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Morningstar notes big improvement in SA unit trust environment

Biennial Global Fund Investor Experience Study rates SA ‘above average’.

Two years ago Morningstar’s Global Fund Investor Experience Study gave the South African mutual fund, or unit trust, industry a C rating. In its 2017 study, however, the independent research house has found the local environment a lot more favourable.

“South Africa was one of the big overall improvers from 2015, with the new Minimum Disclosure Document proving to be more helpful to investors and providing greater disclosure around fees and costs,” Morningstar stated in the report.

The Global Fund Investor Experience Study is designed to promote “a dialogue about global best practices for mutual funds from the perspective of fund investors”. In other words, it highlights what asset managers and the industry could be doing to better serve the investing public.

USA leads the world

For its 2017 study, Morningstar moved away from giving grades to a clearer five-tier rating system – top, above average, average, below average and bottom. Overall, South Africa was rated ‘above average’, making it one of the seven most attractive countries of the 25 covered in the study.

The other countries that share the ‘above average’ rating are Australia, Korea, Sweden, Thailand and the UK. The only country rated ‘top’, was the USA.

“The United States remains the country with the highest grade, a position it has held since the inception of the study in 2009,” Morningstar noted. “The US continues to lead with lower expenses and a strong disclosure regime, both aided by the size and scale of the fund market compared with other countries.”


The biggest improvement noted by Morningstar in the local fund industry was around disclosure.

“Several new requirements released in 2015 improved disclosure and introduced reforms to the regulatory framework for distributing retail financial products to customers in South Africa,” Morningstar pointed out. “In addition, updates to Asisa standards for fee disclosures have created standardised and detailed representations of fund charges, which helps investors better compare component charges across investment products. These changes greatly increase South Africa’s disclosure scores in our report.”

Morningstar also noted that disclosure of portfolio holdings has improved in South Africa too. The number of funds that provide their full portfolios monthly has doubled to 31%.

However, there is still room for improvement, with South African asset managers generally not disclosing fund manager tenure and whether managers are invested in their own funds.

“Two areas where we would like to see more done globally would be disclosing whether portfolio managers have any holdings in the funds that they manage, since we see a positive correlation between holdings and fund returns in the US where this data is available; and improving the quality of commentary around the performance and portfolio positioning of funds as this tends to be fairly generic in nature,” noted Morningstar’s MD for Research Strategy in Asia-Pacific, Anthony Serhan.

Performance fees

South Africa scored an above-average rating for its fees and expenses, with Morningstar noting in particular that funds without upfront fees or trail commissions are widely available. However, the widespread use of performance fees remains a concern.

“Funds in South Africa are permitted to charge management fees with an asymmetrical performance component without an equal reduction in fees for underperformance, and the practice is very common,” the report stated. “Performance fees in South Africa do not have a uniform structure and vary meaningfully, making them difficult to compare and understand.”

Morningstar did however note that the industry is addressing this issue, particularly because government has made it clear that it is not in favour of these fee structures. They are, for instance, not allowed at all on tax-free savings products.

Asisa introduced a Performance Fee Standard in January this year, which Morningstar called ‘a step in the right direction’, but it still only provides broad guidelines on what is acceptable.

Overall, the median asset-weighted expense ratio for local equity funds in South Africa is good, but could certainly improve, as the table below shows.

Median asset-weighted expense ratios in selected countries


Local equity funds

Local allocation funds










South Africa



Source: Morningstar

The full report can be downloaded here.

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