âMuch has been written about the rights of common stock shareholders from a global perspective. Policy differences among countries have sparked a cottage industry of research and opinion about corporate governance, and this debate is driving the gradual convergence of rules and regulations among developed countries. But the mutual fund shareholder doesnât even have a shack of global corporate governance research, let alone a cottage,â said John Rekenthaler, vice president of research for Morningstar. âFive years ago, Morningstar launched Stewardship Grades in the United States that evaluate the degree to which fund companies put investors first. These grades have been a catalyst for positive change in the fund industry. We hope our global study will expand the dialogue about best practices for the mutual fund investor to investment companies, distributors, and regulatory bodies around the world.â
Morningstar researchers evaluated and scored countries in six categoriesâinvestor protection, prospectuses and shareholdersâ reports, transparency in sales practices and the media, fees and expenses, taxation, and distribution practices. Both questions and answers were weighted to give greater importance to high-priority issues, primarily questions surrounding fees and transparency. Morningstar assigned a letter grade for each country in the study commensurate with its score in each category. Then, Morningstar added the category scores to produce an overall country grade. The studyâs authors based their scores on a combination of factual research and interviews with Morningstar analysts residing in each country. Below are the overall country grades with the countries listed in order from highest to lowest scores:
United States: A
United Kingdom: C+
Hong Kong: C
New Zealand: D-
The United States received an A in the areas of prospectuses and shareholdersâ reports and for fees and expenses. U.S. mutual fund reports provide a uniform presentation of fees and expenses as well as complete disclosure of a fundâs total expense ratio history. The United States also had the lowest overall annual expense ratio for its mutual funds. Most investors in the United States pay below 0.75% annually for fixed-income funds and below 1% for equity funds. The United States scored less well in the area of investor protection, garnering a C. The United States lost points because there is no requirement that fund assets be kept with a custodian that is separate from the fund manager.
New Zealand scored the worst overall, largely because of low grades for prospectuses and shareholdersâ reports and taxation. New Zealand received a grade of D- for prospectuses and shareholdersâ reports. This poor grade was given for several reasons, the most important of which was the lack of portfolio holdings disclosure. New Zealand also received a grade of D- in the area of taxation. Dividend and capital gains tax rates are high, and there is no tax incentive for long-term investingâtax rates are the same for dividends, short-term capital gains, and long-term capital gains.