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Best Offshore Savings PDF Print E-mail
Thursday, 04 December 2008 15:42


Best Offshore Savings

Andrew Coyne examines the pros and cons of safety-first products and wonders if they are especially relevant for this year’s investment climate

You could, of course, just leave your money in an offshore deposit account. Providing you choose a major bank in a well-regulated jurisdiction then it doesn’t come much safer. The problem with safety, however, is that while it is crucially important, it has to be weighed up against the return you are getting on your money.

Best Offshore Savings - Interest Rate Rises

Although we have seen a number of interest rate rises in the UK, the US and Europe over the last six months or so, we are still living in a relatively low interest-rate climate. The best available annual rate of interest you can get on US$50,000 at the moment from an offshore deposit-taker is 5.2 per cent, from Halifax International (IOM)’s instant access Dollar International account.

For many people, 5 per cent is just not enough, as far as both income and capital growth are concerned. In this case, it is a question of finding a way of getting a better return on your money. If you want to keep it in an offshore building society or bank account in a time of low interest rates, you may have to be prepared to forego instant access to get the better rates.

On the whole, notice accounts, which prevent you from accessing your money for a set period - such as 30 days, 90 days or 180 days - will pay higher rates. However, you will be penalised for taking your money out early.

Best Offshore Savings & Fixed-Rate Bonds

Similarly, fixed-rate bonds - which tell you the rate you are going to get from the outset, but which lock your money in for one, two or three years, say - will normally pay higher rates, to compensate for the inconvenience caused.

Britannia International in the Isle of Man has run a number of fixed-rate products and may look to launch another early this year - depending on the movements of interest rates.

Managing director Dean Waddingham says: “Obviously, what we have to do is to get a rate that looks better than the variable products. But these have been popular in the past and we have been getting a lot of enquiries for one-year bonds. Where people are looking beyond deposits they are looking for capital protection.” ©

Best Offshore Savings - Tracker-Type Products

You may also consider tracker-type products issued by offshore banks and building societies. Bank of Scotland Offshore has an instant-access tracker account, for example, which guarantees to pay a rate 0.25 per cent below the UK base rate.

Above and beyond deposit-type products, though, how do you get better returns without ratcheting up the risk level?

Well there are a large number of products now on the market which claim to be low-risk or even no-risk.

Best Offshore Savings & Investments

Very few things relating to investment are no-risk. Investing in government bonds is about as risk-free as investing gets, but the returns from major bond markets have not been that encouraging of late and investors may feel they are offering no better prospects than deposit accounts.

What a number of deposit-takers offer, to cater for the low-risk market, are capital-protected investment products. Typically such products will give you exposure to one or more major equity markets with the guarantee that they will return at least your initial capital. Other variants offer higher reward potential for greater risk, and may only guarantee the return of 95 per cent of your money.

The returns from such products - which typically lock your capital in for four or five years - have often been good. For example, HSBC Bank International’s US dollar growth Guaranteed Capital Investment Bond (GCIB), which matured last month, returned 216 per cent (the equivalent of 43.2 per cent a year). Earlier versions also provided excellent returns and thus, there has been a big demand for further GCIBs.

Best Offshore Savings - The Bull Markets

But, of course, we have been enjoying bull markets in many major economies. We don’t know where equity markets will be in five years’ time. It could be argued that some of the product providers in this market are putting false expectations in the minds of investors.

Peter Shirreffs, head of offshore banking at Jersey-based Royal Bank of Scotland International (RBSI), suggests, however, that we should give investors - even conservative-minded ones who are usually more at home in bank deposits - more credit.

“They are comfortable with having a toe in the water,” he says. “Obviously, they hope markets will continue to soar, but if they really believed it they would be in other products.”

Best Offshore Savings & RBSI

 RBSI has run a number of products offering access to stock markets in a capital-protected way. Its latest is the Instant Growth Account. This is a variation on the theme of captial-protected products, adding a guaranteed rate of interest to the equation.

The five-year product has a minimum investment of £5,000. It provides an annual rate of return of 7 per cent on half of the capital, whilst the other half is invested in the FTSE 100 index. Investors get 70 per cent of the gains in the index plus their capital back.

“The product is going phenomenally well, despite the fact there have been two interest-rate rises,” Shirreffs says. “A lot of people have a similar product but don’t guarantee a return.”

Best Offshore Savings & Products

Such products won’t suit everybody, however. One problem is that they lock your money in. Apart from being unable to access your cash, you also need to make sure this doesn’t cause you tax problems. For example, if you invest in a US dollar-denominated product, you don’t want it to mature a week before you head back to the UK, as you could get caught out when you convert back to sterling.

There is also the fact that such products usually cap your upside potential - promising you 60 per cent of stock-market gains, say. In other words, if markets do soar, you won’t benefit to the same degree as investors in non-protected funds. But then they don’t have your safety net.

Finally, you have to have money available to invest when the product is launched. Most of them close to new investments after a set period.
Such products usually work by using derivative vehicles to gain exposure to the equity market and counteract any adverse movements.

Best Offshore Savings - Stock Market

 Some of your investment may be channelled directly into the relevant stock market, where it will enjoy the uplift of any equity-price increases. Alternatively it may be put into Treasury bills or on deposit. It is of little relevance to you because what you get at the end of it is guaranteed - not just the return of capital but also the specified percentage of gains in a rising stock market.

Royal Bank of Canada (Channel Islands) has another variation on the theme of capital-protected funds in the shape of its Strategic Ratchet Fund. This has proved successful because of its defensive stance and conservative risk profile.

Launched in late 1997, it now has US dollar, Swiss franc, sterling and euro classes. The Strategic Ratchet Fund offers exposure to world equity and bond markets but has a target downside maximum risk of 10 per cent, though this is not formally guaranteed.

Best Offshore Savings - Paul Butler

On the plus side, however, your money is not locked in. You are free to come and go in the fund as you would in any open-ended investment product. Paul Butler, senior manager, offshore funds at RBC in Jersey, says: “The fund has been fairly popular. We now have US$175 million invested in it and we are a fairly small distributor.”
Butler says that because of the strength of markets, the 10 per cent downside target has not had to be breached, and that being a diversified fund - i.e. not just invested in equities - it is not a disaster if markets fall off a little.

Best Offshore Savings & The Equity Markets

“We have done very well when equity markets have fallen. We are looking at the same type of volatility as in deposits,” Butler says. “The best way to look at it is as a money-market fund with a limited upside.” RBC uses derivatives to protect against falls and to capitalise on upward movement in the markets. Minimum investment is US$10,000. The group is now considering the possibility of launching a single-sector version of a fund that would give investors exposure to a high-growth sector such as technology with limited downside risk.

 

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