Offshore observers of the Australian self-directed market are often puzzled why investors don't place more of their capital with actively managed funds, instead showing a strong preference for direct equities.

While listed funds like LICs and active ETFs and the mFund Settlement Service have helped close the gap, opening access points for ex-platform investors, there's still a long way to go.

Findings from Morningstar's latest annual Global Investor Experience Report may give some clues as to why.

Australia has placed dead last on measures relating to investment transparency as the only market under review where managers are not required to disclose their portfolio holdings.

"Australia, stands alone with the weakest disclosure regime of the 26 markets evaluated in this study," say report authors Grant Kennaway and Christina West.

"As an otherwise sophisticated market, it is remarkable that Australia remains the only market with no implemented portfolio holdings disclosure regime."

Investment managers are asking investors to pass over their cash without telling them what it's going to be invested in. Or if they are being told, it's often months down the track.

The impact, Kennaway says, is an erosion of trust between investors and managers.

"Transparency is important as it helps investors make better decisions and creates trust in investment vehicles and the firms that manage client assets," he says.

"Fund investors are entitled to know how their money is being invested."

"If you know at any time you can look at an investment managers website and see their underlying holdings – I think this gives investors' confidence to allocate their funds.

Investors who want to see what the gold-standard looks like can turn to Mexico and India. Mexico is the only market in the study that requires weekly portfolio disclosure of material positions, according to the report. India's regulations were updated in October 2020 to mandate that fixed-income funds disclose full portfolio holdings via a downloadable Excel spreadsheet within five days of each fortnight.

ESG: disclosure gap in the spotlight

Failure to disclose had become even more important with the rise of ESG – environment, social and governance – investing, as investors' interest in how their money is being invested rises. Retail assets in sustainable investments were up 21 per cent at the end of the second quarter of 2020, compared with June 2019, totalling $19.9 billion research by Morningstar analysts revealed last month.

"If investors want to avoid exposure to fossil fuels, for example, they need portfolio holdings data (which names the stocks or bonds a fund holds) to provide that transparency," says Kennaway.

ESG and stewardship disclosure is also important emerging area which investors can use to assess a fund's green credentials and engagement activities.

"This ought to help prevent greenwashing - that is, using ESG claims in fund marketing without ESG principles truly guiding investment decisions - from being a significant issue for fund investors," the report authors say.

Europe has been the most assertive in this area, with Sweden leading in ESG disclosure standards, according to the study.

Australia does not have a code or regulation that requires fund disclosure of stewardship activities. Numerous attempts by industry participants and bodies have been made over the years to develop policies for minimum levels of portfolio disclosure.

"Most of these efforts have been in vain," Kennaway says.

Australian Corporations Act amendments that would force super trustees to publish portfolio holdings online were due to come into effect at the end of last year before being postponed. The deadline had already been extended three times previously, in 2017, 2016, and 2015.

Kennaway and West would like to see complete portfolio holdings publicly available from a central website, such as an industry association or a regulator. They don't expect Australian funds to reach India-style standards but want managers to get in the routine of publishing their portfolios every quarter.

"Morningstar is not asking for investment managers to release their portfolios at the end of every month," he says. "We're happy to have a long lag."

Most Australian funds disclose their largest investment holdings on their websites or via PDF.

Kennaway doesn't give any weight to the argument often put forward by managers that they are merely protecting their intellectual property saying, "globally, there are 25 other markets that have compulsory portfolio holdings disclosure."

"There's been no studies to show that it's inhibiting a manager's ability to add value."

Disclosure leaders

Notwithstanding, there are a growing number of asset managers voluntarily moving toward greater portfolio disclosure. Morningstar receives portfolios for 42 per cent of Australian funds on a monthly basis, and another 9 per cent quarterly. But for 44 per cent of funds, Morningstar receives no portfolio at all.

For best in class, Australia's largest superannuation fund, AustralianSuper, discloses most of its holdings online. As do CBUS, AustralianEthical, Pengana and Vanguard.

"For a country that aspires to be considered a global financial centre, having weak regulation that endorses substandard portfolio disclosures should be a concern for all industry participants and is not in the best interests of retail investors," Kennaway and West conclude.