global fund investor experience report 2013

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2013 Morningstar. All rights reserved. The inormation, data, analyses, and opinions contained herein (1) are proprietary to Morningstar, Inc. and its afliates (collectively, Morningstar), (2) may not be copied or redistributed,

(3) do not constitute investment advice oered by Morningstar (4) are provided solely or inormational purposes and thereore are not an oer to buy or sell a security, and (5) are not warranted to be accurate, complete, ortimely. Morningstar shall not be responsible or any trading decisions, damages, or other losses resulting rom, or related to, this inormation, data, analyses or opinions or their use. Past perormance is no guarantee o uture results.

Morningstar Fund Research | 2013 Global Fund Investor Experience Report | 15 May 2013 | Page 1 o 172

Global Fund Investor Experience2013 Report

Acknowledgments

Introduction

Overall Scores

Regulation & Taxation

Disclosure

Fees & Expenses

Sales & Media

Country Summaries

Country Details

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3

4

6

10

13

20

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47

Benjamin N. Alpert, CFA, CAIA

Research Analyst

John Rekenthaler, CFA

Director o Research

Sana Suh

Research Analyst

Executive Summary

The Global Fund Investor Experience report was designed to encourage a dialogue about global best

practices or mutual unds rom the perspective o und shareholders. This biennial report

measures the experiences o mutual und investors in 24 countries in North America, Europe, Asia, a

Arica. Morningstar researchers evaluated countries in our categoriesRegulation & Taxation,

Disclosure, Fees & Expenses, and Sales & Mediawith greater weight given to actual, empirical

answers as well as the high-priority issues o ees, taxes, and transparency.

Key Take-Aways

Investors in the United States are treated the

best, while South Aricans ace the

most dicult und investing environment.

Commission bans are spreading around the

world. By mid-summer, Australia and the

United Kingdom will have restricted commis-

sions with more in the pipeline. This will

prevent many conficts o interest, but it is still

to be seen i investors will are better with

ewer avenues to pay advisors.

Despite the comparable size o the UCITS

market to the U.S. und market, investors in

Europe (and other countries where UCITS

are sold) do not receive the economies o scale

that benet U.S. investors with lower ees.

The United States is one o only a handul o

countries where und investors are

responsible or annual taxes on capital gains

earned by unds.

Funds in most countries continue to treat the

names o portolio managers as trade

secrets. Investors have no way to determine

i the current manager is responsible or

a und's success or ailure.

To coincide with UCITS IV implementation,

we've expanded the importance and depth o

our point-o-sale document evaluation.

Thailand alls rom an A- overall to a B

because o the length and comprehensivenes

o its simplied prospectus.

South Arica alls below average in almost

every area, ailing Disclosure outright with a

Australia and New Zealand do not requireunds to publicly disclose ull portolio holdin

leaving investors to guess at the source

o und returns. Additionally, France, Korea,

South Arica, and the United Kingdom

only disclose ull holdings to current owners.

This lack o transparency is disappointing.

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Acknowledgments

The authors would like to thank Don Phillips and Scott Burns or concept development and oversight.Additional credit is due to Andy Pettit or his extensive input. The authors would also like to

acknowledge the assistance o Morningstars global oces or their contributions, without which

this report could not have been completed.


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The Global Fund Investor Experience(GFIE) report was created in 2009 to encourage a dialogue aboutglobal best practices or mutual unds rom the perspective o und shareholders. This 2013

edition o the report, the third in the series, covers 24 countries, with Korea and Denmark making

their GFIE debuts.

The GFIE report examines the treatment o mutual und shareholders rom multiple viewpoints: the

practices o the und industry; the practices o und distributors; the structure and eectiveness

o regulatory bodies; disclosure policies; the tax code; and the role o the media. The report is not a

commentary on a countrys und industry, as there are many actors besides industry behavior

that aect an investors experience. Moreover, because the report is about investors rather than the

und industry, it does not cover countries that have many unds but ew investors. There is nosection on Luxembourg, or example.

The goal o the report is to encourage a global dialogue about best practices. Morningstar has many

views about what makes or a good experience or und investorsviews that are refected in

the surveys questions and in the scoring o the answers. As a general rule, Morningstar avors active

regulation o unds; low tax burdens on investors; increased disclosure; lower und ees; a

varied distribution system that gives investors many ways in which to purchase unds; and media

coverage that emphasizes the long term. However, Morningstar is open to hearing opposing

views, as well as to learning rom discussions about unresolved issues. One o the aims o the GFIE

report is to prompt such discussions.

This report considers publicly available, open-end unds. The next edition o the GFIE report will

include exchange-traded unds. This report, however, concerns retail registered investment

pools that are not listed on an exchange. The pools do not carry insurance eatures and generally

issue or redeem shares on a daily basis. Open-end unds have a variety o names, depending

upon the country, including: Mutual Funds, Investment Companies, Unit Trusts, and SICAVs. For the

purpose o simplicity, they are called mutual unds or just unds in this report. The GFIE

report does not evaluate the investor experience o other pooled investment vehicles, or example,

guaranteed unds, variable annuities, insurance-linked unds, private pension unds, closed-end unds, collective investment trusts, hedge unds, private-equity unds, venture-capital unds,

institutional unds with limited distribution, and, as mentioned, ETFs.

Introduction


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The GFIE report evaluates each country rom our perspectives: Regulation & Taxation, Disclosure,Fees & Expenses, and Sales & Media. For each topic, Morningstar grades a country

on the A to F scale. Each countrys our topic grades are then combined to orm an overall grade.

In Morningstars view, while none o the GFIEs 24 countries can claim universal best

practices, it is also true that none ails outright in providing a home or prospective und investors.

The highest-scoring country, in this report as well as the two previous editions, is the United States,

which receives the top grade o A. The United States is not a leader on Regulation & Taxation,

earning only a middling score or that section, but U.S. disclosure is clearly the worlds best, U.S.

und expenses are the worlds lowest, and the countrys media do a ne job o emphasizing

a long-term perspective and low costs.

A new entrant to the survey, Korea, comes in with an above-average grade o B+. Funds in Korea are

required to disclose the name o the portolio manager along with their prior three years experience

Additionally, Korean investors ace a avorable tax regime.

