At the Morningstar UK Investment Conference in London yesterday, Morningstar released the results of a study that measures the experiences of fund investors in 16 countries in North America, Europe, and Asia. Our evaluation of investor-friendly practices in fund markets worldwide identified the United States as the best market for fund investors based on such criteria as investor protection, transparency, fees, taxation, and investment choices. New Zealand scored the worst.
Much has been written about the rights of common stock shareholders from a global perspective. Policy differences among countries have sparked a cottage industry of research and opinion about corporate governance, and this debate is driving the gradual convergence of rules and regulations among developed countries. But the fund shareholder doesn't even have a shack of global corporate governance research, let alone a cottage. Five years ago, Morningstar launched Stewardship Grades in the United States that evaluate the degree to which fund companies put investors first. These grades have been a catalyst for positive change in the fund industry. We hope our global study will expand the dialogue about best practices for the fund investor to investment companies, distributors, and regulatory bodies around the world.
Morningstar researchers evaluated and scored countries in six categories: investor protection, prospectuses and shareholders' reports, transparency in sales practices and the media, fees and expenses, taxation, and distribution practices. Both questions and answers were weighted to give greater importance to high-priority issues, primarily questions surrounding fees and transparency. Morningstar assigned a letter grade for each country in the study commensurate with its score in each category. Then, Morningstar added the category scores to produce an overall country grade. The study's authors based their scores on a combination of factual research and interviews with Morningstar analysts residing in each country. Below are the overall country grades with the countries listed in order from highest to lowest scores:
- United States: A
- China: B+
- Taiwan: B
- Japan: B
- Netherlands: B
- Italy: B
- Canada: B-
- France: C+
- Switzerland: C+
- United Kingdom: C+
- Singapore: C
- Australia: C
- Germany: C
- Hong Kong: C
- Spain: D
- New Zealand: D-
The United States received an A in the areas of prospectuses and shareholders' reports and for fees and expenses. US mutual fund reports provide a uniform presentation of fees and expenses as well as complete disclosure of a fund's total expense ratio history. The US also had the lowest overall annual expense ratio for its mutual funds. Most investors in the US pay below 0.75% annually for fixed-income funds and below 1% for equity funds. The US scored less well in the area of investor protection, garnering a C. The US lost points because there is no requirement that fund assets be kept with a custodian that is separate from the fund manager.
The United Kingdom scored grades within a tight range of C to B+ for all categories. The UK's top grade came in the area of investor protection, where it received a B+ and was in fact not far off receiving an A grade. The UK is one of only seven countries surveyed that requires that the responsibility of managing fund assets belong to an independent custodian, depository, or trustee. The lowest grades--both Cs--were given for the category of transparency in sales practices and media and of fees and expenses. The former was due to the fact that although the media cover fund investment topics frequently, they do not sufficiently promote the benefit of long-term investing and the negative impact of fund costs; the latter because UK funds almost always have an initial sales charge and the average total expense ratio for fixed-income funds is rather high in comparison to the other countries surveyed.
New Zealand scored the worst overall, largely because of low grades for prospectuses and shareholders' reports and taxation. New Zealand received a grade of D- for prospectuses and shareholders' reports. This poor grade was given for several reasons, the most important of which was the lack of portfolio holdings disclosure. New Zealand also received a grade of D- in the area of taxation. Dividend and capital gains tax rates are high, and there is no tax incentive for long-term investing--tax rates are the same for dividends, short-term capital gains, and long-term capital gains.
Click here to read the complete report.
