Do you use offshore funds in portfolios?Philbin: We do buy offshore funds for a number of reasons. In some jurisdictions, features such as performance fees, alternative investment approaches, flexible remits and total-return strategies are more commonplace than in the UK onshore market. All these can be useful tools in constructing a balanced fund of funds portfolio. Some of the best investment talent choose to operate offshore, so it does not make sense to exclude them. Our fund screening process – called traffic light analysis -filters all onshore and offshore funds available to us, which broadly means a universe of around 14,000 funds. Hambi: The Gartmore portfolio range of multi-manager funds seeks to invest in the best funds available and we have a significant portion of our assets invested in offshore funds, indeed, of the 33 funds in which we invest, almost 25 per cent are offshore. The advantage is choice. Many of the investment boutiques which have emerged in the last decade have chosen to launch offshore funds as they allow increased investment flexibility, such as high cash weightings and, importantly, the ability to charge a performance fee, which aligns the interests of the manager with the investor. We also like the ability of offshore funds to cap the size of assets, as refusing further investments keeps capacity constrained investment strat-egies viable for existing investors. This means that truly skilled investors are better able to manage investor’s money utilising the increased flexibility while the performance fee element allows the manager to achieve their desired remuneration without having to manage huge, cumbersome funds. Dampier: It cannot be said that we go out of our way to use offshore funds in the portfolios. Our approach to funds is to select funds with fund managers who we believe add value above what we might expect for their style and market capitalisation. We do this through our own in-house proprietary system and to us, generally speaking, it does not matter if the fund is on or offshore. For UK investors, I cannot really see any advantage in using an offshore fund other than superior investment performance. Which offshore funds do you currently like? Philbin: We presently have offshore investments with the likes of JO Hambro Capital Management, BDT Invest and Thames River. All the funds were chosen after in-depth due diligence was conducted and all have fantastic managers and processes. One of the features we like about the JOHCM funds is they have performance fees which align their salaries/ bonuses with their returns. In contrast, BDT has the ability to go 100 per cent invested or 100 per cent cash which is quite an unusual feature. Hambi: We are currently invested in: JO Hambro UK growth – multi-cap approach to UK equities with a strong sell discipline. JPMF US dynamic – a quantitative approach to delivering strong returns from US equities. Findlay Park US smaller companies – diversified approach to investing in under-researched smaller companies in the US. Thames River global emerging markets – great combination of top-down with strong stock selection from one of the most highly resourced emerging markets teams. Invesco Asian equity core – the lead manager is a highly experienced investor who has benefited from the recent recruitment of further analysts. M&G property fund -a major player in this area and able to access deals that others are not resourced to complete. Baring high yield – specialist skills of a strong team with a very flexible approach. JO Hambro Japan – great stockpicking manager who has a record of adding value in Japanese mid-cap companies. Dampier: Currently, we have the Old Mutual UK select smaller companies fund run by Luke Kerr on our recommended list. The simple reason is investment performance has been quite superb. The fund is relatively small at about 35m and this has allowed it to get into smaller special situations. The UK small and mid-cap team under Ashton Bradbury is probably the very best in the industry. This fund would be better known if it was onshore. Onshore funds get better publicity. Having said that, I am delighted that it is a small, nimble fund and I would prefer it to remain that way. For which types of clients are offshore funds suitable? Philbin: It is my job to choose the underlying investments on behalf of our investors, looking across a universe of offshore and onshore funds.I suspect that most private investors would not otherwise get exposure to offshore funds, so this indirect route widens their access to fund manager talent. Offshore funds might be worth considering for a wide range of clients. One consequence of the recent UK Budget is that many of these, if they are recognised or authorised by the FSA, will now be available for UK tax wrappers such as Isas and child trust funds because of a broadening of the definition of eligible investments. If you are buying offshore funds outside of tax-free wrappers, it is important to consider the tax situation if you are investing for income. I suggest that UK-based investors should focus on growth rather than income funds when investing offshore. Hambi: Why are we using offshore funds in the first place? Because we believe there are certain non-UK-domiciled portfolios out there which are better than onshore funds. It is a matter of whether or not an investor has the time and resources to do the necessary research themselves to find out what they want. Where a fund is domiciled should not be an issue. It is more important to access a superior manager and process. Dampier: In my view, offshore funds are suitable for any client providing the fund performance is up to scratch. However one of the problems we do find with many offshore funds is not related to investment performance but administration which we often find poorer and we also feel that clients often believe there is less protection in buying an offshore fund. Offshore funds are more likely to be bought by clients working and living abroad because of tax considerations. What role do offshore funds play in your portfolios? Do you only select FSA-recognised offshore funds? Philbin: Due to compliance restrictions on our portfolios we can only invest in recognised and authorised funds that have distributor status. We presently have about 15 per cent of our unfettered assets in funds that are based offshore. Hambi: We are restricted to selecting only those offshore funds that are FSA recognised, otherwise we would lose our own FSA registration. Further more we recognise the tax issues for UK-domiciled products that invest in non-distributor offshore funds by screening them out of our universe, but we do try to encourage the formation of distributor share classes. Dampier: We only select FSA-recognised offshore funds but the only part they play in a portfolio is once again one of performance. What do investors need to think about when choosing offshore funds? Philbin: Are the funds regulated? Are they authorised and have distributor status? What is the investment objective? Who manages the fund, how long have they managed it, what is their investment approach? How long am I going to invest for? Does the fund have a benchmark similar to what I am looking for? Hambi: The regulations for offshore centres are different to those in the UK which can impact the level of expenses a fund may have to pay and therefore the consequent reduction in return for the investor. It is our experience that the total expense ratio for offshore funds are generally higher than for those domiciled in the UK so it is worth investigating what the true cost of accessing an offshore fund is and whether the additional charges (if there are any) are sufficient enough to warrant selecting an alternative fund. We have access to a variety of technologies able to help us monitor the funds we select from afar, such as performance and risk data. These are expensive and not normally an option for individual advisers or their clients, so many rely on publicly available data for their analysis of these areas. This can be restrictive in terms of the depth, frequency and variety of information available and while this is also the case for onshore funds we would argue that offshore funds tend to be covered less well, as not all offshore groups have established a marketing operation in the UK. Dampier: Apart from performance, investors need to look at the TERs of offshore funds which in my view are often considerably higher than the onshore funds. The other factor is that many offshore funds will have performance fees related to them and investors need to understand how these work. Do you welcome the increase in funds being marketed in the UK following the relaxation in the tax treatment of offshore funds? Philbin: Absolutely – it means that fund of fund managers should benefit as the general investment IFA will have an even bigger investment universe from which to do their research. Hambi: We welcome the changes in tax treatment for offshore funds as it gives investors more opportunity to access funds which were previously unavailable. The issue that arises from this is the investor already has a choice of some 2,000 UK-domiciled funds which is bewildering enough but now there are many more to add to this, perhaps another 3,000. The challenge remains the same – to identify the best and we welcome anything which increases the quality of funds available to us and other investors. Dampier: I am quite happy to have greater choice. I have to say that with some 1,500 Oeics and unit trusts available onshore you do wonder how many more funds we need. Indeed, I suspect that there are more funds than there are shares in the UK stockmarket. Is it any wonder that investors do not know where to start? Richard Philbin, head of fundof funds,F&C Asset ManagementBambos Hambi,head of multi-manager, GartmoreMark Dampier, research director, Hargreaves Lansdown
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Financial advisers around the world face a new frontier of challenges, including increased fee pressures, tightening regulations, growing competition from automated advice platforms and continued market volatility. In order to better position themselves for business growth, advisers will need to assume three key roles. Click to download full article
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