Several countries come next with overall grades o B. They get there via several paths. The East

Asian entrants, Taiwan, Thailand, and Singapore, have avorable tax regimes and thus

score well or Regulation & Taxation. The Netherlands garners a B with slightly better Disclosure

and Sales & Media practices.

Overall Scores

Overall Scorecard

Grade change indicators: iImproved since last survey;sDeclined since last survey;5 No change since last survey;R New country.

Exhibit 1

A 5 United States

A-

B+ RKorea

B 5 Netherlands s Singapore 5 Taiwan s Thailand

B- 5 China RDenmark i Germany s India i Norway i Spain 5 Sweden s Switzerland i U.K.

C+ i Australia i Belgium 5 Canada 5 France i Italy

C s Japan

C- s Hong Kong i New Zealand

D+

D s South Arica

D-

F

Source: Morningstar, Inc.


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Most countries are graded at B- or C+. Almost all European countries land in this range, with only

small dierences occurring between markets. The Undertakings or Collective Investments

in Transerable Securities directive (UCITS; recently updated to the ourth revision known as UCITS

IV) and the Markets in Financial Instruments Directive (MiFID) ensure that und regulations,

disclosure, and marketing meet minimum standards across the continent. Dierent European countrieshave stronger investor practices in diering areas, but in general investors are equivalently.

India is average in most areas but distinguishes itsel with required monthly disclosure o a unds

portolio. The other countries receiving average grades, including Australia, Canada, and

China, are more distinctive. Australia has low-cost unds and a robust distribution model but is poor

at disclosure. Canada does well across the board but is hampered by having the worlds highest total

expense ratios. China, too, ares well in most areas but is hampered by one weaknessin its case,

the restrictions it places on both unds and shareholders in purchasing oreign securities.

Landing at the bottom are Japan with a C, Hong Kong and New Zealand with C- grades, and South

Arica at a D. It is no coincidence that none o those countries are in Europe; i they were, andwere thereore subject to pan-European practices and legislation, they would most likely be pushed

up to average grades. South Arica earns its lowest-rank status primarily through its poor

disclosure practices.


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For the Regulation & Taxation section, Singapore has the top score and Australia the lowest score.Notably, the highest-scoring overall country, the United States, ares relatively poorly or

Regulation & Taxation, earning only a C grade, barely above the lowest score. Also worth noting

is that in the two years since Morningstar last published this study, New Zealand has begun

a process to reevaluate all securities regulations pertaining to unds. These eorts are gradually

appearing in New Zealands grade, which will likely be even higher in the next GFIE report.

In Morningstars view, the best regulatory practice is to have a single regulator that is independent

o the und industry. The regulator is responsible or overseeing the management, disclosure,

operations, and distributions o all types o investment unds. As an independent entity, the regulator

does not ace the conficts o a sel-regulatory body, which must balance the desires o theindustry with the need to protect investors. Having a single regulator rather than multiple regulators,

and having this single regulator oversee all investment unds, helps to reduce the cost o

regulation and simplies the message to und companies.

Additional best practices include adequate stang, public disclosure, and stability. Adequate stang

is needed so that the regulator can pursue inractions as needed and can be proactive in addition to

reactive. Public disclosure o the regulators actions serves two purposes. First, it discourages

maleasance by deterring similar violations. Second, it gives the investing public the condence that

it is aware o all industry issuesnothing is being hidden rom view. Finally, stability helps to


Regulation & Taxation Scorecard


Exhibit 2

A 5 Singapore

A-

B+ s Hong Kong RKorea i U.K.

B i Canada i Japan s Spain 5 Switzerland 5 Taiwan 5 Thailand

B- s Belgium s France 5 Germany i India 5 Netherlands s Norway i South Arica

C+ RDenmark

C i China s Italy i New Zealand i Sweden s United States

C- i Australia

D+

D

D-

F



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ensure compliancei the rules are well-known, they are likelier to be ollowed. Regulations need

to be updated in a timely ashion to handle emerging portolio management techniques and changes

in the marketplace, but the alterations should not be too requent.

Most countries in the GFIE report are served by a single regulator. Oddly enough, two o the highest-scoring countries in most other aspects, the United States and Canada, have the disadvantage

o multiple regulators. Most countries struggle to update their regulations to address new portolio

management techniques. When they do make changes, they dont always do so with composure.

For example, in Europe, many observersincluding Morningstarbelieve that the ongoing regulatory

changes have been coming too rapidly or the industry and investors to digest ully.

As a general rule, Morningstar nds that regulatory enorcement is comprehensive across the globe,

but not proactive. The weakest regulatory regimes are in Denmark, New Zealand, Sweden, and

South Arica. In about two thirds o countries all regulatory actions are disclosed to the public, but in

Australia, Thailand, Belgium, Denmark, the Netherlands, and the United Kingdom only majoractions are disclosed. For the most part, und advertising is well-regulated across the globe, but

Danish practices are a concern.

Moving rom the actions and structure o the regulator to issues controlled by und companies,

Morningstar believes that both und auditors and und custodians should be completely independent

o the und companies that they serve. In the global marketplace, that holds true or auditors

but not or custodians, as more than hal the countries in the GFIE report permit the management

rm and und custodian to share common ownership.

Morningstars view on sot-dollar commissionsthat is, brokerage commissions that the und does

not pay with cash, but rather with other goods or services that it purchases rom the broker

that executes the tradesis simple: The ewer the better. Ideally, und companies would not use

sot-dollar arrangements at all. But i they do, they should be disclosed and used on research

that directly benets the und. Morningstar does not approve o sot dollars being used to oset

und management expenses, pay entertainment costs, and so orth.

Once again, the otherwise strong U.S. market is an exception or this regulatory item. The United

States is the only country in the GFIE report where und companies commonly use sot-dollar

arrangements and which does not have regulation or a regulatory body overseeing such arrangements(The CFA Institute, which governs Chartered Financial Analysts, lls some o this gap with a code

o conduct that mandates that all CFA charterholders use sot-dollar arrangements only i they

benet investors.) In contrast, all European countries subject to the Markets in Financial Instruments

Directive (MiFID) are subject to sot-dollar rules limiting their use to research beneting investors.


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Independent boards o directors are still uncommon in unds, with only a third o countries requiring

a minimum level o independence. Only in India are independent directors required to be a majority

o the board.

