Alternative Equity Investment
by
Jeremy Hetherington-Gore, April 2008
IMPORTANT
WARNING:
The contents of this report have been compiled in good
faith by Investorsoffshore.com to provide assistance
to investors, but do not constitute investment advice
or recommendations. Investors should not rely upon the
information given in order to choose types or routes
of investment but should make their own independent
enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting
the information herein but makes no representations
as to its accuracy and accepts no liability for actions
taken or not taken as a result.
Once upon a time, before the Internet and before globalization
of the financial sector, investment for most people
meant buying stocks, shares or collective investment
units through a broker, using the mail and the telephone.
You can still do it that way, but more and more people,
especially globe-trotting expatriates, do it on-line,
and do it for themselves using a whole zoo of techniques
in which direct ownership of underlying shares is just
one solution, and no longer the best in many situations.
Trading
methods now encompass Contracts For Differences (CFDs),
Spread Betting, Equity and Financial Derivatives (Futures
and Options), and Exchange Traded Funds. Even in plain
vanilla equity investment, the one-time focus on national
bourses has given way to a wide variety of tradeable
markets, on or off the Internet, including so-called
'offshore' stock exchanges.
In
this feature, we will review the progress and uses of
some of the newer ways of trading and investing, paying
attention as well to tax, which is a major issue for
many investors and underlies the development of many
of the newer techniques, particularly in jurisdictions
which cling to stamp duty, such as Ireland and the UK.
Contracts
For Differences (CFDs)
Share
CFDs (they are also used to trade other instruments
such as currencies) are an agreement to exchange the
difference in value of a particular share between the
time at which a contract is opened and the time at which
it is closed. CFDs mirror the performance of a share
or an index; they are traded on margin, and profit or
loss is determined by the difference between the buy
and the sell price.
Because
contracts for difference trade on margin, investors
only need a small proportion of the total value of a
position to trade. CFDs mirror rights in the underlying
shares; thus the owner of a share CFD will receive cash
dividends and participate in stock splits, rights issues
or takeover action.
CFDs have grown enormously in popularity over the past
seven years, particularly with hedge funds, and are
thought to underlie 30% of the LSE's trading. The majority
of major brokerages now offer these products to individual
traders via internet trading platforms, giving instant
access to quotes and other information pertaining to
the market. However, individual investors often use
spread betting (see below) rather then CFDs.
CFDs,
which were launched on the market place in 1998, have
a number of advantages. Firstly, they allow individual
traders the opportunity to take larger positions in
equities than might otherwise be the case through the
use of leveraged margin accounts. In many cases, the
margin requirement may be as low as 10% of the full
transaction value. So, for example, if an individual
wanted to buy 10,000 of ‘Company A’s’
shares and their broker was quoting a price of $1.00,
they would put up an initial margin deposit of just
$1,000, instead of having to fork out $10,000 to buy
the shares outright. If Company A’s share price
subsequently increased and the shares were sold at a
price of $1.20, a profit of 0.20 per share, or $2,000
would be the result. Not a bad return considering an
initial outlay of only $1,000 was needed! The other
major advantage CFDs have over standard share dealing
is that they allow the investor to sell ‘short’
a company’s share, so that profits can be made
on the falling value of stock prices.
However,
where leverage has the potential to deliver handsome
returns, it can also hit one with nightmarish losses,
and the reverse of the above coin is that you could
equally have lost $2,000 for just a $1,000 stake if
the share price had fallen by 20 cents per share. Traders
can protect their downside risk to a degree by placing
a stop loss order. This is an order placed above or
below the entry price (depending on whether one is long
or short) at a point of the maximum loss the trader
is prepared to take, and is usually automatically triggered
when the security reaches that price.
Because
of the risks, CFD trading is highly regulated in a bid
to protect the smaller investor from any unscrupulous
broker. Therefore only traders deemed knowledgeable
enough about the markets in which they are trading and
the risks involved in trading via a margin account are
permitted to open CFD accounts, making them an unsuitable
investment instrument for novice traders.
