Investors exhibit many behaviours that do them a disservice from a return, tax efficiency and estate planning perspective. Hoarding excess cash in offshore bank accounts is one of the greatest crimes one could commit against your long-term financial planning objectives for the following reasons:
Figure 1: US bank deposits, notice period and respective interest rates
Source: bankrate.com and Bloomberg, January 2025.
Conservative investors have tackled the first two of the above challenges by switching funds held in bank accounts into US dollar money market funds. These funds typically provide a pick-up in yield above what can be achieved in a US dollar bank account, and the return is enhanced by its tax-efficient structure.
All funds offered via the Ninety One Global platform are ‘roll-up’ funds, meaning that income is not distributed to the investor but is instead ‘rolled up’ in the fund’s price. This has two significant benefits; firstly, it converts what would typically be an income event into a capital event, reducing the rate of tax that will be applied. And secondly, it defers when that tax would be payable because it will only take place on disposal of a unit. The second point means that the client effectively controls when the capital gains tax is payable.
These advantages can be amplified by combining a roll-up fund with an offshore policy wrapper such as the Ninety One Global Life Portfolio. Under this scenario, the effective rate of capital gains tax (CGT) is only 12%. This presents a substantial tax arbitrage opportunity, where a higher rate taxpayer could transition from paying 45% on interest in a foreign bank account (annually) to just 12% upon disposal in a money fund through the Ninety One Global Life Portfolio.
Recent flows to our offshore platform have shown that many investors are implementing this strategy, which has served them well over the past couple of years. However, with inflation now broadly under control, many central banks have commenced their rate-cutting cycle and the yield on offer from dollar cash has reduced in line with that. Against this backdrop should investors be looking at other investment options?
In the current environment, exposure to bonds provides two key benefits. Firstly, with the rate-cutting cycle having started, maintaining some duration within your portfolio ensures that you can earn a higher yield for longer. Secondly, the inverse relationship between bond yields and their prices means that as rates continue to fall there is the potential to generate a capital gain, which can enhance the total return on offer.
The Ninety One Global Diversified Income Fund is an actively managed global fixed income fund that can leverage more potential sources of return, and this larger toolkit can help to maximise returns whilst also mitigating risk.
While a US dollar money market fund typically provides a pick-up of between 2-3% p.a. over what is available in a bank account, the Ninety One Global Diversified Income Fund aims to provide a further boost of total return (approximately an additional 1% after fees) whilst seeking to eliminate capital losses, both over rolling 12-month periods. When held via the Ninety One Global Life Portfolio this combination of a pick-up in yield and ‘roll-up’ structure can lead to improvements in after-tax returns for limited additional risk. This benefit is shown in Figure 2.
Figure 2: Impact on after-tax value, $100 000 invested
Source: Morningstar and Ninety One, as at 31 December 2024, for illustrative purposes only. Yield on offer will fluctuate over time. Performance shown is net of fees. Rate of 2.5% used to depict bank deposit; tax of 45% applied to growth. For Global Diversified Income and US Dollar Money a full disposal is assumed at the end of the graph where CGT is applied at 12%.
The move to the Ninety One Global Life Portfolio also helps to counter the succession planning issues associated with offshore bank accounts:
The move from offshore bank accounts to US dollar money market funds has been a ‘no-brainer’ over the past couple of years due to the pick-up in yield and the opportunity to both reduce the amount of tax payable and defer when that tax is due.
The Ninety One Global Diversified Income Fund provides a potential new home for funds that currently sit in bank accounts and those sitting in US dollar money market funds, thereby helping clients’ conservative offshore investments to work harder for them. While the benefits are compelling over the short term, they become more so when compounded over longer periods of time. Where these investments are combined with policy wrappers, such as the Ninety One Global Life Portfolio, it further allows for investors to simultaneously tackle the challenges involved with estate and succession planning, leading to improved outcomes for generations to come.