Morningstars position on taxes is the same as its take on sot-dollar arrangements: Less is more.The lower an investors tax bill, the higher that investors return. This stance should not be

interpreted to mean that Morningstar believes that a country should adopt a low-tax government

rather than an administration that charges higher taxes. Morningstar has no view on a

countrys optimal tax policies. Rather, looking at the matter solely rom the perspective o a und

investor, a lower tax rate is better, and tax incentives that reward long-term investing are

better. Thus, the GFIE report evaluates taxes only rom the perspective o the mutual und investor.

Ideally, the und investor would pay no taxes at all. O the 24 countries in the GFIE report, Singapore

(completely) and Hong Kong (virtually) meet this standard. The remaining 22 countries do levy

taxes on und investors but typically ease the burden by oering tax breaks or long-term und owners.In act, Thai investors investing in long-term (ve-year) equity unds can receive a tax credit that

more than osets ongoing taxes.

The second-best policy is to exempt the und shareholder rom taxes until the und is sold. That is,

income, capital gains generated by the unds trades, and internal capital growth rom

appreciation in the unds securities would all be immune rom taxes as long as the shareholder

retains the und (or alternatively, until the shareholder reaches retirement age). Japan

(completely) and Spain (virtually) among the GFIE report countries adopt such an approach.

Next in attractiveness is to exempt und investors rom capital gains while they hold a und, but to

tax a portion or all o the unds income. Many countries have variations o this policy.

Other tax eatures that assist und owners include dividend imputation, where investors only pay

taxes on the dierence between their personal tax rate and the tax rate that the corporation

has already paid through its corporate taxes; applying an infation index to capital gains taxes; and

having the capital gains rate decline over time to reward investors or holding securities

longer. Finally, many countries establish tax-protected retirement or long-term savings accounts

that are under dierent tax regimes than are standard und accounts.

In measuring the overall attractiveness o a countrys tax policy toward und investors, Morningstar

calculated the tax eect on a hypothetical investment that is held or ve years. The portolio

consists o 60% in equity unds and 40% xed-income unds, or a married couple with a combined

income o USD 100,000. I the country oers a type o und account that oers additional tax

protections or an investor with a ve-year time horizon, then that account was used or the exercise


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The calculations o course are aected by the assumptions about the holding length, the portolio

assets, the income, and whether the subject is married or single. Nonetheless, the results are

reasonably robust in that the rank order o countries tends to be airly consistent no matter which

assumptions are used.

Overall, Thailand, Hong Kong, and Singapore have the best tax systems or und investors, and

Norway, Sweden, Denmark, and the United States have the least attractive atertax returns.

USD 147

Zero USD 135

USD 10,350 Tax Cr

Applied at

End o First Year

13

USD 100

Norway

Sweden

Denmark

UnitedStates

Germany

Australia

Italy

SouthAfrica

Netherlands

Canada

Belgium

France

China

Switzerland

India

Korea

Japan

Taiwan

NewZ

ealand

UnitedKingdom

Spain

HongKong

Singapore

Thailand

Exhibit 3

Eect o Taxes on Hypothetical Investment Portolio

Growth o USD 100,000 Ongoing Taxes Liquidation Taxes



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With Disclosure, the United States receives the only A. With the exception o Taiwans B+, no othercountries receive a grade above a B. South Arica, Hong Kong, Australia, and New Zealand lag

behind most o the world with low levels o disclosure.

Disclosure begins with a unds initial documentthe prospectus. The best practice or prospectus

disclosure is to have a short-orm oering document, or simplied prospectus, so that

prospective investors can see a unds costs, risks, and investment strategy in a orm that is easily

and quickly comprehended. Ideally, the document will cover a single und rather than a collection

o undsater all, the goal o the simplied prospectus is to be simple, rather than cumbersome.

The short-orm version should be no more than 10 pages in length, ideally ve pages or less.

Its writing style should be in plain language and avoid investment jargon as much as possible.Inormation about the unds risks and investment strategy should be specic to the und and should

avoid using generic, boilerplate language that could apply to almost any und in existence.

A critical item in both the simplied prospectus and the ull version o the document is the presenta-

tion o the Total Expense Ratio (TER). As annual expenses are arguably the most important item

or a und investor to consider, it is important that these gures be presented in a ormat that

permits ready comparisons. Ideally, the und will show several years worth o TERs so that prospec-

tive investors can see whether these gures are trending up or down. Best practices also include

translating the percentage costs o the TER into a monetary total on a hypothetical investment, so

Disclosure

Disclosure Scorecard


Exhibit 4

A 5 United States

A-

B+ i Taiwan

B i Belgium s Canada s China RDenmark RKorea i Netherlands 5 Singapore i Spain s Sweden

B- i Germany s India i Norway 5 Switzerland s Thailand

C+ i France i Italy 5 Japan s U.K.

C

C-

D+ i Australia

D i New Zealand

D- s Hong Kong

F s South Arica



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that investors realize what the somewhat abstract percentage gures mean when converted into

actual currency costs.

Nearly all countries have uniorm TERs that meet International Organization o Security Commissions

(IOSCO) denitions. However, Hong Kong, New Zealand, and South Arica still have room orimprovement with regard to presenting ees in a uniorm manner. Another potential area o conusion

is acquired und ees. Investors must be careul about which TER they look at, and they must be

aware o what is included in that gure. UCITS IV in Europe has introduced the concept o Ongoing

Charges, which should include acquired und ees (and perormance ees), but the specic

application on inclusion o these expenses is still unclear. In the United States, the prospectus

expense ratio includes acquired und ees but the shareholder report TER does not.

Starting in the second hal o 2013, both Canada and Australia are phasing in shareholder statements

that itemize additional shareholder expenses. Australias statements will itemize all ees

paid to the advisor directly rom the investor, coinciding with a ban on payments rom the und to theadvisor. Canadas new ee disclosure will include all ees paid directly in loads or indirectly

through trail commissions received by advisors or und platorms. These standardized disclosures

will enhance the inormation around components o TERs and other shareholder costs.

These disclosures are also commonly provided in the United States or certain distribution channels

although not in a standardized ormat.

Other important eatures o a prospectus (simplied or otherwise) are inormation about trading costs,

standardized total returns or various time periods, the names and tenures o the unds portolio

manager(s), summary inormation about the unds portolio holdings, and the portolio management

teams compensation and incentives. Trading cost inormation in the orm o brokerage commissions

and/or a turnover ratio is airly common, as is the presentation o total returns. Data about the

unds managers and investment holdings are less common. As or compensation inormation, only

the United States provides that.

