Changing an investing culture

With over 20 years of service to the local investing public, Jesmond Mizzi Financial Advisors Managing Director Jesmond Mizzi identifies some challenges and many opportunities in Malta and beyond.

One of the biggest changes Jesmond Mizzi, Managing Director of Jesmond Mizzi Financial Advisors (JMFA), has seen in the investing public over the past two decades since the firm was established is the way they look at investing. “When we first started out, investors were very bond oriented. I think we have managed to convince clients to diversify their portfolio and include equities,” Mr Mizzi said. One vehicle that seems to have certainly helped was the launch in 2016 of the Merill SICAV, offering an array of investments, depending on clients’ risk profile and investment strategy. “This diversification has worked well over the years. With the volatility that started with the Covid-19 pandemic and which is still with us today, I would say that those who invested in equities have done much better than those who only invested in bonds,” he observed.

Client relationships, the bedrock of the large majority of local investment and wealth management service providers, are facing a challenging future as the weight of regulation is forcing these firms to turn away clients that either have inactive investments or portfolios below a certain limit. JMFA are no exception. “At the moment, any new client must invest a minimum of €20,000. We also have minimum investments for every transaction because the way that we have to do business is much more onerous and costly,” Mr Mizzi explained. “It simply isn’t feasible for us to have a client who wants to invest €5,000 in a Government bond once. We may never see them again, but we would need to continue servicing that investment, with all of the costs associated with it. I fear that, at some point, the lower retail client will not get serviced because it’s too costly – unless regulation makes it a bit easier for certain transactions.”

Mr Mizzi pointed to the increase in the number of support staff needed to serve clients, which has led to significantly higher costs with very little return. Since launching with a modest team of four in 2002, the firm has experienced significant growth, rising to a complement of 28 staff members by 2018. However, since then the increase in regulatory requirements has seen that number balloon to 43. “The reality is that while our team has grown significantly, rather than increasing our advisory and client-facing services, we’ve been adding numbers mostly in the back office – beefing up the compliance, admin (and) the anti-money laundering department.” Not only has JMFA had to change the way it services its clients but also the onboarding of new clients. “When we started 20 years ago, our client base was very much retail across the board. Today we are encouraging investors to go down the discretionary portfolio route, where we have mandates for clients with similar risk profiles and objectives. You can then group them and give a better service, acting faster to service them better and to invest.”

While the Retail Department currently handles clients with portfolios below €400,000, the Wealth Management Department handles clients with over €400,000. Institutional clients are handled by the Institutional Department while the Asset Management Department manages clients’ money via the Merill funds and discretionary portfolios. The Asset Management Department is also responsible for much of the research that the advisors need to effectively manage client’s portfolios as well as being responsible for research and assisting advisors with advisory clients’ portfolios. The Stockbroking Department handles all client trading activity, both local and international, and the Corporate Division caters for IPOs and bond issues in which JMFA act as sponsoring stockbrokers.

Mr Mizzi expressed satisfaction that the appetite for these IPOs and new issues has increased. “We are very happy that the local investor is still very skewed to investing in the local market – predominately new issues – although this year we have seen an increase in trades on the secondary market, also helped by the better performance of the local stock exchange, particularly the big names – Bank of Valletta plc (and) HSBC Bank Malta plc.” Still, he said, the majority of local investors tend to focus on new issues. “There, we have acted as sponsors in a number of local issues and, even this year, the pipeline is quite strong. So that is something positive for the local market,” he added.

The low amount of activity on the secondary market remains a concern to Mr Mizzi. He sees a greater role for bond issues within locally managed fund portfolios rather than to retail clients. “I don’t think we’re there yet. It’s much easier to sell a new bond issue than it is to sell our own funds or international funds, especially when the markets fall,” he said. Client buying strategies were also questioned: “When clients see their portfolio values going down, they tend to wait until it recovers lost ground before deciding to increase their investment. This is the wrong attitude because they should invest more to average down.” Mr Mizzi noted that clients often invest in both individual bond issues and equities, as well as funds. However, one shouldn’t come at the expense of the other. From a risk perspective, he emphasised that investing in a fund presents lower risk compared to holding individual financial instruments. Whereas in the past international equities were taxed for their capital gains, this has now been removed if the financial instruments are held for a period, so the local advantage of investing on the Malta Stock Exchange has been lost. “This has created another hurdle to investing locally and there is now a disadvantage also for funds because people will still pay tax at 15% on capital gains if they invest in funds, even though income from foreign equities will be taxed at one’s marginal rate of tax. I still think this is something that the authorities need to address,” he said.

New sectors and new areas need to be introduced to attract more younger investors to the local market. He pointed to the UK government that is currently encouraging pension funds to invest a proportion of their holdings in research and technology companies since they can take a long-term view. “Even with the pension reform, my hope is that we will start to see more pension portfolios grow. We are still at very low figures when it comes to private pensions in Malta. If it picks up, we would then need to see to it that there is an avenue for that money to be invested in local companies, be it bonds or equities. After all, if we don’t invest in our companies, no one else will,” Mr Mizzi affirmed.

Looking ahead, on the market side he said that, after a tough 2022, inflation started to go down in the United States and he was hopeful that Europe would follow, although in the UK there were bigger issues. “The markets are performing better this year, both on the bond side and on the equity side, and, hopefully, if we don’t have a recession or a hard landing, as interest rates hopefully start to come down, probably next year, the investing public and the economy – because we depend a lot on the economy – will continue to do well, both globally and also locally.” He is more optimistic on the economic outlook today than he was a year ago. “I think inflation will be with us for a while longer and we will need to get used to a higher interest rate environment. With the benefit of hindsight, I would say that central banks acted too late in increasing interest rates, especially considering that during the pandemic you had governments all across the globe dishing out money that probably wasn’t very productive.” Mr Mizzi is hopeful that the local market will continue to flourish. “We have to be selective, and we need to see more IPOs, despite the fact that the more recent ones maybe haven’t been so successful both at launch but also in the secondary market. We talk a lot about it; that we need a market maker, so people can have the peace of mind that they can sell at any given time, which at the moment we don’t have.” With more companies coming to the market and changes on the minimums for IPOs, he stated that more companies should be encouraged to take the plunge.