Note to Advisers, from Aditya Agarwal, MD of Morningstar India

By Morningstar |  16-08-18 | 

Morningstar India has just completed a decade in India. And over this time, we have relentlessly pursued our mission to help investors achieve their financial goals. Towards this end, we empower the advisory and institutional community that serves them.

I am quite sure that you will agree with us when we say that we must all work towards improving the investor experience. Because if the investor wins, everybody wins, including the intermediaries that serve them. Hence our unchanging posture that the investor is our True North.

Towards this pursuit, we work closely with advisers and institutions. We come out with independent research and analysis that is based on a solid methodology, we offer our data and tools for better decision making, and host investment conferences where we bring together experts to help advisers be on top of the game.

We would like to see the growth of the funds industry in India and work closely with all the relevant stakeholders.

The biennial Global Fund Investor Experience report is also an attempt to promote dialogue about global best practices for mutual funds from the perspective of fund investors.

I would like to clear three issues regarding the Morningstar Global Fund Investor Experience Study 2017 (GFIE 2017).

Our study is not about distributor commissions.

The GFIE 2017 study is an independent analysis of the fund investor’s experience across various countries and ranks each one based on 83 questions in areas of 1) Regulation and Taxation 2) Disclosure 3) Fees and Expenses 4) Sales.

Given the level of alpha that Indian funds deliver, there isn’t always enough focus on the absolute level of expenses charged by funds. We think as assets under management grow, asset management companies (AMCs) should focus on passing on the benefits of economies of scale to investors by reducing the total expense ratio (TER). The AMCs have the flexibility to leverage various components of the TER.

To conclude that a lower TER translates into a lower distributor commission is unwarranted, and not what we have implied or suggested.

Our study is not biased against India.

The study covered 25 countries across various continents.

It is worth pointing out that India received the highest grade of Top for ‘Disclosure’ and an ‘Overall’ grade of Average, ahead of many European markets and equivalent to many developed markets.

While the GFIE 2017 states that India is amongst the most expensive geographies when it comes to expense ratios for equity and allocation funds, and these elements fall behind global best practices, it also goes ahead to state that the situation “is not unusual given the developing nature of the Indian fund market and the impact this has on scale and distribution.”

Indian investors do not pay front loads when acquiring funds and the expense ratios for fixed-income funds are globally competitive. India also prohibits funds from charging performance fees, which removes issues around the structuring and disclosure of such fees.

The purpose of our study is to promote best practice.

We have always been emphatic that the purpose of the study is to promote dialogue amongst the industry participants about what constitutes best practice.

In our report, we have openly called out the issues related to bundled versus unbundled fee comparisons. We have also taken the stance that unbundled fee structures are better for investors for three main reasons: 1) better disclosures 2) greater focus on each part of the value chain 3) cheaper funds become available to investors.

As the adoption of direct share classes increase with investors paying for advice, there will be a natural migration towards lower costs of fund ownership and greater value-added advice for investors.

Ultimately, any change will be driven by market participants in individual countries.

The challenge this study puts out is how can we continue to improve the investor experience.

You can read our views on the report in greater detail here.

Feel free to reach out to us if you have any doubts or would like to clarify any issues.


