INVESTOR’S NOTEBOOK STEPHEN CRANSTON
Trading costs are not disclosed, but they are excluded from the total expense ratio
Coverage of the Morningstar Fund Investor Experience Study has been overshadowed by a press release issued by the Association for Savings & Investment SA (Asisa). Perhaps it is not surprising, because, though Asisa rarely displays any kind of bad temper, it did last month. It focused on two factors which did nothing to affect SA’s score in the survey. One was the comment that Asisa is a self-regulatory organisation. Morningstar SA CE Tal Nieburg says the comment was meant to indicate that Asisa has its own code of standards, not that it was a regulator like the Financial Services Board (FSB). There was also controversy around Morningstar’s statement that large financial institutions account for more than half of fund sales and a greater number sell in-house products. Nieburg says this was not a reference to last quarter’s flows but to the available channels to the public. Unlike the US and most other countries in the survey, tied agents make up a large portion of the financial adviser community, maybe as much as half.
I can see why Asisa was upset at the survey when I look at the grades awarded. I hope none of the managers running my money ever got these grades. The overall grade was a C, an improvement over recent years but still below average. The worst grade was a D+ for disclosure, followed by C+ for regulation and taxation as well as for sales and media. And the best score was a B for fees and expenses. Morningstar assures the report’s readers that the dismal disclosure score will improve, as from May 2015 a minimum disclosure document has been introduced.
This replaces the application form as the main reference document and has what the report considers to be “useful” information on the objective, risk and fees of the fund. It normally gives the name of the portfolio manager, but unlike other countries it does not give any information on the manager’s experience and certainly nothing on his or her remuneration. Trading costs are not disclosed, quite absurdly they are excluded from the total expense ratio, and there is no uniform presentation of fees — in other jurisdictions a numerical amount for fees is shown rather than a percentage. Portfolio holdings are not disclosed except on request. In my experience they are getting harder to find. Only Old Mutual still sends me its quarterly portfolios, routinely and within about 10 days of quarter end. Certainly very few clients would have known that its fund had invested in African Bank shares or paper.
Morningstar gives a solid average score for regulation and is generally happy with the FSB and its powers of enforcement, though the authors of the report might not appreciate the capacity constraints at the board. It can still take months for new foreign collective investment funds to be registered, and the majority of flows to these funds are still accounted for by funds affiliated to local businesses such as Investec and Allan Gray’s Orbis. But SA is rightly praised for its trust system, in which assets are kept by a trustee and are not part of the balance sheet of the sponsoring company. Morningstar praises SA for the maximum of R1 000/year that can be spent on treating intermediaries but it is disappointed that tied agents are still subject to sales competitions, which usually have innocent names such as the “Chairman’s Challenge”.
Performance fees are also criticised. The terms of the fee are disclosed but very often there is an asymmetrical performance with generous upside for the manager not made up for by an equal participation to the downside.