Investors in South African-run collective investment schemes are getting service worthy of a C grade on a report card of investor friendliness, according to the latest Global Fund Investor Experience Report from Morningstar Research. In the fourth edition of the biannual report, which began in 2009, Morningstar's researchers evaluated the experiences of unit trust investors in 25 countries in four categories - regulation and taxation, disclosure, fees and expenses, and sales and media - weighted to calculate an overall grade.South Korea and the US both scored A grades, followed by the Netherlands with A minus. South Africa was placed 21st out of the 25 countries surveyed, on a par with Belgium, France, Hong Kong, Singapore and Spain and beating only Italy, Japan and China.Morningstar considered active fund regulation, a low investor tax burden, greater disclosure, lower fund fees, a varied fund distribution system and local news media that help educate investors as desirable attributes in assigning a grade for each of the four categories.According to the researchers, the introduction of the Retail Distribution Review will bring improvements in the environment for investors. Pioneered in the UK in 2013, the review sets compulsory requirements for financial services providers to increase fairness and transparency in the industry.Fifty-five industry-changing proposals for improving market conduct were published for comment by March this year, but an implementation date has not been set.Steven Nathan, the CEO of 10X Investments, said South Africa's C grade in the 2011 Morningstar report - the second-worst among 22 participating countries - indicated concerns about sales incentives that should be addressed by the introduction of the Retail Distribution Review."The [2014 RDR] discussion paper sets out, in great detail, the many different distribution channels and fees charged, underlining the complexity of the system and the inherent conflicts of interest. The paper makes sound proposals on how to simplify the system and limit these conflicts."Most notably, the Morningstar researchers noted this year, South African fund disclosure practices had improved significantly.block_quotes_start They marked us down because they believe South Africa has two regulators, while they prefer there to be one block_quotes_end"Beginning in 2015, a minimum disclosure document now acts as the point-of-sale reference material and replaces the application form as the reference document," the report says. "The [document] is updated quarterly and contains useful information regarding the fund objectives, risks and fees."South Africa scored slightly above average on fees and expenses, earning a B grade, although that grade is a matter of perspective."In South Africa - as well as the US, Australia and the Netherlands - ongoing fund fees are typically unbundled, which decreases reported fund fees. However, if investors are paying for advice and an administration platform, the total cost of owning a fund could be an additional 1% to 1.5%," the report says.Annual expense ratios are lower than average for money market funds, but are average for equity and fixed-income funds.The main areas requiring improvement and where South Africa continued to lag its global peers were regulation and taxation, the researchers found. In this category, South Africa scored a C plus."While large tax exemptions and tax rates can be managed lower, 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 ranking was not well received by the local industry.story_article_left1Leon Campher, the CEO of the Association for Savings and Investment South Africa (Asisa), the representative body for the collective investment scheme sector, said Morningstar's methodology was flawed and unfairly marked South Africa poorly in two of the four categories."It's Morningstar's right to decide which categories they construct and look at, but there are two major inaccuracies that have been in place in this report since 2011. We have engaged with them regularly since then, to no avail."On regulation, they marked us down because they believe South Africa has two regulators, while they prefer there to be one, which is extremely disconcerting."Campher believed Morningstar had classed his association as a self-regulatory body. "That's completely fallacious and wrong. We have only one regulator, the FSB [Financial Services Board]."Second, Campher said Morningstar contended that large institutions with tied agency forces dominated in the sales and media category. "That is inaccurate. Of the 12 biggest companies, which constitute 83% of the assets and flows in the industry, seven of those don't have tied agency forces."Exasperated at the middling ranking, the association's deputy CEO, Peter Dempsey, added that the sample size of 25 countries - out of about 50 that offer such unit trusts - was small and that the categories used ignored South Africa's strong rankings from the World Economic Forum (WEF) in its global competitiveness report.Morningstar is unfazed by the criticism. Tal Nieburg, the managing director of Morningstar South Africa, said the researchers did not say South Africa had two regulators - merely that Asisa was a self-regulatory body."In any event, even if there were a dual regulatory system in SA, this would not affect the score."He said what did affect the score was that South Africa used exchange controls to restrict where funds could be invested.On the issue of tied agents, Nieburg said Morningstar looked at the number of funds available to investors, not an asset-weighted view. And in any case, South Africa scored well in Morningstar's report for its breadth of options for investors. "However, in practice, we note that many funds are not actually sold through the available open architecture system."He said the sample size was sufficient. "Morningstar focuses on countries that have well-established markets for mutual funds and a large number of investors that use funds."Finally, on the issue of WEF rankings, Nieburg said the Morningstar study was focused on a domestic investor's point of view.sub_head_start Indices outdo active funds sub_head_endS&P Dow Jones Indices has released scorecards for 2014, pitting actively managed unit trusts against S&P indices.The results show 84% of actively managed equity funds domiciled in South Africa failed to beat the benchmark S&P South Africa Domestic Shareholder Weighted Index over the calendar year. Over three and five years the proportion of underperforming funds was 82% and 85%, respectively.For the first time, a South African scorecard joined those from North America, Europe, Japan, India and Latin America.The report shows 90% of actively managed global equity funds trailed the S&P Global 1200 Index during 2014.Active managers had more success in the short-term bond category, with half underperforming the index last year (23% over three years and 19% over five years), but in the longer-maturity, diversified bond category, 90% underperformed the JSE/ASSA All Bond Index in 2014, while 73% fell short over three years and 79% over five years. ..