Morningstar Advisor - Fall 2007 - 96

The Phillips Curve The Whole Wide World By Don Phillips BEIJING I write this quarter’s essay from the China Capital Market Forum. Speakers from China, Japan, Europe, Australia, and the United States are here to discuss the dynamic Chinese economy, the phenomenal recent performance of Chinese A shares, and the prospects for the future. While the American, European, and Japanese speakers all urge caution based on the current lofty valuations of Chinese stocks, the local and Australian speakers generally make the case that the market is not overextended and that growth prospects warrant high multiples. It’s a fascinating debate. As I listen to the speakers and reflect upon my recent visits in China with local fund officials and government regulators, it’s hard not to be impressed with the spectacular growth of this market. What was farmland five years ago on my last visit to Shenzhen is today a glistening new central business district filled with world-class hotels and modern office buildings teeming with highly skilled professionals. Where a few years ago there were only a handful of fund companies, today there are more than 50. Capitalism has most certainly come to communist China. It’s at moments like these that it seems especially foolish to limit one’s investment horizons to the U.S. market. There’s just too much happening around the world. Perhaps it’s because the globally oriented Templeton Growth Fund was the first fund I owned, but I’ve always believed in international investing. I believe it even more strongly today, and not just for the academic risk reduction argument, but for the more basic belief that not all great opportunities lie within our shores. But just as travel can open your eyes to new opportunities, it can also make you better appreciate the comforts of home. As much as I believe in the merits of international investing, I’m equally convinced that there’s no better locale from which to be an international fund investor than the United States. At Morningstar, we now cover funds from close to two dozen countries, and we’ve found no market where fund investors pay lower costs, have greater transparency, or have better protections than we do in America. Simply put, investors get a fairer shake here than anywhere else. Country Exp% Equity Exp% Fixed Inc Exp% All Funds tices, and you’ll get a blank stare. Sometimes, it’s important to recognize just how good we have it here at home. Obviously, the scale of the U.S. market allows for much efficiency, but scale alone doesn’t account for all the advantages U.S. fund investors have. It’s the result of financial advisors, personal finance journalists, fund board members, 401(k) trustees, and others fighting for investor rights that have made the U.S. fund market the fairest for investors in the world. U.S. advisors list fund costs as their number-one criteria in selecting funds and have moved their clients’ assets accordingly. They’ve demanded better communication and information on which to base their decisions, and they’ve moved assets away from firms that won’t comply. Fund companies have had little choice but to respond to advisors’ requests for increasingly institutional-like offerings with lower cost, more-disciplined strategies, and greater transparency. Morningstar could write about these issues indefinitely, but if it weren’t for advisors moving money to the firms that cooperate, we wouldn’t have seen the progress we’ve seen in the U.S. fund market. Even today, we routinely see the same fund companies that offer low-cost, fully transparent funds in the United States selling expensive funds with limited disclosure abroad. Investors get the quality of service they demand. Advisors who have stood up for client rights have made the U.S. fund market a better playing field for all of us. So while I’ll continue to travel the world looking for investment ideas, I’m delighted that I’ll be doing so with a U.S. passport. K Don Phillips is Morningstar’s managing director, corporate strategy, research, and communications. Australia Austria Belgium Bermuda Canada Denmark France Germany Ireland Italy Sweden Switzerland U.K. USA 1.05 1.87 1.51 2.28 2.09 1.11 1.71 1.29 1.94 2.24 1.45 1.46 1.56 0.86 0.74 0.62 0.51 2.25 2.25 0.74 0.86 0.88 1.26 1.06 0.79 0.90 1.03 0.66 0.97 1.20 1.35 2.27 2.27 0.85 1.68 1.13 1.79 1.52 1.33 1.40 1.54 0.80 Expense ratios are asset-weighted as of July 31, 2007. Consider expenses. As the table of assetweighted expense ratios shows, economies of scale are better shared with investors in the United States than in any other market. Go a couple hundred miles north of Morningstar’s Chicago office to Canada, and fund costs more than double! Similarly, if you go to Europe and ask a fund to disclose its holdings to shareholders on a monthly basis, you’ll be laughed out the door. Ask a Chinese fund company about fund boards and best governance prac- 96 Morningstar Advisor Fall 2007

Morningstar Advisor - Fall 2007

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