No countries ully hit the mark or simplied prospectuses. Only about two thirds o the countries in

the survey require that the simplied document only contain the individual und being oered.

Most countries manage to keep their simplied prospectuses at an appropriately short length, but

Canada, China, Korea, New Zealand, and Thailand do not. All countries do succeed in communicating

through plain language.

Overall, the best simplied documents are in Korea (despite their length) and the United States.

The weakest are ound in New Zealand. Hong Kong and South Arica are special cases, as they do

not have documents that qualiy as simplied versions.


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For Fees & Expenses, the highest-scoring country (that is, the country with the lowest costs) is theUnited States, while the lowest-scoring country is Canada. This pattern has held true or all three

editions o the GFIE report, as und costs tend to be very stable over time.

Along with Disclosure, Fees & Expenses is the most heavily weighted section o the GFIE report,

making up 30% o a countrys overall grade. Many studies by Morningstar and others have

demonstrated that the most consistent predictor o a unds net perormance is the level o its annual

expenses. Clearly, the best practice rom an investors viewpoint is to have access toand

purchaseunds that have low annual costs.

In addition to annual expenses, unds sometimes levy charges in the orm o either ront-end loadcharges, which are sales commissions paid at the time o purchase o a und, or deerred loads that

are paid when the investor exits a und. These charges were never the most important costs to

long-term investors, and theyre rapidly becoming even less important as more countries move away

rom load shares and as loads are negotiated or waived. As or deerred sales charges, they

were once very popular in the giant U.S. market but have allen steeply out o avor, with many und

companies shutting down the share classes that charged deerred loads.

Specically, in one third o countries ront loads are xed on a specic breakpoint schedule, giving

investors little room to negotiate price. In Belgium, China, France, and Japan, loads are legally

Fees & Expenses

Fees & Expenses Scorecard


Exhibit 5

A 5 United States

A- s Australia s Thailand

B+

B i India RKorea i Norway i Sweden

B- 5 China RDenmark i France s South Arica i Spain s Switzerland

C+ s Germany s Netherlands i Taiwan

C s Belgium i Hong Kong s New Zealand 5 Singapore 5 U.K.

C- i Italy

D+ s Japan

D

D-

F 5 Canada



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negotiable, but in practice retail investors lack the power to negotiate a better deal. Instead, the

benets go to institutions. In the remaining hal o the countries ront-end loads either do not exist

(rare) or are widely and commonly negotiated away by retail investors.

One o the diculties in comparing annual expense ratios across countries has been the development

o unbundled ee arrangements, whereby an advisor is not paid a sales commission by the undcompany in the traditional model but rather is paid a separate ee by the und investor. When taken,

this action has the eect o lowering ocial und expense ratios since unds no longer need

to collect money rom shareholders to make advisor payments. It also has the eect o complicating

expense-ratio comparisons, since the act that the investor in a lower-cost und may pay an

additional ee to an advisor is not considered in Morningstars calculations.

At the moment, this complication does not do much to distort the comparisons, as ew markets have

a signicant amount o unbundled arrangements. The United States is the main exception, as

both the presence o ee-based nancial advisors and plan expenses or the large dened-contribution

marketplace lead to situations in which a unds stated expense ratio may not refect the ullcost o owning that und. However, with India and the U.K. having recently adopted no-commissions

policies and other countries considering such actions, the trend looks to be increasing.

In addition to ongoing, stable expense ratios, und investors sometimes are charged perormance

ees that are based on the returns o the und. Best practice or perormance ees is or them

to be symmetrical, so that a und company is penalized or shortall as well as rewarded or success.

However, since ew countries require that perormance ees be symmetrical, ew unds are

constructed that way. Ater all, which und company wishes to put its ees at risk? (It is instructive

that in the United States, where perormance ees are required to be symmetrical, perormance

ees are exceedingly rare.) Compounding the issue, many asymmetrical perormance ees in the

countries that allow them have been ound to lack appropriate hurdle rates and high-water marks,

urther avoring the manager while hurting the investor.

The main scoring component or this section is the asset-weighted TER by country or our groups o

unds: equity, xed income, allocation, and money market unds. The calculations consider two

perspectives: unds available or sale in the marketplace and unds that are locally domiciled. Thus,

a country is measured both by the opportunity that it gives to investors in registering outside

unds (available or sale) and by the costs associated with its own, domestically grown industry.


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0.60 0.85 1.00 1.15 1.300.60 0.85 1.00 1.15 1.30

Australia

Belgium

Canada

China

Denmark

France

Germany

Hong Kong

India

Italy

Japan

KoreaNetherlands

New Zealand

Norway

Singapore

South Arica

Spain

Sweden

Switzerland

Taiwan

Thailand

United Kingdom

United States

Average Expense Ratio Ranges or Fixed-Income Funds, %Source: Morningstar, Inc.

Exhibit 6

Domiciled Available for Sale

For xed-income unds, the United States, Thailand, and Australia report the lowest ees, and Japan

and Canada the highest. Interestingly, locally domiciled xed-income unds are consistently less

expensive than the ull range o unds available.


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Average Expense Ratio Ranges or Equity Funds, %Source: Morningstar, Inc.

Exhibit 7


1.00 1.25 1.50 1.75 2.00

Australia

Belgium

Canada

China

Denmark

France

Germany

Hong Kong

India

Italy

Japan

KoreaNetherlands

New Zealand

Norway

Singapore

South Arica

Spain

Sweden

Switzerland

Taiwan

Thailand

United Kingdom

United States

1.00 1.25 1.50 1.75 2.00

Fee levels or equity unds are higher than xed income. Only the United States reports

asset-weighted expense levels below 1%. Italy and Canada are the only countries with TERs o

more than 2% on equity unds.


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1.00 1.25 1.50 1.75 2.00

Australia

Belgium

Canada

China

Denmark

France

Germany

Hong Kong

India

Italy

Japan

KoreaNetherlands

New Zealand

Norway

Singapore

South Arica

Spain

Sweden

Switzerland

Taiwan

Thailand

United Kingdom

United States

1.00 1.25 1.50 1.75 2.00

Average Expense Ratio Ranges or Allocation Funds, %Source: Morningstar, Inc.

