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A sense of place

Fidelity is to start paying 0.5 per cent renewal commission on its offshore fund range, saying IFAs are increasingly seeing offshore funds as mainstream investments.

Traditionally, there has been some stigma attached to more far-flung offshore outposts, such as Bermuda and the Cayman Islands, due to a perceived lack of regulation in these domiciles. Closer to home, however, Dublin and Luxemburg are thriving.

Hargreaves Lansdown head of research Mark Dampier believes the offshore sector suffers from a lack of media attention which may have contributed to its relative lack of credibility for some investors and says around 95 per cent of the funds that HL recommends are onshore.

He says: “When you have a very successful onshore fund, it tends to get a lot of attention and inflows. A successful offshore fund does not get the same attention or inflows as an onshore one. There are so many funds now and, historically, offshore funds have had a dodgy reputation. People want to know what is the necessity for going offshore in the first place.

“There is more money in Dublin because funds based there can be marketed to Europe but Luxemburg has been viewed as arrogant in the past and administration can be terrible.”

Baring Asset Management sales and marketing director Ian Pascal says BAM has always sold more offshore funds than onshore funds and offshore investments are becoming more widely accepted. He believes the introduction of Ucits III and the possibility of the Investment Management Association bringing the offshore sector into its statistics will boost offshore investment.

However, Pascal says: “The changes will make little difference to UK growth and UK equity income fund sales. These areas are huge and will continue to be but we may see more offshore influence in growing sectors such as emerging markets and international fixed income.”

He says Baring’s two biggest offshore funds in these areas are the emerging European and China funds, having assets of $2bn and $1bn respectively.

He believes the standardisation of fund regulation across Europe brought about by Ucits III will bring increased competition from European investment houses although one stumbling block may be tax differences between European states.

Familiarity with the tax and administrative regimes of Dublin and other near neighbours will increase their popularity for investors, he says.

Pascal says: “We have launched hedge funds recently in Dublin. There is a feeling that the closer geographically the domicile is, the closer the business philosophy is to mainland UK. This is why the Channel Islands are doing well on hedge funds and Dublin and Luxemburg, too, because people are familiar with their administrative and taxation processes. The further away you go, the more nervous people will get.”

Threadneedle Investments communications director Richard Eats says: “Over the last year, there has been a renewed interest in funds that involve a huge appetite for risk, such as Bric and emerging markets funds. The funds in Europe often have long-established track records but the big houses want to see £30m or £40m in a fund before they take it seriously.

“People have been keen to import Dublin or Luxemburg funds with good track records, particularly for discretionary fund managers. In the 1980s, there was a lot of interest in Japan funds, which subsequently went out of favour.

“Threadneedle has a big European business but all the funds are based in the UK and sell into Europe. We were told it would not work but it has.”

Eats believes Ucits III has helped with selling funds across borders. He says: “We have had the power to sell across borders for years but, with the Ucits directive, you just have to show the regulator your Ucits certificate and you can sell in.”

Artemis product and communications director Nick Wells says: “Ucits legislation has been welcomed around the world because there is a quality guarantee that a Ucits fund will work for investors.

“Luxemburg is awash with financial services companies and office development over the last 12 years has been vast. You do not have to pay stamp duty so it becomes easier to be more transparent and you do not have to incur additional charges.”

Wells says onshore funds still have many advantages and ultimately most investment houses would prefer to be in one place, regardless of the location.

“The UK is good at dual-taxation issues and you can offset higher levels of tax elsewhere. In the long term, you would want to be in one jurisdiction only,” he says.

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