Sample - Study of Global Distribution Channels_1_Feb 14 by Sutherland Global Services

Samples –Global Distribution Channels Study Prepared for XXX

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Outline

Global Summary

Regional Analysis

Europe

Asia Pacific USA Canada

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Retail banks and financial advisors are the key distribution channels globally 45%

18% 11%

Europe Retail Bank

Private bank

11%

Insurance Companies

IFA

Institutional Distributors

Others

54%



26%

Distribution channel varies significantly from

14%

region-to-region 

Banks dominate in Europe and APAC, while

US Defined Contribution Retirement Plan

professional advisors and full service brokers have

Fund Company Directly

Discount Broker/Mutual Fund Supermarket

Professional Financial Advisors

a strong hold in the US and Canada 57%



Channel members also vary significantly e.g. Defined Contribution Retirement Plan is present only in the US

19%

18%

APAC Brokers

Banks

SITE & direct

Insurers

IFAs & others

Financial Advisors

Branch Direct

71%

Canada

15%

Full-Service Brokers

Branch Advice

0% Others

Source: Sutherland Primary Research, Industry Associations, Kneip, PricewaterhouseCoopers

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Outline

Regional Analysis - Europe

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Distribution pattern of natural resources fund follow that of the overall industry with banks being the dominant channel European Fund Assets by Distribution Channel (Pre 1985-2005)

Retail banks dominate the distribution Retail Bank

2005 2000 1995 1990 1985 Pre 1985



45%

18%

55%

11%

15%

10%

64%

15%

69%

62%

11%

10%

18%

17%

67%

5% 3% 3%

10% 2%

11%

20%

11%

Private bank

Insurance Companies IFA

Institutional Distributors Others

Distribution structure for domestic funds and foreign funds differ in Europe

•

Domestic asset managers rely more on retail banks for distribution

•

Foreign asset managers prefer private banks, IFAs, fund of funds and other forms of open architecture wrappers



Private banks, the second largest fund distribution chain, primarily caters to HNIs



Independent Financial Advisors (IFAs) have increased their share in the distribution space over the past two decades, from mere one percent share in 1985 to around eight percent in 2005



As per primary research responses, distribution dynamics for natural based mutual funds is similar to that of overall mutual funds in Europe

Source: ZEW/OEE database, data based on Feri estimations, Primary Research & Sutherland Analysis

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In UK, however, IFAs are the dominant distribution channel as against banks in other European countries Fund Assets by Distribution Channel in Major European Countries (2005)

15%

47%

67%

65%

48%

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, IFAs command more share than the retail banks in distribution of mutual funds in the UK accounting for 47 percent followed by 15 percent of insurance companies



In France, 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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Universal banks and portfolio managers are dominant channel for third party fund distribution % AUM European Distribution of Third-Party Funds

Country-wise Distribution break-up 6% 17% 23%

1.00% 11.00%

France 54%

8.00%

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%

43.00%

Germany

57%

7% 13%

Universal Banks

Portfolio Managers Insurance Companies Financial Advisors Corporations

 Historically, third-party cross-border fund vendors have focused significant efforts on unit-linked providers, particularly multimanager sponsors that sought to diversify manager risk by using a wider array of thirdparty component funds within their products

3% 4%

37.00%

Key Findings

 Although, German Broker-pools remain the primary users of third-party funds, but German banks have become a more significant distribution channel for crossborder fund vendors during the past three years as they have widened the array of products they are selling

14%

Italy 72%

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

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

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Strategic relationship with banks is key successful distribution of funds in Europe European Fund Vendor Rating of Distribution Channel Opportunities (2005)

4.4 4 3.3 2.7 2.1

Unaf f iliat ed Banks

A f f iliat ed Banks

Insurance Firms

1.9

1.8

Direct

Plat f orm-based

Tied Financial

Independent

Dist ribut ors

A dvisors

Financial A dvisors

Note: Rating indicates marketing effort dedicated to channel, with 5 as a maximum.



Banks are the primary targets for funds 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 which could be easily understood and easily sold with a high level of after-market support



Financial advisors are not highly rated as the banks offer better advice propositions and tend to be more competitive

Source: Cerulli Associates- European Distribution Dynamics Preliminary Findings

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Consistent performance is the primary attribute needed for securing distributor relationship with banks European Fund Vendor Rating of Attributes needed to secure relationship with Banks (2005)

4.3 3.2

Perf ormance

Complement ing

3.1

3.0

Willingness t o

Invest ment St yle

2.7

Willingness t o

Relat ionship wit h

af f iliat ed manager

share f ees wit h

invest in building

invest in t raining

Bank's Parent s or

in invest ment

bank dist ribut or

brand awareness

bank st af f and

Ot her A f f iliat es

product /st yle

ot her services

Note: Rating indicates importance of attribute, with 5 as a maximum.



