SA scores ‘C’ for investor experience, capital controls flagged


South Africa has scored a ‘C’ grade in the biannual Global Fund Investor Experience Report released by research firm Morningstar, highlighting capital controls and the restrictions they impose on funds from investing more than a certain percentage in foreign assets.

The research from Morningstar assesses the experiences of mutual fund investors in 25 countries across North America, Europe, Asia, and Africa. This year’s report identified South Korea and the United States (US) as the most investor-friendly markets, and China as the least.

Morningstar evaluated countries based on four categories: regulation and taxation, disclosure, fees and expenses, and sales and media, with researchers generally favouring active fund regulation, low tax burdens, more disclosure, lower fund fees; and educative local news media.

South Africa – the only African company assessed by Morningstar – scored relatively poorly, obtaining a ‘C’ alongside France, Hong Kong, Singapore, Spain, and Italy, with only Japan with a ‘C-’ and China with a ‘D+’ scoring lower.

The country notably lags in regulation and taxation, with Morningstar saying large tax exemptions and tax rates could be managed lower. It also highlighted the negative impact of South Africa’s capital controls.

“South African capital controls restrict funds from investing more than a certain percentage in foreign assets, ultimately limiting choices for investors. South Africa is one of only four countries evaluated in the report to impose such restrictions on investors,” the company said.

On the positive side, Morningstar noted the country’s recent introduction of the Retail Distribution Review had brought improvements to the environment for investors, with fund disclosure practices having been significantly improved and the Minimum Disclosure Document (MDD) now acting as the point-of-sale reference material.

South Africa also scored slightly above average in terms of fees and expenses, with ongoing fund fees typically unbundled, decreasing reported fund fees. Morningstar did note, however, that if investors have to pay for both advice and an administration platform, the total cost of owning a fund could increase by between one per cent and 1.5 per cent.

“However, South African investors have a more positive experience concerning annual expense ratios. Annual expense ratios for allocation funds tend to be higher than the average globally, but lower for money market funds. South African annual expense ratios for equity and fixed-income funds are average,” Morningstar said.


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