Exhibit 8


With allocation unds, the United States is once again the lowest in cost overall, although allocation

unds domiciled in Denmark are also cheap. Most countries all between 1.25% and 1.75% or

asset-weighted expenses or allocation unds, but Australia and the United States are cheapest at

under 1%. Canada is the only country over 2%.


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0.20 0.40 0.60 0.80

Australia

Belgium

Canada

China

Denmark

France

Germany

Hong Kong

India

Italy

Japan

KoreaNetherlands

New Zealand

Norway

Singapore

South Arica

Spain

Sweden

Switzerland

Taiwan

Thailand

United Kingdom

United States

0.20 0.40 0.60 0.80

Average Expense Ratio Ranges or Money Market Funds, %Source: Morningstar, Inc.

Exhibit 9


With low short-term interest rates pervasive in many countries, this study has seen a decline in TERs

on money market unds. Investors in France and the United States pay less than 0.20% or their

unds, while investors in China pay just less than 0.80%.


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Notably, two neighboring markets that are closed to oreign unds are at the top and bottom o the

spectrum or average ees paid. The United States, unlike the vast majority o countries in this

survey, is marked by a large number o sel-directed investors, economies o scale, a high level o

price competition, a retirement tax preerence that uses the same investments or tax-preerred

investments, and one o highest percentages o assets paying an outside advisory ee not refectedin a unds TER. Canada is on the opposite end or all those actors, plus Canada levies a

consumption tax on und management services.

One surprise in looking at global und expenses was how little eect economy o scale seems to

have on the result. Most unds are not designed to lower their management ees as their assets

increase. At the country level, the huge U.S. marketplace shows the eect o economy o scale and

competition, but otherwise there is little correlation between the size o a und market and

the costs o its unds. The very large pan-European UCITS marketplace does not seem to have led to

reduced costs; indeed, small locally domiciled unds are oten cheaper than giant Luxembourg-

and Ireland-based unds. And the developing markets o Thailand and China have relatively low ees,despite being early in their industry histories.


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The U.K., Canada, and Italy have the best investor experiences or Sales & Media, and Belgium,Spain, and Thailand have some o the worst.

From the perspective o the investor, the best sales practices are those that oer the most choice,

and those in which the advisor is reest rom conficts o interest. Ideally, investment

minimums or a und or or a platorm o unds will be relatively low, thereby permitting a broad

range o investors to qualiy. The latter generally holds true: Only ve countries in the report

have strict investment minimums that are not waived or reduced or an automatic savings plan, or

based upon total purchases through a platorm, but three o these countries have very low

median minimums.

Choice can be measured by the number o distribution channels rom which unds may be purchased

Potential distribution channels include banks, insurers, ull-service brokerages, discount brokers,

independent nancial advisors, direct sales rom a und company, and online und platorms. Some

countries, such as the United States, have strong competition and wide availability across all

channels. Other countries are limited to a ew channels.

All countries report the availability o online und platorms as well as distribution o unds through

banks and insurance companies. In 17 o 24 countries, banks and insurance companies still

dominate und sales. This is a problem rom the perspective o best practices as these sales channels

Sales & Media

Sales & Media Scorecard


Exhibit 6

A i U.K.

A- s Canada i Italy

B+ i Australia i Taiwan s United States

B 5 Netherlands

B- i China i Germany s Japan RKorea i New Zealand s Singapore

C+ s France i Switzerland

C 5 Hong Kong RDenmark s India s Norway 5 South Arica i Sweden

C-

D+ i Belgium i Spain i Thailand

D

D-

F



21/172




tend to limit their choices to unds that are associated with the distributor and a select list o

outside unds. In contrast, traditional and discount brokers and independent advisors tend to oer

large und lineups. Most countries in the GFIE report have hal or more o their unds sold

through partially or ully open channels, but Belgium, Denmark, Norway, Spain, and Thailand have

relatively closed markets.

The main sources o conficts o interest come when nancial advisors receive payments or selling

unds and the payments are not known by the investors. Examples include bonuses or increasing

the general level o sales over a particular time period (thereby encouraging the churning o

accounts), bonuses or selling a particular und, or the encouragement rom management to sell

unds that come rom the company that employs the advisor. Morningstar nds that sales

contests to increase the general level o sales by advisors are permitted and unrestricted in most

countries, but there are tighter controls on rewards or selling a particular und.

Another sales consideration is whether advisors are required to consider alternative investmentsbeore making a und recommendation. Many countries have an industry association code o

conduct that requires such an action. The U.K.s new Retail Distribution Review program (RDR) takes

this one step urther by ormalizing this into an industry requirement. Australias Future o

Financial Advice (FOFA) requires that all advisors ollow a duciary standard, placing investors

interests ahead o their own.

Finally, there is directed brokeragethe investor-unriendly practice o steering a unds trades to a

particular brokerage rm in exchange or business that the brokerage rm will bring to the

und company. In most countries, directed brokerage is restricted by the same industry association

regulations that restrict sot-dollar arrangements. However, China reports that while directed

brokerage is an ocially banned practice, it is believed to occur on occasion. In South Arica,

directed brokerage is not ormally restricted.

The medias treatment o unds is an important, although oten overlooked, element o the investor

experience. I the und industry is regularly and widely covered, investors will have greater

condence that the nations unds are a mainstream investment and that it is sae or them to own

unds. Thus, regular and requent media coverage o unds is a best practice. So too is

emphasizing the importance o costs and o long-term perormance. Media reports that ocus on

personalities and short-term perormance leaders are not helpul.

In eight o the GFIEs 24 countries, the major nancial media covers unds or the und industry daily,

while hal o the countries report at least weekly stories. Only in Singapore and Sweden is the

und industry only irregularly covered by the mass media. Less happily, in one third o the countries

the media rarely discuss ees, and in a signicant number o countries they do not discuss

long-term records but instead report on recent perormance.


