Product & Distribution Update: Looking Beyond the Headlines Web Seminar Presentation March 15, 2007 © 2007 SEI Investments Developments, Inc.
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Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Product & Distribution Update: Looking Beyond the Headlines
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What is the SEI Knowledge Partnership? The SEI Knowledge Partnership is an ongoing source of actionable business intelligence and advice for SEI’s investment management clients. It engages clients and industry experts in analyzing the trends and issues that will reshape business conditions in the years to come. The Partnership is designed to help SEI clients: identify the issues they need to be addressing actively keep abreast of changing best practices develop more competitive business strategies
Its agenda currently centers on issues concerning: legal and regulatory change business operations marketing, sales, distribution and client service business strategy The SEI Knowledge Partnership is a service of the Investment Manager Services unit of SEI. This information is provided for educational purposes only and is not intended to provide legal advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. This presentation is intended for SEI clients only and may not be redistributed for any other purpose without prior written consent from SEI. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Agenda 1. Industry Trends 2. Mutual Funds 3. Exchange Traded Products 4. Managed Accounts 5. Alternative Investments 6. Conclusions
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Industry Trends Overall all segments of the industry enjoyed robust growth Mutual funds remain the dominate saving & investing vehicle of choice Total Assets: $11.1 trillion Total Flows: $473 billion Total Households: Mutual Funds as a percentage of total household assets: 21.9% Fragmentation continues Mutual fund concentration grows Variety of winners & losers Size does not guarantee success Funds continue to be sold through a variety of aggregation and intermediary platforms 401(k) 529 Variable Annuities Mutual Fund Wrap Wealth Management Platforms Intermediaries Product development takes center stage Asset Allocation/Lifecycle/Target Date International Alternative Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Industry Trends (cont’d) Exchange Traded Products – Surf’s Up Growth in assets, kinds of Exchange Traded Products funds and sponsors Active Exchange Traded Products on the horizon
Managed Accounts Overall asset growth continues Wirehouses dominate New players emerge
Alternative Investments Growth explosion continues Product proliferation
Product & Distribution Update: Looking Beyond the Headlines
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All Segments Continue to Enjoy Robust Growth Mutual Funds Continue to Dominate MFs (ex-ETFs)
Hedge Funds
SMAs
Key Trends
ETFs
$14,000
$12,000
AUM ($MM)
$10,000
$8,000
$6,000
$4,000
$2,000
$0 2002
2003
2004
2005
2006 Source: SEI, Strategic Insights
Note: Data as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Exchange Traded Products and Alternatives Lead Industry Asset Growth ETFs
SMAs
Hedge Funds
Key Trends
L/T MFs (ex-ETFs)
AUM % Change 100%
80%
60%
40%
20%
0%
-20% 2002
2003
2004
2005
2006 Source: SEI, Strategic Insights
Note: Data as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Mutual Fund Trends Winners and Losers Concentration Product Evolution Share Class Landscape
Product & Distribution Update: Looking Beyond the Headlines
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Mutual Fund Assets and Net Flows Are At An All Time High
Mutual Funds
Mutual Fund AUM and Net Flows AUM
$12,000,000
Net New Flows
$600
$8,000,000
$400
$6,000,000
$300
$4,000,000
$200
$2,000,000
$100
AUM ($MM)
$500
$0
Flows ($Billions)
$10,000,000
$0 1997
1998
1999
2000
2001
2002
