In the second week of June, Morningstar released the 2015 Global Fund Investor Experience Report. The Report evaluates 25 countries out of the 27 where Morningstar has operations, using four categories that are weighted to calculate the overall grade. South Africa was assigned a C rating.
Unfortunately, the 2015 Report contained the same fundamental inaccuracies as in 2013 and 2011. Since these inaccuracies were pointed out to Morningstar in previous years, we took a decision to make our concerns public. This became particularly important as the Report was receiving media attention.
In a media release issued on Wednesday, 17 June, we therefore pointed out the following material misconceptions that Morningstar has about the South African Collective Investment Schemes (CIS) industry.
In the Overall Country Scores section of the Morningstar Report under Regulation and Taxation it is stated that: “In Morningstar’s view, the best regulatory practice is to have a single regulator that is independent of the fund industry. The regulator is responsible for overseeing the management, disclosure, operations, and distributions of all types of investment funds. As an independent entity, the regulator does not face the conflicts of a self-regulatory body, which must balance the desires of the industry with the need to protect investors.”
In the Country Detail section of the Report under the Regulation and Taxation heading, Morningstar then states that: “The Association for Savings and Investment South Africa (ASISA) is a self-regulatory body that works with the fund industry.”
This is a fundamentally flawed statement, as the industry is regulated by the Collective Investment Schemes Control Act (CISCA) which is enforced by the Financial Services Board (FSB). ASISA is a trade association and not a self-regulatory body.
Furthermore, under the heading Sales and Media in the Report’s executive summary it is stated that: “Large financial institutions account for more than half of fund sales, which translates to a greater number of advisors selling in-house products rather than presenting their clients with all possible choices.”
This is simply not true. The bulk of the CIS flows are attracted by CIS management companies that have no tied agents. The 12 biggest CIS management companies manage 82% of assets, excluding money market funds. Seven of these companies do not have tied agents, yet they manage 65% of this 82% share of CIS assets.
In a response to us, Morningstar South Africa stated that our concerns are immaterial to the rating awarded to South Africa. We will continue to engage with Morningstar to resolve these disagreements.
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