,
we see a convergence of whats happening in the euro currency and
whats happening in Malta. The Central Bank seems to be aligning
itself and cutting interest rates in line with the Eurozone."
But whatever the future holds, VFM, with its thumb firmly placed on
the pulse of the industry, is without a doubt well placed to meet investors