Thursday, May 21, 2009

U.S. Funds Receive an A on Morningstar Report Card

Last week, Morningstar released a study, "Global Fund Investor Experience," measuring the experiences of mutual fund investors in 16 countries in Europe, North America, and Asia. In its examination of the investor protection, prospectuses and shareholders’ reports, transparency in sales practices and the media, fees and expenses, taxation, and distribution practices in these countries, the U.S. was rated best overall. Morningstar says it launched this global study because, although investors in U.S. funds have the benefit of Morningstar's stewardship ratings, this kind of research is not readily available regarding funds outside the U.S. The study and resulting report are aimed at starting a dialog about policy differences among countries' regulatory schemes, and sparking a discussion about how rules and regulations may be harmonized internationally by taking the best ideas from the different regimes. According to John Rekenthaler, vice president of research for Morningstar:
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 mutual fund investor to investment companies, distributors, and regulatory bodies around the world.
The overall scores from highest to lowest were:
  1. United States: A
  2. China: B+
  3. Taiwan: B
  4. Japan: B
  5. Netherlands: B
  6. Italy: B
  7. Canada: B-
  8. France: C+
  9. Switzerland: C+
  10. United Kingdom: C+
  11. Singapore: C
  12. Australia: C
  13. Germany: C
  14. Hong Kong: C
  15. Spain: D
  16. New Zealand: D-
The U.S. received the highest grade in the quality and usefulness of prospectuses and shareholders’ reports and for fees and expenses. This is because, according to the report, U.S. mutual fund reports "provide a uniform presentation of fees and expenses as well as complete disclosure of a fund’s total expense ratio history." In addition, funds in the United States had the lowest overall annual expense ratios, with most investors paying below 0.75% annually for fixed-income funds and below 1% for equity funds.

Though the U.S. did well in these other areas, the United States only earned a C in the area of investor protection, losing points because U.S. funds are not required to have their portfolio assets held by a custodian unaffiliated with the fund's manager.

The report cautions that the report should not be considered to be grading each of 16 countries' "fund industry," because the report examines issues from multiple perspectives, and "the mutual fund investor experience is shaped by far more than the fund industry alone."

The full text of the Morningstar report is available at: