Product analysis study for natural resource equity fund by Sutherland Global Services

Case Study and Sample Slides Distribution Strategy for an Australian AMC for selling naturalresources mutual funds

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Distribution strategy for an Australian AMC for selling naturalresources mutual funds Client • The client is one of top five Australian asset management companies with an AUM in excess of USD24Bn. The AMC was considering launching a “Natural Resources” fund, and wanted to understand global trends & best practices for the same

Project Scope • SGS conducted an extensive primary research with leading fund managers, brokers & sales representatives to acquire market intelligence on sales performance of natural-resources mutual funds, identifying dominant customer segments for such products, method of sales/channel of distribution, effective marketing & sales strategy, and appropriate commission strategy • The client also wanted SGS to validate some of their hypotheses through Market sizing, Trend analysis and Product analysis

Sutherland’s Solution • SGS set up a team of 5 analysts including a Supervisor, Survey Designer, Survey Analysts & Research Support Executives to design a comprehensive questionnaire covering important aspects of the study after an extensive secondary research • List of respondents were drawn from proprietary accesses • Exhaustive interviews with over 40 interviewees were completed in about 80 rounds • Sutherland prepared a comprehensive custom-built report, outlining the global market size & trends, distribution analysis, investor choices, product performance, etc.

• Benefits to the Client • Validation of its hypotheses to assess market opportunity helped the client cut down redundant expenditure • Articulate primary research helped customized product development • Informed decisions on product distribution strategies lead to optimization of costs

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Sutherland conducted 43 primary research interviews in four regions

Region

Europe

USA

Canada

Asia-Pacific

Total Successful Interviews

Respondent Category

Total Respondents Contacted

Association - 2 Advisors/ Broker - 4 Fund House - 2 Sales Representative – 3

Association - 0 Advisors/ Broker - 3 Fund House - 2 Sales Representative – 3

Association - 0 Advisors/ Broker - 7 Fund House - 1 Sales Representative – 4

Association - 1 Advisors/ Broker - 4 Fund House - 4 Sales Representative – 3

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90% of natural resources funds are equity funds, of which 57% are European domiciled… SAMPLE EXCERPTS Net assets of “Natural Resources” fund – Data established through bottoms-up approach – (USD277Bn) Equity Funds Share by Region – (USD248.6Bn)

Commodity Funds Share by Region – (USD28.4Bn)

USA 35%

Asia-Pacific 3% USA 87%

Asia-Pacific 3% Europe 57%

Others 3%

* Note – Above data represent 2007 figures

# Of Equity Funds by Region

49 48 118

Canada 6% Others 1% Europe 3%

Canada 2%

# Of Commodity Funds by Region

165

169

7 7

150

218

27 29

25 23 2005

2006

Asia-Pacific

Canada

340

330

269

47 2007 Europe

USA

58 2008 Others

4 2 3 3

3 2007

3 2008

4 1

2005 Asia-Pacific

4 2006 Canada

Europe

USA

Others

Source: Bloomberg, Lipper, Morningstar, Sutherland Analysis

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… and most of the sales origination is domestic for all the funds except for offshore funds domiciled in Europe SAMPLE EXCERPTS Domicile Region

Total No. of Funds by Domicile Type – Bloomberg Domestic

Europe

Asia-Pac

Offshore

184

162

Total No. of Different AUM Split by Domicile Class of Funds by Sales Type – Bloomberg Region – Lipper (USD Bn) Domestic

453

171

Offshore

302

Domestic

43.21

7.82

Remarks

Offshore

91.25

Significant share of sales origination from outside Europe

USD0.06

Most of the sales origination from the region of domicile

101

664

102.24

2.9

Most of the sales origination from the region of domicile

Canada

127

6.44

0.36

Most of the sales origination from the region of domicile

• European offshore funds, although lesser in numbers than domestic funds, have however managed to penetrate more in value terms comparatively by almost double • About 95% of the overall US-based global resource funds are sold primarily in the US alone, coupled with 97% AUM penetration Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Natural resources funds have seen consistent growth in the past few years SAMPLE EXCERPTS AUM % Change FY 2006