CFD
providers fall into two main categories, those that
act simply as agents, hedging all CFD orders in the
underlying cash market, and those who make markets in
CFDs, living off their own spreads. Obviously, there
are hybrid types as well; but an investor may get the
best prices through the first, 'agent' type of intermediary.
There are many other considerations, obviously, including
depth of research coverage, trading strategies and technical
analysis. The technical capabilities of the trading
platform are very important, especially for frequent
traders. The credit rating of the provider is also an
issue.
For
those suited to take the plunge, CFDs have certain tax
advantages, depending on the jurisdiction where they
are being traded from. For example, CFDs are exempt
from share stamp duty in the UK, Ireland and some other
countries as the underlying shares are not physically
owned by the investor. However, profits may be liable
for capital gains tax. Other costs to take into consideration
are broker commissions, which are typically charged
at a rate of 0.2%. While this sounds small these costs
can soon rack up if frequent trades are placed.
CFDs are predominantly used for short-term trading and
a comparison must be made between the savings made from
not paying stamp duty and additional costs, including
financing. It's not easy to make comparisons, since
leakage from poor pricing can easily wipe out tax advantages.
However, for trades that are less than three months
it is normally cheaper to trade with a CFD rather than
with the underlying stock.
In
the UK, CFDs also have their uses in position-building,
since until 2006 they were not covered by FSA disclosure
rules (the Takeover Panel however does include them
in its calculations). Ireland is likely to follow the
UK's example. But disclosure is one thing, takeover
rules another. Most rules governing behaviour during
a takeover are based on beneficial ownership, and it
would be tought indeed to extend compulsory offer rules,
for instance, to shares which were merely the subject
of derivative or cfd interests. The UK will probably
have a go at it, and the EU's MiFID directive will also
be relevant; but it must be doubted if any workable
set of rules could be designed.
The
Financial Services Authority (FSA) finished consulting
on CFDs in February, 2008, but incoming director Hector
Sants is on record as saying that it could be difficult
to shift from a regime of ownership disclosure based
on voting rights to one based on economic interest.
"It is an easy statement to make, but very difficult
to implement," Sants told reporters after the FSA's
annual meeting. He said any change would have to pass
a cost-benefit analysis and be practicable, and could
not come into effect before later in 2008. The FSA is
expected to publish a comprehensive set of rules covering
CFDs in Q3, 2008.
The
tax advantages of CFDs in Ireland and the UK are also
under threat. In March, 2006, the Irish Inland Revenue,
which collects 1% stamp duty on stock exchange transactions,
said it was planning to extend the tax to CFDs. But
technical difficulties, plus strong protests from Irish
Stock Exchange officials, may have persuaded the Revenue
that Ireland's CFD business, which is said to underly
€3bn a month in trading on the Irish exchange, would
simply decamp to London if the tax is imposed. Either
government could legislate to tax CFDs in all kinds
of ways, but the direct application of stamp duty might
well be knocked down by the courts.
In
any case, the financial sector thinks that stamp duty
on shares is an antiquated and anti-market tax which
can only damage the future of the UK and Irish stock
exchanges, and would like to see it abolished.
No
doubt the UK's HMRC is watching its Irish brother's
campaign with the greatest interest. The UK Treasury
is not good at abolishing taxes, but is noted for its
ability to invent new ones.
Although
CFDs got their start in the UK because of stamp duty,
they have been taken up in other parts of the world
due to their convenience and flexibility, particularly
over the Internet.
CFDs
are currently available in Germany, Switzerland, Italy,
Singapore, South Africa, Australia, Canada, Thailand,
New Zealand and Sweden. Hong Kong plans to issue CFDs
in the near future. CFDs are not available in the US,
due to SEC restrictions.
The Australian Stock Exchange launched exchange-traded
Contracts for Difference in 2008, making it only the
second exchange to have listed CFDs after London. CFDs
have shown astonishing growth in Australia since they
were introduced a few years ago.