Aditya Agarwal

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Dhawal Parikh
Aug 23 2018 07:42 AM
 Aditya Agarwal, MD’s explanation has raised more questions when it was supposed to give answers. Generally, you guys don’t have a culture of answering questions. I hope that Aditya will behave differently. Your reputation is nowhere close to what you think it is. In India, you are at best a fringe player after a decade. If you hope to be taken seriously Aditya must write another article addressing all the feedback he got.
SV Prasad
Aug 22 2018 04:33 PM
 Kind attn: Mr. Aditya Agarwal MD-MSI Having finished a decade I congratulate MSI for its presence ( global tag doesn’t earn any extra marks though - as investor or reader relevance alone counts ), contribution and service to the cause of investor community and other market participants including advisers & distributors. MSI is one of the few websites which provides a distinct section and platform for investment advisers & distributors, and yet faced with a strong backlash from them for calling a spade a spade. This very design mix itself makes investor community view the website and resources always with a pinch of salt. I am not sure if it makes a strong case for some fundamental shift or redesign in your market positioning or layout to earn the trust in the eyes of retail investors and readers. As you are well aware, SEBI is a strong and credible regulator of our country and too big, credible & impartial to be unduly influenced by any specific stake holder, agencies or factors as perceived by a few. And SEBIs trump card would always be the investor interests, based on which the whole investment infrastructure has grown. The changes happening in the industry & country were market driven based on dynamic risk-return environment and ‘inevitable’ inspite of presence or absence of any section of market intermediaries. The advisers & distributors were at best catalysts and participants in the process, certainly not the prime movers. It is the dog that wags the tail not the other way round.
SV Prasad
Aug 22 2018 04:32 PM
 As an active investor with considerable investments in stocks & funds for over three decades and regular reader of some online resources pertaining to this area, I visit your website only for some quality article content both local and global, which I find to be worthy of reading or to save for future reference (browsing even through Archives, article gists or digests & round-ups when I get some free time ) . At times I also use Fund comparison tools and fact sheets for historical data on scheme attributes, portfolios & changes , use data exports and skip all other sections & tools including Portfolio manager, having tried them out earlier and found not in line with what I often look for in online resources. It is strange that I hardly find any reader response to your content or critical points raised by fellow readers. I can only presume it is proportional to the amount of patronage from the readers & investor community in general , even if I safely assume your website is visited by more informed investors and readers as compared to other online forums. An effective and useful portfolio & analytical tools itself could earn a lot of regular and loyal eyeballs keeping aside analyst ratings which are offered by almost every website and even on electronic media frequently. Best Wishes to grow in terms of ‘relevance’ to investors and thereby make a bigger impact for yourself.
KAUSHIK Bhattacharjee
Aug 21 2018 05:18 PM
 Is it possible to mention the data sources or share the data based on which you have arrived at your analysis such that any one can verify the claims?
N M Rajugopal Shreedhar
Aug 20 2018 08:08 AM
 The very fact that the MD has to come out with a justification in defence of Morning Star indicates that MS has got it wrong this time with regard to expense ratios. Perhaps MS can enlighten us on how to reduce the gap between the Direct Plans and Regular plan expense ratios without affecting distributor commissions, when even the MF managements themselves admit to the contrary. As IFA's and dsitributors , one cannot help feeling that the entire survey is designed to provoke SEBI to reduce the commissions--wonder if MS has ever been on the ground , trying to push MF schemes to the retail investor. Surely this is betrayal of trust--once the MF houses have gained momentum in fund mobilisation , ditch the distributors who have sweated to make this happen. Initially it was SEBI which had curtailed the commissions (which was justified, in my opinion)--now it is the fund houses ,through such intermediaries, who are out to reduce the meagre amount paid as commissions, rather than reducing their in-house fund management charges.
sandeep deshmukh
Aug 20 2018 07:00 AM
 i am continuing the thread below. there is a yawning gap between morningstar and the investor's trust. if you have not been able to achieve it in a decade, then what are the chances that it will happen in the future? even today when anyone says mutual funds, your established competitor is the first choice. you should do soul-searching to uncover the reason. no smart man lives in a state of denial. have a nice day!
Santosh Thapliyal
Aug 19 2018 08:16 AM
 Why is Morningstar giving so much importance to 'trivial accusation' coming mainly from a small percentage of distributors? Morningstar does enjoy the faith, trust & respect of investors and i think that is what matters most.

If publishing a comparative report makes some distributors unhappy, so be it! Promoting best practices to enhance investor experience is too important a matter to be held at ransom by selected few who just want to secure their interests.
Viswanath Nagarajan
Aug 17 2018 01:43 PM
Our paths have never crossed, but I know about you thanks to Larissa.
Reading your note, I was a bit saddened but not surprised. Saddened to see the travails of Morningstar, not surprised because the rot set in eons back. Trust is more important in the sphere of research and investments, than it gets credit for. Even after completing a decade in India, you find yourself in an awkward spot over a trivial accusation.
Have you contemplated why Morningstar doesn’t enjoy the investment community’s trust? The face of Morningstar i.e. Research is characterised by confused thinking, and often borders on the farcical. Obviously I lack faith in you. Why should anyone trust you for that matter? It doesn’t help to tom-tom phrases like independent research and analysis. Banality under any label is just that. Strive to earn the investor community’s faith, trust and respect. Beyond a point no one cares a hoot about your global parentage.
Milind Chitnis
Aug 17 2018 07:43 AM
 Point you have mentioned viz that cost is only aspect of study is well appreciated But can you at all compare cost structure of Indian funds where rightly or wrongly 3 fees viz. platform fees, advice fees and fund management are combined with ONLY fund management fees charged in certain markets. Is this not comparing apples and oranges?
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