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Australia equal first for low fund fees

Emma Rapaport  |  18 Sep 2019Text size  Decrease  Increase  |  
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Australia joins the US and the Netherlands as the lowest fee charging nations for managed funds, according to Morningstar's annual Global Investor Experience Study.

By asset class, Australia's asset-weighted median expense ratios are 0.90 per cent for allocation funds (or multi-sector funds), 1.23 per cent for equity funds, and 0.60 per cent for fixed-income funds.

Italy and Taiwan on the other hand were marked down for charging high fees. Italy charges asset-weighted medians of 1.55 per cent, 2.03 per cent and 1.11 per cent, respectively for Italian-based allocation, equity, and fixed-income funds.

Expense ratios are the annual fee that all funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses such as management fees, administrative fees, and operating costs.

The Morningstar Global Investor Experience study seeks to encourage a dialogue about global best practices for open-ended funds from the perspective of unitholders. It evaluates the environment for fund investors in 26 major markets including the US, New Zealand, India, Germany, Canada, China, and from this year, Mexico.

Australia got top marks for things such as banning upfront fees when investors buy into a fund.

Researchers also praised Australia's move to end grandfathered commissions by 2021.

Australia effectively banned commissions and volume-based payments for the distribution of and advice of a range of retail investment products in 2013. However, funds that paid ongoing commissions at the time were exempt. The new ban would bring all existing contracts in line with the 2013 ban.

For a third study in a row, Australia shares its top ranking with the US and the Netherlands.

"What these markets have in common is ongoing fund fees that are typically unbundled," Morningstar researchers said.

"Asset-weighted fees in the large US and Australian marketplaces show the effect of economies of scale and competition.

"Also notable, the US and Australian markets are closed to funds domiciled elsewhere, so that their low expenses for locally domiciled funds are not affected by more expensive offshore funds when calculating the available-for-sale expenses."

Here’s a look at how the countries performed:

Fees and expenses scorecard

Global Investor Study Morningstar

The study reflects Morningstar's views about what makes a good experience for fund investors. Analysts favour effective regulation of funds that promotes:

  • transparency and polices misleading statements and conflicts of interest;
  • low tax burdens on investors;
  • comprehensive, easy-to-understand disclosure;
  • a varied distribution system that gives investors multiple ways in which to purchase funds;
  • media coverage that helps to educate investors; and
  • competitive fund fees.

Italy and Taiwan both received the lowest grades in this year's study. Taiwan's asset-weighted median fees for fixed-income funds are the highest among markets in this study, partly driven by Taiwan's heavy concentration in funds that invest in higher-cost markets, such as emerging-markets debt and high yield, researchers said.

Italy is a cellar-dweller when it comes to affordability because individual investors are routinely subjected to initial charges and "retrocessions", which may refer to kickbacks or referral fees.

Australia: ETF usage 'low'

Beyond unlisted funds, researchers found Australian retail investors’ use of exchange-traded funds is “low” when compared with other global markets and total assets under management ($1.62 trillion).

"ETFs account for around 2.5 per cent of this figure, which is lower than most developed markets in North America and Europe," they said.

However, they say usage is growing rapidly, with more products coming on line and substantial inflows recorded.

A vibrant ETF market can be a driving force for lower fees on open-end products, according to researchers.

This comes amid fears that record flows into ETFs risk distorting asset prices.

However, the study found ETF usage among retail investors is low across most global markets it examined.

In Asia, where fund distribution is dominated by local banks that have no incentive to sell ETFs to individual investors, researchers noted a low level of ETF usage across the region.
ETF adoption is the highest among individual investors in the US where ETFs have become the vehicle of choice of many self-directed investors and digital advice providers.

Fees coming down globally

Globally, fund fees continue to fall, with the majority of the 26 markets studied seeing asset-weighted median expense ratios for domestically domiciled and available-for-sale funds fall since 2017.

Researchers cite several factors driving fees lower including regulation like the Australian Future of Financial Advice reforms and subsequent banking royal commission, awareness among retail investors of the importance of minimising costs, and the move towards fee-based financial advice.

Competition among passive fund providers is also driving fees down. US heavyweight Fidelity Investments last year launched two index funds with zero fees, signalling a new front in the passive investing price war.

is an editor for Morningstar.com.au

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