The
EU's MiFID directive, which came into force in late
2007, may threaten CFD trading in EU member states'
markets because of its best execution rules. The situation
is quite unclear. Countries with established CFD sectors,
such as the UK and Ireland, will probably try to find
a way around the difficulty of ensuring best execution
for 24-hr on-line trading, but countries like Germany
and France which might see their lucrative national
stock exchanges invaded by Anglo-Saxon CFD traders will
probably try to hold the line. The result would be to
drive the entire CFD sector offshore, which would be
good for offshore exchanges such as the Channel Islands
exchange based in Guernsey, but eventually disastrous
for land-based national stock exchanges. It should be
interesting!
No
EU member states have yet responded coherently to the
requirements of MiFID as they apply to complex financial
instruments such as CFDs.
Spread
Betting
This
has also become a very popular way for smaller investors
to take a punt on the stock market, and the number of
firms now catering for this form of investing has grown
markedly over the past five years. The internet has
also made spread-betting cheaper and more accessible
to investors.
The
tax advantages of Contracts for Differences also apply
to spread betting, since the bettor has no ownership
interest in the underlying securities. Of course, in
many cases, there is no underlying security. As with
CFDs, spread betting began in the UK, but has spread
(sorry!) to other markets. The UK's new gambling legislation,
which came into force in September, 2007, makes it easier
for providers of spread betting to advertize and operate
in the UK, and will probably encourage further development
of the sector.
Put
simply, spread betting allows an individual to bet on
whether a company’s share price, or the value
of a stock index, will rise or fall above or below a
price quoted by the spread betting firm. In a typical
example, the firm will make a quote for the price of
a market or instrument at some point in the future.
So, for example, the firm may quote a bid/offer (selling/buying)
price for Company A’s shares of $1.00 - $1.05
at the end of a day’s trading. If the bettor thinks
Company A’s share price will finish the day higher
than this price, he would buy, or go long, at the offer
price of $1.10. If the trader is right, and the share
price ends the day at say, $1.20, he will have obviously
made a profit on the bet. The level of profit will depend
on how much money the trader has risked per one point
movement in the share price. If he bet $10 per point,
his profit would be $100 ($10 multiplied by 10 points).
Conversely, if Company A’s shares had dipped during
the day, and finished at $0.95, the trader would have
made a loss of $150.
Spread
betting gives the individual a lot of flexibility at
a relatively low cost in terms of commissions and tax.
It also allows small investors the opportunity to trade
a wide range of financial instruments ranging over stock
indices, currencies, interest rates, commodities, and
options. Most spread betting firms also offer an alternative
to conventional fixed-odds betting on sports and other
events. In fact, many brokers now offer the whole range
of the above services, from CFDs through to futures
and spread betting. However, all of these forms of investment
are fairly high risk and not suitable for the inexperienced
investor. Therefore, they are also probably not the
right choice for the passive, more conservative longer-term
investors.
In
January, 2006, the UK's Financial Services Authority
(FSA) announced that it had fined prominent spread-betting
firm Cantor Index Limited GBP70,000 for running a misleading
campaign promoting spread betting.
The
financial services regulator criticised a Cantor advertising
campaign entitled 'Free Xda' for Cantor Mobile, the
firm's new spread betting device.
According
to the FSA: "The promotional material, which included
flyers handed out at London stations, posters and advertisements
on television and in the popular press, did not contain
adequate warnings about the risks of spread betting
and consequently put a large number of potential customers
at risk."
One of the key risks of spread betting is that if a
spread bet position moves against the customer they
can lose far more than their initial deposit, and although
the firm's terms and conditions contained risk warnings
which the customer had to agree to before they could
spread bet, the risk warnings were not deemed to be
sufficiently prominent by the FSA.
The
regulator also suggested that the structure of the offer
of a "free" combined handheld computer and mobile telephone
known as an "Xda" provided a strong incentive for consumers
to spread bet.
Added
to this, the service was promoted in a way that attracted
the attention of relatively less experienced investors,
and the firm did not consider the greater potential
risk posed or take appropriate additional steps to ensure
that those investors understood the risks associated
with spread betting.
Speaking
with regard to the advertising campaign, Anna Bradley,
director of the Retail Themes Division of the FSA announced
that: "Cantor Index should have paid more attention
to the greater potential risk posed to less experienced
investors and the greater need to ensure that the risks
associated with spread betting were likely to be understood
by them. This should have been done through robust systems
and controls."