AUM % Change FY 2007

AUM % Change FY 2008

% Fund Flow Increase in 2007 over 2006 Fund Flows

Global

80.0%

32.0%

26.0%

38.0%

Europe

73.0%

43.0%

-11.0%

251.0%

United States

81.0%

28.0%

52.0%

27.0%

74.0%

32.0%

3.0%

-37.0%

Region

Asia-Pacific Canada

• AUM increase in 2006 was mainly due to: – Increase in new fund launches: There were 101 new funds launched in 2006 as against 62 in 2005 – Attractive performance of the overall commodity sector was led by emerging markets: MSCI commodity producer index for emerging markets increased by 42% as against 30% in 2005 Note: Figures for year 2008 are as of May 2008 Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Universal banks and portfolio managers are the dominant channels for distribution of third-party funds SAMPLE EXCERPTS % AUM European Distribution of Third-party Funds 1.0%

Country-wise Distribution break-up 6%

• Historically, cross-border third-party fund vendors had put forth significant efforts on unit-linked providers, particularly multi-manager sponsors that sought to diversify manager risk by using a wider array of third-party component funds within their products

17%

23%

France

11.0% 54%

8.0%

37.0%

Key Findings

24%

Switzerland

• Third-party funds have enjoyed greater success in Switzerland post 1998, but banks have a smaller share as compared to other European countries

69% 1% 22%

Germany 43.0%

57%

13% 8%

• Foreign market entrants in Italy continue to experience most success in the bank channel • They have primarily relied on bank-sponsored gestioni patrimoniali in fondi (GPF) and fund-of-funds for new business

5% Universal Banks Portfolio Managers Insurance Companies Financial Advisors Corporations

Italy

• Although German broker-pools remain the primary users of third-party funds, German banks have become a more significant distribution channel for cross-border fund vendors during the past three years as they have widened the array of products being sold by them

14%

72%

Source: Magnus Spence, Sector Analysis; Cerulli Associates- European Distribution Dynamics Preliminary Findings

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In the UK, IFAs are the dominant distribution channels as against banks in other European countries SAMPLE EXCERPTS Share of Fund Assets by Distribution Channel in Major European Countries (2005) UK

15%

Spain

47%

67%

Italy

65%

Germany

48%

France

28%

Retail Bank

Private Bank

12%

Insurance Companies

20%

IFA

17%

Funds of Funds

3% 4%

12%

11%

4% 2%

26%

Institution/Corp.

Others

• Unlike most European countries, the UK has independent financial advisors (IFAs) commanding more share than retail banks in distribution of mutual funds, accounting for 47% followed by insurance companies with 15% • In France, the institutions and corporations channel (which could be charity/endowment organizations and corporate divisions managing pension obligations), account for almost a quarter of a distribution of mutual funds Source: ZEW/OEE database, data based on Feri estimations

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Consistent performance is the primary attribute needed for securing distributor relationship with banks SAMPLE EXCERPTS European Fund Vendor Ratings of Distribution Channels (2005) 5 4.4 4 4 3.3 3

2.7 2.1

1.9

1.8

Independent Financial Advisors

Direct

Unaffiliated Banks

Affiliated Banks

Insurance Firms

Platform-based Distributors

Tied Financial Advisors

Note: Rating indicates marketing effort dedicated to channel, with 1 being minimum & 5 as maximum

• Banks are the primary target for fund distribution in Europe, whether through strategic partnerships or cross-ownership connections • However, banks have less sophisticated sales-forces and more automated advice delivery systems, and therefore, fund vendors are required to create products that could be easily understood and easily sold with a high level of after-market support • IFAs are not highly rated, as banks offer better advice propositions and tend to be more competitive

Source: Cerulli Associates - European Distribution Dynamics Preliminary Findings

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Strategic relationship with banks is key to successful distribution of funds in Europe SAMPLE EXCERPTS European Fund Vendor Rating of Attributes Needed to Secure Relationship with Banks (2005) 5

