LONDON, ENGLAND - NOVEMBER 08: Queen Elizabeth II looks at a selection of jade objects on display at the reopening The Sir Joseph Hotung Gallery at The British Museum on November 8, 2017 in London, England. (Photo by Daniel Leal-Olivas-WPA Pool/ Getty Images)
The Duchy of Lancaster invested £10m for the Queen in offshore funds © Getty

Last week’s Paradise Papers revelations detailing the tax affairs of the rich and famous were a dream for newspaper headline writers. From the Queen to Formula One driver Lewis Hamilton, allies of Donald Trump, the US president, to actors in Mrs Brown’s Boys, the British sitcom, a host of well-known figures were shown to have made use of structures based in offshore tax centres following the leak of 13.4m documents from Appleby, the law firm.

But behind the headlines, the stories shine a spotlight on the investment arrangements of several public bodies at the heart of the British establishment, including the Duchy of Lancaster, the Queen’s estate, the UK parliamentary pension fund and the endowments of Oxford and Cambridge universities. What is most revealing is not so much their use of offshore funds — which are a common feature of the global asset management industry — but the types of assets in which they invest.

It raises wider questions about whether the institutions’ beneficiaries and guardians have knowledge of the more controversial and arcane investments, and whether their potential returns are worth the reputational risk they carry.

“This leak will keep members of the fourth estate busy for quite some time,” says John Ralfe, an independent pensions consultant, referring to the press. “But it also raises a whole load of questions about investment consulting and institutional investors.”

The relationship between investors and their consultants was one of the areas of focus in the much-followed Asset Management Market Study, released by the UK’s Financial Conduct Authority this year. The regulator found that many institutional investors struggle to monitor and assess the advice they receive from their consultants.

“There is no standardised framework to assess the quality of advice or to help investors assess whether they are achieving value for money,” it said.

Among the Paradise Papers’ revelations was that the Duchy of Lancaster, a £519m portfolio of assets managed on behalf of the Queen, had invested a total of £10m in two offshore funds. Through its investment in one of these, Dover Street IV Cayman fund, based in the Cayman Islands, the duchy holds a £3,208 stake in BrightHouse, a controversial rent-to-own homeware retailer.

Not only had BrightHouse relocated to Luxembourg to lower its tax bill, but it had also recently been ordered by the FCA to pay £14.8m in compensation over irresponsible lending. The embarrassing revelation recalled a similar disclosure four years ago that the Church of England indirectly held a £75,000 stake in Wonga, the payday lender, while Justin Welby, the Archbishop of Canterbury and head of the church, had railed against its practices.


Percentage of assets managed in Europe that are domiciled in Luxemburg and Ireland, with just 10 per cent domiciled in the UK

Despite the Queen being the main beneficiary of the duchy, the organisation was quick to point out that she has very little to do with the day-to-day running of the portfolio. This is delegated to a council picked by the sovereign on the recommendation of the chancellor of the Duchy of Lancaster, currently Patrick McLoughlin MP.

The council includes Sir Alan Reid, keeper of the privy purse, who manages the monarch’s finances, Martin Beaumont, the former Co-operative Group chief executive, and Kathryn Matthews, a non-executive director at several investment companies, including Rathbone Brothers and Hermes Fund Management.

Having grown over more than 750 years through a series of inheritances and land confiscations, the duchy is heavily concentrated in commercial, residential and agricultural property. Just 10 per cent is dedicated to financial assets, which the duchy’s annual report says provides much of the overall portfolio’s liquidity. It is within the financial assets slice that the offshore investments were made.

“Why on Earth are they faffing around and having small amounts in different places?” says Mr Ralfe, who believes the portfolio would have been much better served by investing the 10 per cent financial assets in index funds.

“It boils down to the fact that investment consultants are in the business of providing complex solutions, recommendations and approaches because they get paid on a time and materials basis,” he adds. “If you put forward a simple idea you’re not going to be paid as much.”

The duchy’s investment portfolio is overseen by Stanhope Consulting, the advisory arm of Stanhope Capital, an investment company that manages $9.5bn for wealthy families and charities. The financial assets have been managed by Newton Investment Management, a boutique under the Bank of New York Mellon umbrella, since 2004.


Percentage of UK funds that do not have any independent directors, compared with just 20 per cent for those domiciled overseas

The endowments for the universities of Oxford and Cambridge were both shown to have invested tens of millions of pounds in offshore funds, including alternative funds domiciled in the Cayman Islands and Guernsey. These funds invested significantly in oil exploration and deep-sea drilling companies, including making a £1bn commitment to Royal Dutch Shell, the Anglo-Dutch oil and gas company. Both Oxford and Cambridge are under pressure from their staff and students to divest fully from fossil fuels.

Another investor in the fossil fuel partnership was the Universities Superannuation Scheme, the UK’s main pension plan for academics, which had invested £88m.

Prem Sika, professor of accounting at the University of Sheffield, says public institutions need to be especially careful to make sure they are not invested in assets their beneficiaries do not agree with.

“Almost every academic would like to see ethical investments and greater transparency,” he says. “If the funds are going to invest in funds that are highly questionable from an ethical point of view, then they need to come out with a rationale as to why they are doing it.”

More than 40 per cent of assets managed in Europe are in funds domiciled in Luxemburg and Ireland, with just 10 per cent domiciled in the UK, despite London’s dominance as a base for asset managers.

One criticism often levelled at offshore funds is their lack of strong governance. But research by LCP, the pension consultants, shows that despite offshore centres often being seen as the Wild West, funds domiciled outside the UK typically have more independent directors. It showed 56 per cent of UK funds that it studied did not have any independent directors, compared with just 20 per cent for those domiciled overseas.

Get alerts on Tax when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article