The importance of collective investment schemes on the growth and strategic direction of the Malta Stock Exchange

Abstract

The dissertation first considers several issues governing both collective investment schemes and the Malta Stock Exchange. It then assesses investors' motivation in participating directly or indirectly in the capital market. The dissertation shows that taxation is not geared to effect the demand for investment in CISs or the MSE. However, as fund companies do not pay income tax then bond funds should be preferred to direct investment in bonds. On the other hand investors with low income should from a tax point of view invest directly rather than through a fund. Although fees charged on collective funds are higher than those of direct investment, investors seem to ignore such a cost as evidenced by the growth of collective funds. Investors seem to find that the benefits outweigh the costs of collective funds. The dissertation also provides a general profile of a representative local investor. The dissertation proceeds to analyse the effects that local and foreign investing funds have on the local capital market. One finds that there is a positive correlation between stock returns and fund flows. Moreover funds flows affect the stock returns and not vice versa. Thus, funds have increased liquidity to the market pushing up prices. On the other hand, foreign investing funds are absorbing the excess liquidity on the local capital market and aiding investors to have a more diversified portfolio. As such funds increase in popularity aided by the liberalisation of exchange control, one could realise that such funds could destabilise the monetary sector. This outcome will result if investors allocate a greater proportion of their savings into foreign assets, causing the local market to become illiquid. However, home-country bias coupled with local investors having already illegal foreign investments, renders unclear a definite pronouncement on such an issue.