European fund vendors indicate performance has been the primary criterion in the manager selection processes



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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Lately, fund supermarket are making their presence felt and are giving impetus to online distribution channels Online Purchase of Mutual Funds is Prominent in Uppermiddle and Upper Income Class



Currently, fund supermarket is not a major distribution channel in Europe, with small penetration in the UK and Germany where it accounts for 3 and 1.5 percent respectively



However, fund supermarket generally offers a wide range of investment funds in all asset classes in order to establish themselves as a one-stop shop for investment



As a result, this channel is beginning to take off in rest of the Europe



Direct banks are among the leading fund supermarkets



Emergence of fund supermarkets has given impetus to growth of online investment in mutual funds in Europe



Online investment in mutual funds is also a function of the ‘well-off’ of an investor as per Forrester’s survey with following percentage of online mutual fund investment as per income class:





14 percent of internet users in lower income class



27 percent of internet users in middle-class



35 percent in upper-class

Higher education, young age, good jobs and greater income are other characteristics of online investors in

Europe

Source: ZEW/OEE database, data based on Feri estimations and Forrestor

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Average retrocession/commissions paid to distributors is around 51 percent for all the equity funds Average Retrocession Paid to Distributor (as percent of management fee) France

Germany

Italy

Spain

Equity

47.8%

46.1%

59.7%

52.3%

51.2%

Bond Funds

48.4%

47.8%

61.3%

52.3%

51.5%

Balanced

47.9%

47.6%

60.3%

51.9%

52.2%

Money markets

35.6%

38.3%

52.8%

39.4%

36.9%

CPPI

41.1%

38.1%

45.6%

47.5%

51.4%

Fund of funds

45.0%

41.7%

49.6%

48.4%

43.4%

Hedge funds

12.5%

27.1%

20.8%

27.5%

20.0%



Retrocession has been the most common method of remuneration for distributors. It is a fee-sharing arrangement whereby a portion of the fees charged by the asset management company (AMC) are returned either to marketers or other agents in consideration for their efforts in distributing the products



Retrocession paid to distributors varies from country to country e.g. Italian and Spanish distributors command higher retrocession



Retrocession has remained almost stable over the past few years

Source: ZEW/OEE database, data from Cerulli Associates

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Outline

Regional Analysis â&#x20AC;&#x201C; Asia Pacific

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Banks are the most preferred channel for distribution of funds Asia ex-Japan Fund Assets by Distribution Channel (2004-2009E)

2009E

14%

66%

14%

2008E

15%

64%

15%

2007E

16%

63%

16%

2006E

16%

Brokers

Banks

SITE & direct 61%

17%

Insurers

2005E

17%

60%

2004

18%

57%

18%

19%

IFAs & others



Banks are the preferred distribution channel and is expected to sustain dominance in the future



Direct distribution contributing to around 15 percent of the sales is expected to decline from present level but will remain major factor due to emergence of internet as a preferred channel in some Asia-Pacific countries



Independent Financial Advisors (IFA), still a small segment in Asia, is expected to rise in Australia and Japan where the industry is in developed stage



As per opinion leaders in the industry, distribution dynamics for natural resources mutual funds would be similar to that of overall mutual funds in Asia-Pacific

Source: Cerulli Associates

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Banks are the major distribution channel in China, whereas brokers and security companies dominate in Korea and Japan China Distribution Channel Trends Banks

Brokerage

India Distribution Channel Trends Banks

Direct

100%

90%

80% 70%

60%

Direct

Others

18 23

70% 60%

50%

40% 30%

IFAs

80% 8

Nat. Distributors

40% 30%

20%

20% 10% 0% 2004E

2005E

2006E

Banks 100%

2007E

2008E

Securities Firms 1

2009E

Others 4

2004

2005

Banks and others 90% 80%

70% 87

70% 60%

50%

40%

30%

20% 11

2001

2002

2003

2004

2005

Securities Companies

100%

80%

10%

2010E

90%

60%

10%

20% 10%

2004

2005

2006E

2007E

2008E

2009E

Korea Distribution Channel Trends

2006E

2002

2003

Japan Distribution Channel Trends

Source: Japan: 2002-2005 Actual data for POIT only from the investment trusts association Japan. 2006E-2009E source is Cerulli, for locally domiciled mutual fund AUM market share only, India: RBI Report as on FY 04, Cerulli, Korea: AMAK, China: Cerulli Associates

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With rising cross-border distribution of mutual funds in Asia-Pacific, finding the right local distributor is the key success factor for offshore funds