AUM = All Open & Closed End Mutual Funds; Flows = Open End Only All figures in $ millions as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
2003
2004
2005
2006
Source: SEI, Strategic Insights
March 15, 2007
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Half of All Complexes Continue to See Net Inflows Complexes w/Positive Flows (left axis)
Mutual Funds
Complexes w/Negative Flows(left axis)
Total Net Flows (right axis)
500
$300 66%
400
63% 51%
53%
55%
56%
62% 55%
52%
$250
300 200
$200
100 $150 0 (100)
Flows ($Billions)
Number of Mutual Fund Complexes
50%
$100
(200) 37%
34%
$50
38%
(300) 49%
47%
45%
44%
45% 50%
48%
(400)
$0 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: SEI, Strategic Insights
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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…But Less Than Half of All Fund Portfolios Now Have Positive Net Flows Complexes w/Positive Flows (left axis)
Complexes w/Negative Flows (left axis)
Mutual Funds
Total Net Flows (right axis)
4,000
$300 60%
53%
60% 47%
3,000
51%
49%
50% 46%
44%
45%
2,000 $200 1,000
0
$150
(1,000)
Flows ($Billions)
Number of Mutual Fund Portfolios
$250
$100 (2,000) 40%
40%
$50
(3,000) 53%
47% 51%
49%
50%
54%
56%
55%
(4,000)
$0 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: SEI, Strategic Insights
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Mutual Fund Industry Remains Fragmented with a Variety of Winners and Losers Representing a Diverse Group of Organizations Top 25 Fund Complexes by 1-Year Net New Flows Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Manager Name American Funds Vanguard Dodge & Cox DFA Fidelity T Rowe Price OppenheimerFunds Goldman Sachs Schwab PIMCO/Allianz Glbl Franklin Templeton John Hancock Thornburg The Hartford Legg Mason Capital Davis-Selected Adv Loomis Sayles JPMorgan Funds Princor Eaton Vance IXIS Asset Mgmt Harbor Capital Russell Invst Grp Nuveen UBS Glbl Asset Mgt
Mutual Funds
Bottom 25 Fund Complexes by 1-Year Net New Flows
1 Yr Total
2006
70,410 34,730 19,093 15,115 11,333 10,921 10,607 7,149 6,924 6,815 6,632 6,332 6,054 5,833 5,253 5,036 4,546 4,481 4,337 4,271 3,432 3,412 3,315 3,069 3,038
977,709 926,827 136,514 89,231 837,747 193,290 151,187 48,315 50,925 201,587 297,315 48,621 19,674 39,697 54,687 62,775 12,916 74,052 27,984 59,168 9,815 34,439 30,658 18,524 20,036
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Manager Name Putnam AIM Investments American Century Morgan Stanley Adv Legg Mason Ptnrs RiverSource MFS Evergreen InvMgmt DWS Scudder Dreyfus Morgan Stanley Federated Prudential Finl Rydex Global Adv Caterpillar Janus Ariel Capital Wells Fargo Lord Abbett Aston Asset Mgmt FAF Advisors Van Kampen Branch Banking Weitz & Co Phoenix Investment
1 Yr Total (15,058) (8,720) (8,588) (7,167) (6,752) (6,161) (5,989) (4,798) (4,459) (4,147) (3,055) (2,815) (2,660) (2,145) (2,066) (2,046) (1,716) (1,648) (1,553) (1,356) (1,261) (1,232) (1,165) (1,123) (1,009)
2006 95,073 61,838 78,873 27,767 58,408 54,857 78,598 52,321 62,465 60,287 32,024 41,460 32,686 6,691 76,580 7,018 43,026 59,572 5,457 20,665 81,308 2,833 6,086 11,244
Note: Long-Term, Open End, Non-ETF Funds, in Millions, as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Mutual Fund Industry Remains Fragmented with a Variety of Winners and Losers Representing a Diverse Group of Organizations
Bottom 25 Fund Complexes by 3-Year Net New Flows
Top 25 Fund Complexes by 3-Year Net New Flows Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Manager Name American Funds Vanguard Dodge & Cox PIMCO/Allianz Glbl Fidelity T Rowe Price DFA Franklin Templeton OppenheimerFunds John Hancock Grantham Mayo Legg Mason Capital Schwab Princor Julius Baer Goldman Sachs First Eagle The Hartford Thornburg Davis-Selected Adv Calamos Advisors Hotchkis & Wiley Russell Invst Grp Harbor Capital Eaton Vance
Mutual Funds
3 Yr Total
2006
236,419 124,138 52,158 40,144 36,763 36,165 34,042 29,258 26,975 17,595 17,070 15,861 14,721 13,349 12,306 11,686 11,481 10,049 9,978 9,781 9,591 8,744 8,212 8,008 7,981
