Farflung empire
JOHN BULL
Offshore funds are beginning to attract a good deal of attention. To the general public they have an attractive free-booting air, rather as if they were pirate unit trusts established in ships anchored some miles beyond territorial waters. To the City, they are a source of worry. Because they are in- corporated outside the United Kingdom and because they do not advertise here, they are outside the scope of Board of Trade regula- tions. They sell in this country through pro- fessional advisers.
Offshore funds are unit trusts which main- tain the freedom to operate in any market of the world; and because they are careful where they site their headquarters, they usually avoid the need to pay capital gains tax, which would otherwise inhibit an active switching policy. Being unregulated, they can charge you what they like—and invest in what they like. About twenty-five have been set up by British groups or are managed by British investment advisers, but there are many more, with antecedents which are difficult to discover. The first and most im- portant rule, therefore, is to stick to funds run by reputable London houses. One which I like the look of has been launched this week—Tyndall Overseas Fund.
Tyndall have been active for some years in this country, running some successful con- ventional unit trusts. Their investment managers are S. G. Warburg, who are to run the Tyndall Overseas Fund. The backing, therefore, is first class. How does the fund work? The sterling area resident can only in- vest outside the sterling area (i.e. in Wall Street) by two routes—either by purchasing investment dollars At a premium (currently 30 per cent or so) or by borrowing foreign currency. Tyndall Overseas Fund has arranged to borrow up to $5 million for a five year period, lending an equivalent amount of sterling in London. The company still needs to purchase some investment dollars in order to provide a margin of cover for its loans. But the result is that an in- vestment of £2,000 through the Tyndall Fund can be used to purchase $4,600 of foreign securities whereas the investment of the same amount directly through the premium currency market would only allow you to buy $3,690 of foreign securities. In effect Tyndall allows you to purchase foreign securities at a premium of only 3.9 per cent. During the last twelve months the premium has fluctuated between 17 and 59 per cent.
Tyndall Overseas Fund has been in- corporated in Bermuda, which means that no tax will be paid on the fund's income and it and its shareholders are exempt from Bermudan capital gains tax and estate duty. Thus the fund itself can pursue an in- vestment policy untrammelled by tax con- siderations though of course United Kingdom residents who are shareholders will be liable to income tax, surtax and capital gains tax in the normal way. This is an im- portant distinction. Offshore funds cannot extend their fiscal immunity to their shareholders. Tyndall Overseas is a bit of a hybrid because although shares are always redeemable at asset value by the managers the shares are also to be dealt in on the Lon- don stock exchange. There is an initial charge of 3+ per cent included in the subscription price of the shares and the recurring management charge amounts to 1 per cent per annum.
What sort of investment policy is the fund going to pursue? The prospectus states roundly that 'the object of the fund is capital growth'. Income is not a consideration in determining investment policy. The portfolio is expected to consist of shares of companies in North America, Europe, Japan and other industrialised countries. And the managers make it plain that 'in particular they will not hesitate to hold cash if such a policy is likely to prove beneficial to the Fund'. We can judge Tyndall's track record from the performance of Tyndall International Fund, also Bermudan based, which has been in operation since the middle of September 1968. By 11 February 1970 this fund had ap- preciated by 30.8 per cent. During the same • period the Financial Times all-share index recorded a 12 per cent fall and Wall Street as measured by the Dow-Jones industrial average fall back 18 per cent. Japanese equities did well, however, rising by just over 25 per cent in the same period. That really" the test of an international fund. It ought to do as well as or a little better than the most buoyant share market. I expect it to be into and out of Japanese shares, into and out of Wall Street and into and out of everywhere else at the right moment.
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