22/172




Index o CountriesExhibit 11

Country Page #Summary Details

Overall Grade / Change Regulation & Taxation Disclosure Fees & Expenses Sales & Media

Australia 23 48 CN i C i D1 i A s B1 i

Belgium 24 55 CN i B s B i C s D1 i

Canada 25 60 CN 5 B i B s F 5 A s

China 26 66 BM 5 C i B s B 5 B i

Denmark 27 71 BM R C1 R B R B R C R

France 28 76 CN 5 B s C1 i B i C1 s

Germany 29 81 BM i B 5 B i C1 s B i

Hong Kong 30 86 CM s B1 s D s C i C 5

India 31 90 BM s B i B s B i C s

Italy 32 95 CN i C s C1 i C i A i

Japan 33 101 C s B i C1 5 D1 s B s

Korea 34 106 BN R B1 R B R B R B R

Netherlands 35 111 B 5 B 5 B i C1 s B 5

New Zealand 36 116 CM i C i D i C s B i

Norway 37 122 BM i B s B i B i C s

Singapore 38 127 B s A 5 B 5 C 5 B s

South Arica 39 132 D s B i F s B s C 5

Spain 40 137 BM i B s B i B i D1 i

Sweden 41 142 BM 5 C i B s B i C iSwitzerland 42 147 BM s B 5 B 5 B s C1 i

Taiwan 43 152 B 5 B 5 B1 i C1 i B1 i

Thailand 44 157 B s B 5 B s A s D1 i

United Kingdom 45 162 BM i B1 i C1 s C 5 A i

United States 46 168 A 5 C s A 5 A 5 B1 s

Country Summaries


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Average Expense Ratios, %

All Funds

Fixed-Income 0.60

Equity 1.13

Allocation 0.96

Money Market 0.50

Regulation & Taxation C-

Disclosure D+

Fees & Expenses A-

Sales & Media B+

Growth of USD 100,000

USD 135,667

Zero Tax

USD 127,045

Australia

Australias overall grade is an average C+. Australian investors enjoy low costs, which are a major

benet, and have good sales and media practices. The countrys weak disclosure practices and high

tax rates are two major drawbacks, and oset some o the strengths in ees.

Regulation & TaxationAustralia scores below average in Regulation & Taxation. Australian investors suer some o the

highest investment taxes o any country in the survey. It is one o only a handul o countries in

which capital gains are passed through to und investors annually, rather than deerred, and accumu-

lated in the gains in the und share price. Fund investors also pay consumption taxes on the

service o investment management. In the area o regulation, we observe that Australia regularly

updates regulations but that not all regulatory sanctions are disclosed to the public.

Disclosure

Australia has major problems with Disclosure. Critically, investors do not have access to the very

basic item o portolio holdings. Australia is the last country in this survey without any orm oportolio disclosure presently or in proposed regulations. With global best practices being mandatory

quarterly disclosure, Australia is very ar rom the mark. Also, Australias product disclosure

statement misses some marks as a simplied prospectus. The document lacks standardized returns

and poorly describes the investment strategy and risk o the und. Lastly, nowhere in the

disclosure is portolio manager inormation available. In this respect Australia is no worse than most

countries, but it is still an area or improvement.

Fees & Expenses

Australia ares very well with respect to Fees & Expenses. Australian equity, allocation, and xed-

income unds are some o the least expensive globally, with only the much larger United States

charging consistently lower Total Expense Ratios. Money market unds are worse and are higher

in cost than the global average.

Sales & Media

Australias Sales & Media practices are strong. Open-architecture platorms with unds rom a

variety o sponsors dominate und sales in Australia, but there is a ull variety o und sales

channels available or investors. We estimate that more than 80% o purchases come rom a sales

channel oering open or guided architecture. Future o Financial Advice regulations place

a duciary standard on advisors, requiring advisors to place investors interests ahead o their own.This protection is stronger than ound in most o the world.

Australia

Overall Grade

C1


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Available-or-Sale Funds

Fixed-Income 1.38

Equity 1.90

Allocation 1.64

Money Market 0.39

Domiciled Funds

Fixed-Income 0.31

Equity 1.56

Allocation 1.18

Money Market 0.44

Regulation & Taxation B-

Disclosure B

Fees & Expenses C

Sales & Media D+


USD 131,671

Belgium

USD 135,667

Zero Tax

Belgiums overall grade is an average C+. Belgian investors ace relatively lower expense ratios

and adequate disclosure and government regimes. However, Belgian investors also invest within a

captive, closed-architecture sales model that does not always benet the investing public.

Regulation & TaxationBelgiums regulations are consistent with the pan-European rules coming out o Brussels at a renetic

pace. Morningstar nds that while the changes are positive, there is some sentiment that they

are too requent or und companies and investors to understand prior to implementation. The eect

o pan-European rule changes at their current pace remains to be seen. Belgium also scores

near average on taxation. Belgiums tax rates on dividends and income are higher than the survey

average but are oset by an exemption on taxes or capital gains on shares held more than one year.

Disclosure

Belgium is in line with world averages on Disclosure, but investors would benet rom more-requent

portolio disclosures that enable evaluation o managers decisions. It would also be helpulor investors to know managers names and start dates. Another area in which Belgium can improve

is in costs disclosures. Currently Belgium does not require a monetary illustration o und costs

that would convert ratios into monetary terms so novices could see how much they are paying or

services. Belgium could also improve its disclosure practices by requiring unds to annually update

prospectuses as opposed to only requiring updates when the document is amended or changed.

Fees & Expenses

Belgium receives a C in Fees & Expenses because o the average-to-low costs o locally domiciled

xed-income and allocation unds. The investment universe o oreign-domiciled, Pan-European

unds in Belgium is larger than the universe o domiciled unds, but these Pan-European products

tend to be more costly than local unds. Morningstar has observed that most advisors in Belgium are

compensated through asset-based commissions, either up ront or through ongoing charges.

It is important that investors have choices in how they compensate advisors, and it is especially

important to have the option o avoiding embedded ongoing charges. Unortunately, it remains

dicult or Belgian investors to locate and purchase unds that do not have embedded advice ees

in a trailing or up-ront commission, and this contributes to Belgiums low grade in this section.

Sales & Media

Belgium receives a D+ in the area o und Sales & Media practices. A large part o this grade is dueto the closed architecture o the Belgian market. Banks and insurance companies dominate the

sales o unds, and these companies tend to oer proprietary unds. Morningstar has observed that

Belgian investors can easily buy unds rom only two o the ve main sales channels ound

throughout the world. The absence o choices is a weakness in Belgium.

Belgium

Overall Grade

C1


25/172





Domiciled Funds

Fixed-Income 1.50

Equity 2.42

Allocation 2.15

Money Market 0.55


USD 130,071

Canada

Canada

At a deceptively normal-looking C+, Canadas overall grade hides major strengths and weaknesses.