977,709 926,827 136,514 201,587 837,747 193,290 89,231 297,315 151,187 48,621 63,648 54,687 50,925 27,984 26,293 48,315 34,181 39,697 19,674 62,775 26,799 13,442 30,658 34,439 59,168
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Manager Name Putnam AIM Investments Janus Morgan Stanley Adv RiverSource MFS DWS Scudder Legg Mason Ptnrs American Century Wells Fargo Federated Prudential Finl Dreyfus Evergreen InvMgmt Columbia Funds BlackRock Morgan Stanley FAF Advisors Pioneer Seligman Old Mutual Capital Weitz & Co Allegiant Fifth Third Bank Aston Asset Mgmt
Note: Long-Term, Open End, Non-ETF Funds, in Million, as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
3 Yr Total (62,790) (35,157) (28,246) (22,357) (22,055) (18,331) (17,217) (12,215) (10,579) (10,547) (10,385) (9,748) (9,145) (7,970) (7,389) (7,238) (6,273) (5,462) (4,462) (3,770) (3,481) (3,444) (3,092) (2,756) (2,548)
2006 95,073 61,838 76,580 27,767 54,857 78,598 62,465 58,408 78,873 43,026 41,460 32,686 60,287 52,321 102,983 94,466 32,024 20,665 35,538 8,145 3,981 6,086 5,743 5,457 5,457
Source: SEI, Strategic Insights
March 15, 2007
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The Industry Remains Fragmented Despite Some Concentration as Managers Fall In and Out of Favor
Mutual Funds
Mutual Fund AUM Market Share Rank Largest Complexes: 2006 American Funds Vanguard Group
Rank
5 Biggest Complexes
2006 1996 3 1
Next 5
2
Fidelity
2 3
1
Franklin Templeton
4
4
Remainder 100%
Largest Complexes: 1996 Fidelity Vanguard Group
1996 2006 3 1 2
American Funds
2 3
1
Franklin Templeton
4
4
Putnam BlackRock
5 6
11 12
AIM Investments
7
23
Barclays Global PIMCO / Allianz
6
229 22
T Rowe Price
7
9
OppenheimerFunds
8
13
DWS Scudder
8
22
53
T Rowe Price
9
7
10 11
14
Riversource Investments
5
Morgan Stanley Advisors
10 11
50
12
6 49
American Century OppenheimerFunds
Dodge & Cox Columbia Funds Putnam BlackRock Dimensional Fund Advisors
5
9
13
Van Kampen Asset Mgmt
14
19
American Century
15
12
MFS Investment Management
16
18
Janus
17
80%
60%
40%
20%
12 13 14
10
Dreyfus
15
24
Legg Mason Partners
16
27
Janus
17 18
17
25
MFS Investment Mgmt
AllianceBernstein 19 Grantham Mayo & Van Otterloo 20
21 36
Van Kampen Asset Mgmt Prudential Financial
0% 1996
15 8
Columbia Funds
17 18
JPMorgan Funds
28
19 20
16 14 43
2006 Source: SEI, Strategic Insights
Note: Long-Term, Open-end Mutual Funds Only Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
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Concentration Has More to with Recent Winners and Losers
Mutual Funds
Concentration of Flows by Complex, 1996 vs. 2006 Concentration of Flows, 2006
Concentration of Flows, 1996 AIM, 5%
American, 6%
Remainder, 17%
American, 24%
Fidelity, 9% Remainder 40% Putnam, 11%
Next 5, 16% Barclays, 16%
Vanguard, 12%
DFA, 5%
Next Five, 17%
Dodge & Cox, 7%
Vanguard, 15%
Source: SEI, Strategic Insights
Note: Long-Term, Open End Mutual Funds Only Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
17
World Allocation Still in High Demand vs. Supply Top 50 MS Categories by Portfolio Count to Flows Count
Rank Morningstar Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
W orld Allocation Bank Loan Foreign Large Value High Yield Muni Specialty-Natural Res Latin America Stock Foreign Large Growth W orld Stock Foreign Large Blend Multisector Bond Inflation-Protected Bond Europe Stock Conservative Allocation Japan Stock Foreign Small/Mid Value Diversified Emerg Mkts W orld Bond Foreign Small/Mid Growth Mid Value Interm-Term Bond Moderate Allocation Emerging Markets Bond Large Value Pac/Asia ex-Japan Stk Long-Short
3 Yr Total
# of Portfolios
68,703 16,990 52,005 19,779 26,630 3,074 33,363 52,855 81,588 16,064 13,731 13,082 26,625 8,398 10,042 25,934 19,556 9,673 32,081 84,503 46,611 5,881 76,044 7,473 8,684
21 20 67 28 44 6 68 109 173 38 33 32 68 22 27 71 60 31 109 303 173 22 357 36 43
