Wary investors start to look abroad

British investors remain wary of offshore-domiciled funds but fund supermarkets are boosting access and the Investment Management Association is set to include them in its onshore sectors

Britain remains a small market for offshore-domiciled mutual funds, according to the 2007 Investment Management Association (IMA) annual survey, published last month. While IMA member firms run £570 billion of assets for offshore-domiciled funds, British investors are less keen to go abroad and the association sees little change in the sales patterns. “As yet, there is little sign of significant sales of overseas-domiciled funds into the UK retail market,” it says.

But could offshore funds be on the verge of a breakthrough? Fund supermarkets are increasing their offshore ranges and improving access for British investors. Cofunds, for example, offers 15 Luxembourg-registered funds run by Aberdeen, Fidelity, Franklin Templeton, Henderson and Norwich Union. The firm added Smith & Williamson’s cash fund in May, and plans to bring other Dublin-domiciled funds onto the platform later in 2008.

FundsNetwork, meanwhile, provides access to offshore funds run by Fidelity and Schroders. The sector is also set to receive a boost from the IMA itself, as the association moves towards including offshore funds in its established onshore sectors, allowing easier comparison of foreign-domiciled funds and bringing them to a mainstream audience. As reported in last week’s Fund Strategy, some commentators, including Steven Brown at Principal Global Investors, say the change is imminent.

Mona Patel, the head of communications at the IMA, confirms that the collection of static data – including charges, total expense ratios, benchmarks and asset allocations for 620 offshore funds run by 24 providers – is underway. During the process, managers suggest the most suitable sector for their funds, or if new sectors are required. Patel says the IMA isalso trying out data collection from fund supermarkets to improve sales information on both offshore and onshore funds.

The IMA began publishing sales data for offshore funds in April 2007. According to the association, the funds generated gross British retail sales of £7 billion in 2007, compared with almost £70 billion for onshore funds. Redemptions caused net sales of offshore funds to fall to just £400m. James Davies, investment research manager at Chartwell and an Adviser Fund Index (AFI) panellist, says investors remain wary of offshore funds because they perceive them as higher-risk. However, he is upbeat on the likely impact of their inclusion within the IMA sectors.

“It will be a good thing,” says Davies. “It will build momentum and encourage firms like us to get involved.” Davies says he is “reviewing” Dalton Strategic Partnership’s Luxembourg-domiciled Melchior Selected Trust Pakistan Opportunities fund, which was launched in June.

David Wynn, investment director at Bentley Jennison Financial Management, and Brian Dennehy, the managing director of Dennehy Weller, are also positive on wider access to non-British funds. Wynn says Bentley Jennison does not use offshore funds in its cautious, balanced or adventurous client portfolios, but it has some investments in specialist areas. These include funds of hedge funds run by Matrix.

Dennehy takes a similar line, although he warns that a bigger range of funds also means more work for advisers. He says: “I would hate to be missing something, and I would like to see IMA sectors covering onshore and offshore funds. More choice is great, providing that as an adviser you have robust processes to sort out the wheat from the chaff.”

According to the IMA, British-domiciled funds account for just under €800 billion (£640 billion), or 10.1%, of the European market. Luxembourg is the most popular with over €2 trillion in assets, followed by France (€1.5 trillion), Germany (€1 trillion) and Ireland (€810 billion). Luxembourg and Dublin are the main offshore domiciles for British investors. British promoters account for 38% of total net asset value for Irish-registered funds and 11% of Luxembourg funds.

The Advisor Fund Index – A Summary

The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).