The issue of where a fund is domiciled is one that investors have usually left to the investment management group, but competition among the major jurisdictions has become so hot that location will play an increasing part in the choice. It is becoming a question of whether the interests of the investor or the investment group running the fund are paramount.

One Scottish investment group says it chose Dublin over Luxembourg as a location for its funds, because it was more advantageous to clients. Are those with already established bases in one of the locations going to be just as forthright in the investors’ interests? It is hard to see them selling anything but their own places of operations. For this reason, some of the biggest groups make sure they have bases in as many as they can.

More and more jurisdictions claim to be the best base for pooled schemes, but four are likely to have most appeal to Europeans: Luxembourg, Dublin, Jersey and Guernsey. But there are others which are used within the European zone, including Cyprus, Gibraltar and the Isle of Man, and those further afield in the Caribbean.

Europe’s cross-border fund market is currently dominated by Luxembourg. Continental Europeans have long had an affinity with the Grand Duchy’s stable environment, whose appeal is often based on the length of its presence in the fund market.

People are historically used to coming here,” says Eleanor de Rosmorduc, manager at Flemings in Luxembourg. “France, Belgium and Germany all consider Luxembourg as an extension of their own country.” The symbolic extension is compounded by the linguistic capabilities of the Luxembourg service providers, an area which Rosmorduc points out is not being adequately served by the competitors. “You can only go so far in the institutional market speaking English.”

Luxembourg certainly does not sell itself on being cheap. On the contrary Rosmorduc sees rising staff costs as one of the main problems as salary is linked with inflation and Luxembourg law matches the degree of remuneration with the level of education reached, impacting on the overheads suffered by companies based there. But in terms of sheer volume, with more than $320bn assets under management in investment funds - a 13.9% increase since end-1995 - Luxembourg is still Europe’s clear leader.

The latest innovations to come out of the jurisdiction include the cloning of funds, developed by Banque Indosuez Luxembourg, and the establishment of the European Fund Administration company - a joint venture between Banque Generale, Kredietbank, Banque et Caisse d’Epargne de l’Etat and Banque de Luxembourg. And the next thing in the pipeline is the Euro-pension scheme.

The new player biting at Luxembourg’s heels is Dublin, whose scope for attracting future business is, some say, even greater than that of Luxembourg. Dublin is particularly popular with English-speaking countries, such as the US and the UK, although this is not its sole client base. Dublin markets itself on being more flexible and quicker on setting up funds and also as generally a lower-cost country in which to do business. The jurisdiction offers a massive, cheap and highly educated workforce, which does not look set to dwindle, though some criticise it for a lack of middle management as salaries are not competitive enough. And while one Luxembourg banker points out that education is no compensation for experience and that Dublin has five years to go before it even reaches the point Luxembourg is at now, it is continuing to attract business. And continental groups have not been shy to use it. One recent example was DEKA, the German asset manager which also has operations in Luxembourg.

The Channel Islands are viewed as the real European offshore domiciles - notably because of their exclusion from the EU, and significantly from the Ucits funds directive, which is designed to allow funds meeting certain criteria to be marketed throughout Europe. This gives a passport to Europe for funds based in Dublin and Luxembourg. Jersey is now particularly attractive to investors wishing to enter “esoteric areas of investment” such as derivative products.

The UK has been a traditionally good source of business, but Jersey found a particular niche in the Japanese market when it became an OECD country and now attracts business from the Middle and Far East and South Africa. Legislation on collective investment schemes is being updated and is moving away from the widely misunderstood dual-pricing system. The change to the mid-market pricing basis implemented by its Dublin and Luxembourg counterparts is expected by the end of the year.

Guernsey until recently has acted more as a retail base for offshore funds and has moved into the institutional arena due to the “less labour-intensive” nature of the market. Like Jersey, Guernsey serves the specialist fund market, particularly in the emerging markets sector, but also has a heavy weighting in currency and fixed-income funds. Despite their exclusion from the Ucits market, the islands have set up bilateral agreements with various countries around the globe, enabling them to market their funds internationally. While they view themselves as a global base, with investors located in more than 140 countries worldwide, a large proportion of investment comes from the US. Guernsey is promoting its protected cell companies, which the Guernsey Fund Managers’ Association says will be easier to manage, more cost-effective and more secure.

Offshore domiciles make the most of their tax advantages, though they may not trumpet these. Both Jersey and Guernsey are low-tax areas - neither has income or capital gains tax for the external investor. While money managers - particularly those based in Luxembourg - are keen to point out that the tax aspect is not the selling point of the fund, the tax situation in Luxembourg is, in some cases, enough to turn some institutional investors towards Dublin. The current taxes levied on funds are six basis points on equity and bond funds, two basis points on money market funds, one basis point on institutional funds while none is charged on fund of funds (where the investments are in Luxembourg funds).