On the positive side or und investors, Sales & Media practices are excellent and Disclosure

is very good. Unortunately, these benets are oset by annual expense ratios that are the highest in

this survey.


Canada is slightly above average in Regulation & Taxation. In the Canadian Tax Free Savings Account,

investors are allowed to save specic amounts tax-ree. This counteracts taxes that do not otherwise

avor mutual und earnings over other income. For taxable accounts, Canada is one o just a ew coun-

tries that require unds to pass through realized capital gains annually. This practice eectively treats

und investors similarly to investors in vehicles like stocks where the individual (as opposed to the und

manager) has control over reaping capital gains. Most countries encourage diversied savings through

mutual unds by deerring und gains, and sometimes income, until unds are sold. Also, unlike more than

hal the countries in this survey, Canadian investors pay ull consumption taxes on the service o asset

management.

Disclosure

Disclosure in Canada is investor-riendly. Although Canada alls short o best practices by publishing ull

portolio holdings semiannually rather than quarterly, disclosure practices are otherwise positive.

Expense inormation is clear and comprehensive, including ve years o expense history and a monetary

illustration o each unds costs. Unlike many countries in this report, Canada requires that unds

divulge the names o their portolio managers, although currently it does not require that their length o

tenures be given.

Fees & Expenses

Canada ails in Fees & Expenses. Among the 24 countries in this survey, Canada has the highest

annual expense ratios or equity unds, the second highest or bond unds, and the highest or allocations

unds. These costs cannot be explained by pointing to unique eatures o the Canadian und market.

Canadas method or computing und expenses is the global standard, and its distribution model

o nancial advisors selling and servicing unds that are typically sold without a ront-end load is widely

shared (although not by its southern neighbor, the United States). High consumption taxes on

management services do not explain the dierences in ees. Morningstar has ound that, all things

considered, Canadian und investors pay up to 0.50% more in annual und expenses per year than do

investors in und markets o a similar size elsewhere in the world.

Sales & Media

Canadian investors enjoy excellent Sales & Media practices. Sales contests and avored compensation o

particular unds is strictly regulated to maintain the saleorces independence. The media in

Canada will sometimes emphasize long-term investing and will nearly always mention high und costs.

Furthermore, minimum initial investments are low.

Regulation & Taxation B

Disclosure B

Fees & Expenses F

Sales & Media A-

Overall Grade

C1

USD 135,667

Zero Tax


26/172




Overall Grade

B2


Domiciled Funds

Fixed-Income 1.02

Equity 1.07

Allocation 1.05

Money Market 0.79


USD 132,462

China

Chinas grade is B-, average within the survey. Chinas most attractive eature is its comprehensive

disclosure. The main drawback or Chinese und investors is restrictiveness, as China does

not permit oreign-domiciled unds to set up shop and limits the amount o assets that Chinese

unds can invest overseas.


China earns its lowest grade in the area o Regulation & Taxation. China has no provision or oreign-

domiciled unds to apply or sale within China, thereby stifing competition.

Additionally, Chinese investment unds need permission to invest assets overseas, and limits

generally accompany this permission. China is the only country in this survey without

specic tax exemptions on investments or retirement, but this is not a large drawback as Chinese

investors ace no taxes on capital gains o und shares and only moderate taxes on income.

Disclosure

Chinese Disclosure is generally thorough. Chinese unds report quarterly, with good discussions bymanagers o their unds perormances. Unusually, Chinese unds provide both the name and

tenure o the unds portolio manager. In 2010, China launched a website that contains a comprehen-

sive collection o und literature. The major drawback to Chinese disclosure is that China does

not calculate ocial und expense ratios, although the individual expense components are itemized,

thereby permitting a diligent investor to determine the ratio.

Fees & Expenses

China is average in Fees & Expenses. China equity and allocation unds have the lowest expense ratios

o any non-English-speaking country. However, its xed-income and money market unds are

about average in cost. Most Chinese unds do have ront-end sales charges, which are oten negoti-

ated downwards by large investors, although less commonly by small buyers.

Sales & Media

Sales & Media practices in China are mixed. On the one hand, the investor-unriendly behavior o

sales contests and avored compensation or the sale o particular unds are permitted with

little oversight. So too is the practice o directed brokerage, by which a und steers its trades toward

a brokerage rm that helps to sell its shares. On the other hand, minimum required investments

o Chinese unds are very low. Also, und distribution in China is dominated by open-architecture

distribution, so that investors generally have the opportunity to choose between manydierent und companies.

China

Regulation & Taxation C

Disclosure B

Fees & Expenses B-

Sales & Media B-

USD 135,667

Zero Tax


27/172






Fixed-Income 1.15

Equity 1.90

Allocation 1.30

Money Market 0.42

Domiciled Funds

Fixed-Income 0.64

Equity 1.43

Allocation 0.64

Money Market 0.42


USD 124,926

Denmark

Denmark has the average score o B-. Danish Fees & Expenses are about average when compared

with those o other countries in this survey, as are regulations and tax policies. Disclosure scores

slightly above average. The weakest area or Denmark is Sales & Media.

Regulation & TaxationDenmark lands in the middle or Regulation & Taxation. Danish investors benet rom pan-European

regulations and guidelines. One example is the requirement that sot-dollar arrangements be

used to benet the research o the und (rather than other purposes such as entertainment). Other

aspects o Denmarks regulations are less benecial or investors. The regulatory organization

is not always adequately staed and does not always have the resources to proactively investigate

improprieties. With regard to taxes, Danish investors ace high rates on interest and dividends

annually. These contribute to making Denmarks tax environment one o the least investor-riendly

in the report.

DisclosureDenmarks B grade in Disclosure refects its general conormity with pan-European standards, with

some slight improvements. One area in which Denmark-domiciled unds do excel is in the

voluntary disclosure o portolio holdings. More than 80% o unds managed in Denmark exceed

regulatory requirements in providing investors and research rms with ull portolio holdings

on a monthly basis. Fund manager inormation is also requently given despite no requirement to

disclose manager names or tenures.

Fees & Expenses

Demark has an average grade in Fees & Expenses. The annual expense ratios or unds domiciled in

Denmark are noticeably lower than those or oreign unds marketed to Danish investors.

