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US Again Leads Global Fund Investor Experience Ranking

by Glen Shapiro,, New York

22 May 2013

Morningstar, Inc. has released its 2013 Global Fund Investor Experience (GFIE) report, which evaluates investor-friendly practices in fund markets across North America, Europe, Asia and Africa, and in which the United States is again assessed as the best market for fund investors based on criteria such as investor protection, transparency, fees, taxation and investment distribution.

John Rekenthaler, vice president of research for Morningstar, said: "Working with our analysts around the world, we expanded our survey to 24 countries this year. We hope our survey findings will help investment companies, distributors, and regulatory bodies around the globe continue to focus on improving the environment for investors."

Morningstar researchers have evaluated countries in four categories: Regulation and Taxation, Disclosure, Fees and Expenses, and Sales and Media. Morningstar weighted the questions and answers to give greater importance to factual, empirical answers as well as the high-priority issues of fees, taxes and transparency.

Within a grading from A to F, the US garnered the highest score for the third time with a top grade of A. The US has the world's best disclosure and lowest expenses. South Africa, in contrast, received the lowest grade largely because of poor disclosure practices.

Most countries are graded at B- or C+ – almost all European countries land in this range, with only small differences occurring between markets. The new countries reviewed in this year's report – South Korea and Denmark – earned grades of B+ and B-, respectively, while New Zealand showed the largest improvement rising to a C- from a D- because of positive regulatory changes and an encouraging expansion of disclosure requirements.

Among the key findings of the study are that, while the US and European fund markets are roughly similar in size, US investors pay significantly lower fees than European investors; and that, with regard to disclosure, Australia and New Zealand do not require funds to publicly disclose full portfolio holdings, while France, South Africa, South Korea, and the UK only disclose holdings to current owners.

In the Regulation & Taxation section, Singapore has the top score and Australia the lowest score. Notably, the highest-scoring overall country, the US, fares relatively poorly in this section, earning only a C grade, barely above the lowest score. The US is one of only a handful of countries where fund investors are responsible for annual taxes on capital gains earned by funds.

The GFIE report evaluates taxes from the perspective of the mutual fund investor. From their viewpoint, a lower tax rate is better, as are tax incentives that reward long-term investing – and, ideally, they would pay no taxes at all. Of the 24 countries in the report, Singapore (completely) and Hong Kong (virtually) meet this standard. The remaining 22 countries do levy taxes on fund investors, but typically ease the burden by offering tax breaks for long-term fund owners.

In fact, investors in Thailand investing in long-term (five-year) equity funds can receive a tax credit that more than offsets ongoing taxes, with the second-best policy being to exempt the fund shareholder from taxes until the fund is sold. Japan (completely) and Spain (virtually) among the GFIE report countries adopt such an approach.

The report lists the next most-attractive tax policy as to exempt fund investors from capital gains while they hold a fund, but to tax a portion or all of the fund's income, and confirms that many countries have variations of this policy.

Other tax features noted by Morningstar are those that assist fund owners by including dividend imputation, where investors only pay taxes on the difference between their personal tax rate and the tax rate that the corporation has already paid through its corporate taxes; applying an inflation index to capital gains taxes; and having the capital gains rate decline over time to reward investors for holding securities longer. Finally, many countries establish tax-protected retirement or long-term savings accounts that are under different tax regimes than are standard fund accounts.

Overall, Thailand, Hong Kong and Singapore have the best tax systems for fund investors, and Norway, Sweden, Denmark and the US have the least attractive, based on after-tax returns on a hypothetical portfolio.

TAGS: capital gains tax (CGT) | South Africa | tax | investment | pensions | Denmark | tax incentives | retirement | investment funds | Australia | Norway | Singapore | Thailand | United Kingdom | fees | France | Hong Kong | Korea, South | New Zealand | Spain | Sweden | United States | tax breaks | individual income tax | Japan | Africa

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