In many ways, we have had a similar experience in the investment management industry. Historically, the principal offering was onshore funds. They had the advantage of being familiar to consumers and intermediaries and many had excellent track records in mainstream asset classes.
However, they were not able to meet everyone’s needs. Just as sports fans today turn to satellite and cable television, investors with particular requirements are looking to offshore funds for a wider selection of investment strategies.
Until recently, offshore funds were viewed as slightly exotic, with little to offer the average investor. We believe that view is outdated. Today, most international investment houses offer offshore fund ranges, typically located in centres with strong regulatory regimes such as Dublin and Luxemburg.
To exclude these products from consideration could mean missing out on the wide range of investment opportunity and the returns such funds can deliver.
That breadth of opportunity is one of the main advantages of offshore funds. Compared with their onshore counter-parts, offshore vehicles include a greater range of single country and sector funds, as well as funds investing in more specialist areas such as emerging market equities and bonds. This can be an advantage for investors wanting exposure to a specific area of the market or who want to implement asset-allocation views in their portfolios with pinpoint accuracy.
The other reason to look at offshore funds is performance. By including a more extensive range of funds when selecting the most appropriate vehicle, it is only natural that the most attractive combination of risk and return will be sometimes be delivered by an offshore fund.
Savvy investors have been looking at offshore funds for years and many of the City’s leading multi-manager teams regularly invest in such funds on behalf of their clients.
Until recently, it was not always easy for advisers to get full details about the range of offshore vehicles on offer by investment management houses. That is now changing. Information on company websites is much more comprehensive than it used to be and the major platforms have started to add offshore funds to their offerings.
In turn, sales of offshore funds are rising sharply, doubling over the last year to £1.16bn. The final seal of approval came from the Investment Management Association, which last year chose to include offshore funds when constructing the absolute return sector, and it is likely to give the go-ahead later this year to a plan to introduce offshore funds in all the major sectors in 2010. Expect to hear more about offshore funds from the main providers over the coming year in preparation for this important change.
There are, however, two caveats that investors should be aware of. First, is the domicile of the fund a well known, well regulated regime? Second, the fund currency. Sterling classes may be available but euro or dollar classes are likely to be more common.
Currency movements can enhance investment returns as well as erode them and investors who want to protect themselves from this added volatility may want to check whether a sterling-hedged share class is available.
Ian Pascal is marketing director at Baring Asset Management