The Panel Peter Hicks – head of IFA channel, Fidelity International Jasper Berens – head of UK retail sales, JP Morgan Asset Management Paul Truscott – director of product development, Schroders
Peter Hicks – head of IFA channel, Fidelity International
Jasper Berens – head of UK retail sales, JP Morgan Asset Management
Paul Truscott – director of product development, Schroders
What benefit will it bring to offshore funds by being included in the IMA’s sales figures?
Hicks: One factor blocking sales of offshore funds in the UK has been that they are not very visible to advisers and investors. The IMA including the funds in their statistics is the first step towards resolving this issue.
Berens: We see the IMA’s move to list offshore funds as giving financial advisers in the UK a greater choice of funds, funds managers and asset classes. But it also gives them a greater wealth of information that was otherwise difficult to access.
Truscott: IFAs already have a big challenge in advising on around 2,000 UK funds and they will naturally look at a number of factors when advising clients, including performance. As many IFAs use the IMA sectors to select their funds, it is imperative that offshore funds are included in those sectors.
Is the potential market in the UK for offshore funds currently being realised?
Hicks: No. First, offshore funds rarely appear alongside onshore funds in statistics and performance tables in the UK and have therefore suffered from a lack of visibility. Second, they are not generally accessible via platforms and life company links – the regular route to purchase for many advisers. We are beginning to see this change but there is still a long way to go.
Berens: Certainly not to its full potential. Under Ucits regulation, we expect this to change significantly though. The rest of world is buying these funds, be they investors from Germany, France, Italy, Latin America, Asia or America. Anything that highlights and promotes understanding of these offshore products can only be a good thing. The IMA’s decision is a marked step towards breaking down perception barriers and integrating the two.
Truscott: In the UK fund universe, there are approximately 2,000 funds totalling £347bn. However, there are an additional 3,000 offshore Ucits funds totalling £742bn that could be made available to UK retail investors.
In theory, a Ucits fund authorised in its home state should be able to be registered for sale in any other EU state without the burden of additional regulation, or “gold plating”, imposed by the country into which it goes on sale.
However, some countries have made it difficult for offshore funds to be sold by maintaining a number of “protectionist” policies. These can be both regulatory and also tax policies. For many years, the UK has been one of the worst offenders of these protectionist policies.
A number of significant barriers such as tax and distribution barriers have hindered cross-border fund management firms from effectively distributing offshore funds in the UK.
Why do some advisers not recommend or use offshore funds?
Hicks: Most advisers (and their clients) do not care where a fund is domiciled as long as they have a sterling share class. However, the funds need to be visible and accessible.
Much of the time, the reason advisers do not recommend certain offshore funds is because they are not available for purchase through their usual routes.
There are a small number of platforms which have added some offshore funds to their range, including FundsNetwork and Cofunds, but there are a large number of platforms and life companies which have not. This tends to be for logistical reasons and we know a number of companies are looking to change this.
It might take time but we expect offshore funds increasingly to be available on platforms.
Berens: For some reason, many UK advisers still see the offshore sector as a murky world despite the fact that they often perform better than their onshore counterparts. Offshore fund launches are often cheaper and there is a great demand from European investors. But for UK investors, perhaps for the reason that they are often denominated in currencies other than sterling, the same is not true.
To date, advisers have had to search long and hard to gain access to this information – in a competitive market, where many of them are adjusting to new regulation and fee structures, this can be a very costly exercise for advisers.
Truscott: For many years, the biggest barrier for offshore funds was the problem of the Inland Revenue’s distributor status. However, in March 2004, the Inland Revenue changed its distributor status regime so that the distributor status test was applied at the share class level rather than at the “umbrella” level.
What this meant, in practice, was that fund management groups could create new distributing share classes in their existing offshore fund ranges that satisfied the three main tests set out by the Inland Revenue.
As a consequence, UK investors in distributing share classes now have their income taxed as income and their gains are subject to capital gains tax (which is the same tax treatment as UK funds). Another barrier was distribution. To be able to distribute successfully offshore funds in the retail market, the funds must be on IFAs’ radar screens.
How important is the inclusion of funds on fund platforms and interest in specialist funds for driving sales of offshore funds?
Hicks: Inclusion on platforms is very important. Interest in specialist funds is less important. Many offshore funds are not necessarily specialist in nature. The most important thing for driving their sales is simply making them more accessible and visible.
Berens: Very important. I think that the next stage is for advisers to start buying offshore funds, which would lead to more products becoming available on wrap platforms and fund supermarkets.
There is always a need for investors to build a diversified portfolio. And, by giving them and advisers greater access and insight into the more specialist offshore offerings, they will now be able to do so in a way that fits into their individual risk profile.
Truscott: Now that the fund marketplace is becoming more European focused, other distribution channels are opening up. With the successful emergence of fund supermarkets, more opportunities are arising for groups to distribute their funds via these platforms.
Are you seeing strong sales of offshore funds through onshore platforms yet?
Hicks: Where the funds are available on platforms, then there are strong sales although we would still expect sales to grow. For example, our India Focus and China focus funds are both offshore funds but both have been extremely popular funds on FundsNetwork. Demand for them has also led to them being included on the CoFunds platform more recently.
Berens: No. At present, it is very limited due to operational issues on the side of the platforms and the demand simply is not there yet. Even though JP Morgan is the leader in sales terms of offshore funds in the UK and Europe, we are selling our offshore offering through multi-managers, brokers and private banks at present.
Truscott: There seems to be a strong preference still for UK domiciled funds.
What advantages do offshore funds offer for UK investors?
Hicks: They offer investors more choice. As long as the funds have a Sterling share class and are available on a platform, they should be considered alongside their onshore counterparts when taking investment decisions.
Berens: Greater diversity for one. We currently have 131 offshore funds, the vast majority being Luxemburg Sicavs, totalling $206.5bn in assets under management and many offer access to specific investment areas that many onshore funds don’t.
Investing solely in the areas of India, Taiwan or Singapore on an individual basis is rarely, if at all, accessible through onshore offerings. They also offer the ability to take advantage of currency fluctuations when denominated in Euros or (US) dollars, for example.
But also, it must be said that the structure of offshore funds is extremely similar to their onshore counterparts and therefore hold many of the same advantagesTruscott: An obvious advantage is the wider choice that could be made available to investors allowing them to access new types of funds and fund managers that have previously not been available.
The wider choice will increase competition which, coincidentally, is probably the reason why it has been so difficult to remove the barriers to entry.
The playing field is not yet level between onshore and offshore funds but is levelling out. During the next 12 to 18 months, the choice of funds available to investors should expand greatly as the UK fund industry finally embraces Europe.