It has been said that offshore mutual funds offered no better returns than comparable US onshore funds. One or more of the following conditions would have to exist for this to be true.
1. The U.S. mutual fund company pays little or no corporate taxes.
2. The U.S. mutual fund accumulates income tax free for investors.
3. Fund managers in the U.S. are unique in their ability to choose consistent winners.
4. There are no tax benefits for an offshore company investing in the US
Since it is unlikely that most onshore mutual fund companies would be able to meet condition one, two or three, and given that there are tax advantages granted to offshore corporations making investments in the US, I wonder on what basis this statement rests?
The advantage an offshore fund offers is that it can earn and accumulate profits while paying little or no tax. Payment of dividends, interest or capital gains will only be taxed if investors live in jurisdictions that tax such gains (most high tax countries). Even if income potentials were similar, offshore funds have a clear advantage over their high tax counterparts.
Taking this line of thinking one step further, if offshore mutual funds are unable to offer investors better returns than onshore, why are there literally thousands of them located in low and no-tax jurisdictions earning such incredible profits?
For those curious about the benefits of investing in offshore funds, The Micropal Guide to Offshore Investment Funds will provide some interesting reading! All returns were converted into US$ to level the playing field. The median return of the top 350 funds was 34.08% in 1996. The median return of the top ten funds in 1996 was a whopping 137.53%! Unfortunately, much of these gains have been wiped out by the collapse of Asian stock markets which dropped more than 35% as a group during 1997 and these markets remain weak in 1998. These huge drops will create buying opportunities when these markets have stabilized. European markets on the other hand have remained strong.
Those who doggedly maintain that the US is the only place in which to invest, will be interested to know that an examination of average annual stock market returns between 1980 and 1990, revealed that US stock markets generated an average return of 16.0%. They were 13th behind Japan, Switzerland, Germany, the UK and a host of other countries. Hong Kong was in first position showing a 25.5% return. Once the Asian markets stabilize, they will again offer significant opportunities for capital appreciation for those positioned to take advantage.
The Micropal Guide examines over 5,500 offshore funds in a number of different categories. George Soros Fund Management group controls my favorite; the Quota Fund which amassed a healthy 78.80% in 1996. The five-year return was 851.64%! How would you like to have that fund in your portfolio?