In the last quarter of 2017, Morningstar released it biennial Global Fund Investor Experience Study (GFIE), 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. Scoring was based on responses to 83 questions; 69 were addressed in a fixed-response survey completed by in-house, country-expert analysts, and the other 14 were determined by quantitative measures leveraging Morningstar’s comprehensive global database of managed products.
First published in 2009, the Morningstar Global Fund Investor Experience study has promoted a dialogue about global best practices for mutual funds from the perspective of fund investors. The report is not a commentary on a country's fund industry, as there are many factors besides industry behaviour that affect an investor's experience. The report is about investors rather than the fund industry. Morningstar has always served as an independent voice for investors and the individual investor has always been Morningstar’s true north.
What makes for a good fund experience?
Morningstar has many views about what makes for a good experience for fund investors. As a general rule, we favour active regulation of funds, low tax burdens on investors, increased disclosure, lower fund fees, a varied distribution system that gives investors many ways in which to purchase funds, and media coverage that helps to educate investors.
Globally we are witnessing continued downward pressure on fees in many markets. Taken together, bans on (or substantial waivers of) sales loads, continued decoupling of 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. However, the move toward lower total investing costs is anything but linear.
While the costs of certain investment products are declining, and relatively cheap exchange-traded funds are proliferating, investors are in some cases still paying as much to own a portfolio, as lower costs for investments are negated by higher costs for advice. Advice fees can vary by investor, advisory firm, and account type.
That said, we maintain that by lowering the cost of investment products via commission-free share classes and by unbundling other expenses from the cost of investment management, transparency improves and investors benefit. In addition to lowering all-in costs for do-it-yourself investors, those participating in a fee-based advice model may accrue additional benefits from more-individualized service, including savings guidance, tax planning, and pension optimization, which collectively add significant value to the investor experience. If it is clear that an investor is paying for advice, then they are more likely to receive better quality advice.
Fees in the Indian asset management industry
India is amongst the most expensive geographies when it comes to expense ratios especially for equity and allocation funds. 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. Indian investors do not pay front loads when acquiring funds and the expense ratios for fixed-income funds are globally competitive. India also prohibits funds from charging performance fees, which removes issues around the structuring and disclosure of such fees.
Given the level of alpha that Indian funds deliver, there isn’t always enough focus on the absolute level of expenses charged by funds.
We think as assets under management grow, asset managers should focus on passing on the benefits of economies of scale to investors by reducing expense ratios. As the adoption of direct share classes increase with investors paying for advice, there will be a natural migration towards lower costs of fund ownership and greater value added advice for investors.
As stated at the start the purpose of the GFIE is to promote dialogue about what constitutes best practice. Ultimately, any change will be driven by market participants in individual countries. The challenge this study puts out is how can we continue improve the investor experience. If the investor wins everybody wins, including the industries that serve them.
Access the Morningstar Global Fund Investor Experience Study 2017 here.
