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Offshore offers choice and performance

Although offshore funds are included in the IMA fund sectors and available to buy on popular platforms such as FundsNetwork, for some people they retain a certain louche image and lack the respectability of UK-domiciled funds.

To view centres with strong regulatory regimes such as Dublin and Luxemburg as somehow exotic is quaint in these days of global, inter-connected economies, when the other side of the world is a phone call or email away and much of what we buy is manufactured in the thriving economies of Asia.

There undoubtedly is a need for proper due diligence before investing in offshore funds. Advisers should consider the domicile of a fund, its structure and the investment case before committing capital.

However, that is really no more than needs to be done when looking at onshore funds already, after all, the Arch cru funds were UK domiciled but still failed, as many investors found to their cost.

The point is there is nothing intrinsically risky about the fact that a fund is domiciled offshore, any more than an onshore registration should negate the need for careful research.

Investors familiar with the big international investment houses may find some comfort in the fact that most of these well established, well known companies offer comprehensive offshore fund ranges.

There is one additional thing advisers should pay particular attention to for offshore funds and that is the currency. Sterling classes may be available but euro or US dollar classes are likely to be more common.

Currency movements can enhance investment returns as well as erode them but investors who want to protect themselves from this added volatility may want to check if a sterling- hedged share class is available.

But why invest in an offshore fund at all? The first reason is choice. Compared with onshore funds, offshore funds include a much wider range of single-country and sector funds, as well as funds investing in more specialist areas such as South-east Asia or developing bond markets.

This can be an advantage for investors who want to take focused exposure to a particular area or implement asset-allocation views in their portfolios with pinpoint accuracy.

The other reason to look at offshore funds is performance. By including a wider range of funds when selecting the most appropriate vehicle, it is only natural that the most attractive combination of risk and return will sometimes be delivered by an offshore fund.

Switched-on investors have known about the advantages of looking at offshore funds for years. That is why many of the City’s leading multi-manager teams invest regularly in offshore funds on behalf of their clients.

Until recently, however, it has not always been easy for advisers to get full information about offshore funds.

Fortunately, that is now changing. Information on company websites is more comprehensive than it used to be and the major platforms have started to add offshore funds to the range available. The recent move by FundsNetwork to increase the selection of offshore funds available on its platform is to be applauded and other platform operators will no doubt follow suit.

The decision of the IMA to include offshore funds domiciled in Europe in the sectors – provided they fit the sector definitions – has been a major step forward in increasing the visibility of offshore funds.

And they have proved popular with investors. Assets managed in these funds have increased by more than 20 per cent over the past year, to £31.8bn.

The one fly in the ointment has been the growth of the specialist sector.

As many of the offshore funds added by the IMA invest in emerging markets, they have tended to fall outside the other sector definitions to land in this catch all sector. As a result, there are now over 300 funds in the specialist sector.

It would be helpful to have more granularity here to make it easier to compare funds with similar investment universes and benchmarks.

As the number of funds in the universe grows, calls to see the introduction of more specific sectors are likely to increase.

Ian Pascal is head of marketing and communications at Baring Asset Management, London


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