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Inside Our Report on the Global Mutual Fund Industry

How we evaluated countries on regulation and taxation, disclosure, fees and expenses, and sales

Anthony Serhan, Managing Director of Research Strategy, Morningstar Australasia

 

The Morningstar Global Fund Investor Experience study looks at the global mutual fund industry to find markets that can provide great experiences for fund investors. We produce the report every two years to encourage a dialogue about global best practices for mutual funds from the perspective of fund shareholders.

Our 2017 study evaluates mutual funds in 25 countries on four categories—regulation and taxation, disclosure, fees and expenses, and sales—and grading each country on a five-point scale of Top, Above Average, Average, Below Average, and Bottom.

Here are some results for these four categories, and a brief explanation of what we look for in each:

Mutual fund regulation and taxation

Country results: The regulation and taxation section had the tightest grouping of grades, as indicated by the large number of Average grades. No country received a Top grade, but Singapore led a group of three that includes Italy and South Africa with Above Average grades, while Australia had the lowest grade. As in 2015, the U.S., the country with the highest overall grade, fared relatively poorly, earning a Below Average. South Africa fared strongly, improving its grade from 2015, followed closely by a group of countries from both Asia and Europe.

Our analysis: In Morningstar’s view, one of the best regulatory practice is to have a single regulator that’s independent of the fund industry. The regulator is responsible for overseeing the management, disclosure, operations, and distributions of all types of investment funds. As an independent entity, the regulator doesn’t face the conflicts of a self-regulatory body, which must balance the desires of the industry with the need to protect investors. When assessing mutual fund taxation, Morningstar looked at the matter solely from the perspective of a fund investor: A lower tax rate is usually better, and tax incentives that reward long-term investing are usually better.

Mutual fund disclosure

Country results: In disclosure, the United States and India earned Top grades, with five countries—Canada, South Korea, Sweden, Taiwan, and Thailand—getting Above Average grades. While most countries occupy similar positions as in the 2015 survey, India and Thailand took notable jumps upward as their mutual fund disclosure practices improved significantly. This global progress is also seen at the other end of the scale with no country receiving the lowest Bottom grade for disclosure. South Africa, which received one of the lowest grades in the last study, saw a noteworthy improvement and earned an Average grade in 2017.

Our analysis: Disclosure begins with a fund’s initial document—the prospectus. In recent years, these long and complex prospectuses have been replaced with shorter versions, known as the short-form or simplified prospectus. That’s a beneficial development for prospective investors, because—if best practices are followed—it lets them see a fund’s costs, risks, investment strategy, and other information written in plain language in an easily digested format. Europe has historically led in this area but other countries are pushing forward with Thailand now requiring the use of charts and tables to help investors better understand complex data while South Africa has now implemented a new Minimum Disclosure Document standard.

Mutual fund fees and expenses

Country results: The overall grades for fees and expenses across the study indicate some movement from prior years, with the perennial anchors—the United States, Australia, and the Netherlands—grading highly (which correlates with low fees and investor-friendly fee disclosure), and Canada and Taiwan in the Bottom bucket, primarily because of high asset-weighted median expenses. Joining the Top countries for fees and expenses are New Zealand and Sweden, with Belgium falling into the Bottom grouping.

Our analysis: Our 2017 calculations of asset-weighted median fees in the major asset classes—equity, fixed income, and allocation—show continued downward pressure on mutual fund fees in many global markets. Taken together, bans on (or substantial waivers of) sales loads, continued decoupling of mutual fund expenses from advice charges, bans on commissions, plus mandatory fee transparency, have resulted in a great many investors paying less for funds than ever before. But while the costs of certain investment products are declining, and relatively cheap exchange-traded funds are proliferating, investors are in many cases still paying as much to own a portfolio, as advisors are still predominantly paid by commissions in many of the global markets examined and many of the dominant financial institutions are not quick to adopt new models.

Mutual fund sales

Country results: Australia has the best investor experience for sales, earning a Top grade in the 2017 study. Belgium, Finland, Norway, and Spain all received Bottom grades.

Our analysis: We believe investors are best served by sales practices that place their interests first. When we examined sales practices across 25 fund markets around the globe, we looked for markets where financial advisors are subject to a fiduciary standard and there is a requirement to disclose conflicts of interest. We prefer fund investors to have easy access to a variety of fund options, ideally through an open-architecture system, that are not dominated by a certain type of financial institution. 

Read more about the global mutual fund industry in the Morningstar Global Fund Investor Experience report.

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