Flow Count Ratio 3,272 849 776 706 605 512 491 485 472 423 416 409 392 382 372 365 326 312 294 279 269 267 213 208 202
Mutual Funds
Top 50 MS Categories by Portfolio Count to Flows Count
Rank Morningstar Category 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Specialty-Real Estate N/A Mid Blend Specialty-Prec Metals Long Government Small Blend Long-Term Bond Diversified Pac/Asia Target-Date 2015-2029 Target-Date 2030+ Muni CA Interm/Short Bear Market Muni National Interm Small Value Muni NY Long Target-Date 2000-2014 Large Blend Muni NJ Small Growth Specialty-Utilities Muni NY Interm/Short Muni Single State Lng Convertibles Mid Growth Muni Single State Interm
Note: Open End Mutual Funds in Millions Only as of December 31, 2006 Product & Distribution Update: Looking Beyond the Headlines
3 Yr Total
# of Portfolios
Flow Count Ratio
17,841 244,262 27,312 2,756 2,182 23,534 2,520 1,194 814 697 2,641 2,526 5,392 7,585 1,578 521 13,443 170 1,475 -4 -42 -804 -319 -4,507 -2,117
97 1,382 166 21 17 207 23 11 9 9 35 36 83 125 29 14 505 21 253 25 24 102 23 272 106
184 177 165 131 128 114 110 109 90 77 75 70 65 61 54 37 27 8 6 (0) (2) (8) (14) (17) (20)
Source: SEI, Strategic Insights
March 15, 2007
18
Over the Last Three Years there has been a shift towards Global/International Equity Fixed Income
Global/Int'l Equity
Mutual Funds
Domestic Equity
Total
300,000
250,000
Flows ($MM)
200,000
150,000
100,000
50,000
0
(50,000) 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: SEI, Strategic Insights
Note: Long-Term, Open End Non-ETF Mutual Funds Only Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
19
Domestic Equity Continues to Lose Out to Asset Allocation, Alternative, and International Domestic Vanilla
Asset Allocation
International
Sector
Mutual Funds
Hedge-Like
160,000 140,000 120,000
Net Flows ($MM)
100,000 80,000 60,000 40,000 20,000 0 -20,000 -40,000 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: SEI, Strategic Insights
Note: Affiliated, Unaffiliated, and Mixed Fund-of-Funds Only Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
20
Interest in Pre-Packaged Investment Advice Products Takes Off
Mutual Funds
Fund-of-Funds, 2006 $40,000
$8,000
Flows
$35,000
$7,000
$30,000
$6,000
$25,000
$5,000
$20,000
$4,000
$15,000
$3,000
$10,000
$2,000
$5,000
$1,000
$0
Flows ($MM)
AUM ($MM)
AUM
$0 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006 Source: SEI, Strategic Insights
Note: Affiliated, Unaffiliated, and Mixed Fund-of-Funds Only Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
21
Alternative Investment, While Representing a Small Percentage of AUM, Gained Traction
Mutual Funds
Long-Short Mutual Funds $6,000
$18,000 AUM
Flows
$16,000 $5,000 $14,000
$4,000
$10,000 $3,000 $8,000
$6,000
Flows ($MM)
AUM ($MM)
$12,000
$2,000
$4,000 $1,000 $2,000
$0
$0 1997
1998
1999
2000
2001
2002
Note: Long-Term, Open End, Actively Managed Equity Funds as of 12/31/2006 Product & Distribution Update: Looking Beyond the Headlines
2003
2004
2005
2006
Source: SEI, Strategic Insights
March 15, 2007
22
Alternative Products May Be the Best Alternative for Smaller Managers
Mutual Funds
Top 25 Long-Short MF Portfolios by 3 Year Net Flows
Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Net Flows 3 Yr Total
Manager Total Long-Short Mutual Funds
8,684
Hussman Strategic Growth Gateway Fund JPMorgan Multi Cp Mrkt Neutral Schwab Hedged Equity Diamond Hill Long Short JPMorgan Hibrdg Stat Mkt Neut Calamos Market Neutral Income Laudus Rosnbrg Val Lng/Sht Eq Rydex Absolute Return Strat Absolute Strategies Am Cent Long Short Equity Gartmore US Gro Ldrs LongShort JPMorgan Intrepid Long/Short TFS Market Neutral James Market Neutral Rydex Hedged Equity SSgA Directional Core Equity 1st Srce Monogram Long Short Geronimo Multi Strategy Geronimo Option & Dividend Inc Janus Adv Long Short Templeton Global Long-Short Geronimo Sector Opportunity DW S Disciplined Market Neutral DW S Discplnd Long/Shrt Val
