U.S. Receives Top Overall Grade in Global Finance Report

A biennial global finance report gives the U.S. the highest overall grade in terms of global best practices for mutual funds from the perspective of fund shareholders, but says the U.S. lags in its regulation and taxation practices.

Morningstar’s 209-page Global Fund Investor Experience Study covers 25 countries across North America, Europe, Asia and Africa, evaluating each country’s treatment of mutual fund investors from four perspectives: the structure and effectiveness of regulatory bodies and the tax code, disclosure practices, fees and expenses, and sales practices.

The report notes that the U.S. continues to lead with lower expenses and a strong disclosure regime, as it has since Morningstar’s first such study in 2009, with both areas supported by the size and scale of the fund market compared with other countries. The U.S. does have areas to address, however, with only average results for sales and a regulation-and-taxation grade that lags behind many other markets.

Following the U.S. are six markets that have “above average” grades, according to the report. Korea, the United Kingdom and Sweden continued their high grades from the 2015 iteration of the study. South Africa received one of the biggest overall improvements in ranking, with its new minimum disclosure document proving to be more helpful to investors and providing greater disclosure around fees and costs, the report explains. Australia, meanwhile, shifted to “above average” with top grades in both sales and fee practices, even though the country was still “below average” for disclosure.

Disclosure Practices

The U.S. and India earned “top” grades for disclosure practices, while Canada, Korea, Sweden, Taiwan and Thailand received “above average” grades. While most countries maintained similar positions as in the 2015 survey, India and Thailand moved up in the rankings because of their significantly improved disclosure practices. The U.S. and India are the only markets that require disclosure on remuneration practices for fund managers, the report notes.

Fees and Expenses

The overall grades for fees and expenses across the study reveal some movement from prior years, with New Zealand and Sweden joining the U.S., Australia and the Netherlands in receiving “top” grades (correlating with low fees and investor-friendly fee disclosure). Canada and Taiwan, meanwhile, remained in the “bottom” bracket, primarily as a result of high asset-weighted median expenses, while Belgium also dropped into the bottom grouping.

The authors note that their 2017 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. They further explain, however, that while the costs of certain investment products are declining and exchange-traded funds are proliferating, in many cases investors are still paying as much to own a portfolio, as lower costs for investments are negated by higher costs for advice (as well as administration and operations).

Regulation and Taxation

No country received a “top” grade in this category. Italy and South Africa joined Singapore as part of a group with “above average” grades; Australia had the lowest grade in the “bottom” category. As in 2015, the U.S. fared poorly for regulation and taxation, earning a “below average” grade. Most of the remaining countries evaluated in the report received an “average” ranking.

The authors note that the impending implementation of MiFID II in Europe will bring in tougher rules to protect investors, and they anticipate that European markets will improve their standing in future editions of the study.

Sales Practices

Australia has the best investor experience for sales, while Belgium, Finland, Norway and Spain have some of the worst, according to the report. The U.S. received an “average” ranking. In examining sales practices across 25 fund markets around the globe, the authors emphasize that they looked for markets where financial advisers are subject to a fiduciary standard and there is a requirement to disclose conflicts of interest.

They also looked at investors’ access to a variety of fund options and the extent to which ETFs are used in each market. The report notes that more markets are making funds from other markets available, with the percentage of markets indicating that foreign domiciled funds are easily available to investors, growing from 52% in 2015 to 64% in 2017.

The report also estimates that in 15 of 25 markets, more than 50% of funds are sold through an open-architecture platform. And like 2015, the report shows the same six markets — Belgium, Denmark, Finland, Norway, Spain and Thailand — contain narrow distribution channels, with fewer than 20% of funds sold through open-architecture platforms.

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