Authored by John Rekenthaler, vice-president of research for Morningstar Inc., and research analyst Benjamin Alpert, the study of the global investor experience is an updated and expanded version of a global study released in May 2009.

Today's study ranks 22 countries, up from 16 two years ago. The countries received grades in four categories: regulation and taxation; disclosure; fees and expenses; and sales and media. From these rating categories, the Morningstar study also calculated a composite grade.

As was the case with the 2009 study, Canada would have scored higher overall if not for its dismal grade on fees. Canada was the only country to receive an F. Italy -- which was the second worst with a D grade -- was the only other country that did not receive at least a C grade for its fees and expenses.

"At a deceptively normal looking C+, Canada's overall grade hides major strengths and weaknesses," the study says. "Positively for investors, sales and media practices are excellent and disclosure is very good. Unfortunately, these benefits are counterbalanced by steep taxes and the highest fund costs found in this survey."

The study's discussion of Canadian fund fees includes point-by-point rebuttals to industry criticisms in response to Morningstar's previous global study of fund-investor experience. Canadian industry executives -- including president Joanne De Laurentiis of the Investment Funds Institute of Canada -- contended that the Morningstar fund-fee comparisons were "apples to oranges" because of major differences between Canadian pricing structures and those of other countries.

Among the differences cited by the industry are: the bundling of advisor compensation into the management fees of Canadian-domiciled funds; lower front-end commissions charged in Canada; federal and provincial taxes that push up management-expense ratios (MERs) in Canada; and greater transparency in the reporting of expenses in Canada.

In rebuttal, Rekenthaler and Alpert state in the newly released 2011 study that with "rare exception," every country's funds pay for distribution costs out of their funds expense ratios.

On load structures, the Morningstar study says "Canada's load structure is broadly similar to the global average. In many countries, funds with a front-end sales charge are in the minority, and in many countries as well these charges can and are negotiated to lower levels than are stated in the prospectus."

The Chicago-based authors acknowledge that high taxes are partly to blame for contributing to high MERs in Canada, but that this did not affect their global ratings by country. "The source of the costs is immaterial to the fund investor," they said, adding that many European funds also are subject to value-added taxes.

On transparency of fund expenses, the study stated that Canadian disclosure of fund fees and expenses is not materially different from that of the other 21 countries studied.

The study said there is some merit to the argument that Canadian fund fees should not be compared to those of the U.S., since the U.S. market is much larger and enjoys greater economies of scale. But the authors also noted that Canadian fees are "significantly higher" than those in other countries with modest populations, such as Australia, Belgium, Hong Kong, Norway and Sweden, among others.

Canada's overall grade of C+ placed it in a tie with France, Germany, Japan and the United Kingdom. Nine countries were awarded better grades, led by the United States and Singapore which were the only two countries to be awarded an A grade. Six countries received a C grade, while South Africa received the second lowest grade of C-. New Zealand received a D-, which was the worst overall grade.

On other aspects of the Canadian fund industry, the study concluded:

• Canadian investors enjoy excellent sales and media practices. Sales contests and preferential compensation for sales of particular funds are strictly regulated. There is frequent media coverage, including mentions of high fund fees and the merits of long-term investing. Grade: A



• Disclosure in Canada is also investor-friendly. Among the regulatory requirements that drew praise were the five-year disclosure of the fund's expenses history, and monetary illustrations of each fund's costs. Investors have easy online access to regulatory filings via the www.sedar.com website. Grade: B+



• On regulation and taxation, the study lamented Canada's high taxes on fund management fees, namely the GST in five provinces and the harmonized sales tax (HST) which combines the GST with a provincial tax in the remaining five provinces. (In Ontario, the largest province, the introduction of the HST effective July 1, 2010, resulted in the tax on fund fees soaring to 13%, up from the previous 5% when only GST was applicable.) The study also slammed Canada for restricting competition in open-end mutual funds by prohibiting foreign-domiciled funds from registering for sale in Canada. Grade: D

To read, the full study, click here.

Canada's global grades

	Category	Grade
	Overall grade	C+
	Regulation and taxation	D
	Disclosure	B+
	Fees and expenses	F
	Sales and media	A
	Source: Morningstar Fund Investor Experience 2011