1,958 1,411 1,282 1,132 1,058 963 225 187 175 165 96 59 56 54 53 42 28 22 19 17 16 15 12 10 10
2006 4,960
Note: Long-Term, Open End, Non-ETF Mutual Funds in Millions Only Product & Distribution Update: Looking Beyond the Headlines
563 338 349 699 809 963 637 103 162 78 93 27 56 46 (4) 35 24 13 19 17 16 40 12 10 10
2006
AUM % Total
16,390
100.0%
2,843 3,330 2,103 1,241 1,232 998 934 324 230 177 94 97 61 58 66 44 31 46 20 18 16 192 13 10 10
17.3% 20.3% 12.8% 7.6% 7.5% 6.1% 5.7% 2.0% 1.4% 1.1% 0.6% 0.6% 0.4% 0.4% 0.4% 0.3% 0.2% 0.3% 0.1% 0.1% 0.1% 1.2% 0.1% 0.1% 0.1% Source: SEI, Strategic Insights
March 15, 2007
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Mutual Funds
No Load Flows
Front Load Flows
Level Load Flows
Back Load Flows
No Load #
Front Load #
Level Load #
Back Load #
8,000
350
7,000
300
6,000
250
5,000
200
4,000
150
3,000
100
2,000
50
1,000
0
0
Net Flows ($ Billions)
# of Funds
No Load Continues to Dominate Assets and Number of Funds Followed by Front Load
(50) 1997
1998
1999
2000
2001
2002
2003
Note: Long-Term, Open End, Non-Index, Non-ETF Mutual Funds Only Product & Distribution Update: Looking Beyond the Headlines
2004
2005
2006
Source: SEI, Strategic Insights
March 15, 2007
24
Exchange Traded Product Marketplace Overview
Exchange Traded Products
ETF Flows
Assets Under Management reached $423 billion as of December 31, 2006 Growth rate of 46% over 2005
Market flows and assets are dominated by Barclays Global, followed by State Street and BONY Barclays Global represented 70% of all flows in 2006 and 55% of AUM; State Street was .6% of flows and 22% of AUM 6 of the Top 10 largest funds by AUM are from Barclays Global
There were 374 funds with AUM as of December 31, 2006 (73% increase over 2005) 396 funds were filed with the SEC in 2006 63 funds filed through the end of January 2007 (run rate of 744 by year end)
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
25
Exchange Traded Products Flows and Assets Continue to Set Records
Exchange Traded Products
Exchange Traded Product Overview: Industry Flows & Assets $450,000
$80,000 Assets
$423,000
Flows
$400,000
$68,700
$70,000
$350,000 $60,000 $54,500
$301,800
$300,000 $42,400
$250,000
$43,900
$50,000
$227,800
$40,000 $200,000 $30,000
$151,300
$150,000
$29,100
$20,000
$101,900
$100,000 $11,900
$50,000
$6,100
$82,800
$14,400
$65,500
$10,000 $33,800
$3,400 $15,500
$0
$0
$6,700
1997
1998
1999
2000
2001
2002
Note: All ETFs as of December 31, 2006
2003
2004
2005
2006
Source: SEI, Strategic Insights
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
26
Flows ($MM)
Assets ($MM)
$53,700
Barclays and SSgA Continue to Dominate as New Entrants Emerge
Exchange Traded Products
Exchange Traded Product Overview: Assets by Manager $232,300
BGI
$92,477
SSgA
$27,172
BONY Vanguard
$22,307
World Gold Trust
$9,261
Pow ershares
$8,504 $3,714
Rydex ProFunds
$2,164
Wisdom Tree
$1,536
DB Commodity
$1,013
Victoria Bay
$794
First Trust
$706
Van Eck
$523
Claymore
$431
Fidelity
$142 $0
Note: As of December 31, 2006
$50,000
$100,000
$150,000
Assets ($MM) Product & Distribution Update: Looking Beyond the Headlines
$200,000
$250,000
Source: SEI, Strategic Insights
March 15, 2007
27
Exchange Traded Products
Growth in Funds and Product Proliferation Continue… Are Actively Managed Funds on the Horizon? Growth of Exchange Traded Products: Number of Funds 400
374
• 396 Funds filed in 2006 • 63 Funds filed through 1/31/2007, estimated 744 filed by year end
350
Number of Funds
300
250 216 200 152 150 101 100
113
117
2002
2003
81
50 19
29
30
1998
1999
0 1997
2000
2001
2004
2005
2006
Source: Pensions and Investments (December 25, 2006), Morgan Stanley Investment Strategies, Bloomberg, SIMFUND
As of December 31, 2006
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
28
Managed Accounts
Managed Account Trends Managed Accounts Assets increased 13.1% to $1.15 trillion in the 3rd quarter of 2006 Citigroup ($276.9 billion) and Merrill Lynch ($204 billion) account for over 41% of AUM Wirehouses continue to dominate the market with 70% of AUM, or $794 billion
Asset Allocation The broader market shifted away from International Equities to Domestic Equities due to U.S. Equities outperforming foreign stocks Large Cap Domestic Equity (23.8%) and International Equity (20%) had the highest market share by investment discipline as of 3Q 2006
Unified Managed Accounts
Assets reached $10.8 billion as of 2Q 2006 $9.1 billion held in the Morgan Stanley Personal Portfolio program Largest growth in 2006 was from LPL Financial of 86% Nearly 38,000 accounts Approximately 81% of all UMA assets are held in separate accounts with the remaining in mutual funds and ETFs Lower investment minimums and fees will lead to wider acceptance of these programs Citing already low margins and the introduction of model portfolios could cut management fees by almost 30% leading to some managers to exit the business Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
29
Managed Accounts of All Types Continue to Gather Assets
Managed Accounts
Managed Accounts AUM, 2000 - 2Q 2006 $1,800 $1,552
$1,600 $1,426
$1,400 $1,208
AUM ($Billions)
$1,200 $998
$1,000
$800
$754
$793
$744
$600
$400
$200
$0 2000
2001
2002
2003
2004
2005
2Q 2006 Source: Cerulli Associates
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
30
Wirehouses Continue to Dominate Market Share although IBD and Third Party Sponsors are Gaining Ground Bank
Discount
Regional
Third Party Sponsors
Managed Accounts
Independent B/D
Wirehouse
100% 90% 80% 70% 60%
71.1%
73.2%
74.8%
77.3%
69.7%
66.8%
64.1%
62.3%
50% 40% 30% 20% 10%
7.9%
7.4% 6.3% 6.3%
0% 0.8%
1.9% 1999
7.7%
9.5%
9.8%
10.6%
8.7% 7.5%
7.0%
7.3%
7.5%
3.9% 2.0%
4.2% 2.7%
4.5% 3.4%
4.5% 3.6%
2003
2004
2005
2Q 2006
8.1%
7.3%
7.9%
7.9%
0.8% 2000
0.8% 2001
11.5%
8.3%
7.3%
2.4%
10.9%
7.9% 8.7%
2.0%
9.9%
1.2% 2002
3.1%
As of June 30, 2006
Source: Cerulli Associates
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
31
Top 10 Sponsors Account for Lion Share of Industry Assets
Managed Accounts
Top 10 Managed Account Sponsors $300.0 $276.9
$250.0
$204.0
AUM ($ billions)
$200.0
$150.0 $114.6 $101.2 $91.7
$100.0
$59.9 $46.7
$50.0
$35.4
$35.1
SEI
Lockwood
$30.0
$0.0 Citigroup
Merrill Lynch
Morgan Stanley
UBS
Wachovia
Ameriprise
As of September 30, 2006
LPL
Fidelity
Source: Money Management Institute
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
32
Manager Concentration Also Exists
Managed Accounts
Top 25 SMA Managers, 3Q 2006, $Billions R an k 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
M an ag er N am e C learbridg e A dvisors N uveen A llianz G lobal Investors B randes Investm ent P artners Lord, A bbett & C o. C olum bia M anag em ent A llianceB ernstein N euberg er B erm an D elaw are Investm ents B lackR ock F inancial U B S G lobal A sset M g m t. Lazard A sset M g m t. D avis A dvisors JP M org an D reyfus Investm ents E aton V ance C alam os A sset M g m t. M F S Investm ent M g m t. Invesco M adison Investm ent A dv. F ayez S arofim & C o. N orthern T rust Inv. F rank lin T em pleton O ld M utual G oldm an S achs
3Q 2006
% S h are
$64.0 $40.2 $27.6 $25.3 $20.9 $17.1 $15.1 $14.1 $13.5 $12.7 $12.4 $12.0 $11.9 $10.2 $10.1 $9.7 $6.5 $5.4 $5.4 $5.2 $4.6 $4.4 $4.4 $4.1 $3.7
7.94% 4.99% 3.43% 3.14% 2.59% 2.12% 1.87% 1.75% 1.68% 1.58% 1.54% 1.49% 1.48% 1.27% 1.25% 1.20% 0.81% 0.67% 0.67% 0.65% 0.57% 0.55% 0.55% 0.51% 0.46%
Calculated across multiple platforms including SMA Advisory, SMA dual contract, and rep as portfolio manager Product & Distribution Update: Looking Beyond the Headlines
Top 10 Managers represent 31% of total industry assets
Top 25 Firms represent 45% of total industry assets
Source: Money Management Institute
March 15, 2007
33
Alternatives
Alternatives Go Mainstream $1,500,000
AUM
$1,426,700
Flows
$1,300,000 $126,474
$140,000
$120,000
$1,105,300 $1,100,000 $100,000
$80,000 $700,000 $60,000
$490,500
$500,000
