Morningstar hopes to bring fund analysis to China

Carl Meerveld, president at Morningstar Asia in Hong Kong, recently spoke with FinanceAsia about his firm's ambitions, particularly in China, in addition to musing on his long history of helping build the region's mutual funds industry.

FinanceAsia: Who is Morningstar Asia?

Carl Meerveld: Morningstar is the largest fund analysis company in the world. I would estimate it's twice the size of our two competitors, Lipper and Standard & Poor's Fund Services, combined, in terms of staff and volume. We established our Hong Kong office in mid-2000 as a joint venture with Softbank and PCCW. We're also in Japan, Korea and Australia. From Hong Kong we cover all of the rest of Asia, including India.

Lipper and S&P focus on institutions; their clients are fund management companies using their services for peer comparison purposes in order to market their funds. Morningstar, however, has always focused on distribution. In the United States, we grew along with the IFAs [independent financial advisors], then with the banks and the brokers. Now fund managers adopt our services because of the influence of their distributors.

Morningstar started rating mutual funds 10 years ago, before Lipper or S&P, and that's a core part of our business. We've noticed that those funds rated with four or five stars also get the most flows. But our ratings are historic, they're a tribute to how a fund has performed and not an indicator of future performance.

Both Lipper and S&P have been in the region for a much longer period.

That's right. I introduced Micropal, as it was then known, to Asia in 1988. I owned the agency for six years before selling it back to Micropal, which later was acquired by S&P. Then I headed the Lipper operations in the mid-1990s. These companies introduced fund analysis to this part of the world.

What was the scene like back then?

Mutual funds actually have a nearly 30-year history here. The first was a local Jardine Fleming fund launched in 1973. But for 20 years, the clients were mainly expatriates, and the funds were sold by IFAs that dealt primarily with expats. Only in the past 10 years have fund companies targeted locals and established retail distribution. In 1989 Schroders was the first to put out a bi-lingual Chinese and English prospectus. In 1992, Citibank was the first bank to sell third-party funds, and I helped design and implement Standard Chartered's service which began in 1994. The expats were leaving Hong Kong while the assets had shifted to the local Chinese. So from a local perspective, the mutual funds industry in Hong Kong is only 10 years old, and banks now account for over 50% of the funds sold.

How quickly is the industry gaining steam?

Frankly, retail investors are not picking funds up. Mutual funds in Asia must be sold; they aren't bought. In the US or the UK, people with a certain level of cash buy funds. It's a natural part of savings and wealth management. In Asia, we're still trying to make people aware of them. In that respect, the launch of MPF [Hong Kong's Mandatory Provident Fund] has been very helpful. People need familiarity with something to become comfortable with it. From the two years I spent helping to sell funds at Standard Chartered, I can tell you the first sale to someone was very time consuming. It was hard.

Do people buy through IFAs?

The IFA role is limited. In Australia, the UK and the US, there is value in tax planning and investment services. Here the tax regime is less onerous, so there's less incentive to seek advice. Also, here the banks are more trusted intermediaries. This has created an opportunity for Morningstar given our emphasis on distribution services.

What exactly are those?

We collect a comprehensive range of data on things such as fund performance and charges, and supply that to distributors, which use it to help decide what funds to offer or in statements to their customers. It's just one more piece of information for the retail investor in the investment selection process. We provide a lot of services on the internet as well.

What are your expansion plans?

We compile our database from Hong Kong. Elsewhere we need enough initial sales to justify a local presence. Singapore and Taiwan are the obvious places we're considering. Singapore has a growing mutual fund industry that has regional distribution. Taiwan has a really big domestic retail industry. In both of those markets, we can approach fund management companies directly. They now realize the impact of disclosing information to reputable third parties. We've got funds calling us to ask us to carry more information. They're desperate to make sure they're included.

How do you approach China?

China is interesting. It has potential, but the question is how do we develop that market? We're involved in conversations with all levels of the industry. Our Chicago-based COO is also of mainland Chinese origin, so we have inside the organization native Mandarin speakers. As I've said, the distributors are our market - banks, some brokers. The guys in China are looking at the success of Citibank, Standard Chartered and HSBC - and this is non-funded fee income, it doesn't go on your asset/liability sheet, and you can build a business at minimal extra cost to your infrastructure. They see a business they can get into. Open-ended mutual funds are the first step, and we will watch how that progresses. We want to be collecting data on Chinese funds. There is a huge educational need at all levels.

Do you need a partner in China to collect data?

We're looking. We could tie up with mainland data collectors, but I can't say who. All I can say is that we hope to announce an initiative sometime in 2002.