Morningstar India has just completed a decade in India. And over this time, we have relentlessly pursued our mission to help investors achieve their financial goals. Towards this end, we empower the advisory and institutional community that serves them.
I am quite sure that you will agree with us when we say that we must all work towards improving the investor experience. Because if the investor wins, everybody wins, including the intermediaries that serve them. Hence our unchanging posture that the investor is our True North.
Towards this pursuit, we work closely with advisers and institutions. We come out with independent research and analysis that is based on a solid methodology, we offer our data and tools for better decision making, and host investment conferences where we bring together experts to help advisers be on top of the game.
We would like to see the growth of the funds industry in India and work closely with all the relevant stakeholders.
The biennial Global Fund Investor Experience report is also an attempt to promote dialogue about global best practices for mutual funds from the perspective of fund investors.
I would like to clear three issues regarding the Morningstar Global Fund Investor Experience Study 2017 (GFIE 2017).
Our study is not about distributor commissions.
The GFIE 2017 study is an independent analysis of the fund investor’s experience across various countries and ranks each one based on 83 questions in areas of 1) Regulation and Taxation 2) Disclosure 3) Fees and Expenses 4) Sales.
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 management companies (AMCs) should focus on passing on the benefits of economies of scale to investors by reducing the total expense ratio (TER). The AMCs have the flexibility to leverage various components of the TER.
To conclude that a lower TER translates into a lower distributor commission is unwarranted, and not what we have implied or suggested.
Our study is not biased against India.
The study covered 25 countries across various continents.
It is worth pointing out that India received the highest grade of Top for ‘Disclosure’ and an ‘Overall’ grade of Average, ahead of many European markets and equivalent to many developed markets.
While the GFIE 2017 states that India is amongst the most expensive geographies when it comes to expense ratios for equity and allocation funds, and these elements fall behind global best practices, it also goes ahead to state that 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.
The purpose of our study is to promote best practice.
We have always been emphatic that the purpose of the study is to promote dialogue amongst the industry participants about what constitutes best practice.
In our report, we have openly called out the issues related to bundled versus unbundled fee comparisons. We have also taken the stance that unbundled fee structures are better for investors for three main reasons: 1) better disclosures 2) greater focus on each part of the value chain 3) cheaper funds become available to investors.
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.
Ultimately, any change will be driven by market participants in individual countries.
The challenge this study puts out is how can we continue to improve the investor experience.
You can read our views on the report in greater detail here.
Feel free to reach out to us if you have any doubts or would like to clarify any issues.
Regards,
Aditya Agarwal