However,
the Financial Services Authority did acknowledge that
no Cantor Index customers suffered any unreasonable
losses as a result of the advertising campaign, and
praised the remedial action since taken by the spread
betting firm.
Equity Derivatives
Another
tool offering flexibility to individual and institutional
investors alike is the derivative. Trading in stock
futures, for instance, can be found through a number
of exchanges globally, and, increasingly, through the
Internet. Although futures are perhaps more readily
associated with the commodities or fixed income markets,
where traders or companies have traditionally tried
to hedge against adverse price swings, stock futures
can perform the same function as contracts for differences.
They are thus useful for individual investors who want
to undertake stock trading without actually having to
physically buy or sell the stocks. Basically, buying
shares on the futures market means that the buyer agrees
to buy or take delivery of the shares at a future date,
but paying the current price. Most futures trades are
cashed out before this delivery date, meaning that the
underlying share or instrument never actually changes
hands. As with CFDs, they are also traded on the principle
of margin, so, again, there is potential to take a large
position in an equity without having to put up the requisite
amount of cash.
There
is also the added flexibility that multiple trading
strategies can be employed (as with most other equity
derivative contracts), such as combining long and short
positions with a holding in the underlying shares, and
the use of options, which confers on the trader the
right, but not the obligation, to buy and sell share
futures when they reach a certain price (known as the
strike price). Options can be employed in many different
combinations, and themselves be bought and sold. However,
option strategies have defeated even Nobel-winning economists,
so inexperienced traders may want to start with the
simplest of options strategies where derivatives are
concerned!
Stock Index Futures
Another
slightly more esoteric and less direct form of alternative
equity investment is buying and selling stock indices
in the futures market. While stock index futures have
been on the investment map since their introduction
in the early 1980s, they have only recently appeared
on the radar of the smaller investor thanks in large
part to the growth of internet trading and the rise
in popularity among private individuals of day trading.
Again, stock index futures were developed as a hedging
tool for institutional traders to provide protection
against a price reversal of the stocks in the manager’s
portfolio. However, stock index futures also provide
an opportunity to make smaller short term gains.
The
principle of trading in stock index futures is the same
as any other futures market, except that the trader
is effectively buying and selling a set of numbers,
and no physical delivery of an underlying asset is possible.
This means that positions are settled in cash at the
expiration of the contract at either a profit or loss,
although the vast majority of index futures contracts
are either settled prior to expiry, or ‘rolled
over’ to a later expiry date.
The
value of a stock index contracts is fixed by the exchange
upon which the index is traded. One of the more popular
(and most expensive) indices to trade is the S&P
500, where each point has a fixed value of $250, and
where quick profits (and losses) can be made. So, say
the index is valued at 1,000 points when it is bought,
one S&P futures contract will be worth $250,000.
If one contract is bought on a 10% margin, the trader
must put up $25,000 to initiate the position. If the
index swings by a relatively brisk twenty points during
the rest of the day, the trader has the potential to
gain, or to lose, $5,000 in one fell swoop ($250 multiplied
by 20 points). Clearly, such trading is not for the
faint hearted or light of pocket! However, recognising
that there is considerable demand for this type of trading
among smaller investors, ‘e-mini’ contracts
(‘e’ denoting that trading is electronically
driven) have been developed on some exchanges where
the index is otherwise prohibitively expensive or too
risky for small traders. The S&P 500 e-mini contract
is worth $12.50 per quarter of one index point, meaning
that one contract is worth $50,000 if the index is valued
at 1,000 points, so a 20 point swing represents a loss
or gain of $1,000. It is worth mentioning that not all
indices are as expensive to trade as the S&P 500
or Nasdaq 100. For instance, FTSE 100 index futures,
traded on the London International Financial Futures
Exchange (LIFFE) are worth £10 ($18) per index
point.
