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The gates are open for offshore funds

Offshore funds have been largely ignored over the years, with UK investors having a preference for those based domestically.

However, is that simply because onshore funds are better marketed and thus better known to advisers? Or is it because offshore funds have an unfair stigma attached to them and their lack of presence on UK platforms makes them more difficult to buy?

Recent movements in the industry may change that. With the RDR and the IMA’s inclusion of offshore funds in its sectors and individual company changes to fund ranges in order to boost their presence on platforms, the profile of offshore funds is rising. If advisers and investors continue with a sole preference for domestically based funds, they could be missing out.

Admin issues have been seen as a hurdle in the full-scale inclusion of offshore funds on many UK platforms. The likes of Cofunds and Fidelity FundsNetwork do provide offshore portfolios on their service but these are not many. One of the concerns for platforms has been the issue of dealing with various currencies. Offshore funds tend to feature a hedged sterling share class and platforms need to include the exchange rate on contract notes, something they do not have to do for domestically based funds.

Cofunds says for its retail clients it only links to sterling share classes of offshore funds to limit currency issues such as conversions taking place outside the fund. It says: “We do not feel it is appropriate to offer multi-currency instruments to advisers due to the increased risk of the FX and the added complications of processing foreign exchange transactions.”

Last week, HSBC added sterling share classes to nine of its emerging market-focused offshore funds to get round this issue. HSBC Global Asset Manage-ment UK managing director Andy Clark says: “Previously, the lack of access-ibility to subscribe, redeem and receive sterling-quoted prices has been cited as an obstacle for inclusion by many platforms and, with this removed, we expect these key HSBC funds to become far more widely accessible via these important distributors.”

Another stumbling block in getting offshore funds noticed was overcome in April when the IMA began including them in its sectors. Within three months, over 175 funds had been forwarded by their respective management companies for inclusion, with more expected to join before the year is out as the IMA undergoes another raft of elections in this regard. The inclusion of these funds has proved to highlight a greater depth of choice for investors, with many of these foreign-domiciled funds appearing at the top of their respective domestic peer groups.

Baring Asset Management head of UK retail distribution Rod Aldridge says: “Historically, there was often a misconception that investing in offshore funds was less efficient from a tax, fee or regulatory point of view. The reality is that offshore products not only offer, in many cases, better performance than their onshore peers but are also competitive when it comes to all these other issues.”

According to Financial Express data, in the Asia excluding Japan sector, there are 14 funds domiciled in either Luxemburg or Ireland. Of these, three are in the top five of the sector over one year to October 1. GAM Star China equity based in Ireland is the best-performing fund over the 12 months followed by Luxemburg-based Invesco Asia consumer demand and Franklin Templeton Asian growth.

In the global emerging markets sector there are six offshore funds listed, two of which appear in the top 15 over one year. Again, it is an offshore portfolio that leads the sector – JPM emerging markets small cap. Global growth is another popular area for offshore fund inclusion, with 15 funds domiciled outside the UK. In this case, only one appears in the top 15 performers – JPM JF global focus, ranked ninth.

The global bond sector has 17 offshore funds, seven of which are ranked in the top 15 and two are in the top five, Principal preferred securities and Templeton global total return. An advocate of offshore fund inclusion for years, Clark says it is about that the provision of choice, not necessarily that offshore funds perform better than onshore ones.

He says: “Until recently, offshore funds missed the radar screens of investors and intermediaries who relied heavily on the IMA sectordriven performance league tables. Now, these better-performing funds are clearly visible amid the popular databases. This has levelled the playing field and, as a result, investors seeking emerging market funds have more good quality choice.”

HSBC Global Asset Management has registered 11 funds for inclusion in the IMA sectors, and Clark says the funds have had increased interest since becoming more visible to UK investors and intermediaries. Another argument for onshore fund dominance is the fact that advisers know them better and have greater access to the managers.

The UK’s star fund manager mentality may lend itself to a preference for onshore portfolios but many offshore portfolios are run by stars on a more global stage. For instance, Legg Mason’s Bill Miller, Templeton’s Dr Mark Mobius and HSBC’s Sanjiv Duggal are well known internationally but would the average UK investor recognise their name? Or would they prefer someone in the UK they do recognise?

Some of these offshore names may be new to investors but many have featured within multi-manager portfolios for some time. For instance, the Templeton global total return bond fund is a popular choice among fund of fund managers, as is GAM Star China and many of JPM’s portfolios, under-scoring the fact that a lot of these funds are not esoteric offerings, just little known to mainstream investors.

With the gates open for offshore funds to become more accessible, UK-focused groups could face increased competition. Advisers could also be overwhelmed with the number of new funds they may have to assess and after the RDR that may be another incentive to move away from a fund selection role. Whatever happens, the added choice given to investors cannot be seen as a bad thing. Understanding that choice, though, is another matter.


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