Foreign-based mutual funds and ETFs are a typical example of a PFIC, which are corporations where at least 75 percent of the gross income is “passive" (e.g. dividends, interest, capital gains, rent, royalties), or where at least 50 percent of the assets generate passive income.
The U.S. is one of the more complicated jurisdictions in the world, says Reed, and citizens must be mindful the rules may follow them around the world. In Singapore, you don't pay taxes on capital gains, but if you're an American, you're still required to file U.S. taxes, where short-term and long-term gains are taxed differently. This means a Singaporean money manager may not manage the frictional tax costs the same way a U.S. manager would.
Fixing an error after the fact can be extremely difficult and costly.
A diversified portfolio is key
Another area investors often overlook is their liquidity needs. “A pitfall that families can run into is too much concentration in high-growth illiquid strategies," says New York-based, Ben Goetsch, a senior analyst for Investment Solutions at City National Rochdale.
“Ensuring they have exposure to liquid asset classes is important. And that's especially important in the context of families that have large illiquid holdings already," Goetsch says, adding it's also important from a diversification perspective.
If a family's wealth comes from real estate business, for example, their portfolio should not hold significant real estate investments. In other words, diversify and invest in something different from the family business.
Diversification becomes all the more important considering we're in the late stage of the current economic cycle and not likely to see the same significant returns of the last decade in the coming years.
In the next five years, 36 percent of HNWIs in Asia say their investment strategy will shift towards greater diversification, according to EIU data.
Build your global portfolio
While markets are difficult to predict, City National's Goetsch recommends holding some traditional asset classes such as global equities, with a focus on emerging Asia and the U.S.
While the pace of growth in China has eased in recent years, it's still growing more rapidly than Western economies. The same is true for several other emerging markets in Southeast Asia, making them appealing investment targets.
Europe, still feeling some of the repercussions of the financial crisis more than a decade ago, has seen its growth slow substantially. And with interest rates sitting in negative territory, the region is less attractive for investors.
Outside of Asia Pacific, just eight percent of HNW respondents in Asia say they invest cash and savings in emerging markets such as the Middle East (four percent), Latin America (three percent) and Africa (two percent), according to The EIU.
“Ten years into this expansion, we've seen very high levels of returns in the equity markets globally, and we've seen interest rates come down significantly," says Goetsch, noting valuations for traditional asset classes are relatively high versus history.
“What that implies for the future is that there's a high likelihood that the returns over the next five to 10 years will be generally lower than the return for the last five to 10 years."
This is a sign for investors to look for differentiated sources of return. Some are turning to the loan or credit market. High-yield segments of bond markets, for example, have become popular and there is an increased interest in alternative asset classes, especially among ultra-high-net-worth individuals.
Of the HNW investors surveyed in Asia by the EIU, 42 percent say they invest in hedge funds, 18 percent are active with managed futures and 17 percent hold commodities.
Whatever your risk profile and your goals for the coming decade, being mindful of your needs, the tax implications of your investments, and the regulatory landscape of both your home country and where you reside, are essential building blocks for a diversified portfolio.
* Younger generations are those aged between 18-54, who are also known as Generation Z, Millennials and Generation X. Older generations are known as Baby Boomers and Silent Generation.
City National Rochdale, LLC (City National Rochdale) is a wholly owned subsidiary of City National Bank, an RBC company. City National Rochdale is an SEC registered investment advisor.
Non-deposit investment products are not guaranteed by City National Bank or any of its affiliates or subsidiaries. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. All investing is subject to risk, including the possible loss of the money you invest.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank, its affiliates, and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.
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