Stock
index futures, like many derivative equity products,
originated in the US, but by now they are available
from almost all large equity trading centres. China
is one of the few major trading centres not to have
enabled stock index futures. In 2007, the China Financial
Futures Exchange published draft trading rules for the
country's first stock index futures, which are expected
to be launched in Q2 2008. The Chinese authorities are
concerned about increasing volatility in the country's
red hot markets, however. When trading does begin, it
will be based on an index of the 300 largest firms by
market capitalisation on the Shanghai and Shenzhen stock
exchanges.
ETFs
Exchange
Traded Funds are a relatively new addition to the equity
investment sphere. An exchange-traded fund is an investment
company with shares which trade intraday on stock exchanges
at market-determined prices. Investors may buy or sell
ETF shares through a broker just as they would the shares
of any publicly traded company.
ETFs
were first introduced in the USA in 1993 and in Europe
in 2000. Currently, there are over 1,050 ETFs listed
globally with over EUR522 billion (US$713 billion) assets
under management. In Europe there are over 364 ETFs
available with assets under management of approximately
EUR82 billion. By 2011 it is widely forecast that assets
in ETFs globally will exceed EUR1,500 billion.
ETFs
were first developed in the early 1990s as a means of
giving investors access to a basket of stocks at a low
cost. ETFs first began life in the United States, but
have slowly caught on in other areas of the world, notably
Europe, and they are also making headway into the Asian
markets. ETFs are usually linked to a particular index,
for example the Dow Jones Industrial Average, the Standard
& Poor’s 500, or London’s FTSE 100.
They may track a certain sector within these indices,
like, for example, technology companies, mining companies
or pharmaceutical firms, but they do so within a single
share. ETFs have also been developed that track company
sectors across different exchanges in a certain geographical
region, for example, Western European technology stocks.
This gives investors the chance to diversify their portfolios
by taking exposure to international equities that may
have been off limits to smaller investors through complex
cross-border regulatory concerns. ETFs are also making
headway into territories where equities were previously
inaccessible to smaller investors, such as China.
On
the surface ETFs appear very similar to mutual funds,
but in actual fact, there are a couple of key differences.
One of the main differences is that ETFs can be traded
openly throughout the trading day, unlike mutual funds
which can only be redeemed at the closing price of each
day. This means that ETFs may be equally suitable to
the more conservative buy-and-hold strategist, or the
more active trader looking for short-term speculative
gains. The other major advantage of ETFs over their
mutual fund cousins is that the former can be sold short,
whereas the latter cannot.
Furthermore,
costs are also much lower for ETFs, varying between
0.1% and 0.2%. This compares to average mutual fund
fees of around 1.4%, while unit trusts charges can be
as high as 1.75%. ETFs are also generally more tax efficient
than standard mutual funds. On the other hand, frequent
intra-day trading of ETFs means that costs will increase
the more an individual trades. As with direct stock
purchases, investors must also absorb the bid/offer
spread, meaning that an ETF may have to be bought or
sold at a higher or lower price than desired. So, as
with any other security, there are many considerations
for the investor to weigh up when choosing the construction
of a portfolio.
There
is an extensive and growing range of ETFs. In the United
States, most ETFs trade on the American Stock Exchange
(AMEX). The largest and most popular among them include
the S&P 500 Index Depository Receipts (known as
Spiders), the Nasdaq 100 Index Tracking Stock, otherwise
known as QQQ, and the Diamonds Trust, which tracks the
top 30 stocks on the Dow Jones Industrial Average. On
the London Stock Exchange there are 14 ETFs known as
ishares which are marketed by Barclays Global Investors,
tracking both the FTSE 100 and the broader FTSE250 indices,
the top 100 European firms, the Dow Jones Eurostoxx
index, the S&P 500 and Japanese shares.
Most
European exchanges have ETF offerings. For instance,
the total number of ETFs listed on the Swiss Exchange
(SWX) rose to more than 100 from ten different issuers
after Deutsche Bank listed 13 new Exchange Traded Funds
on the Swiss Exchange (SWX) in August, 2007.
Deutsche
Bank said that as part of its offering, investors in
Switzerland will be able to benefit from falling markets
for the first time. The bank is launching the first
ETFs in Europe on the DJ EURO STOXX 50 Short Index,
ShortDAX and DJ STOXX GLOBAL SELECT DIVIDEND 100 Index,
the latter two which are exclusive to Deutsche Bank.