Flows ($MM)
AUM ($MM)
$900,000
$46,907 $40,000 $300,000 $185,700 $23,336 $100,000
($100,000)
$38,900 1990 $0
$20,000
$14,698 1995
2000
2005
2006
$0
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
34
Hedge Fund Growth Continues Overall in Both Fund of Funds and Direct Strategies
Alternatives
Total Hedge Funds vs. Total Hedge Fund excluding Fund-of-Funds, 1997 - 2006 Number of Hedge Funds (excl. FoF)
10,000
9,462
Number of Total Hedge Funds
9,000
8,661
8,000
7,436
7,000
7,241 6,665
Number of Funds
6,297 5,782
6,000
5,379 5,065
5,000
4,454
4,000
3,617 3,325 2,990
3,000
2,948
3,102
3,873
4,598
3,904
3,335
2,564
2,000 1,000 0 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
35
Fund of Funds Growth Recovers
Alternatives
Estimated Growth of Hedge Fund of Funds, 1990 - 2006 $600,000
$120,000
Assets
Flows $100,000
$500,000 $80,000 $400,000
$300,000
Flows ($MM)
AUM ($MM)
$60,000
$40,000
$20,000 $200,000 $0 $100,000 ($20,000)
$0
($40,000) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
36
Despite Continued Growth, Alternatives Begin To Witness Some Maturity and Consolidation
Alternatives
Estimated Number of Funds Launched/Liquidated, 1997 - 2006E 2,500
Funds Launched 2,073
Funds Liquidated
2,000
1,435
Number of Funds
1,500 1,087
1,356
1,094
1,000 673 450
500 261
348
328
(57)
(71)
0 (52)
(115)
(92)
(162)
(176) (296)
(500) (600) (848)
(1,000) 1997
1998
1999
2000
2001
2002
2003
2004
2005
2006E
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
37
Historically Alternatives Had a High Degree of Product Concentration
Alternatives
Estimated Strategy Composition by AUM, 1990 Convertible Arbitrage, 0.48% Distressed Securities, 2.40% Short Selling, 0.12% Sector (Total), 0.24% Relative Value Arbitrage, 10.08%
Em erging Markets (Total), 0.36% Equity Hedge, 5.28% Equity Market Neutral, 1.68% Equity Non-Hedge, 0.60%
Merger Arbitrage, 0.60% Event Driven, 3.84%
Fixed Incom e, 3.24%
Macro, 71.07%
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
38
Alternatives Like Other Segments of Investment Management Show Signs of Proliferation
Alternatives
Estimated Strategy Composition by AUM, 2006 Short Selling, 0.29% Sector (Total), 5.08%
Convertible Arbitrage, 3.17%
Distressed Securities, 4.40% Relative Value Arbitrage, 13.23%
Em erging Markets (Total), 4.39%
Regulation D, 0.24% Merger Arbitrage, 1.55% Market Tim ing, 0.35%
Equity Hedge, 28.67% Macro, 10.93%
FI: MBS, 2.09% FI: High Yield, 0.87% FI: Diversified, 1.51% FI: Convertible Bonds, 0.09% Equity Market Neutral, 2.53%
FI: Arbitrage, 2.90% Event Driven, 13.55%
Equity Non-Hedge, 4.15%
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
39
Top Three Strategies Dominate Flows
Alternatives
Estimated Net Asset Flow by Strategy ($MM), 2006 Equity Hedge $38,853 $21,112
Relative Value Arbitrage $18,165
Event Driven
$16,543
Macro $8,002
Emerging Markets (Total) Sector (Total)
$4,683
FI: Arbitrage
$4,624
Merger Arbitrage
$4,186
Convertible Arbitrage
$4,183 $3,123
Distressed Securities FI: High Yield Mortgage Backed
$1,587 ($1,808)
Source: Hedge Fund Research, Inc. Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
40
Conclusion
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
41
We Think of Asset Management as a Complex, Segmented Collection of Businesses, but It’s Really All One Business
s d n u F l a tu u M s d ip n tr u ts F l u a O EETTFFss Outstrip Mutu SSM MAAIInnvveessttm meennttssRRiissee
Hedge HedgeFunds FundsGain GainInstitutional InstitutionalAcceptance Acceptance
s d n u F x s e d d n n I u F n x O e t d s i n I w AANNeew wTTwist On MMaannaaggeerr Weds Lo Weds Lonngg--OOnnllyy,, Hedge Hedge d e i f i n U w d e e i f N i s l n i e U v w n e U N m s r l FFiirm Unvei m r o f t a l P t n m r u o o f c t c a l A P d t e n g u a o n c a c M A Managed Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
42
Do You See Convergence as a Challenge…
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
43
In a Converging World, Investors and Channels Determine Product and Packaging Managed Assets
Products
Traditional
Large Cap Domestic Equity
Institutional
Small Cap Global Emerging Mkt Debt Asset Allocation
Segments
Corporate DB Public DB Taft-Hartley Endowments Foundations
Channels
Direct Consultants Mgr of Mgrs
Convertible Arbitrage Portable Alpha
Gatekeeper
Long/Short Global Macro
VA Sponsors Direct DC Plan Sponsors DC Alliances WRAP Programs Online
Multi-Strategy
Individual Investor
Distressed Credit Arbitrage Statistical Arbitrage
Ultra HNW Affluent Emerging Affluent Mass Market
Product & Distribution Update: Looking Beyond the Headlines
Separate Accounts Mutual Funds Limited Partnerships
Real Estate
Institutional
Packaging
Direct Family Offices Consultants Brokers RIAs
Commingled Funds Separate Account WRAP Mutual Fund WRAP ETFs Stock Baskets
March 15, 2007
44
The Triumph of Open Architecture Intermediaries control access and flows Packaging evolves
Customization the norm Funds, separate accounts in all segments UMAs, MSPs, ETFs Choice and access vs. proprietary
Supermarkets vs. limited shelf space Institutional like platforms emerge Product selection VS fund family selection
Pricing distinctions fade – The Bundle of services for a single fee Disintermediation is changing the notion of distribution and shelf space Distribution strategy by: Segment Channel Intermediary
Rapidly Evolving Channels RIAs Brokers Wealth Managers Trust Departments Consultants Lawyers Accountants DC Alliances Insurance Agents Fund Supermarkets Manager of Managers Web-based Financial Portals
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
45
Investor Preferences Evolve from Benchmarks and Performance to Outcomes and Results Is Demand Pushing the Industry Toward Outcome-Based Investing? Rapid product proliferation Changing demographics & investor needs Which products will have a long shelf life?
Benchmarks
Outcomes
Style Box
Core + Satellite
Relative Returns
Absolute Returns
Philosophy Driven
Needs Driven
Active Core
Index Core
Alternative = Alternative
Alternative = “New Active”
Stock Picking
Asset Allocation
Economic Cycle
Life Cycle
Single Package
Multi Package
Is alternative the new face of active management? Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
46
Investors Want Financial Wellness… Product Integration is Key to Success Wealth management “bundle” has become accepted industry wisdom Trying to capture a greater share of their clients’ wallets Acting as gatekeepers rather than conduits Investment management is no longer the key value-added component
Intermediaries moving beyond open architecture Quality (analysis, evaluation & selection) rather than quantity Product customization the norm Choice and access vs. proprietary Other Services
Asset Allocation Cash
Funds
Hedge
+ ETFs SMAs
Performance Measurement Tax Planning Trusts and Estates Philanthropy Insurance Concierge Services Banking Brokerage
Product & Distribution Update: Looking Beyond the Headlines
=
The Unified Account
March 15, 2007
47
The Outlook: Continued Fragmentation with Opportunities in All Segments
Investor focus: Outcome & results orientation not performance
Investor orientation evolves from accumulation to preservation and retirement income
New markets will require different competitive attributes
Open architecture expands shelf space and product offering
Alternative investments and Exchange Traded Products go mainstream and reshape industry landscape
New advisory models: Solution oriented and platform dominated
Global opportunities emerge
Product & Distribution Update: Looking Beyond the Headlines
March 15, 2007
48
Thank you.
© 2007 SEI Investments Developments, Inc.
The SEI Knowledge Partnership is a service of the Investment Manager Services unit of SEI. This information is provided for educational purposes only and is not intended to provide legal advice. SEI does not claim responsibility for the accuracy or reliability of the data provided.