Cross-border distribution in Asia

Country of Sale

Berm uda and US

Britis h Virgin Island s

Caym an Island s

Hong Kong

Japan Macau

1 1

Germ any

Irelan d

Jerse y

Luxe mbou rg

Mauri tius

233

772

Guern sey

Hong Kong

Total

% of Foreig n Funds

1106

93%

268

427

909

73%

259

1 2

172

South Korea

659

259

Taiwan TOTAL

Unite d Kingd om

Malaysia Singapore

Switz erlan d

135

112 1

600

434

610

58%

2425

3353



There is no pan-Asian single fund market. Each country has its own regulatory and tax environment, language, currency, distribution processes and most importantly, investor culture. These factors all complicate distribution, and a successful strategy is one that is well-tailored to local requirements



As regards the distribution model, many Asian countries' distribution channels are dominated by banks, with which fund managers must deal. However, when those banks start to sell their own asset management products, open architecture comes under threat



As the markets grow, the established distribution channels are expected to come under greater competition from new players such as fund platforms



Finding the right local distributor and an experienced TA service provider is key to penetrating Asian markets, and, to ensure continued growth in those markets, all actors need to push for standardization, automating processes, increasing STP rates and reducing costs and risks

Source: PricewaterhouseCoopers, Worldwide Fund Distribution 2006. Data from Lipper Hindsight, figures as at 31/12/2006.

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Taiwan is one market where Foreign Funds have seen success Taiwanese Mutual Fund AUM by Domicile 2002 to June 2007 (US$ bn)

86.1

Locally Domiciled

79.3

Cross-Border

71.8 60.8

58.3

57.6 56.9 44.9

17.9

2002

23.6

2003

27.9

2004

33.4

2005

2006

Jun-07



748 cross border funds offered by 60 foreign fund companies totaling ~US$57bn as of June 2007 out of a total market of ~US$114.5bn



Distribution driven market – banks account for 59% of distribution



Onshore funds generally sold through local banks and offshore funds sold through international banks such as Citibank, HSBC and Standard Charter



A number of European natural resources funds are registered for sale in Taiwan as well as Hong Kong, which is another major market for foreign funds in Asia

Source: Cerulli Associates

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Outline

Regional Analysis â&#x20AC;&#x201C; USA

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Professional financial advisors are the most dominant distribution channels for natural resources funds… US Mutual Fund Assets by Distribution Channel (1990-2007)

2007

24%

2005

26%

2000



14%

24%

1995

1990

14%

15%

21%

20%

56%

54%

Defined Contribution Retirement Plan Fund Company Direc tly

55%

56%

Disc ount Broker/Mutual Fund Supermarket Professional Financ ial Advisors

19%

72%

Professional Financial Advisors which include Full-Service Brokers, Independent Financial Planners, Banks or Savings Institutions Representatives, Insurance Agents and Accountants are the primary purchase channel for mutual fund investors in US



Although, Fund shares sold through professional financial advisors, have traditionally accounted for the majority of mutual fund holdings, the increasing role of defined contribution (DC) plans in the last two decades has led to a change in the type of purchase channels being adopted by investors



However, research findings indicate that Professional Financial Advisors would account for a higher percentage of purchases for natural resources mutual funds

Source: Investment Company Institute; Sutherland Primary Research

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â&#x20AC;Ś as they offer a wide array of services in addition to helping investors purchase mutual fund shares US: Type of Services Received from Primary Advisors

Portfolio Review and Investment Recommendations

85%

Periodic Discussion of Financial Goals

83%

Planning to achieve specific goals

75%

Comprehensive Financial Planning

75%

Specialist areas such as Tax Planning

51%

% of respondents with on-going advisory relationships Source: Investment Company Institute

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Amongst Professional Financial Advisors, Full-Service Brokers and Independent Financial Planners hold a higher market share

US Mutual Fund Primary Purchase Channel*(2007)

US Number Of Funds Owned by Purchase Channel (2007) Average Number of Funds Sold

Fund C ompany Directly 14% Accountant 2%

Discount Broker 10%

10 24%

Full Service Broker 26%

16%

6% 5% 18%

17% 18% 33%

23%

71%

Insurance Agent 6% Banks or Savings Institution 18%

Independen t Financial Planner 24%

35%

34%

Full-Service Broker

Independent Financial Planner

1 to 3

4 to 6

7 to 10

Bank or Savings Institution

11 or more

ď&#x192;ź

Research findings also indicate that within professional financial advisors, investors are mostly using the services of Full-service Brokers and Independent Financial Planners for making purchases of natural resource based mutual funds

ď&#x192;ź

Banks or savings institutions representatives are also a major distribution channel and primary research findings indicate that they are gradually taking up more share in the market as banks are beginning to offer advisory services

Source: Investment Company Institute;

*Note: Mutual Fund Purchases outside employer sponsored retirement plans