Key Insights from the SIFT 2012 Conference July

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

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 Funds. Network • Gregory Fleming, President, Morgan Stanley Smith Barney • Frank Mc. Carthy, 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 2

Scenes from SIFT 2012 www. sionline. com/conferences/2012 -Fund-Trends/about. asp 3

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: Ø Some FAs want funds as modular building blocks Ø Some FAs want bundled solutions (outsourcing complexity) 4

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

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 6

Product Themes • Retirement income: Stand Alone Living Benefits – attaching VA like guarantees to funds, SMAs Ø Differences from VAs: directly owned; not tax deferred; pays under contractual contingency Ø 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 7

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 8

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 9

A Few Key Distribution Themes – Continued Shift to Fee-Based Advisory • Key initiative discussed in both National BD & Independent/ Regional BD panels Ø One Reg’l BD exec noted his firm’s fee based share of assets has gone from 10% to 25%; their goal is 50% Ø 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) Ø 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 Ø Rep as PM FAs need guidance in asset allocation Ø Helping FAs to allocate themselves, or helping them become more comfortable with home office model allocations 10

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

Evolution of Portfolio Construction • With the movement to fee based, the fund business is becoming more de centralized Ø Death of the fund family concept Ø Record Albums vs. i. Tunes • “Set & Forget” doesn’t work anymore Ø 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 Ø Approach BDs with product and platform agnostic view Ø FAs paying attention to model portfolios, even if not adopting them • New and innovative strategies are gaining attention 12

Profitability Pressures • Increased asset velocity within fee based advisory programs (particularly Rep as PM) Ø One BD exec acknowledged the strain it is causing in relationship between distributors & asset managers Ø One fund exec noted that Rep as PM business is one half as profitable as other channels • Preference for Institutional share classes by BDs Ø SI research shows No Load shares rising to 55% of total sales in 2011 • How are fund firms responding Ø More sophisticated data analysis & advisor segmentation Teams focused on data analysis and interpretation Ability to leverage predictive analysis? Ø Continued evolution of wholesaler compensation toward profitability focus 13

Distribution ‘Takeaways’ from SI • Take advantage of the various means to become a “strategic partner” to distributors Ø Helping FAs transition their business model to fee based Ø Providing asset allocation insights (as opposed to product pitch) Ø 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 Ø “A la carte” fund selection is changing advisor portfolio construction Ø Asset longevity is in a secular decline within advisor sold space Ø 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 14

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