Regulations do not prevent asymmetrical perormance ees (that is, charging perormance ees with

no osetting reductions in ees or underperormance), but this is also typical within the report.

Sales & Media

Denmark receives a C in Sales & Media. The media in Denmark does not regularly ocus on und

costs, despite the availability o Danish unds that are much cheaper than most unds domiciled

elsewhere in Europe. Morningstar also observes that it is very unusual or long-term investing to be

discussed at all. The Danish und market is characterized by closed architecture: Most unds

are sold through the bank and insurance company channel and are proprietary to the rm selling theund, thereby limiting choices or investors.

Denmark

Overall Grade

B2

Regulation & Taxation C+

Disclosure B

Fees & Expenses B-

Sales & Media C

USD 135,667

Zero Tax


28/172






Fixed-Income 1.09

Equity 1.85

Allocation 1.64

Money Market 0.17

Domiciled Funds

Fixed-Income 0.62

Equity 1.77

Allocation 1.64

Money Market 0.16


USD 132,394

France

Frances overall grade is C+. In two areas, France earns an average grade o B-. However, the act that

unds provide only the regulator and not the public with ull portolio holdings brings down both

Frances Disclosure and its overall grade.

Regulation & TaxationFrance is mostly in line with the survey norm in Regulation & Taxation. Exceptional areas

are counteracted by areas that need improvement. Going urther than most countries (which allow

sot-dollar arrangements used or research), France prohibits sot-dollar arrangements altogether,

discouraging potential conficts o interest or unds. On a less positive note, Frances lack o a

comprehensive single statute to regulate the und industry is a minus or investors. Other regulations

are in line with the norm (as France adheres to UCITS rules and other pan-European regulations).

Disclosure

France ares the worst in Disclosure, as French unds are not required to provide ull disclosure o

portolio holdings to the public. In contrast, most countries in this report adhere to the norm oproviding ull public disclosure o holdings at least semiannually. French unds do, however, disclose

holdings ully to the regulator. As with other countries in the European Union, France requires

unds to provide a Key Investor Inormation Document. The KIID does well in some areas, such as

providing a clear explanation o risks and disclosing returns or standardized periods in

maximum length o two pages. However, the KIID does lack potentially helpul inormation, such as

a monetary illustration o ees and manager names and tenures.

Fees & Expenses

Fees & Expenses in France are neither high nor low or both locally domiciled and oreign-domiciled

unds. The exceptions to this rule are expense ratios or money unds, which are generally lower

than the average. Funds without loads or trailing commissions are widely available (which is

benecial to investors), and they have been adopted to such a point that they now constitute a

moderate percentage o assets in France. Unortunately, France ollows common practice in allowing

unds to charge perormance ees without an osetting reduction or underperormance. Further-

more, the terms o the perormance ees are not always disclosed clearly in und documents.

Sales & Media

France ares no better or worse than other countries in Sales & Media. As with other countries

subject to pan-European regulations and guidelines, France prohibits the practice o directedbrokerage. Regulations also prohibit advisors rom receiving excess compensation or selling specic

unds to investors, protecting investors rom being sold unds inappropriate to their situation.

The French market is characterized by a somewhat limited but adequate mix o distribution channels.

The media in France almost never mentions und costs and only sometimes promotes long-term

investing, which is typical globally.

France


Disclosure C+

Fees & Expenses B-

Sales & Media C+

Overall Grade

C1

USD 135,667

Zero Tax


29/172




Overall Grade

B2



Fixed-Income 1.12

Equity 1.83

Allocation 1.64

Money Market 0.37

Domiciled Funds

Fixed-Income 0.70

Equity 1.44

Allocation 1.38

Money Market 0.57


USD 125,942

Germany

Germany

Germanys overall grade is an average B-. Germany gets an average score or Regulation & Taxation a

well as or Sales & Media. Germany is quite close to the norm in other areas as well.


Germanys B- or Regulation & Taxation refects its general adherence to pan-European regulations.Following the practice o most European countries, sot-dollar arrangements are allowed, but

they must be disclosed. As is common across the survey, Germany requires unds to have a superviso

board, but it could improve by instituting a minimum level o independence or board directors.

Another area or improvement is taxation policies. In the reports hypothetical und perormance and

tax scenario, Germany has one o the lowest atertax returns because o its high tax rates and the lac

o exemptions and deerrals available in other countries. And while there are tax incentives to invest

or retirement, the choices are limited and not as varied as investment options without tax incentives

Disclosure

Germanys average Disclosure score also refects generally average pan-European practices. As withother countries in the European Union, Germany requires unds to provide a Key Investor

Inormation Document. The KIID is a concise two pages, written in clear language, and provides an

explanation o risks that are specic to the und. Areas or improvement or the KIID would be

to add portolio holdings, trading costs, and manager names and tenure. As ar as changes specic to

Germany, one possible improvement would be to require annual updates or prospectuses

(as is standard or most countries). Currently, German unds are required to update the prospectus

when there are changes, which in practice amounts to updates or only major changes.

Fees & Expenses

Germanys Fees & Expenses are about average or both locally domiciled unds and unds available o

sale. Funds without loads or trailing commissions exist but are dicult or investors to locate,

and they make up a minimal percentage o assets. Germany allows asymmetrical perormance ees

that charge more or overperormance without an accompanying reduction in ees or underperorm-

ancenot an investor-riendly practice. However, it is helpul or investors that the terms o perorm

ance ees are disclosed clearly in und documents.

Sales & Media

Germany scores an average B- in Sales & Media. As is common in most countries in the survey,

German unds tend to waive or signicantly reduce investment minimums or investors who enroll inan automatic investment plan. The German media is also typical in sometimes emphasizing

long-term investing and occasionally pointing out high und costs. Like many countries, Germany prohib

its advisors rom receiving excess compensation or selling specic unds. Germany breaks rom

the norm in that less than 50% o unds are sold through an open-architecture system. Germany coul

improve by urther opening its distribution system.


Disclosure B-

Fees & Expenses C+

Sales & Media B-

USD 135,667

Zero Tax


30/172


(3) do not constitute investment advice oered by Morningstar (4) are provided solely or inormational purposes and thereore are not an oer to buy or sell a security, and (5) are not warranted to be accurate, complete, ortimely. Morningstar shall not be responsible o

global fund investor experience report 2013

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