Offshore funds have traditionally been viewed as somewhat exotic and even slightly scary investments, suitable for sophisticated tax exiles but without much to offer for ordinary investors. We think that view is outdated.
Most international investment houses offer offshore fund ranges, typically located in centres with strong regulatory regimes such as Dublin and the Channel Islands. To exclude these funds from consideration can mean missing out on the breadth of opportunities on offer and the attractive returns these funds can deliver.
Offshore ranges include a much wider selection of single country and sector funds than their onshore counterparts, as well as funds investing in more specialist areas.
Having access to this wider range of opportunities can be a real advantage for investors looking to gain focused exposure in certain areas or to implement asset allocation views with pinpoint accuracy. This is one of the reasons why many multi-manager teams invest regularly in offshore funds on behalf of their clients.
The other reason to look at offshore funds for UK investors is simple – the performance. No single investment company has a monopoly of talent. By including a wide range of funds, it is only natural that some of the managers will be able to deliver a highly competitive combination of risk and return.
This is particularly the case when it comes to investing in international equity markets. Region by region, the list of top-performing funds looks very different if you add in offshore funds, offering investors the potential to make higher levels of return in each of these areas compared with onshore funds alone.
Why do investment companies not simply offer mirror images of these funds as unit trusts? Sometimes they do but very often it is not economic.
For example, a company might estimate that there is enough demand for a particular product in a single country to be able to raise, say, £50m within a few years. That is the level at which many investment companies take the view that the total expense ratio for a fund starts to become competitive.
However, if the same amount could be raised in European countries and further afield by domiciling the fund in Dublin, then setting it up as an offshore mutual fund becomes a more attractive business proposition. This is why offshore funds are so popular with international investment houses and why UK unit trusts can sometimes seem like the poor relation when looking for funds investing in specialist areas.
The economies of scale which are possible when a fund grows above a certain size can also mean that the TERs of popular offshore funds are lower than for onshore funds. That is always welcome news for investors. Annual management charges are generally competitive with onshore funds and can even be lower in areas where competition is strong.
Until recently, it was not always easy for advisers to get full information about the range of offshore funds on offer. Fortunately, that is now changing. Information on company websites is much fuller than it used to be and the press are gradually moving away from an exclusive focus on unit trusts to look more widely at the full range of funds available.
The decision of a number of platforms to add offshore funds means that investing is becoming increasingly easy. Cofunds, FundsNetwork and the Skandia platform are in the process of adding offshore funds to their ranges and more are likely to follow if interest remains high in these investment vehicles.
There are a few things discerning investors should be aware of. The domicile of the fund is one thing. Consider whether it is a well known, well regulated regime. Another is the fund currency. Sterling classes may be available but euros or dollar classes are likely to be more common and this could have an effect on returns. Above all, we do not believe investors should feel nervous about investing in offshore funds. They really are not as scary as you might think.
Ian Pascal is marketing director at Baring Asset Management