Asian investors are unimpressed by their experience with mutual funds, in large part due to relatively high fees and expenses attached to the products. Unfortunately, the cost of funds in the region looks set to remain above that of other regions, according to Morningstar’s latest biennial report.
The research agency's Global Fund Investor Experience (GFIE) study measures the experiences of mutual fund investors in 25 countries across North America, Europe, Asia, and Africa. Each country was evaluated by regulation and taxation, disclosure, fees and expenses and sales and then either graded top; above average; average; below average; and bottom.
Most Asian countries, including China, Hong Kong, India, Japan, Singapore and Taiwan, received an “average” grade. Only the US was graded in the top rank.
Fund investment fees and expenses are higher in most Asian jurisdictions than in developed markets, which dragged down investors’ overall investment experience, Wing Chan, director of manager research, told AsianInvestor.
This has occurred despite a steady decline of fund fees. “It’s not that fees in Asian countries have got higher in the past two years. In fact, fees in the global fund market have gone down,” Chan said.
Developed markets like the US, UK, Australia and Netherlands are adopting a fee-for-advice model and more investors there are engaging in passive investing, so their overall fees and expenses are lower, he said.
In contrast, Asian countries (with the exception of Australia) use a commission distribution model, in which the charges of fund distributors, relationship managers and advisors are bundled together and retail investors have no choice but to pay these embedded commissions when buying the product.
Changing this commission culture will depend on regulatory moves. Chan said regulators in Asia are still focused on the need to improve fee transparency. So far this has extended to getting fund distributors to clearly state the fee levels of the funds, but it has not yet encompassed discussions on banning commission fees, he added.
The fees and expenses category had a 30% weighing of a country’s overall score., higher than the 25% in the previous study. It received a heavier weighting because changes in fees can make a big difference in net returns and thus investors’ behavior, Chan said.
However, Sally Wong, chief executive officer of Hong Kong Investment Funds Association, believes increasing competition and technological advancement will help to bring fees down in Asia.
Higher fee transparency will also enable investors to be more discerning, and some of them may switch to fund platforms that provide execution-only services if they do not want the financial advices, she told AsianInvestor.
Hong Kong improvement
While Hong Kong was one of the territories in Asia to receive an ‘Average’ score, its overall average grade was regarded as an improvement from the previous study, according to the Morningstar report.
The city gained an “average” grade for regulation and taxation, and the absence of virtually any taxes on fund investments was seen as a very positive thing for investors. However, the city doesn’t offer any tax incentive for retirement investing either, and investors have little choice of investment products in their mandatory provident funds (MPFs), even though there are many MPF providers in the market, Chan said.
Hong Kong’s disclosure also fell into the middle of the pack. Chan noted that areas for improvement included a need for the city to require that funds publish a section of management’s discussion of fund performance and disclose the names and past performances of the portfolio managers involved.
The city receives a “below average” grade for fees and expenses, given that the price of funds available for sale in Hong Kong, as measured by expense ratios, is higher than in many countries, according to Morningstar.
In Hong Kong, asset-weighted median expense ratio for available for sale fixed-income funds stands above 1.31%, while most others in the study range between 1.01% and 1.15. Hong Kong’s asset-weighted median expense ratio for available for sale equity funds ranges between 1.76% and 2%, compared to less than 1% in the US.
The city earns an “above average” grade for sales, as over 80% of funds are sold through an open-architecture system, and investors must receive a prospectus prior to the purchase of a fund.
But Chan noted that the number of online platforms for fund distributions in Hong Kong lagged behind some Asian peers like Korea.