4.3

4 3.2

3.1

3.0

2.7

Willingness to invest in training bank staff and other services

Relationship with bank's parents or other affiliates

2 1 0 Performance

Complementing affiliated manager in investment product/style

Willingness to share fees with bank distributor

Investment Style

Willingness to invest in building brand awareness

Note: Rating indicates importance of attribute, with 1 being minimum & 5 as maximum

• European fund vendors indicate that performance has been the primary criterion in the manager selection process • As distributors such as banks reposition themselves as advisors to their client base, they need to underscore their objectivity and skill by selecting the best fund managers • Although many European consultants feel that Branding is also critical, it means far less to either the distributor or the fund vendor

Source: Cerulli Associates - European Distribution Dynamics Preliminary Findings

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Luxembourg is the most attractive destination for fund house registration SAMPLE EXCERPTS Global Mutual Fund Break-up by Domicile 3%

24%

16%

2008 Total Funds 664

– Exemption from Luxembourg profit and capital gains taxes and no stamp duty on share issues or transfers

10%

– Funds are created under part one of the "UCITS" law, which allows fund houses to market their shares freely in all member states of the European Union

30%

Canada

Cayman Islands

France

Luxembourg

139

108

Ireland/Dublin

• The Grand-Duchy of Luxembourg offers the investment fund industry a modern legal and tax environment that has attracted many fund houses. Below are some key advantages for funds domiciled in Luxembourg

– Well-defined regulatory framework for fund houses ensures investor protection – Availability of working professionals and service providers such as custodian, fund accountants, transfer agents and tax advisors • US is the second largest destination in terms of domicile of natural resources funds

Source: Association of the Luxembourg Fund Industry; Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Sector-wise energy and metal & mining and region-wise North America and Europe attract a majority of investments SAMPLE EXCERPTS Share of Investment by Industry Focus

Share of Investment by Geography Focus 12%

24%

26%

3% 5% 49%

2% 10% 25%

27%

9% Metals & Mining Energy

North America Europe

Gold & Precious Metals

Asia Energy - Alternate Sources Oil & Gas Service

Africa

Chemicals

Latin America

Others

Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Diversified natural resources and precious metal funds have given higher returns over the last five years SAMPLE EXCERPTS Sector-wise Average Returns 40

(% Avg Returns)

29 27

25 25 20

22 18

15 10

5 0 I Yr return (%) Energy

3 Yr Return (%) Div. Natural Resources

Precious Metals

5 Yr Return (%) Utilities

• Precious metals and diversified natural resource funds have out-performed the other two categories of funds in terms of long-term performance • Precious metal funds such as gold funds have given 37% (annualized) returns over the past five years, followed by diversified natural resources funds with 36% returns over the same period • In terms of one-year returns, energy-based funds are almost on par with diversified resources and precious metal funds

Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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In terms of different investment styles, commodity, growth and large cap focused funds have given higher returns SAMPLE EXCERPTS (% Returns) 44.7

27.9

Fund Performance by Asset Class • Equity funds have been the outperformers vis-à-vis other asset classes in the short- to medium-term horizon. Commodity funds display stronger returns in the long term • Growth funds, followed by value-based funds, continue to look good within the global resource space

15.5

16.0

29.9

25.3

12.8

1 Yr Return Equity

3Yr Return Commodity

Fund Performance by Investment Style

23.6 18.1

16.6

9.9

9.6

3Yr Return

Blended

11.6

-4.6 Large Cap

Value 20.4

18.7 7.2

Fund Performance by Investment Focus 1 Yr Return

5 Yr return

Growth 21.3

15.8

19.6

16.9

1 Yr Return

• Large caps have clearly been the winners followed by mid cap funds

5 Yr return Alternative

22.4 16.4

21.9

16.8

3Yr Return Mid Cap

22.8

4.9

5 Yr return Small Cap

Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Also, percentage cash holdings vary across asset classes & investment styles SAMPLE EXCERPTS (% Cash Holdings) 27.6

