Offshore Funds Earn Their Stripes
By Matt Blackman Offshore Finance U.S.A. May/June 1999
(Note: This version is the original from which the article was taken.)
The year, 1998 will go down as one of the most capricious in global investment history. While Asian and many emerging markets floundered, North American markets gyrated wildly, besieged by a series of unprecedented global events. The Dow Jones Industrial average soared to new heights in August before losing 20 percent of its value. By year-end it had regained almost all lost ground, much to the surprise of investors and analysts alike, gaining more than 17 percent for the year. Overall, U.S. markets were up 28 percent.
Meanwhile, Internet and high-tech stock gains continually required that rules for corporate stock valuations be re-written as investors fought over initial public offerings (IPOs) driving stocks prices into the stratosphere. eBay rose more than 1,600 percent from its IPO price before retreating slightly and Internet 'old timer' Amazon.com, ended the year up nearly 1000 percent from 1997.
Who knows what the future holds for North American markets but many pundits are again predicting the final demise of the longest bull run in history. Cries from investment analysts that stocks are overpriced grow louder but the rallies continue.
Currencies were volatile as well. Russia, partly on the advice of fund sage, George Soros, finally floated the ruble only to see it drop 70 percent, catching even the omniscient Soros himself off-guard, costing his Quantum group of funds over $2 billion US. Brazil, the latest casualty, may still require large bailouts like Malaysia and Korea from the International Monetary Fund to prevent a Russian style currency meltdown.
As North American markets rocketed to new heights, Asian markets led by the Japanese Nikkei continued to plumb lows not experienced for more than a decade. Commodity prices dropped as well. The CRB and GSCI commodity indices lost 40 and 44 percent respectively for the year.
And now for some skill testing questions: compared to other stock markets around the world, where did the U.S. finish? More importantly, where do you put your money in 1999?
If you haven't considered venturing further afield to explore foreign markets, this may be a good time to have a look. Do you risk buying high and selling higher, sit on the sidelines, or buy low to make a profit? Certainly statistics are on the side of the last group if you wait long enough and have the staying power.
Whether you are interested in exploring the offshore option or are an old hat, the new edition of the Standard & Poor's/Micropal Guide to Offshore Investment Funds 1998/99 is worth a read. Updated from last year and with analysis on 6200 (up from 5500) funds, editor Robert B. Milroy provides us with some valuable lessons gleaned during his more than 25 years as an investment analyst and advisor.
Mr. Milroy, a Canadian expat from Vancouver, now calls the Channel Island of Guernsey his home where he advises high net-worth clients on how and where to invest. Like many of the funds he follows, Milroy is domiciled offshore where there is freedom to invest in international corporations and funds that can generate profits with minimum regulation and taxation.
The freedom from regulation also helps companies profit but this can act as a double-edged sword. Long Term Capital Management hedge fund was also free from most onshore regulation but when it dropped there was little warning due to the lack of disclosure. Not that regulation or disclosure would have made a difference to the institutions invested but those looking for a scapegoat claim it could have provided some advance warning. No one complained while it was making a profit.
Do offshore funds outperform those onshore? Assuming that fund managers in both camps have similar abilities to pick winners, offshore funds have two distinct advantages. First, there are no limitations on where and in which company or vehicle they can invest. Secondly, the fund and many of the companies in which they invest pay little or no taxes. These are the advantages of being offshore. To compete an onshore fund would have to make the same return plus whatever taxes are due. Anyone who argues differently has not studied the numbers. Granted, someone who bought Amazon.com at $30 which is now trading at over $300 may be skeptical but that kind of performance is far from typical. Over a long period, like 5 to 10 years, an offshore fund should outperform an onshore one unless there is something wrong with the managers.
The Guide segregates over 6200 offshore funds into 301 sectors and 15 broad categories.
Let's look at an example. The Soros Quota, a derivative hedge fund, experienced a 79 percent increase in 1996 and only managed a 51 percent gain in 1997 but managed a whopping 961 percent during the past five years ending 1997. The fund had a 27 percent return for the first quarter of 1998 but it will be interesting to see how the fund fared through the Russian ruble crisis later in the year!
Mr. Milroy mentions the fund's fall in Part 2 of the book. "Although George Soros' Quota fund is still holding … in the new Hedge Fund sector, its performance… is well down…Instead, Sloane Robinson Investment Management has swept the board with three sub-funds of its umbrella fund, the SR Global Fund. Top of the sector was the SR Emerging Fund, which doubled its investors' money in 1997, clocking up a 103.38 percent return."
The funds displayed in the Guide are differentiated into 16 general asset catergories and contain such useful information as listed below.
{Quota Fund ratings are in parenthesis ( ) unless indicated elsewhere.}
