Key Insights from the SIFT 2012 Conference July 18, 2012 Loren Fox, Senior Research Analyst, Dennis Bowden, Asst. Director, US Research,

2 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

3 Scenes from SIFT

4 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)

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

6 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

7 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

8 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

9 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

10 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

11 Fee-Based Advisory Should Continue To Be A Key Driver of Growth Source: SI Fund Sales Survey

12 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

13 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

14 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

15 © Copyright 2012 Strategic Insight, an Asset International company, and when referenced or sourced Morningstar Inc. and Lipper Inc. All rights reserved. The information, data, analyses and opinions contained herein (a) include confidential and proprietary information of the aforementioned companies, (b) are provided solely for information purposes, and (c) are not warranted or represented to be correct, complete, accurate, or timely. Past performance is no guarantee of future results. The aforementioned companies are not affiliated with each other. This report has been prepared using information and sources we believe to be reliable; however, we make no representation as to its accuracy, adequacy or completeness, nor do we assume responsibility for any errors or omissions or for any results obtained from the use of this report, including any action taken with respect to securities referred to in this report. Our employees may from time to time acquire, hold or sell a position in securities mentioned herein. We may from time to time perform services for any company mentioned in this report. This report is not a prospectus or representation intended to use in the purchase or sale of any securities mentioned in this report. Strategic Insight is available by subscription and by single copy upon request to the publisher.