August 21, 2000
Actively-managed offshore funds may be an easy way for U.S. fund companies to access foreign markets, but their total expense ratios are typically very high and not published anywhere in the fund prospectuses or any other literature, according to a study conducted by Fitzrovia International of London, a research and consulting firm.
The study found that the 464 U.S. actively-managed funds domiciled in offshore fund centers, including Dublin, Luxembourg and the Carribbean, have an average total expense ratio of 2.14 percent, making them a bad investment for most investors, the study states.
The high expense ratios are often shouldered by unsuspecting shareholders because the information is not readily available to them, said Ed Moissen, a spokesperson for Fitzrovia.
If the growth of assets invested in U.S. offshore funds is any indication, the ranks of investors who unwittingly pay higher fees than they had planned, is growing. Foreign assets invested in U.S. offshore funds have burgeoned in the past five years, according to Fitzrovia. In that time, assets in U.S. offshore funds domiciled in Dublin and Luxembourg have grown 462 percent and 773 percent, respectively. (MFMN 5/15/00)
Offshore funds do not report their total expense ratios because the regulations of the countries with offshore fund centers do not require them to do so, Moissen said.
"In offshore jurisdictions, there are no regulations to present investors with . . . all annual operating costs. Management [fees], 12b-1 charges and the like remain buried in financial statements," according to the study.
While the prospectus of an offshore fund will typically contain management charges and marketing fees, these various fees are scattered throughout the document, Moissen said.
"There should be more transparency," he said.
Annual operating costs for offshore equity funds need to be capped, added Paul Molton, CEO of Fitzrovia.
"We would call on new funds to cap annual operating costs until a fund reaches a size where these expenses can be contained," Molton said. "Alternatively, promoters can seed' fund launches [i.e. invest their own money] to guarantee a minimum viable fund size."
Fidelity Investments U.K. of London offers 30 offshore actively-managed equity funds, all of which are domiciled in Luxembourg, said Jo Roddan, a spokesperson for the firm. "Basically, we think disclosure of expense ratios is a good thing," she said. "We already disclose all of our expenses and they are easily listed in the prospectus."
While Fidelity does not list the total expense ratio, the expenses are "broken down," making them easier to read, Roddan said.
Moreover, total expense ratios are only one facet of the expenses paid by investors, she said. Fitzrovia's study does not measure the initial fees charged by offshore funds, a fee that is significant in the overall cost of a fund, she said.
Offshore funds are an easy way for U.S. firms to gain exposure to a foreign market because a company can set up a clone of a domestic fund and price it like a new fund without being subject to the regulations of the country where they are distributing it, said Geoff Bobroff, president of Bobroff Consulting of East Greenwich, R.I.
The funds are attractive to foreign investors because they are not subject to their country's tax regulations and they can often provide greater exposure to U.S. investments than funds offered in their countries, he said.
Setting up an offshore fund can also allow a U.S. company to distribute the same fund to a variety of markets, depending on the flexibility of the regulatory environment of the country where the fund center is located, said Bobroff.
But that regulatory flexibility is not always beneficial to the investor who is left in the dark concerning an offshore fund's total expense ratio, Bobroff said.