Key Insights from the

SIFT 2012 Conference

July 18, 2012

Loren Fox, Senior Research Analyst, lfox@sionline.comDennis Bowden, Asst. Director, US Research, dbowden@sionline.com

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What was SIFT 2012?

On June 19-20, 130+ investment management executives from 80 organizations gathered in New York City for the Strategic Insight Fund Trends 2012 conference. Attendees: avg. 17 years’ experience in biz

The 1 ½-day event featured panel discussions and presentations on mutual fund product, distribution and retirement-related topics - from industry experts and key gatekeepers.

Speakers included:

• John Carroll, Head of US Retail Distribution, Allianz Global Investors

• Carolyn Clancy, EVP and head of Fidelity’s FundsNetwork

• Gregory Fleming, President, Morgan Stanley Smith Barney

• Frank McCarthy, VP and Gen’l Manager of External Products, Ameriprise

• Dan Moorman, Director of Mutual Funds, Wells Fargo Advisors

• Peter Thatch, Managing Director of Global Funds, Merrill Lynch

• and many others

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Scenes from SIFT 2012 www.sionline.com/conferences/2012-Fund-Trends/about.asp

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Product Themes

Uncertainty and volatility: shift from in focus from relative to absolute returns, search for best global opportunities, unconstrained mandates, uncorrelated returns

Investors, advisors focusing more on managing risk and volatility in the post-crisis environment. Complexity

This has meant in many cases that financial advisors take on a more active role in managing client portfolios (Rep-as-PM)

More financial advisors running portfolios:

Some FAs want funds as modular building blocks

Some FAs want bundled solutions (outsourcing complexity)

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Example of Bundled Solutions: Global Asset Allocation Funds’ Flows Accelerate in 2012

Net Flows into Global Asset Allocation* Funds, $B

-10

-5

0

5

10

15

20

25

30

35

40

45

* Excludes lifecycle funds. Source: Strategic Insight Simfund MF

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Growth of “Alternative” Mutual Funds

• Fund firms launching more "alternative" mutual funds than ever, but there's no universally agreed definition of "alternative.“

• Lots of interest in “alt” mutual funds, but uptake among FAs lower than expected. More education & training needed.

• Alternative mutual funds even making their way into target-date funds.

• While mixed-asset funds have offered correlation-balanced approaches, the industry is starting to see risk-balanced and risk-parity approaches too

• Panelists expect more product innovation in: volatility; risk; global macro strategies; multi-strategy products. More ‘absolute return’ and hedge-like approaches, fewer traditional strategies, directional funds

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Product Themes

• Retirement income: Stand-Alone Living Benefits – attaching VA-like guarantees to funds, SMAs Differences from VAs: directly owned; not tax-deferred; pays

under contractual contingency Stand-Alone Living Benefits are suited to fee-only FAs who don’t

use VAs, but product is emerging & prospects are unclear

• Target Date Funds: Custom target-date funds growing, opportunities for consultants, DCIO fund managers as asset allocators; fee disclosure regs to boost DCIO

• ETFs are here to stay. More buzz on Active ETFs (Total Return ETF); will revenue sharing come to Active ETFs?

• Partnering/Sub-advising may grow as ’40 Act fund lineups offer more exotic and complex strategies

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Fund Product Development

• Product development cycle is faster now than a decade ago

• New products should meet investor needs, but should also strengthen/extend firm’s brand

• Broker-dealer execs at SIFT 2012 encouraged fund firms to talk with them before launching new products. Remember that brand-new funds rarely achieve meaningful net flows right away

• Non-traditional products can bring additional operational complexities. Work with custodian, fund admin as strategic partners

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Product ‘Takeaways’ from Strategic Insight

• Some advisors want funds as modular building blocks, some want bundled solutions? Offer both types of funds

• Offering non-traditional/alternative funds? Educate advisors on how to use the products

• Most firms need either a pro-ETF strategy or an anti-ETF strategy – regardless of whether Active ETFs are ‘real’

• Be realistic about your core competencies; collaborate with partners where it makes sense

• Talk to broker-dealers before launching a new fund: come with ideas to bounce off them – don’t ask what they need

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A Few Key Distribution Themes – Continued Shift to Fee-Based Advisory

• Key initiative discussed in both National BD & Independent/ Regional BD panels One Reg’l BD exec noted his firm’s fee-based share of assets has gone

from 10% to 25%; their goal is 50%

A Nat’l BD exec said that his firm moves 3-5% of their mutual fund AUM from brokerage to advisory per year

• Many FAs need help shifting their business model from brokerage to advisory (despite often instant pay raise) One Nat’l BD exec recommended fund firms partner with his firm’s “In-

Field Productivity Consultants” to help FAs with their business model

• Within this movement, migration to Rep-as-PM Rep-as-PM FAs need guidance in asset allocation

Helping FAs to allocate themselves, or helping them become more comfortable with home office model allocations

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Fee-Based Advisory Should Continue To Be A Key Driver of Growth

Sales by Channel: Annual Sales Growth (%)

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Wrap/FeeBased

Advisory

RIAs IODC Indep/Reg'lBDs

Pure Inst'l/Other

InsuranceAgents

Nat'l BDs Bank BDs

-5%

0%

5%

10%

15%

20%

25%

30%

35%2011 2010

Source: SI Fund Sales Survey

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Evolution of Portfolio Construction

• With the movement to fee-based, the fund business is becoming more de-centralized Death of the fund family concept Record Albums vs. iTunes

• “Set & Forget” doesn’t work anymore One BD exec noted effort to identify and shine light on these

types of portfolios as a key initiative for his firm

• Importance of strategy-centric focus Approach BDs with product- and platform-agnostic view FAs paying attention to model portfolios, even if not adopting

them

• New and innovative strategies are gaining attention

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Profitability Pressures • Increased asset velocity within fee-based advisory

programs (particularly Rep-as-PM) One BD exec acknowledged the strain it is causing in

relationship between distributors & asset managers

One fund exec noted that Rep-as-PM business is one-half as profitable as other channels

• Preference for Institutional share classes by BDs SI research shows No Load shares rising to 55% of total sales in

2011

• How are fund firms responding More sophisticated data analysis & advisor segmentation

Teams focused on data analysis and interpretation

Ability to leverage predictive analysis?

Continued evolution of wholesaler compensation toward profitability focus

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Distribution ‘Takeaways’ from SI

• Take advantage of the various means to become a “strategic partner” to distributors Helping FAs transition their business model to fee-based

Providing asset allocation insights (as opposed to product pitch)

Be seen by distributors as proactive rather than reactive (helping to advance their initiatives with new ideas, innovative strategies)

• The distribution landscape is changing…so should your strategy “A la carte” fund selection is changing advisor portfolio

construction

Asset longevity is in a secular decline within advisor-sold space

Profitability “margin-for-error” in fund distribution is shrinking Leverage data to segment channels & advisors more precisely

Find ways to align distribution strategy with firm profitability

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