Morningstar Inc. is the world’s leading mutual fund (MF) tracking firm. Mint caught up with its founder and chief executive officer, Joe Mansueto, to get his perspectives about the Indian as well as the global MF industry. Edited excerpts:
India has at least five large MF awards. Morningstar Fund Awards is the latest addition. The investor is confused because multiple funds win awards in the same category bestowed by several firms. How does another award work?
Well, there are a lot of firms that provide MF ratings. There is a reason why our ratings have become a global standard for evaluating funds. That’s because we have a large team of analysts, who really understand the firms from a deep fundamental perspective. We have about 80 fund analysts globally. So we have a very deep knowledge and understanding of funds.
Mindspeak: Joe Mansueto says there is a high correlation between an adviser community and a successful fund market. Abhijit Bhatlekar / Mint
The mission of Morningstar gives more credibility to our methodologies, our ratings and to our fund awards. There are several others who also give awards, there are several voices, but we think our voice is the most credible. But it’s a big world, lot of people, different firms with lots of different opinions.
Coming to regulation, India has seen a whole slew of regulation in the fund space in the last one year. How does it compare with other markets? Don’t you think it is too tight compared with other product categories, such as unit-linked insurance plans? Doesn’t it put the Indian MF product at a disadvantage?
From what I can tell—and I am not a regulatory expert—I would applaud the regulators in India for trying to adopt global best practices in their regulatory framework. They are looking to protect the investor, who is looking for better investment outcomes.
I would say it is a very aggressive plan to get there quickly. I have seen other markets get there very slowly. So, India is fairly quick to adopt some very investment-friendly policies.
But I think you make a good point about insurance products. It should be a level playing field and there should be no difference.
Was there ever a trade-off of the same sort in the US industry? Were MFs and insurance ever at war there?
There have been those kinds of wars before. I think the issue has not been so from a regulatory framework in the US, but from a tax framework. Insurance products had some tax incentives associated with them. That gave them some advantage and helped them grow.
But I don’t think there was any time that funds did not grow. Funds grew strongly in the past 25 years in the US. Insurance-related products also grew. They are not really as big as MFs despite their tax advantage.
How important is a regulatory framework in regulating financial advisers and in ensuring mass participation in the funds industry? In which other markets have you seen such regulations making a difference?
When I started 25 years ago, a significant part of the business was directly sold to investors without any IFAs (independent financial advisers) involved. What has happened in the last 25 years is that advisers are really dominating the distribution and sales of MFs not only in the US but around the world. Advisers are critical in helping investors overcome their financial fears. They play a critical role.
And you’ve seen it happen in markets across the US, Singapore and Hong Kong?
Canada is very strong in terms of advisers, the US is very strong, Australia is very strong, they all have very strong fund markets. The other markets, specially the South-East Asian ones, are still evolving.
In India, they seem to be on the right track. And then in Europe, it’s a mixed bag. Some countries are stronger, other countries are not (banks are stronger than independent advisers). For example, in Germany, the mutual fund distribution market is dominated by large banks. But I think there is a high correlation between the adviser community and a successful fund market.
If we agree that a loaded product carries intrinsic advice, or a product which has a load embedded in it is an advised product, shouldn’t a broker-dealer then also be an adviser?
That is right. I think our view is advisers need to be compensated whether from the front-end commission or trail and so if a broker is giving advice on a transaction/receiving advice, so I would agree.
So would the US also go the no-load way? UK’s Financial Services Authority (FSA) has said it will do it, Australia is also talking about it. Do you see that happening at all in the US?
It is happening by market forces in the US. There are very few funds that are sold with significant loads today; loads have really come down. When I started out, there were 7% to 8% loads. Those have come down.
And fee-based clients are much more common. That said, if you are a long-term investor, there may be a case where front-end load may make sense. If you’re going to invest for a long period of time, paying one upfront fee versus a long trail fee actually makes sense. I don’t think it’ll ever go away in the US, though the amount will certainly come down.
Twenty-five years ago, did you imagine that you would open shop in Mumbai and speak to the Indian press?
I wish I could be such a visionary, but I am not. My idea of business is pretty much one year at a time. So the only part of future I could have told you 25 years back is that MFs have a great future, because they are really the best way for the average individual to invest. I could have said that MFs have a great future, but no I couldn’t have predicted that 25 years later I would be here. Just as today, I couldn’t tell you 25 years from now what Morningstar would look like.