Morningstar announces findings from Fourth Global Fund Investor Experience Report; South Africa scores C grade
Morningstar Research (Pty) Limited, a subsidiary of Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today released its biannual Global Fund Investor Experience report, which assesses the experiences of mutual fund investors in 25 countries across North America, Europe, Asia, and Africa. South Africa scored a grade of C in the report. Morningstar researchers identified Korea and the United States as the most investor-friendly markets and China the least investor-friendly market.
Morningstar evaluated countries in four categories that are weighted to calculate the overall grade: Regulation and Taxation, Disclosure, Fees and Expenses, and Sales and Media. Morningstar researchers generally favor active fund regulation; a low investor tax burden; more disclosure; lower fund fees; a varied fund distribution system; and local news media that helps to educate investors about their choices. Morningstar assigned countries a letter grade for each of the four categories and used the underlying scores to produce an overall country grade. The analysis was based on information from publicly available sources, Morningstar data, and Morningstar experts located in the company’s offices around the world.
Tal Nieburg, Managing Director for Morningstar in South Africa, said, “Our mission at Morningstar is to help investors reach their financial goals. The goal of our Global Fund Investor Experience report is to improve the investor experience by examining the treatment of mutual fund shareholders in various countries to spur dialogue about best practices. Every market we examined has areas for improvement, and we hope our research about the experience of fund investors worldwide will help serve as a catalyst for positive change.”
Key findings behind South Africa’s grade include:
• South Africa scored an overall C grade, with the country’s introduction of the Retail Distribution Review bringing improvements to the environment for investors.
• Most notably, South African fund disclosure practices have significantly improved. Beginning in 2015, a Minimum Disclosure Document (MDD) now acts as the point-of-sale reference material and replaces the application form as the reference document. The MDD is updated quarterly and contains useful information regarding the fund objective, risks, and fees.
• South Africa scored slightly above average in the area of Fees and Expenses, earning a B. In South Africa—as well as the United States, Australia, and The Netherlands—ongoing fund fees are typically unbundled, which decreases reported fund fees. However, if investors are paying for both advice and an administration platform, the total cost of owning a fund could be an additional 1.0 to 1.5 percent.
• However, South African investors have a more positive experience concerning annual expense ratios. Annual expense ratios for allocation funds tend to be higher than the average globally, but lower for money market funds. South African annual expense ratios for equity and fixed-income funds are average.
• However, South Africa lags the market in other areas, most notably Regulation and Taxation, where South Africa received a C+.
• While large tax exemptions and tax rates can be managed lower, South African capital controls restrict funds from investing more than a certain percentage in foreign assets, ultimately limiting choices for investors. South Africa is one of only four countries evaluated in the report to impose such restrictions on investors.
The overall country grades for 2015 are below, from highest to lowest and then in alphabetical order:
Korea: A
United States: A
The Netherlands: A-
Taiwan: A-
United Kingdom: B+
Sweden: B
Australia: B-
Denmark: B-
Finland: B-
Norway: B-
Switzerland: B-
Canada: C+
Germany: C+
India: C+
New Zealand: C+
Thailand: C+
Belgium: C
France: C
Hong Kong: C
Singapore: C
South Africa: C
Spain: C
Italy: C-
Japan: C-
*China: D+
New this year, Morningstar incorporated The World Press Freedom Index in its assessment of media for the Sales and Media category. Reporters Without Borders, an international nonprofit organization, publishes the index annually to measure the freedom of information in 180 countries. Morningstar also added a quantitative analysis about the frequency of portfolio reporting in the Disclosure category, and included a first-time review of the fund investor experience in Finland.
Additional key findings of the 2015 report include:
• Korea received an A this year because of its improved sales practices, up from a B+ in 2013, and is the only other country aside from the United States to achieve the top grade.
• The United States garnered the highest score for the fourth time with a top grade of A. While the United States boasts relatively low expenses and strong disclosure, its Sales and Media category grade is average.
• The Netherlands rose to an A- grade in 2015, compared with a B in 2013, improving in the areas of Fees and Expenses and Sales and Media assisted by a newly implemented ban on advisor commissions.
• Finland received a grade of B-, reflecting consistent practices that have developed from pan-European regulations.
• China received the lowest grade of a D+ because of high fees, limitations on overseas investing, and restrictions on foreign-domiciled funds.*
• Since the 2013 study, regulators in New Zealand introduced semiannual portfolio holdings disclosure, while Thailand plans to move from semiannual to quarterly disclosure. Australia is now the only market that does not have portfolio holdings disclosure requirements. The global fund industry is generally ahead of regulatory requirements, with monthly holdings releases becoming common.
• Nearly every market has enacted new or updated regulations over the past two years, which shows active engagement by regulators in the areas Morningstar evaluates in the report.
• In 22 of the 25 countries evaluated, banks and insurance companies are named as one of the dominant fund sales channels. The next most common channel, cited in seven countries, is the independent advisor.
To read Morningstar’s complete Global Fund Investor Experience report, please visit http://global.morningstar.com/GFIE2015PressKit. Morningstar published its first Global Fund Investor Experience report in 2009.
Morningstar has more than 100 manager research analysts worldwide who cover approximately 4,100 funds. The company provides data on approximately 186,500 open-end mutual funds, 9,800 closed-end funds, and 11,300 exchange-traded product listings as of March 31, 2015.
