Offshore Bonds - Flexible Investments for Volatile Markets

The last couple of months have been nervous times for those invested in the world’s financial markets. The fear of recession, the slowdown in the housing market, and the sub-prime mortgage crisis have all lead to the decline in the markets; leaving the average investor unsure whether to be exposed to the equity markets or not.

If you currently have money sitting in a bank account that you want to work harder for you, what do you do? Do you risk investing in equities hoping that, in the long-term, the markets will rise? Purchase fixed-interest and bond funds which may perform well whilst the markets are volatile but will under-perform equities when the bull market returns? Do you invest in property? Or do you hold the money in cash and accept that, whilst your money is safe, it is not going to return as much as you would like?

Many people do not realise that there is an option which allows you combine all four options - an offshore bond.

What is an offshore bond?

An offshore bond (also known as a personal portfolio bond or collective investment bond) is a life assurance contract offered by the larger financial institutions in reputable offshore jurisdictions; such as the Isle of Man, Jersey and Guernsey.

Whilst an offshore bond is technically a life assurance contract, this is purely to give the bond many of its tax advantages. In reality, an offshore bond is primarily an investment vehicle and the death benefit is simply the value of the bond less any outstanding charges (subject to a minimum of 101% of the investment made).

Most offshore bonds can hold any freely tradable asset; i.e. cash, bonds, unit trusts and collective investment funds, property funds, structured investments, capital protected investments, stocks and shares. Individual properties cannot be directly held in an offshore bond as they are not deemed to be freely tradable.   

Existing investors can transfer their current assets into an offshore bond whilst new investors can transfer cash into the bond and purchase their preferred assets through the bond. Many assets, particularly investment funds, can be purchased at favourable rates through the bond - because the assets are being purchased by the life assurance company on your behalf, upfront charges are usually waived.

Additionally, minimum investment levels are often reduced from US$ 50,000 per asset to US$ 10,000 per asset or lower. This allows the average investor to build a significantly more diverse portfolio of assets than they normally could through direct investment.

Why are offshore bonds preferable in a volatile market?

As well as providing the investor the facility to purchase a diverse range of assets, offshore bonds have another key feature which is particularly valuable in troubled markets: many bonds allow the investor to make up to 10 fund switches per year without any charge. This means that when the investor becomes uncomfortable with the markets, they can switch out of equities and commodities and purchase cash, fixed-interest and bond funds to consolidate their gains.

Then, when the investor is happy with the markets again, they can switch back into whichever equity funds they feel will perform best at that time. At this time, they may have as many as 2,000 funds plus individual stocks and share to choose from depending on the bond they chose.

If the investor held the equity funds directly, they may not be able to switch into the lower-risk assets at all or they may have a large redemption penalty on the sale plus brokers fee on the new purchase; either way, most of the losses are likely to have occurred by the time the switch is completed.

Through the offshore bond they could transfer quickly, easily and without charge.  It will also place them in an ideal position to switch back into equities when they feel the time is right - as it would for new investors.

How does this relate to the current market?

At present, many financial consultants are advising investors to switch into cash, fixed-interest and government bond funds. The thought process being that market volatility will continue and bond funds are a ‘safe haven’ in such conditions.

If correct, buying into bond funds now (whether a new or existing investor) would actually result in the investor buying into them at a relatively low value as the demand for cash, bond and fixed-interest funds would be expected to increase  as the market volatility continues and/or a market downturn becomes more imminent.

Therefore, existing investors will consolidate their gains (by protecting them against potential losses from a fall in the equity markets) and may even enjoy better returns than those generated by the equity funds they were previously invested in.

As mentioned above, this would also place both new and existing investors in the ideal position to quickly switch into equities when there is more confidence in the markets again and be in the right investment vehicle for future downturns.

How can Candour Consultancy help?

Candour Consultancy advises on a wide range of offshore bonds from some the worlds leading financial institutions. Should you wish to speak to one of our fully qualified financial advisors, just click here to provide us with your preferred contact details.