Mutual Funds: Looking Ahead

Avi Nachmany Director of U.S. Research Strategic Insight [email protected]

2

Q1: What Will Happen with $10 Trillion in Cash?

Q2: Bond Fund Demand in 2013, 2014, 2015 and Beyond?

3

Q3: Will Global, Tactical AA Continue to Lead Demand? Further Refinements of Balanced Global Investing?

Q4: Equity Fund Sales: ‘2H’12, 2013-14? Beyond Focus on Asset Allocation Solutions, Dividend Income?

5

Q5: Emerging Market Investing: Already Matured beyond Just Episodic, to Strategic and Core?

Assets, $B Objective Name (SI) 04/12

Emerging Markets, Regional, and Sector Funds

Int'l Emerging Market Equity Global Equity Sector Pacific Equity without Japan Int'l European Equity Pacific Equity with Japan Int'l Latin America Equity Int'l China Equity Int'l Japanese Equity Int'l Single Country Equity Total

Source: Strategic Insight Simfund MF

316.5 63.0 27.0 16.2 9.5 9.4 18.1 8.8 50.7 519.2

2008 Net New Flows, $B 2009 2010 2011 YTD-04/12

6.5 0.9 (3.5) (2.9) 0.9 (0.8) 0.4 (2.3) (3.0) (3.8) 33.3 4.2 4.9 (0.6) (0.1) 2.0 4.9 (1.4) 11.1 58.2 56.5 3.8 3.9 (2.4) 2.1 (1.3) (2.7) (1.0) 8.7 67.5 19.0 6.0 (4.2) (1.2) 0.5 (3.2) (2.3) 2.6 (1.2) 16.0 21.2 1.0 0.7 0.2 0.1 (0.1) (0.1) (0.1) (1.1) 21.9 6

Q6: Will Relative Risk-Adjusted Returns Remain Key Screening Criteria for Traditional Diversified Funds?

(e.g., 1Q12 Flows vs. Trailing 3-Yr Risk-Return Relative Scores, SC/MC*)

100% 90% 80% 70% 60% 50% 40% 30% BLUE Bubble = Inflows RED Bubble = Outflows Bubble Size = Net Flow $ 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30%

Lower < 3 YR DOWNSIDE RISK > Higher

20% 10% 0%

*Mid / Small Cap Stock actively managed Funds; Relative risk and return rankings measured within each fund’s Morningstar categories; bubble size corresponds to 1Q’12 net flows. The funds in the charts clearly share appealing risk-return characteristics for the 36 months ending March 2012.

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Q7: Search for Alternative, Lower Down-Side Risk Ways to Invest - Cyclical or Secular?

(Data below exc. ETPs) Selected "Alternative" Strategies in 1940 Act Funds Morningstar Category Assets % Share $B Assets 4/12 4/12

World Allocation Nontraditional Bond Commodities Broad Basket Multialternative Market Neutral Long/Short Equity Managed Futures Bear Market Currency 328.0

48.6

51.4

16.1

18.5

22.7

8.7

4.4

9.5

Equity Precious Metals

Total above

25.4

533.3

Source: Strategic Insight Simfund MF

62% 9% 10% 3% 3% 4% 2% 1% 2% 5%

100%

Net Flows $B 2009 2010 2011 Ytd-4/12 Jan'09 to Apr'12

11.3

9.5

9.7

1.6

4.0

1.9

1.4

2.3

-0.7

2.2

43.2

28.0

27.8

14.6

3.9

4.6

3.3

1.8

2.3

1.4

4.0

91.9

25.5

8.0

9.2

4.5

1.9

2.1

4.5

-0.4

3.3

-2.2

56.5

12.0

-2.4

3.3

0.9

0.2

1.4

0.4

0.4

0.4

-0.4

16.1

76.8

42.9

36.7

10.9

10.8

8.8

8.1

4.6

4.4

3.6

207.6

Q8: Can New ETFs Concepts Bridge Successfully the Opportunity Gap of Index and True Active Management?

US ETF Growth: 2002 Thru Q1 2012 Flows $B

200

Assets $B

1,400 175 1,200 150 125 Net Flows (left axis) Assets (right axis) 1,000 800 100 600 75 50 400 25 200 0

2002 2003 2004

Source: Strategic Insight Simfund MF

2005 2006 2007 2008 2009 2010 2011 Q1'12

0

Q9: Equilibrium Forces in 3-5 Years? Distribution of Actively Managed Funds Expand Fastest Where?

