Despite the all-too-common perception of offshore investing being laden with risk, inadequately regulated, and exclusively for fat cats stashing money in a treasure island-esque jurisdiction, there are legal and financial advantages to international investing. These are, however, typically overlooked. Maybe the truth is just not as glitzy or as “Hollywood.”
While it might be less sensationalist, the reality is that focusing on a global approach to investing helps ordinary folk mitigate risk during times of market volatility, allowing them to benefit from bona fide tax advantages and make the most of the inevitable opportunities that emerge.
However, since the Panama Papers allegations last year, which suggested that major tax evasion on a grand scale was taking place, offshore investing has been demonized by the press. Indeed, offshore investors have been widely depicted as tax evaders hoarding ill-gotten gains in faraway locations with infinitesimal tax rates.
Yet, even the term “tax haven” seems somewhat archaic now, when you consider the level of transparency — enhanced by whistleblowers — and stringent regulations we have today. Private financial information is routinely exchanged between all principal tax authorities worldwide, reducing the attractiveness of offshore centers for “hot” money.
As highlighted by FT Adviser and CBS News, amongst many others, while tax evasion is a serious global issue, the Panama Papers case is not an accurate picture of the wider offshore industry. The focus is on tax efficiency, within a legal framework, and lighter regulation when it comes to company and fund formation. In addition, investors can enjoy enhanced flexibility and investment options, as part of a comprehensive financial strategy.
We have to remember that financial product regulation in most countries is aimed at protecting the non-sophisticated investor. It is far easier to register, say, a long-only UK equity fund in London than it is to register a private equity fund or a global multi-asset fund that might seek to be a little unconventional (e.g., to be able to move 100% of its assets into just one asset class). But access to such funds helps investors to diversify their portfolios and so reduce risk. If a fund can launch quicker, and the fund manager has to jump through fewer regulatory hoops to get it launched, off-shore registrations make sense, and it makes sense for investors — whether based onshore or offshore themselves — to use them.
Similarly, a well-diversified portfolio should always include several industrial sectors and asset classes, as well as geographical regions. In fact, the majority of finance experts would agree that failure to sufficiently diversify a portfolio is one of the most commonplace mistakes made by investors.
Additionally, individuals can benefit from legitimate financial refuge in such locations where there may be political unrest or extreme currency volatility. By being offshore, funds can be protected from criminal raids, for example, providing financial privacy. That said, there is a world of difference between financial privacy and financial secrecy. As I’ve said on previous occasions: “Privacy can be necessary. Secrecy is not.”
Investing across geographical regions is a fundamental part of an appropriately diversified portfolio. It is incorrect that global investing poses greater risk. Quite the opposite is true. The more diversified the portfolio when a global slant is adopted, the more enhanced the reduction of overall portfolio risk.
Furthermore, the idea that investing internationally is targeted to more experienced, sophisticated investors is a complete misapprehension. Indeed, there are various, well-handled retail funds that offer worldwide stock market exposure, using diverse approaches.
Offshore centers are often thought of as lightly regulated, and therefore inherently riskier than investing onshore. Certainly, some state-backed guarantees, access to compensation, and the right to appeal to regulatory bodies may be curtailed on offshore markets. But an advisor will be familiar with these aspects of offshore investing and should inform the client before any investment is made. As to the application of the law, British law applies in the Crown dependencies and is keenly applied at the local level, since scandal deters business. In the current political climate, scandal also encourages calls for greater regulation (i.e., higher costs) from their onshore rivals.
Focusing on a global approach and investing offshore places investors in a prime position to make the most of these opportunities brought about during times of unpredictability and market turbulence.