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A book review by Matt Blackman
It has been said that offshore mutual funds offered no better returns than comparable US onshore funds. One
or more of the following conditions would have to exist for this to be true.
1. The U.S. mutual fund company pays little or no corporate taxes.
2. The U.S. mutual fund accumulates income tax free for investors.
3. Fund managers in the U.S. are unique in their ability to choose consistent winners.
4. There are no tax benefits for an offshore company investing in the US
Since it is unlikely that most onshore mutual fund companies would be able to meet condition one, two or three,
and given that there are tax advantages granted to offshore corporations making investments in the US, I wonder
on what basis this statement rests?
The advantage an offshore fund offers is that it can earn and accumulate profits while paying little or no tax.
Payment of dividends, interest or capital gains will only be taxed if investors live in jurisdictions that tax
such gains (most high tax countries). Even if income potentials were similar, offshore funds have a clear advantage
over their high tax counterparts.
Taking this line of thinking one step further, if offshore mutual funds are unable to offer investors better
returns than onshore, why are there literally thousands of them located in low and no-tax jurisdictions earning
such incredible profits?
For those curious about the benefits of investing in offshore funds, The Micropal Guide to Offshore Investment
Funds will provide some interesting reading! All returns were converted into US$ to level the playing field. The
median return of the top 350 funds was 34.08% in 1996. The median return of the top ten funds in 1996 was a whopping
137.53%! Unfortunately, much of these gains have been wiped out by the collapse of Asian stock markets which dropped
more than 35% as a group during 1997 and these markets remain weak in 1998. These huge drops will create buying
opportunities when these markets have stabilized. European markets on the other hand have remained strong.
Those who doggedly maintain that the US is the only place in which to invest, will be interested to know that
an examination of average annual stock market returns between 1980 and 1990, revealed that US stock markets generated
an average return of 16.0%. They were 13th behind Japan, Switzerland, Germany, the UK and a host of other countries.
Hong Kong was in first position showing a 25.5% return. Once the Asian markets stabilize, they will again offer
significant opportunities for capital appreciation for those positioned to take advantage.
The Micropal Guide examines over 5,500 offshore funds in a number of different categories. George Soros Fund
Management group controls my favorite; the Quota Fund which amassed a healthy 78.80% in 1996. The five-year return
was 851.64%! How would you like to have that fund in your portfolio?
Before you run off, sell the farm, and put all your hard-earned cash into an offshore fund, there are a few
things to consider. Funds that generate the greatest returns are also the most volatile. The Micropal Guide rates
each fund for volatility to make it easier for investors to choose which funds meet his or her individual comfort
level. Funds that demonstrated small fluctuations earned low volatility ratings. The median volatility rating for
US Money Market Funds was 0.23. My favorite, the Quota Fund, had a volatility of 13.62. The Japanese JF Ninja had
volatility rating of 20.2 and showed a 58.9% loss in 1996 but a 34.06% return over 5 years. If you can't sleep
at night worrying whether your investment lost a few dollars the previous day in some far off market, volatile
offshore funds are not for you.
If you live in Canada, the United States or Britain, there are conditions for investing in offshore funds. It
may be necessary to set up an offshore corporation to buy funds and accept all documents pertaining to the offshore
investment. The following explanation by Woody Milroy should help clarify who can invest and how they can do it.
"Firstly, offshore products are available to anyone in the US and Canada who are "qualified or institutional
investors". Each country or for that matter each province may have a different term as to what qualifies as
a qualified or exempt individual or entity. A Canadian can buy an offshore fund, if it is bought outside Canada.
The offshore entity selling funds cannot to be seen to promote the offering of its products in Canada which would
be a violation of Canada's security trading regulations which requires a valid prospectus on file approved by its
security commission. Consequently no broker or financial adviser can legally buy an offshore fund for a client,
but the client can buy it directly abroad.
Fund companies that have not filed an offering memorandum with the Securities and Exchange Commission in the
US will not normally sell shares to US citizens. As Mr. Milroy explains, "In the US ... the offshore fund
companies themselves do not want to come afoul with the SEC regulations, especially under the 100 person rule.
This is more thoroughly explained on page 58 of the 1997/98 guide."
"With respect to the UK, many offshore products are available to UK residents and may be sold there if
they are FSA approved (they meet similar investor protection laws as exist in the US. Note the Class A funds in
Guernsey are created for that reason)."
It is important to check with a qualified investment dealer or broker to determine which offshore funds you
are able to buy. If your broker is not knowledgeable in the realm of offshore funds, find one who is.
Another advantage of an offshore fund is the ability to invest in various currencies. Funds invested in Singapore
enjoyed an added 15.87% return between 1992 and 1997 due to that currency's performance against the US$. Investors
in Canadian markets lost 15.64% over the same period due to the drop of the Canuck buck.
The Micropal Guide answers many commonly asked questions in easy to understand language. All investment jargon
and terms are explained and easy to follow. Various investment strategies are explained to insure that every aspect
of making an offshore fund investment is covered.
Buying an offshore fund offers investors the ability to diversify their investment in different markets and
currencies to insure greater security. These investments will have to be declared for residents in most high-tax
countries (e.g. Canada and the US), and taxes will have to be paid on income, so check with your tax advisor to
insure that all tax laws are considered. In some cases, not declaring income until after dividends are received
could be costly. The US penalizes such tactics and you could end up paying more tax than your total investment
income after you pay accumulated interest and penalties.
I can't wait to see how some of the derivative funds like the Quota Fund have done in the wake of the currency
and stock market crises in Asia. Sharp managers like Soros made shiploads of money if they read the situation correctly.
The Indonesian ringgit has lost 85% of its value against the US$ between July 1996 and January 1997. Shorting volatile
currencies is certainly not for the faint of heart!
Mr. Milroy is working on a new edition, which is expected out by the end of summer and will cover over 6100
funds plus the sector categories have been revised to reflect the importance in hedge funds with 28 new categories.
Watch for a review of the upcoming edition in this column.
The Micropal Guide to Offshore Investment Funds 1997/98 Edition is a total of 496 pages of information essential
to any investor seriously considering an offshore portfolio. It is available from Financial Times Magazines for
US$125 plus tax and shipping or can be purchased by phoning 1-888-848-8844 toll free (USA & Can) or Fax: +44-1481-701462.
Email:info@intl-offshore.com or view http://www.intl-offshore.com
*RATING 8.5/10* Reading Level - Advanced to Professional.
Disclaimer: The views expressed are independent and the sole opinion of Matt Blackman who has not and will not
receive financial remuneration from the publisher or author for this review. Although great care was taken in writing
this review, the author cannot and does not guarantee the accuracy of information contained herein due to its complex
nature. Readers are advised to obtain legal counsel before making any investment or estate planning decision. Review
copy of this publication was supplied by publisher.
Note: This column is dedicated to reviewing books on the subject of offshore investing and asset management.
It is designed to provide an insight into the publications available to assist readers looking for the best information
available for the money. If you have a comment or question about a review or have read written a publication of
interest that you'd like to discuss, please:
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