This complements the ETFs that were launched on the
DJ EURO STOXX SELECT DIVIDEND 30 Index, S&P CNX Nifty
(India) Index and eight other Emerging Market indices
the previous month.
“With
these two ETFs on short indices Deutsche Bank offers
investors in Europe the possibility to participate via
a ETF 1:1 on falling markets for the very first time.
Hence investors will be now able to bet on falling markets
or hedge entire portfolios without having to use derivatives,”
said Thorsten Michalik, Head of Exchange Traded Funds
for Deutsche Bank.
The
21 db x-trackers ETFs belong to a series of 49 outstanding
Deutsche Bank ETFs in Europe. With those 49 outstanding
ETFs Deutsche Bank is the third biggest ETF provider
in Europe, measured by the number of ETFs. The new db
x-trackers ETFs cover indices on different asset classes
– equities, bonds, cash market, credit and commodities.
Deutsche
Bank says that the growth of the ETF market in Europe
reflects the strong demand from private and institutional
investors for passive investment instruments that are
attractively priced and easily accessible. DB x-trackers
ETFs are already available to retail investors in Germany
through monthly savings plans.
Some
51 ETFs from two new and five existing issuers have
been listed on the SWX this year alone, almost doubling
the choice of products in the ETF segment since the
start of 2007. ETF trading volumes were also 55% higher
in the first half of 2007 than in the same period in
2006.
Alain
Picard, Product Manager of ETFs & Other Financial Products
at the SWX & virt-x, observed: "ETFs are becoming more
and more popular in Switzerland. These flexible, low-cost
products meet the varied needs of private and institutional
investors alike. The choice of products in various asset
classes, such as equities, bonds and commodities, is
growing all the time. These new ETF will give investors
access to even more regions, sectors, investment styles
and strategies."
Ethical Investing
Although
ethical investing does not strictly fall into the alternative
category, it can be nevertheless be viewed as an alternative
to the standard equity portfolio or mutual fund. Ethical
investments come in a variety of forms, and tend to
differ depending on the shade of ‘green’
that an individual wants with their investment.
There
are two basic routes into ethical investing: pick the
stocks yourself based upon your own beliefs and ethical
principles; or put your money (and faith) into a managed
fund which only buys stocks in certain companies depending
on the pre-defined rules the fund has set itself. Naturally,
if one chooses not to invest in certain firms because
of the products they make, or because of the negative
side effects they have on the environment or health,
then this excludes a large number of potentially high
growth stocks from a portfolio - for example, firms
in the alcohol, tobacco, armaments, oil and gambling
industries will be off limits, leaving a limited choice
of companies in which to invest. As a consequence, many
feel that ethical funds will never match the returns
of conventional equity investment funds over the long-term.
Nonetheless,
in spite of these self-imposed restrictions, ethical
funds have performed comparatively well in recent years.
One example is the Stewardship Growth Fund, the UK’s
first ethical fund which was launched in the mid 1980s
amid much scepticism over its prospects. Twenty years
on, the fund manages £600 million ($1 billion)
and was ranked in the top fifty of the 276 funds in
its sector over the last three years. Detractors argue
that ethical funds have performed well because they
are weighted towards small and mid-cap stocks, which
have generated good returns over the short term. However,
there is clear and growing demand for ethical funds
and investment products, as indicated by a recent Mori
poll, which showed that two-thirds of clients wanted
independent financial advisors to offer ethical investment
options, so there appears to be enough belief in ethical
investments to make them a viable alternative.
If
one wants to make an ethical investment, it pays to
do a bit of due diligence beforehand, as some funds,
and some companies, may not be as green as they seem
on first inspection. Advocates of ethical investment
recommend that prospective investors study a fund or
company prospectus carefully before deciding whether
it will be a suitable investment that matches their
own ethical principles. To be doubly sure, some advise
investors to obtain a written statement from the fund
or company clearly stating its investment policy or
business activities.
