Danish taxes still a hurdle for foreign groups
The taxation of returns from non-domestic funds in the Danish market is a vexing challenge, but there are other opportunities developing, says Schroders local head of intermediary sales.
Lars Jelgren, head of Nordic intermediary sales at Schroders, is clear on where his immediate challenge lies.
Danish tax law currently makes it difficult to compete with products not domiciled locally, because of the effect on the individual investor. The gist of the rules mean investors pay more tax on income, such as dividends, from non-domiciled funds. Capital gains may also be treated differently.
“That is annoying,” Jelgren says, as it poses a challenge to any company importing funds into Denmark. And it can affect investors in other strange ways too.
For example, Schroders is the manager of the Danske Bank mutual fund called Danske Invest China. It is described as “more or less” a replication of Schroders’ own Luxembourg-domiciled Greater China fund. The main difference is Danske Invest’s active ethical overlay, but in other respects it is the same portfolio.
‘A form of protectionism’
Jelgren says for a Danish investor deciding whether to invest in either the Danish-domiciled Danske Invest China or the Schroder Luxembourg Greater China fund, there is the realisation that the latter will come with a higher tax bill. Danske Bank even has its own equivalent fund domiciled in Luxembourg, which Schroders also sub-advises on. Here too, an investor would be taxed more, Jelgren says, adding the tax rules could be described as a form of protectionism.
Despite this challenge, Jelgren sees several ongoing areas of development in the Danish funds market which leads him to be positive on the opportunities for non-domestic houses such as Schroders.
One is the level of diversification – or rather lack of it. For example, there is a dearth of UK equity funds in comparison to Germany or Turkey funds. The argument seemingly put forward by the market is that lack of demand means it is not efficient to launch UK funds for Danish investors. Jelgren does not agree. What is likely to happen in the future, he says, is greater use of master-feeder structures within financial groups and feeder funds into external products not on the market.
Trend changes in client demand are another area of opportunity, although it is important to distinguish between what investors say they want and what they are actually buying. There is interest in, and buying of, different types of credit – both high yield and investment grade – but the actual buying does not necessarily reflect the level of interest in alternative products.
Another area of interest yet to change buying patterns is multi-asset products. “This interest is very encouraging,” Jelgren says. “Two-to-three years ago it was unthinkable to even discuss a multi-asset product with a bank with in-house fund production capabilities.”
He adds that the top four areas of discussion nowadays are: absolute return, credit exposure, hedge fund exposure in Ucits format and multi-asset.
Fixed income has long dominated the Danish market, particularly in the form of sovereign bonds and mortgage bonds. This made sense when interest rates were high, but with rates currently so low, investors are starting to realise they risk losing money if they are positioned incorrectly, (for example, their position is too long). This implies some opportunity for specialist credit products in the market.
Multi-asset may be the most promising of all these areas from Schroders’ point of view. There is increased pressure on selectors and asset allocators to service their own clients, Jelgren says, and it means the discussions with them have become more earnest over the past 18 months. If they are unable to build their own multi-asset products or solutions, Schroders’ own suite of multi-asset funds are on hand to take advantage of any demand.
There is also a noticable increase in the level of due dilligence being performed by selectors. This requires more resources to deal with, for example, more frequent and detailed reporting. However, the upside to this extra work is that it may help build more faithful clients over time.