Cash Holdings by Asset Class

Equity

• Global resource alternative funds, due to their fund management style, contain the largest proportion of cash in their portfolios • Value-based / small cap funds are operating on a risky territory by incorporating negative cash flows. This could primarily reflect a relative degree of leverage exposure to achieve higher returns

4.4

1.6 Commodity

Alternative

3.4 0.7

Cash Holdings by Investment Style -2.4 Blended 1.9

Growth

Value

3.0

Cash Holdings by Investment Focus -11.1 Large Cap

Mid Cap

Small cap

Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Global resource funds fee break-up – A snapshot SAMPLE EXCERPTS

Equity

Commodity

Alternative

Exp Ratio

Fr. Load

Back Load

Mgmt. Fee

Perf Fee

Growth

0.74

1.37

1.35

Exp Ratio

Value

Fr. Load

Back Load Large Cap

Mgmt. Fee

Perf Fee

Mid Cap

Small Cap

0.90

1.27

1.26

1.67

3.60 1.37

1.23

1.25

0.19

0.39

0.58

5.00

2.66

Pricing Structure Performance by Investment Focus

3.72

11.67

Blended

0.06

0.80

1.30

1.36

0.23

2.86

5.36

Perf Fee

1.56

1.30

1.02

8.00

5.87

1.82

1.37

1.31

2.34

1.25

Mgmt. Fee

0.63

Findings indicate relative variance in the fee structure across investment styles, exhibiting their dynamic nature

Back Load

0.41

•

Pricing Structure by Investment Style

2.66

• Alternative funds quote a higher performance fee vis-àvis other asset classes within the overall global resource space

4.26

Fr. Load

1.22

2.30

2.66

Pricing Structure by Asset Class

3.16

17.29

(% Fees & Expenses)

Exp Ratio

Source: Bloomberg; Lipper; Morningstar; Sutherland Analysis

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Singapore, Chile and Bahrain appear to be attractive sales destination for Europe-domiciled funds as per number of funds sold in these countries

SAMPLE EXCERPTS Total AUM (Offshore Funds: USD91.25Bn) Country Wise # of European Funds Sold in Asia-Pacific Country Singapore Taiwan Macau Korea Hong Kong

# of Funds 264 54 38 08 77

Country Wise # of European Funds Sold in Middle East Country Bahrain Lebanon

Total number of offshore funds in Europe: 302

Country Wise # of European Funds Sold in Latin America Country Chile Peru

ASIA PACIFIC

LATIN AMERICA

MIDDLE EAST

AFRICA

# of Funds 96 08

# of Funds 99 02

Country Wise # of European Funds Sold in Africa Country South Africa

# of Funds 10

• UCIT regulations and their acceptance in different countries has allowed many Europe domiciled funds to originate sales out of Europe • Among the Europe-domiciled offshore funds, 255 alone come from Luxembourg , attracting sales from other region • Asia-Pacific is the most important region in terms of offshore sales of Europe-domiciled funds • As per industry reports, Asia-Pacific accounted for almost 30% of the total fund flows of European equity funds in the fist half of 2007 • Also, Blackcock raised around USD5Bn from Taiwan in 2007 for its different funds • Bahrain and Chile also have high attraction for Europe-domiciled funds • UAE, also, is amending the regulation to allow sale of UCIT in the country Source: Bloomberg; Lipper; Sutherland Analysis

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Dominance of distribution channel also varies according to the type of customer SAMPLE EXCERPTS Institutional Customers

•

Institutional investors predominantly invest directly in a mutual fund company as it helps them to negotiate better on fees charged

•

For institutional clients, mutual fund companies have a dedicated sales team, and also a separate institutional share class in funds

•

HNIs primarily invest through private banks. Private bankers offer customized services to HNIs and manage their investment portfolio for other investment products as well

•

Apart from private banks, retail banks also cater to HNIs

•

Retail investors prefer tailor-made and on-demand advisory services of independent financial consultants for mutual fund and other investments

•

This scenario is more applicable to the UK, Germany and Italy, while in other European countries retail investors prefer advisory services of banks for investments

HNIs

Mass Market

Source: Sutherland Primary Research

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