Morningstar Advisor - August/September 2013 - (Page 67)

Exhibit 2 Taking a Bite Out of Retirement Savings: The chart shows the effect of taxes on hypothetical 60% stock/40% bond portfolios in 24 countries. Each portfolio begins with a value of $100,000 and is held for five years. Thailand fared the best thanks to a tax credit (shown in orange). Norway had the largest tax. $147,638 Growth of $100,000, Five-Year Holding Period Taxes Zero Tax: $135,667 $10,350 Tax Credit Applied at Thailand Singapore Hong Kong Spain United Kingdom New Zealand Taiwan Japan Korea India Switzerland China France Belgium Canada Netherlands South Africa Italy Australia Germany United States Denmark Sweden Norway End of First Year $100,000 0 $13,266 contrast with standard global practice, which is not to tax investors on fund capital gains until investors sell their fund shares. The U.S. treatment of taxes can take a bite out of retirement savings. For example, take a hypothetical balanced portfolio of $100,000 held for five years in a taxable account by a married couple. The United States has the fourth highest tax bite of the report’s 24 countries (Exhibit 2). In the exercise, which assumes moderate annual gains, Singapore, Hong Kong, and Spain permit their investors to retain their entire investment results, so that they have the full pretax total of $135,667 at the end of the five-year period. (Thailand does that even better by giving fund investors a tax credit, so that they effectively land at $147,638.) The United States barely beats out famously high-tax countries Denmark, Sweden, and Norway. The U.S. regulatory environment could also use some improvement. The Securities and Exchange Committee is an effective regulator, but there is some confusion due to the presence of other regulators. The existence of multiple regulators can cause gaps in regulatory coverage and extra costs for fund companies that must answer to multiple parties. It would be more effective if U.S. mutual funds answered to a single party. Regulatory enforcement is similar: It is acceptable without being outstanding. The SEC is sufficiently staffed, so that it can enforce violations that come its way. However, the agency struggles to proactively identify problems. The SEC has not consistently made public the names of companies that violate its directives. That is a negative for investors. It recently indicated it may be changing that policy. Fund advertisements in the United States are well regulated and are free of the abuses that occur in some global markets. In addition, the U.S. is one of the few countries to require that funds have a board of directors, including some members who are independent. Keeping the Streak Alive While the United States benefits from the most mature mutual fund industry on the planet, there is always room for improvement. Advisors and their clients need to continue to push fund companies, regulators, and legislators for more useful standardized disclosure; consistent regulation across all investment products; and tax policies that encourage responsible investment savings. K John Rekenthaler is director of research with Morningstar. Benjamin N. Alpert is a research analyst with Morningstar. MorningstarAdvisor.com 67 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2013

Morningstar Advisor - August/September 2013
Contents
Contributors
Letter From the Editor
Under Pressure
Has Your View of Bonds Recently Changed?
The Simple Life Cuts a Path to Prosperity
How Extended Is Your Bond Fund?
A Bond Contrarian Scours the Globe for Value
Investments á la Carte
Investment Briefs
Bond Market Behemoths
Shopping in the Digital Age
Shopping in the Digital Age
Diverse Crowd
Motor City Meltdown
Bond Convergence
Corporates Are Fairly Valued, but Opportunities Will Arise
A Legend Still Pines for the Good Fight
Greener Pastures
Forecasting Market Bubbles and Crashes
Forecasting Market Bubbles and Crashes
Home-Court Advantage
Overcoming Technophobia
These Funds Are Counting on Undervalued Sectors
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
What Price Advice?

Morningstar Advisor - August/September 2013