Morningstar has released its seventh edition of biennial Global Investor Experience Report 2022, which grades the experiences of mutual fund investors across 26 markets, breaks down the key factors contributing to global fee trends and provides a detailed look at the trends within each specific market.
The GIE report is structured around three chapters:
- Fees and Expenses
- Disclosure
- Regulation and Taxation
Fees and Expenses in India
- India’s Fees and Expenses grade remains consistent at Average, the same as in the last study. In 2019 study, India’s grade improved to Average, from Below Average in 2017. India continues to enjoy higher grade than several developed European and Asian markets. Investor-friendly regulations, like the ban on front loads, up-front commissions and overall reduction in Total Expense Ratios (TERs) capping investment charges, contribute positively to the country’s grade.
(Click on the image to expand)
- Asset-weighted median fees for fixed-income funds remain among the cheapest in the world. This is offset by the relatively higher asset-weighted median fees of 1.74% for allocation funds and 1.78% for equity funds, generated by the continued prevalence of distributor plans that bundle distribution fees. In India, charging front-end sales loads has not been permitted since August 2009.
- India’s relatively higher asset-weighted medians TERs in Indian equity funds and allocation funds are primarily driven by the fact that the majority of investors prefer the services of mutual fund distributors and thus invest through a commission-embedded plan. Unlike many other countries in the study whereby majority of investors invest in a commission-free share class and pay a separate advice fee.
- As such, India largely follows the bundled expense ratio structure with commissions embedded into the expense ratios of funds. Investors do not incur any additional costs such as advisory fees, platform fees, or front-end loads when purchasing distributor share classes.
- Funds without trail commissions—also known as direct share classes—have been available since January 2013, as per regulations. Expense ratios for direct share classes are significantly lower and comparable to global non-advice-fee-embedded share classes.
- Since the expense cap reductions, India has seen a meaningful decrease in asset-weighted median Total Expense Ratios (TERs). Asset-weighted median expense ratios for domestic and available-for-sale funds fell in a majority of the 26 markets surveyed since the 2019 study. For domestically domiciled funds, the trend was most notable in allocation and equity funds, with 17 markets in each category reporting reduced fees.
- India is one of four countries (Australia, the Netherlands and the UK being the others), where initial charges (front loads) are banned, while usage of initial charges remains high in some parts of Europe and Asia.
- Currently, 46% of the industry’s assets are invested in direct share classes (when we also include money market/liquid funds), but a large part of this is from institutional investors. Individuals invest 21% of their overall assets directly, which accounts for approximately 11.5% of overall industry assets. Growth in equity fund assets since the last study has resulted in lower expense ratios across share classes for equity funds as per the regulator-defined slabs.
- We could continue to witness this downward trajectory in asset-weighted median expense ratios as the market share of direct share classes increases along with the growth in fund assets, leading to lower expense ratios.
- Funds in India are not permitted to charge performance fees. Investors in India sometimes pay for advice in addition to vehicle-related expenses for commission-free share classes, though such instances are still limited.
Asset-Weighted Median Expense Ratios and Assets by Distribution Channel
Key Takeaways From Other Markets:
- The majority of the 26 markets we studied saw the asset-weighted median expense ratios for domestic and available-for-sale funds fall since the 2019 study. For domestically domiciled funds, the trend was most notable in allocation and equity funds, with 17 markets in each category reporting reduced fees.
- Lower asset-weighted median fees are driven by a combination of asset flows to cheaper funds as well as the repricing of existing investments. In markets where retail investors have access to multiple sales channels, investors are increasingly aware of the importance of minimising investment costs, which has led them to favour lower-cost fund share classes.
- Outside the United Kingdom, United States, Australia, and the Netherlands, it is rare for investors to pay for financial advice directly, as the global fund industry structure perpetuates the use of loads and trail commissions. Consequently, many investors will unavoidably pay for advice that they do not seek or receive. Even in markets where share classes without trail commissions are technically registered for sale, such as Italy, they are not easily accessible for the average retail investor, given that fund distribution is dominated by intermediaries, notably banks.
- Australia, India, and the Netherlands remain the only markets to effectively ban front loads. The primary beneficiary of front-loads is the fund distributor (notably banks). There appears to be a lack of political will to phase out front-loads in global markets, despite the clear misaligned incentives that front-loads can create. The Australian Banking Royal Commission and the misselling that led to the UK Retail Distribution Review painfully highlight the impact that misaligned distributor incentives can have on retail investors.
- The move toward fee-based financial advice in the US and Australia has spurred the demand for lower-cost funds like passives. Institutions and advisers have increasingly opted against costlier share classes that embed advice and distribution fees. The trend extends to markets such as India. The growth of F-class shares in Canada is another notable example.
- In markets where banks continue to dominate fund distribution, particularly in Asia, investors still confront sales loads, although those who purchase funds online will often benefit compared with those who choose to buy funds from banks. While these online channels can avoid excessive up-front loads, we have yet to see evidence that these new channels are driving the asset-weighted median fee lower.
- Appropriate performance-fee structures and disclosures remain a watch area for Morningstar. In markets like New Zealand where there is no prescription by regulation for the performance-fee benchmark to be appropriate and tied to the asset allocation of the fund, this has led to some inappropriate benchmarks being used as hurdle rates by local fund managers. Large performance-fee earnings that reflect market movements rather than manager skill have been evidenced in recent years.
- Price wars in the Exchange Traded Funds (ETF) space have also put downward pressure on fund fees across the globe. In the US, competition has driven fees to zero in the case of a handful of index funds and ETFs, and these competitive forces are spreading to other corners of the fund market.
Download the full report here.
ALSO READ:
