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Home-Court Advantage

Once again, the United States ranks as the top country for mutual fund investors.

John Rekenthaler and Benjamin N. Alpert, CFA, 08/14/2013

This article originally appeared in the August/September 2013 issue of MorningstarAdvisor magazine. To subscribe, please call 1-800-384-4000.

Investors can always find something to gripe about when it comes to the U.S. mutual fund industry. But in reality, investors here are better off than their counterparts across the globe. For the third straight time, the U.S. mutual fund market has finished atop Morningstar’s biennial Global Fund Investor Experience Report.

The report, which debuted in 2009, looks at industry practices across 24 countries from the perspective of a fund investor. In addition to measuring the quality of a country’s fund industry, the study looks at a country’s regulatory climate, tax policies, disclosure guidelines, costs, sales practices, and media coverage. The countries are graded on a scale from A to F in four categories: Fees and Expenses, Disclosure, Sales and Media, and Regulation and Taxation. Those four grades are combined to form a single overall score.

The United States finished first in the rankings with an overall grade of A. The United States led all countries in Fees and Expenses and Disclosure. It finished third in Sales and Media.

Those showings enabled the United States to overcome a mediocre ranking in Taxation and Regulation and to continue its streak of having notched the top overall grade in each of the survey’s three editions.

For those keeping score, Korea came in second. The country, which was included in the report for the first time, benefitted from decent fees and its regulatory environment, although it could improve on portfolio-holdings disclosure. Bringing up the rear was South Africa, which fell to a grade of D largely because of poor disclosure rules that have failed to keep pace with improving global standards on transparency. Canada earned a C+. Its Sales and Media practices are exellent, and Disclosure is very good. These benefits are offset by annual expense ratios that are the highest in our survey.

Cost Effective
The United States dominated in arguably the most important area, Fees and Expenses, which accounts for 30% of the overall grade. It is true that the scope of the Fees and Expenses measurement is narrow. The survey does not capture expenses from no-transaction fee platforms, plan fees from 401(k) recordkeepers, and asset-based fees from financial advisors. These costs are part of a fund investor’s experience, but they are difficult to quantify. The decision to use only direct fund costs helps the United States because it levies more indirect fees than other countries. On the other hand, the United States is hurt by the survey’s sole emphasis on mutual funds. The United States has an enormous exchange-traded-fund industry. ETF costs are typically lower than those of mutual funds. Recognizing that ETFs are part of the mainstream, Morningstar will include those investment vehicles in the 2015 edition of the report.

Even so, the United States still fares well. For equity funds, no country save the United States has an asset-weighted expense ratio that is under 1%. In contrast, Canada’s and Italy’s equity funds have asset-weighted expense ratios exceeding 2%, and seven other countries are between 1.75% and 2%. The United States also has the lowest costs among broad asset groups, such as fixed-income, asset allocation, and money market (Exhibit 1).

is vice president of research for Morningstar.

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