Distributor body challenges Morningstar to public debate on expense ratios

A body of financial advisors and distributors on Saturday challenged Morningstar India’s Managing Director Aditya Agarwal to a debate in any public forum to bring out the “true picture” of expense ratios. 

The Foundation of Independent Financial Advisors (Fifa) was reacting to Agarwal’s remarks on a social media platform, that “individual investors’ interests have always been our true north and we will be delighted when India truly becomes the third least expensive country”. 
In the Morningstar Global Fund Investor Experience report 2017, India turned out to be the second most expensive country for equity mutual funds, of the 25 countries that were reviewed. Morningstar classified India in the “below average” category in the fees and expenses scorecard. 
Fifa, which sent its own study to the Securities and Exchange Board of India (Sebi) this week, concluded that among the 25 countries reviewed, India is actually the third least expensive for equity mutual funds.
According to Dhruv Mehta, chairman of Fifa, “These studies publish the annual expense ratios of mutual funds in countries across the globe and grades countries based among other factors, on the asset weighted median expense ratios. However, expense ratios without adjusting for exclusions/inclusions in expense ratios of unbundled and bundled countries are not meaningfully comparable.” Fifa in its report said that when expense ratios are made comparable, there are significant changes in the ranking of costs of equity funds. The ranking of Canada improves from 25 (the most expensive) to nine, the ranking of Switzerland falls from one (the least expensive) to 12, and the ranking of India improves from 24 (one of the most expensive) to three (one of the least expensive).

Fifa has been carrying out its own analysis of expense ratios from 2016, prompted by Morningstar’s “Global Fund Investor Experience 2015”. The latest study by Fifa has also been done after Morningstar came out with the 2017 version of its biennial report.
Commenting on the divergent views on expense ratios between Morningstar and Fifa, Nilesh Shah, managing director of Kotak MF, tweeted on Saturday that he’d be happy to host a public debate to settle the issue once and for all. That is when Fifa threw down the gauntlet to Morningstar, inviting the latter for a debate on the issue.
Other AMC chiefs also expressed their views on the different set of findings. Radhika Gupta, CEO of Edelweiss MF, tweeted, "... we should do apples to apples comparisons of the total cost of ownership including front loads, exit loads etc and the true results will be there for everyone to see. Comparing apples to kiwis is dangerous." 
A query sent to Morningstar didn't elicit any response at the time of going to press.  Meanwhile, the distributors’ body has requested Sebi to give them a chance to present the findings of their latest report.
Sebi has been nudging the industry to make mutual funds more cost-efficient. In March, the market regulator decided to reduce the additional expenses charged by mutual funds by 15 basis points.
“Based on data and the recommendations of Mutual Fund Advisory Committee (MFAC), the board approved the proposal to reduce the maximum additional expense permitted to be charged to a mutual fund scheme from 20 basis points to five basis points,” Sebi had said in a note.