Wrapping the modern portfolio

Traditional domestic mutual funds around Europe have long provided investors with a method to diversify their investments. For wealthier individuals, a “private” authorised unit trust is an efficient vehicle within which to run a bespoke investment strategy. It provides an investment fund in which family members, family trusts and even pension funds may hold units. These funds can provide a valuable opportunity for tax deferral, allowing profits to be realised and reinvested without incurring tax charges. The trade-off is that they can be restrictive in their investment powers. In the UK, an authorised fund may hold no more than 10 per cent in a single security. They cannot sell short and may not invest more than 5 per cent of the fund in other investment schemes. With more investors now seeking “absolute” returns rather than those benchmarked to the markets, there is increasing demand to hold alternative assets such as hedge funds, private equity and derivative-based guaranteed investments. Private banks are thus looking to use offshore centres to build structures, often under the professional investor legislation, which offers a less rigid regime. Appropriate vehicle Selection of the appropriate vehicle will depend upon an individual’s investment strategy and tax planning objectives. For those resident in certain European jurisdictions, it may be necessary to hold the investment fund within another structure, for example, an insurance “wrapper”, for tax purposes. Creation and delivery of a tailored structure, as well as the underlying portfolio, can involve the collaboration of a number of parties. Strategy first The structure should be created around the investment strategy, rather than the structure driving the investment selection, so the portfolio manager is integral. An offshore bank or trust company may act as manager (operator) of the investment fund. An insurance company will supply the wrapper. The whole process will generally be co-ordinated by a private wealth manager. Several jurisdictions have recognised that investment has moved offshore. In the UK there is a review of the offshore funds regime, and in Germany, legislation is coming which allows hedge funds to be marketed to the higher end of the retail market. Until then, investors want a competitively priced wealth management structure that enables them to achieve their long term investment goals.

Christine Ross is head of financial planning at SG Hambros