Investment trusts were traditionally set up and managed in the UK, but there is a significant number of investment companies domiciled offshore in the Channel Islands or elsewhere. Many are quoted on the London Stock Exchange, so it is sometimes difficult to tell them apart from onshore companies.
Many well-known UK firms run investment companies offshore, including Aberdeen, F&C, Henderson and Standard Life Investments; but there are also lesser-known and overseas providers such as CATCo Investment Management, Juridica Asset Management and Phaunos Boston.
There are now 116 offshore investment companies among the Association of Investment Companies’ (AIC) current membership of 399, making up 29 per cent of the association.
Some of the earliest ‘investment trust’ entities were formed as common law trusts, while others were structured as companies from the start. But the trusts soon converted to companies, which also had the advantage that they could borrow money. However, the term ‘investment trust company’ persisted.
Onshore companies also had to abide by a specific set of rules. By setting up offshore, investment companies have been able to take advantage of a different regime, which has proved more tax-efficient for some companies but has, more importantly, given them more flexibility on distribution of income.
When Henderson Far East Income moved from being an onshore to being an offshore company it said the main reason was ‘the Company will not be subject to UK corporation tax, which should significantly increase its net distributable income’.
However, according to Nathan Brown at stockbroker Numis Securities: ‘The primary reason is because offshore companies can pay their dividends from any source. They do not have to come out of income or realised profits.
‘They can, for example, be paid out of uninvested cash. In Guernsey, as long as a company is solvent, it can also return any amount of capital to shareholders. This means companies can be more confident of maintaining a steady flow of income.’
From an investor’s point of view, there is little difference between companies based on- and offshore according to Annabel Brodie-Smith, the AIC’s communications director. She says: ‘There are far more similarities than differences between UK investment trusts and offshore closed-ended investment companies.
‘They are all closed-ended, listed on a stock exchange, with an independent board of directors, and all have the freedom to gear to enhance returns, and all have similar investment flexibility; for example, they are able to invest in unlisted assets. From a corporate governance perspective, all have to report against the UK Corporate Governance Code.’
Onshore vs offshore investment companies