Investing in funds that aren’t based in the UK

Your investment may not be covered by the Financial Services Compensation Scheme (FSCS) or the UK Financial Ombudsman

Because offshore funds aren’t authorised by the FCA, investors are not necessarily entitled to all the protections that are provided to investors in domestic funds.

An important one to be aware of is the Financial Services Compensation Scheme (FSCS). The FSCS protects investors when UK-authorised financial services firms fail by paying compensation. Your investment is usually guaranteed by the FSCS up to an amount of £85,000 across all accounts held with the failed financial services firm.

You may also not be entitled to go to the UK Financial Ombudsman if you have a complaint about your investment.

You might be protected under these schemes if you invest through a UK financial adviser. But if you invest directly with the offshore fund manager it is very likely you won’t be covered. This introduces another layer of risk that you should consider before you invest.

Changes in the value of the pound can have an effect on returns

Investing in offshore funds often means investing in a currency other than pounds sterling, such as euros or US dollars. Changes in the exchange rate – the relative value of the pound to other currencies – will change the value of your investment, independently of how the value of the assets you are invested in changes. This is often called ‘exchange rate risk’.

This can be positive or negative. If the other currency rises in value relative to the pound, your holding will be worth more; if the value of the pound rises, your holding will be worth less.

This will only affect you when you come to cash your investment in – just like the other factors that can have an impact on the value of your investment – but it is another risk you should be aware of before you invest in an offshore fund.

Longer dealing times can affect what you get when you buy and sell

There is often a delay between the time you let us know you want to buy or sell a fund and setting the price of the deal. As a result, there can be a difference between the value of your investment when you let us know you want to trade and the actual price when you buy or sell, especially if markets are moving quickly.

It can take longer to price deals for offshore funds than UK-domiciled funds. UK funds typically deal within 24 hours. For offshore funds, it can be two days or more.

A longer dealing time could mean a bigger difference between the value of your investment when place a trade and the value when the deal is priced. You should bear these timings in mind when you are buying or selling units in an offshore fund. 

Many AXA IM funds also offer a ‘sterling hedged’ share class, which aims to reduce the impact of exchange rate fluctuations against the pound. That way, the value of your investment may better reflect the performance of the underlying assets.

Taxation could be different in offshore funds

Returns from offshore funds are taxed in same way, and at the same rate, as investments in domestic funds – you cannot avoid tax by investing offshore. However, there are administrative differences to the way offshore funds are taxed that can be important when you file your tax return. You should obtain tax advice if you’re uncertain about how this might affect you.