Islamic Investment
Another
route into the ethical investment universe is through
the rapidly-growing Islamic investment industry. Investments
constructed along the principles of Shariah law automatically
screen out companies deemed to have a harmful effect
on society or that are anathema to the Islamic religion,
for instance those connected with alcohol, gambling,
pornography, armaments, and pork. Importantly, Shariah
law also precludes the charging of interest, which is
deemed to be profit made without effort and with no
beneficial effects on the community at large. This puts
a large swathe of conventional investment off limits
to Islamic investors, although a number of specially
constructed investment products continue to be approved
which circumvent the need to charge interest, and which
are proving ever popular.
2006
was the year in which Islamic finance, a concept virtually
unheard of outside banking circles a decade ago, finally
crossed the border-line between slightly exotic alternative
territory and the mainstream. Islamic banking and finance
industry has undergone something of an explosion in
recent years as demand for an alternative to western
banking products structured along ethically-aware Islamic
principles has grown, and in early 2007 it received
the financial equivalent of the accolade when then UK
Chancellor Gordon Brown announced that the Islamic finance
industry would be given the same tax treatment in the
UK as other investments. The move was applauded by tax
and finance experts, who say it puts the City of London
at the forefront of the nascent but rapidly growing
global industry.
Islamic
equity funds are widely available in the traditional
Muslim territories of the Middle East and the Far East
where many major banks and investment firms offer the
products to retail investors. Islamic finance is also
gaining a foothold in the west, with many specialist
institutions appearing in countries such as the UK and
the United States dedicated solely to selling Islamic
investment products. Moreover, some major western banks,
including the likes of HSBC and Deutsche Bank, are getting
in on the act, with more sure to follow.
Key
locations for the rapidly developing Islamic finance
sector are Dubai and Labuan, because they are sophisticated
low-tax centres in Islamic regions with concentrations
of wealthy investors, while London and the Cayman Islands,
as existing banking and investment fund centres, are
home to the highly skilled legal and financial professional
communities needed to bring Islamic products to market.
The
global Islamic finance industry is now worth more than
$1 trillion in terms of assets, having quadrupled in
the last three years. Although this figure remains just
a fraction of global assets, given a world Muslim population
of around 1.5 billion people, the industry has enormous
potential, and this is a fact that is starting to be
recognised in boardrooms of some of the world’s
largest western-based banking, fund management and insurance
groups, many of which have now launched banking facilities
compliant with Shariah law.
In
some respects, the Islamic banking and finance industries
are still in their infancy. However, the sector has
grown sharply in the last decade or so, and with the
global Muslim population currently around 2 billion,
growth potential is clearly in place, so expect to see
Islamic investment become an established feature of
the investment landscape in years to come.
Offshore Equity Investment
Investment
in equities listed on offshore stock exchanges is another
avenue worth considering in the alternative sphere,
which can bring significant tax and cost benefits if
the right investment path is taken. Just what is the
right investment path however, can vary enormously depending
on the jurisdiction of residence (including whether
offshore or onshore), the offshore jurisdiction in which
the investment is taking place, and the tax, regulatory
and legal considerations in both locations. This subject
alone could easily stretch to several pages! Therefore,
offshore equity investing is an area that needs to be
thoroughly researched, and it is essential that a potential
offshore investor employs the services of a suitably
knowledgeable and impartial financial advisor who specialises
in this area. 'Offshore' jurisdictions which have stock
exchanges include: Bahamas, Bermuda, Costa Rica, Cyprus,
Dubai, Guernsey, Hong Kong, Luxembourg, Mauritius, Panama
and Switzerland.
By
and large, these offshore markets are suitable only
for experienced investors, and with obvious exceptions
such as Hong Kong and Switzerland have attracted mostly
professional investors. Most of them have done little
to encourage international retail investment.
The
perils of investing in smaller, offshore markets are
well illustrated by Cyprus and Dubai, both of which
have seen boom and bust scenarios based on localized
'irrational exuberance'. However, if you are cautious,
and do the due diligence, there are sometimes outstanding
opportunities in smaller market places. Anyone who was
brave and clever enough to go back into the Russian
market after 1998 will have been able to retire by now!
At least if she didn't buy Yukos. |
