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Morningstar Announces Findings from Second Global Investor Experience Study - United States and Singapore Score the Best and New Zealand Scores the Worst

Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today released results of its second study that measures the experiences of mutual fund investors in 22 countries in North America, Europe, Asia, and Africa.

Morningstar’s evaluation of investor-friendly practices in fund markets worldwide identified the United States and Singapore as the best markets for fund investors based on such criteria as investor protection, transparency, fees, taxation, and investment distribution.

New Zealand scored the worst, but has been showing signs of improvement since Morningstar published its first study in May 2009. This year’s study also includes first-time evaluations of fund investor experiences in Belgium, India, Norway, South Africa, Sweden, and Thailand.

“With this report we hope to advance the dialogue about best practices from the perspective of the mutual-fund shareholder,” said John Rekenthaler, vice president of research for Morningstar.
“Just as with stocks, some jurisdictions offer relatively friendly investment climates for mutual fund owners and others less so. Working with our analysts around the world we have analyzed and compared 22 mutual fund marketplaces, highlighting their strengths and weaknesses. We hope our global study will help investment companies, distributors, and regulatory bodies worldwide continue to focus on and enhance best practices for investors.”

Morningstar researchers evaluated countries in four categories: Regulation and Taxation, Disclosure, Fees and Expenses, and Sales and Media. Both questions and answers were weighted to give greater importance to factual, empirical answers as well as the high-priority issues of fees, taxes, and transparency. Morningstar assigned countries a letter grade for each category and then added the category scores to produce an overall country grade.

The study’s authors gathered information from available public data and from interviews with local Morningstar analysts. Below are the overall country grades, from highest to lowest scores in alphabetical order:

Singapore: A
United States: A
Thailand: A
India: B
Netherlands: B
Switzerland: B
Taiwan: B
China: B
Sweden: B
Canada: C+
France: C+
Germany: C+
Japan: C+
United Kingdom: C+
Australia: C
Belgium: C
Hong Kong: C
Italy: C
Norway: C
Spain: C
South Africa: C
New Zealand: D

The United States received an A in the areas of disclosure, fees and expenses, and sales and marketing, but a C+ in the area of regulation and taxation. U.S. Government bodies assigned with investor protection have struggled to identify violations in a timely manner, such as the Madoff ponzi scheme. Additionally, the United States is one of only five countries to tax fund investors on capital gains earned within fund shares, and its tax rates for short-term capital gains are among the highest in this study.

Singapore received A's for regulation and taxation as well as for sales and media. The country has a strong regulatory regime with an absence of most investment taxes. Regulations ban sales practices that are most rife for abuse, and disclosure is good. However, Singaporean funds could carry lower costs.

New Zealand scored the worst overall, largely because of low grades in the areas of Disclosure as well as Regulation and Taxation. While the tax structure continues to be relatively unfavorable to fund investors in New Zealand, it is worth noting that there may be changes on the horizon in terms of disclosure and regulation.
The Securities Commission and the Ministry of Economic Development have recently begun reviewing the uniformity of disclosure of fees, commission structures, advisor incentives, and other regulatory changes. In late May 2010, the New Zealand Commerce Minister also announced the establishment of a single regulator, the Financial Markets Authority (FMA), ahead the first full review of the Securities Act in more than 30 years.

The UK received an overall grade of C+, showing no change on the 2009 findings. However, in the area of Investor Protection, the UK received a grade of B+, a notch higher than the ‘B’ awarded in the 2009 Morningstar study and just shy of an overall A in this area. The UK also received B grades in the areas of Transparency in Prospectus and Reports and also in Taxation. Along with France, a B grade for taxation is the highest awarded for any European country and acknowledges a UK taxation system that encourages
long-term investing. All ‘A’ grades in the area of Taxation were taken by countries with no capital gains or ordinary income taxes.

Of the new countries reviewed in this year’s study, Thailand had the highest overall score of A-. Strong disclosure and low fund fees boosted Thailand’s score. However, limited fund availability, sales contests, and poor media coverage tempered the rating.

South Africa scored at the bottom of the new countries evaluated with a C-. Regulation that limits foreign investment reduces the availability of foreign-domiciled funds and constricts the number of investment strategies that managers based in South Africa can undertake. South Africa also scored poorly for disclosure. Historical expense ratio information, detailed fees, trading costs, and portfolio holdings were generally lacking or difficult to obtain.