The methods used by Maltese investment firms to evaluate financial instruments’ prices

Abstract

Purpose: This study determines the kinds of fundamental and technical tools that are used by Maltese investment firms to value financial instruments. It also assesses the degree to which Maltese investment firms make use of technical and fundamental analyses. Finally, it investigates how Maltese investment firms' ways of using analysis tools differ from literature recommendations. Design: Findings were obtained by conducting semi-structured interviews and handing out surveys to people responsible for performing financial instrument analysis within each Maltese investment firm out of a sample. Findings: 46% of investment firms use a mixed approach; incorporating both fundamental and technical analysis while 11% of firms base their investment decisions on only technical analysis. The top-down and bottom-up approaches are used equally among those applying fundamental analysis, making use of a number of ratios and qualitative elements such as the market share of a company, innovation levels and management skills. Fundamental analysis is applied according to literature recommendations except for some differences in the emphasis placed on certain elements within the fundamental approaches. Regarding fundamental analysis, apart from operating performance ratios, almost all types of financial ratios are used by means of a scorecard. These are often used to compare against competitors’ ratios. Relating to technical analysis, the 2 most prevailing chart patterns used are the Price Channel, for identifying trends, and Support and Resistance levels, for confirming price reversals and predicting bottoms of downtrends. The 2 most frequently used indicators are the Simple Moving Average and Bollinger Bands. Technical indicators are used in conjunction with chart patterns to identify the most appropriate entry points. On a separate note, investment advisors rely on performance based models to refer clients to funds. Conclusions: Maltese investment firms see fundamental analysis as the most effective form of analysis while technical analysis is seen as a supplement to fundamental analysis. The ways in which technical analysis and fundamental analysis are used differ according to the type of financial instrument being analysed. For private equity, purely fundamental analysis is used while government bonds are analysed using yield curves. Maltese corporate bonds are often not rated and an internal ranking system with multiple fundamental elements is often implemented. Forex can be traded by implementing only technical tools. Investment firms incorporate the widest variety of analysis methods in stock analysis. Value: This study is beneficial for understanding the Maltese fund management and investment advisory industry. It can be used as a stepping stone by Maltese investment firms to generate new financial instrument analysis ideas.