Offshore listings broaden choice

Offshore funds are to be included in the Investment Management Association’s sector-by-sector fund rankings from next year – in a move that will increase choice and competition in the UK fund industry.

The addition of a further 586 funds run from Luxembourg, Dublin, Jersey and Guernsey to the listings is expected to encourage investors to look beyond the UK’s shores. Lipper, the fund performance monitor, points out that there are five times as many offshore funds with a track record of one or more years as there are UK-based equivalents. And several of the top-performing funds in their sectors are now based in Luxembourg and Dublin.

Rod Aldridge, head of UK retail distribution with Baring Asset Management, said: “Until now, UK-based funds have been the only funds visible to intermediaries on the popular databases and in industry performance tables. We welcome the progressive action taken by the IMA to make offshore-domiciled funds eligible for inclusion in their sectors.”

The offshore funds to be added to the IMA’s rankings all have so-called Financial Services Authority (FSA) distributor status. This means that investors with stakes in them pay capital gains tax of 18 per cent on any gains realised when shares are sold. This is a superior arrangement to the 40 to 50 per cent tax imposed on the sale of shares in offshore funds that are not approved by UK regulators.

In addition to the volume of offerings, another advantage of offshore funds is that they offer exposure to “niche” sectors. There are more funds listed outside the UK that invest exclusively in Brazil and China, for example, as well as a wider variety of absolute return funds. UK income investors on the hunt for higher yields can also access funds such as First State’s Asian equity income fund, as their search widens to markets outside the UK.

New research from HSBC and Baring Asset Management shows that the top- performing funds over the past year that invested in China, India, Latin America and global emerging markets were all offshore.

Advisers point out, however, that UK-domiciled funds still have benefits. First, they usually carry lower fees and charges on average. Across all actively managed equity funds, the average total expense ratio (TER), which measures a fund’s operating costs, for UK-domiciled funds is 1.66 per cent, according to Lipper. This is lower than the average 1.98 per cent TER reported for offshore funds listed in Luxembourg and Dublin or the Channel Islands.

A second downside of offshore funds is that hedge-fund style performance fees are often tacked on to them, says Mick Gilligan, head of research at advisory firm Killik & Co. On top of an initial fee of, say 5 per cent, a number of absolute return funds listed offshore charge an annual management charge of 1 to 2 per cent, plus a 20 per cent quarterly performance fee if returns over a set period exceed three-month sterling-based Libor (the inter-bank lending rate).

Managers at UK fund houses often choose to list funds in Luxembourg or Dublin to woo European investors as it is still unusual for UK-domiciled funds to be denominated in euros. “Germans are among the biggest buyers of funds in Europe. German buyers would rather buy funds in Luxembourg or Dublin than in the UK,” says Gilligan.