While Luxembourg might not see it as an issue, many investors think otherwise. “We have seen a lot of people looking at the jurisdiction and saying, well, I’m just not going to pay that,” says Richard Warne, vice president of global fund services at Chase, despite the other advantages Luxembourg might offer. Similarly Citibank set up a money market fund in Dublin, now worth approximately $1.28bn, to avoid the six basis points which were then charged on the fund. As the fund only had a 25 basis point expense ratio, paying six of that out in tax proved to be enough of a deterrent. Luxembourg has since dropped the tax, partly due to the competition from Dublin and also through increased pressure from promoters.

For certain funds, Dublin has a clear advantage on the tax side through double tax treaties it holds with various countries around the globe. Dublin holds more double tax treaties than the other three domiciles, which may make it an attractive domicile for an institution wishing to invest there. These treaties exist to protect the investor from suffering tax twice - once in the domicile and once in the country of investment. Neither Jersey nor Guernsey impose a withholding tax, which would make it difficult to negotiate such treaties - because if an investor is not suffering tax at source, there is no reason why the country being invested in should give a reduced rate of investment.

Dublin benefits from a 10% tax break for local management companies, which is up for revision and possible abolition in 2005. And while domiciles such as Luxembourg might be rubbing their hands in glee, the real impending issue could affect them both. The advent of tax harmonisation throughout the EU could theoretically tarnish the appeal of Dublin and Luxembourg for some member states and it could be the Channel Islands’ turn to welcome in some new investment.

Investor protection is provided by the four domiciles. With financial service providers realising they must be present in as many countries as the customer demands, the question of investor protection is not so much a comparison between domiciles as between the big service providers and if they operate in the domicile where the fund is based. In the age of globalisation, most of the big players are spread across three if not all four domiciles, so the investor should receive the same service and security guarantees.

As Gordon Fitzjohn, director of Morgan Grenfell, Jersey, points out, “They should get the same service from Dublin, Jersey and Luxembourg, as nowadays the big service providers have uniform systems and operational procedures, regardless of the centre.” However, the notion of investor protection has traditionally been applied more aggressively for retail clients rather than institutions. Institutional investors are often viewed as sufficiently sophisticated and well-informed to be prepared to face an element of risk to serve their investment needs. So much so, that neither Dublin nor Luxembourg offer any compensation schemes to institutional investors on the basis that, says Bernard Hanratty, head of offshore funds at Citibank in Dublin, they “don’t need anyone there to pick up the pieces” and are in fact deemed as “most inappropriate”.

The flip side of this is that the offshore authorities are willing to be more flexible with the institutional investors, which are naturally investing a substantially larger amount of capital, or are bringing in welcome business for the jurisdiction’s third party service providers. According to Chase’s Warne, “the rules are relaxed to a point where you can virtually go and ask for the relaxation of any rule you like on a case-by-case basis, based upon the nature of the fund and investors, and then it will be up to the regulators to say whether they are comfortable with that.”

Investor protection, though does not disappear entirely. “The Guernsey authorities are obviously flexible where they can be,” says Nick McCathie, chairman of the Guernsey Fund Managers Association, “but I would stress they would not allow any form of derogation from the appropriate rules or regulations merely on the basis that ‘oh well, if we don’t we’ll lose the business’.”

Jersey’s regulatory system, in fact has been known to turn down business on the basis of the promoter’s reputation. “Sometimes it’s a little bit over the top” admits Fitzjohn. “Jersey may decline or reject promoters of an institutional fund and promoters can then go to Dublin.” If a promoter is not sufficiently experienced, “too embryonic”, or does not have a wide enough spread of investors, the application for a fund can be rejected. Dublin, with its more aggressive self-promotion, may take a more relaxed approach to competing against the likes of Luxembourg. “Dublin will take a broader view perhaps to taking on business from newly established promoters. Jersey likes to have the comfort that the promoters of institutional funds have a track record. And it protects the Jersey fund industry” says Fitzjohn. Jersey puts tighter reins on the responsibility of trustees, with the regulations stipulating that the custodian of the fund must also be domiciled on the island to enable regular compliance checks, though certain circumstances allow the delegation of custodians. There are doubts if Dublin has been able to sustain the same amount of diligence in this area in its quest for new business. Fitzjohn says: “Dublin tries to do the same, but I think they have grown so quickly that I’m not sure if they’ve been able to achieve that.”

Admittedly, a healthy appetite for market share does not necessarily correlate with a lesser quality of service, and even if this was the case it is certainly not deterring money managers from adopting Dublin as their second home. Banque Internationale á Luxembourg for one is including the domicile in its global expansion programme and more are sure to follow in its footsteps. And while investment managers might assure investors that it is the manager that counts and not the fund’s base and that there is no real battle on between the domiciles, the Luxembourg government’s stance on tax harmonisation might suggest otherwise. By only consenting its vote if OECD countries are included, not-ably bringing Jersey and Guernsey into the same tax bracket, it conveys the notion that perhaps that competition is more fierce than some managers would like investors to think. Let the games go on.

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