45% 40% 35% 30% 25% Sales by Distribution Channel as a Percentage of Total Sales +9% -1.5% 2009 2010 2011 % Change 2009 - 2011 +1.0% -0.7% 20% 15% 10% 5% 0% Wrap/Fee Based Advisory* Nat'l BDs Indep/Reg'l BDs Investment Only DC*

*Only among firms providing breakdowns of Wrap/Fee-Based Advisory and Investment Only DC sales, respectively. Note - these sales may span multiple standalone channels.

Source: SI Fund Sales Survey

+0.7% RIAs Pure Inst'l/ Other Bank BDs Insurance Agents

Q10: Share of FA Distribution with Point-Of-Sale Compensation in 2015?

Nat'l BD Share of Mutual Fund New Sales by Platform Type Mutual Fund Wrap vs. Commission Based* 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Mutual Fund Wrap Commission-Based Q 1' 08 Q 2' 08 Q 3' 08 Q 4' 08 Q 1' 09 Q 2' 09 Q 3' 09 Q 4' 09 Q 1' 10 Q 2' 10 Q 3' 10 Q 4' 10 Q 1' 11 Q 2' 11 Q 3' 11 Q 4' 11

Source: Coates Analytics Distribution Management System / SI Analysis *Note: Reflective of data from national broker dealer firms with both commission based and wrap platform data captured in Coates Analytics Distribution Management System.

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Q11: More of the Same in Coming Years, or a Reversal?

70% 60% 50% 40% 30% 20% 10% 0%

Coates-Tracked National BD Wrap Platform Breakout - Proportional Assets by Program Type Non-Discretionary Rep-as-Advisor Home Office Model Portfolio-Based Discretionary Rep-as-PM

70% 60% 50% 40% 30% 20% 10% 0% Q1'08Q2'08Q3'08Q4'08Q1'09Q2'09Q3'09Q4'09Q1'10Q2'10Q3'10Q4'10Q1'11Q2'11Q3'11Q4'11

Source: Coates Analytics Distribution Management System / SI Analysis

Q12: Fund Asset Velocity in Discretionary Accounts Alarming to Investment Managers, Some Distributors

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Monthly Redemption Rates - All Long Term Funds January 2008 - June 2011

Total Industry (ICI) Rep as PM Rep as Advisor Home Office Model Commission-Based Jan 08 Mar -08 May 08 Jul-08 Sep-08 Nov-08 Jan 09 Mar -09 May 09 Jul-09 Sep-09 Nov-09 Jan 10 Mar -10 May 10 Jul-10 Sep-10 Nov-10 Jan 11 Mar -11 May 11 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Source: Coates Analytics Distribution Management System / ICI / SI Analysis

Q13: What % of FA Sales in Y-Share Class in 2014?

Sales by Share Class as a Percentage of Total Sales 60% 55% 50% 45% 40% 2009 2010 2011 35% 30% 25% 20% 15% 10% 5% 0% No Load "A" at NAV* Level-Load "A" at 2-4% Load* "A" at 4% or greater Load* "A" at below 2% Load* "B" Shares

*Only among firms providing breakdowns of "A" share sales.

Source: SI Fund Sales Survey

Q14: Daddy, What is 12b-1?

No Load Shares Proportional Sales Breakout within Wrap / Fee-Based Advisory Programs No Load Shares w/12b-1 Fee No Load Shares w/out 12b-1 Fee 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 28% 72% 17% 83% 2009 2010

*Among the 22 firms in 2011, 25 firms in 2010 and 17 firms in 2009 providing such breakdowns of No Load share sales via Wrap/Fee-Based Advisory Programs.

Source: SI Fund Sales Survey

13% 87% 2011 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%



Q15: Another New Normal in a No Load World Ahead: Opportunities?

Re Invent “direct to the investors” distribution?

 Increasingly, our personal footprint on the internet helps identify a bias around “self directing,” “validating,” and “delegating,” and how best to communicate with each person for maximum engagement. Also, a revised map of “influentials” with mutual fund distribution “klout”  Use such understanding to invigorate existing portals for “direct to investors?” Or new portals (Amazon, Google, Facebook, eHarmony?)

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