AIA | News

Securities Investment Trends and Returns

Last updated: 08 Sep 2025 09:00 Posted in: AIA

We consider the growing popularity of investment in international securities, alongside the issue of reclaimable withholding tax being left on the table, affecting investor’s rightful returns.

It is easy to be dazzled by the meteoric rise in the capital values of some US domiciled stocks. They have fuelled the majority of recent market growth, with a collection of iconic stocks representing several percentage points of total US stock market capitalisation, and having stock prices that have grown exponentially over the last decade.

Nonetheless, it is important to distinguish between dividend earnings and capital growth as, over the long term, many analysts remind us that capital values can plummet just as easily as they can escalate. Over the long term, dividends have been the main contributors to total return in equity investments. An analysis of the S&P 500 returns since 1940 shows that, over this period, dividends and dividend reinvestments accounted for 94% of the index total return.

The outlook for earnings in the US markets is critical for UK investors. Most investment portfolios have a strong representation of foreign stocks, and the majority of these will tend to be the in the United States and in Europe – simply the result of market size and investment opportunity. Equity dividends elsewhere have also remained healthy and consistent since the Millennium, in contrast to other asset classes. For instance, payouts for the MSCI Europe have once again reached record levels, according to calculations by Allianz Global Investors, and the dividend yield is following a positive trend too. More recently, this has also been accompanied by rising bond yields, both sovereign and corporate.

The popularity of foreign investment

All this adds up, despite recent volatility, to a leap in income rates from all securities – fixed income and equities alike. Additionally, the appetite for foreign investment has actually grown. Data from the International Monetary Fund (IMF) reveals income from foreign stocks and bonds steadily growing over the last ten years.

Further analysis of this IMF data shows how foreign investment portfolio values have changed over a ten-year period. The totality of cross-border securities investment has increased by 58% over the period. An extended bull market (with a dramatic but temporary hiatus in the COVID crisis) has favoured foreign equities, which have seen 69% growth over the last decade. Overseas bonds, with government issuance providing only suppressed returns until recently, have shown a more modest 35% growth in value in the total investment portfolio.

To compare proportionate growth rates, total assets under management in UK institutions increased by just over a third in the last ten years; by comparison, the UK’s foreign equity investments expanded by over half.

The pensions issue

While returns on equity and bond investments are looking healthy, there is an accompanying concern for asset managers – the adequacy of individual savings for retirement.

Pension funds went through stormy times after the financial markets crash of 2008, yet most have subsequently recovered. For defined benefit schemes, which suffered heavily due to an extended low-interest rate environment from fixed income instruments, the coast now looks clear. According to the Department for Work and Pensions, there are still around 5,000 defined benefit schemes operating. These schemes have around £1.4 trillion in assets and are relied on by 10 million people for their retirement income.

Their deficit has been turned to surplus, according to PwC’s Low Reliance Index. This means that the majority of defined benefit pension schemes have become ‘fully funded’ and are on track to meet their future obligations. However, the move to defined contribution schemes has been considerable since the Millennium, with four to five times the number of enrolled members in defined contribution schemes compared with defined benefit.

Yet, none of this means pensions are magically adequate across the population. A seminal and balanced study from the Institute for Fiscal Studies notes that negative factors outweigh positive developments, resulting in the need for UK citizens to increase their savings rates to provide for their retirement.

All of this raises an ethical issue – that pension scheme administrators should make every effort to maximise returns for their beneficiaries. The same is true for investment managers where the client is saving privately for their retirement.

Tax implications

Why then should the issue of maximising returns on foreign stocks and bonds be relevant to taxation considerations?

Generally speaking, when foreign dividends or bond interest payments are made, the tax regime in question retains a certain level of withholding tax. Where that jurisdiction has a double taxation treaty with the investor’s domicile, a proportion of that withholding tax is reclaimable.

For foreign investors into most developed markets, the statutory withholding rate ranges from 15% to 30%. For most treaty partner countries, investors can claim back between five and 20 of the percentage points withheld. Translate that into a proportion of dividend or coupon earnings, and the loss from failing to reclaim withholding tax puts a serious dent into the investor’s rate of return.

There would be no issue if reclaimable withholding tax were efficiently and effectively reclaimed for investors. But do asset owners – pension funds, insurance companies, sovereign funds – enjoy the fullness of those dividends or interest payments?

The answer is ‘they do not’. Or rather, they don’t back all their investors’ rightful returns. The reclamation process is bureaucratic and complex. Many studies have remarked on the complexity of reclaiming withholding tax. The result is that not all reclaims are processed, with investors ending up losing a percentage of their rightful income.

This issue has come under the spotlight as the global volume of dividends paid out rises, and bonds once more deliver a significant coupon. Asset owners such as pensions funds have a duty to their beneficiaries to maximise income, fund managers also have a fiduciary duty to optimise returns for investors, and custodians want to deliver the best possible service to clients.

How much is being left on the table?

At TaxTec, we compile a regular study showing how much withholding tax lies unreclaimed annually on foreign dividends and interest payments. The study provides the most up to date global estimate as $16.4 billion, with US cross-border investors missing out on over $3.8 billion in rightful returns. UK investors are leaving $1.3 billion in unreclaimed withholding tax on the table.

The reason for withholding tax lying unreclaimed has been, in our view, the complexity and bureaucracy of the process.

A proportion of investment administrators have historically looked at the effort needed to reclaim and have concluded it uneconomic. Also, in a world of long-term historical capital value growth on stocks, it is all too easy to brush the benefits of reclaimed returns to one side as less significant.

However, as noted at the beginning of this brief article, long-term returns from equities investments are focused on dividends rather than capital gains. So to ignore marginal earnings benefits from withholding tax reclamation is also to do investors a major disservice over time.

Closing the tax reclamation gap

Modern technology has now come to the rescue of investors. Complex bureaucratic tasks can now be automated. Artificial intelligence is able to manage unstructured data and interactive processes. In short, there is no excuse for investment management and administrators to fail to grasp the totality of returns for investors, including tax reclamation of foreign dividends and interest payments.

As to the likely future balance of a typical investment portfolio, most analysts expect international diversification to grow. This is not merely into the United States, where the current capital gains might prove less than permanent. The basic picture of economies across the globe remains slower growth in many developed economies, contrasted with rapid (but possibly volatile) growth in developing areas of the world.

Investment portfolios will undoubtedly follow that growth to provide best value and opportunity for investors. Therefore, the issue of delivering the fullest returns from foreign stocks and bonds is an issue that is likely to grow in importance.

While some progress has been made over the past decade in withholding tax reclamation rates, there is a still a fair way to go. Services that ease the process of reclamation are widely available. And a handful of pioneering custodians have already engaged those services to optimise investor returns. Yet the gap still remains.

These returns belong to investors, and it is the ethical duty of all market participants to ensure they are not left unnecessarily on the table. Double taxation treaties were set up to ensure that investors are not taxed twice, yet lack of reclamation on a proportion of rightful income is effectively allowing double taxation to continue.

 

Author bio

Stephen Everard is founder and CEO of TaxTec