India leads most markets in fund disclosure practices

This month, Morningstar, Inc. released its biennial Global Fund Investor Experience (GFIE) report, which grades the experiences of mutual fund investors in 25 countries.

Though the evaluations is done in 4 categories —Regulation and Taxation (20%), Disclosure (30%), Fees and Expenses (30%), and Sales (20%); the report examines the practices of the fund industry; the practices of fund distributors; the structure and effectiveness of regulatory bodies; disclosure policies; and the tax code. The grading scale consists of Top, Above Average, Average, Below Average, and Bottom.

• The Below Average grade in Fees and Expenses is a function of the higher expense ratios in India, which in turn reflect the more limited economies of scale at present.

• India receives an Average grade in Regulation and Taxation. India matches global best practices in many areas of regulation. India is one of only a handful of countries in this study that continue to have capital controls limiting the amount funds can invest in foreign securities. The tax system provides incentives for fund investing, including the deferral of capital gains tax until units are sold.

• Disclosure in India earns a Top grade, it is the only other country along with the United States to earn this grade. Transparency of portfolio holdings remains the best of any market, with monthly disclosure required and those portfolios typically released after 10 days. It is now mandatory for asset managers to disclose fund manager compensation levels as well as manager investments in their funds.

• India’s Fees and Expenses grade of Below Average reflects some of the highest expense ratios for equity and allocation funds in the study and the reliance of ongoing trailing commissions to pay for advice. Canada, India, Italy, and Spain are the only countries in the study that report median fees of 2% or more.  While these elements fall behind global best practices, the situation is not unusual given the developing nature of the Indian fund market and the impact this has on scale and distribution.

• Sales practices in India receive an Average grade. The quality of advice has improved through a range of initiatives, starting with the Investment Advisory Regulations in 2013 and more-recent moves to place caps on the level of commissions paid by product providers.

• The U.S.: Country with the highest grade—as it has since 2009—leading with lower expenses and a strong disclosure regime. However, it continues to trail other markets on Regulation and Taxation, and Sales practices.

• Belgium, France, Italy, Finland, Spain: Below Average grades.

• South Africa, Australia, Thailand: Jumped to Above Average grades off the back of many years of regulatory development.

• Across the globe, regulation and better practices have improved the environment for mutual fund investors. No country received the “Bottom” overall grade and more than half received an overall grade of Average.

• As evidence mounts that fees can be a crucial factor in investment performance, Fees and Expenses are weighted more heavily in 2017 than in previous editions of the report. This year, calculations of asset-weighted median fees in the major asset classes—equity, fixed income, and allocation—show continued downward pressure on fees in many global markets.

• While a number of markets have moved away from paying commissions such as the U.K., Australia, and Netherlands, in 15 markets advisers are still paid predominantly through commissions.

• In 24 out of 25 markets, bank and insurance companies remain one of the most widely available distribution channels. Australia, Canada, New Zealand, and the U.K. are the only markets that feature independent advisers as one of the major distribution channels.