European markets heading for unprecedented growth

The past year's performance of international investment funds marketed in the Republic from Britain was covered in this column last week and it generated some interest from Irish fund managers who thought we should also make the case for the domestic product.

"While the performance of external investment institutions is commendable," writes Mr Dara Fitzgerald of Hibernian Investment Managers, "I would question the number of Irish investors who actually invest in these mainly sterling funds. In addition there may be an issue in relation to the tax treatment of gains and returns." Mr Fitzgerald stoutly defends the performance record of Irish fund managers, pointing out that his own company launched a new series of Euro funds just last January that should, he says, "benefit from the expected strong economies and investment markets of the Euro-bloc. We're pleased to report strong interest by investment advisers and their clients and excellent returns since the launch," he writes. "I appreciate that six months is a short time in investment terms, but the figures are as follows: Hibernian EuroEquity Fund (38.2 per cent net); Hibernian Continental Equity Fund (29.0 per cent net). The EuroEquity Fund is the best performing of all unit-linked funds over this period."

Mr Fitzgerald's comments about the tax treatment of the international funds is correct: the Invesco, Gartmore, HSCB, Fleming, Templeton European equity funds we quoted last week achieved six month performance of between 41.65 per cent and 22.67 per cent, but these are gross returns as these funds are not taxed internally (as Irish funds are).

CGT at the full 40 per cent rate does apply on gains from British or European-based funds, so they should be treated as long-term investments, certainly until the tax anomaly is reversed. Irish investments are charged either at a 20 per cent CGT or 24 per cent income tax rate and many investment advisers are complaining that the higher CGT rate at the very least breaks the spirit of EU competition regulations. Even with the higher tax, some independent advisers believe the tax-free roll-over status of the funds themselves give them a distinct advantage in the long term over domestic funds which must reserve profits to pay annual tax obligations. (Irish pension funds are not taxed internally and their returns are significantly higher that ordinary investment funds.) Moneymate provided us with year-to-date and two-year performance figures which show the cumulative two-year returns from these funds have been nothing less than spectacular, though returns to date this year do not suggest the same high rates from 1996-1997 will necessarily be repeated. A consensus is emerging that the fall-out from the collapse in Asia is going to have some stifling effect on growth in the West.

There are pros and cons whichever choice you make about fund managers: experience, access to information and resources, tax regimes, size and volume of the funds and past performance all come into play. But the evidence appears to be clear that European companies and stock markets are going into an unprecedented period of growth, that might be slowed down by external world events but is unlikely to be reversed.