Differences between onshore and offshore funds blur as rules change and entry requirements to sectors relax. Helen Burnett-Nichols examines what this slow, inexorable trend and wider choice means for advisers and investors.
“From our side, we have always had a significant offshore business into the UK and the reason being is that we have a significant proportion of our business is done through the discretionary marketplace,” he says. About a third of the business that Schroders writes with discretionary intermediaries is into its offshore funds, says Stoakley, and this is also trending more towards the advisory community.
In terms of fund sales, the IMA reports that net retail sales of offshore domiciled funds reached £147.8m in June 2010, compared with £60.3m# in June 2009. Last year, net sales of non-UK domiciled funds were mostly driven by retail investment, says the association.
While in theory, says Stoakley, every pound invested into an offshore fund is a pound not invested into an onshore fund, it is not likely to get to the point where UK-domiciled funds are left behind – but the playing field may eventually even out.
“One might get to a point in five or six years’ time where essentially all IFAs or all advisers are domicile-neutral, in which case you could well see more than 50% of business in the UK being written into offshore funds,” he says.
”We are way out there ahead of the competition, but by dint of not being a member of the IMA, our data wasn’t being seen by anybody”
Although this is not yet reality, in terms of Schroders’ net business in the first seven months of the year, just under 30% has gone into offshore funds, compared with 10% five years ago and 3% a decade ago. Stoakley says he would expect that to continue to grow.
At Cofunds, however, Woodburn says it has not yet seen a huge uptake in offshore funds, which accounted for 1% of gross new business on the platform in the first seven months of the year.
“Advisers are still showing a clear preference to onshore diversified global emerging markets funds rather than some of the really niche single country emerging markets funds that are available offshore,” she says.
Meanwhile, HSBC already sells more offshore funds than onshore funds, says Clark, but the firm has noticed an increase in requests for information since its offshore funds were included in the IMA sectors.
“Some of these funds are being discussed as part of the portfolio planning process and I think what everyone realises is most UK investors’ portfolios are heavily weighted UK, probably dangerously so in terms of risk perspective, and I think advisers are, a lot more, looking for diversification,” he says.
Clark says he thinks offshore funds are set to become a natural part of UK investors’ portfolios, aided by the arrival of Ucits IV in mid-2011, which he says will make for a clean playing field.
Ucits IV is designed to encourage cross-border fund mergers and distribution, as well as allow firms in one European Union country to manage funds domiciled in another.
“Over time, with the regulatory changes and the Ucits changes, my longer-term case is that it will just be a whole range of funds from one hand on the left, complete long-only to, on the far right, long-short and in the middle, market-neutral,” adds Potter.
While Woodburn says she is not aware of any obstacles to advisers being able to see and invest in these offshore funds, some managers still have a big role to play in terms of educating advisers that often these funds are not any different, given that there are still myths out there about their complexity.
“If the tax status is such that the UK investor is not disadvantaged, then really what is important to the UK investor is getting a fund that gives him decent returns, and doesn’t penalise him in terms of its tax treatment,” says Martyrossian. “Where they’re sitting seems to me a complete irrelevance,” he adds.
Stoakley says that there is not generally as much information available on offshore funds, as many are managed by more specialist groups and are still not on mainstream platforms. If advisers deal direct into offshore funds, the administration and dealing procedures are different to onshore, resulting in more administrative hassle and cost, he adds.
“As a consequence, the advisory market, in my opinion, still prefers onshore to offshore, because it’s much more familiar with that. But increasingly, as groups offer some really quite interesting products – offshore products into the UK – we’re finding advisers are overcoming any reluctance to use offshore funds,” he says.
“It’s quite a slow process, its not going to happen overnight,” he adds.