2009s Stock Fund Expense Ratio Trends: Increasing Ratios, Expense Ratio Caps, the Challenge of 15c P

1
2009s Stock Fund Expense Ratio Trends
Increasing Ratios Expense Ratio Caps the
Challenge of 15(c) Peer Group Selections and
More

• Strategic Insight
• Avi Nachmany Avi_at_sionline.com
• Kevin Shine Kshine_at_sionline.com

SI OnLine.com 15(c)
SimfundFiling.com
Simfund US / VA / Asia / Europe / Private Label
StrategicInsightGlobal.com
AnnuityInsight.com
2
Todays Topics

• A few observations on the industry beyond fees
• Stock funds rising expense ratios notable but
  having only a minimal impact on the average
  shareholder account
• Expense cap challenges managers trustees
• 15(c) in 09 rely only on 08 fiscal year data
  or supplement with estimates for 09
• How SI can assist on fee-related research board
  guidance and more

3
Industry Overall Sales of Equity and Bond Funds
Still Nearly 150B Monthly
4
Because of Retirement Funding Goals Even During
Bear Markets a Majority of Fund Sales are of
Equity Funds (Automatic Investments PPA etc.)
5
Recent Inflows Have Gone to Stock Funds with the
Highest Trailing Return / Risk Relative Ratings
Even When Such Funds Show Large Absolute Losses
6
Fee Trends in 2009 The Context

• Assets of many equity funds today are half of
  what they were during the funds latest fiscal
  year. Similarly the average stock fund
  shareholder account is down by half
• Falling assets and shrinking account sizes
  trigger fee ratio increases. In March 2009
  expense ratios for most stock funds are much
  higher than the levels reported for them during
  the funds latest fiscal year
• Increase in many stock fund expense ratios 15
  b.p.
• Increase in cost to investors with an average
  account balance (8000-9000) 1 monthly

7
SIs Increasing Focus Assistance Data for
Fee-Related Research

• 2009 2010 Attention to fee rises for managers
  trustees fiduciaries advisors gatekeepers
  investors regulators Expect more from SI on
  fee research board-related issues
• Shortly a report on this discussion today will
  be published on sionline.com register for access
  to our site share the study with trustees if
  appropriate
• Trustees increasingly ask for access to SI
  research not just on board-related topics but
  for general perspective trends reach out to us
  to accommodate your trustees interest in such
  research
• Simfund complete timely fee data (open-end
  funds VA funds ETFs closed-end funds
  sub-advisory non-management fees)
• SimfundFiling.com daily tracking of fund changes
  filed with the SEC smart Google on EDGAR
  weekly synopsis help-on-demand for specific
  research
• 25 analysts researchers on-call mutual funds
  VA funds and globally

8
SECs Andrew Donohues Speech to Fund Directors
1/13/09

• (An excerpt related to Advisory Contract
  Renewal)
• ... this year the 15(c) process will be even more
  critically important. fund directors will likely
  want to consider carefully additional information
  or issues that may not have been present in
  previous reviews. For example for a fund with an
  expense cap that has experienced an increase in
  its expense ratio due to a decline in asset
  values or redemptions is it appropriate to
  modify or eliminate the expense cap What
  standard will the board employ to determine any
  such modification Similarly many funds use
  funds in a peer group as a benchmark to analyze
  fees charged and expense ratios incurred. Boards
  should be mindful in evaluating funds within a
  peer group that the funds that historically may
  have comprised this peer group may no longer be a
  member of that group or have comparable assets
  under management. The challenges you face in
  evaluating certain data regarding peer funds
  especially historical expense ratio and other
  cost data are not insignificant. As such in the
  presence of extreme conditions directors should
  be sensitive to the limitations of comparable
  data. While this sensitivity is always important
  it will be particularly essential in the coming
  year.
• Read full speech on http//www.sec.gov/news/speech
  /2009/spch011309ajd.htm

9
The Mutual in Mutual Funds A Bear Market
Reminder

• Every mutual fund serving individual investors
  has many small accounts and a much smaller
  number of large accounts.
• Costs to run such funds are proportionately
  allocated based on assets inherent in the
  mutual fund structure is subsidization of small
  accounts due to the mutualization of fees
  (management and non-management fees)
• One reason for fee ratio increases today each
  equity fund has many more small accounts and
  fewer very large accounts

10
Distribution of Fund Account Sizes vs. Assets
Pattern at One Manager is Typical for Many
Managers Today
Source Strategic Insight Research
11
Large Cap Equity Transfer Agent Fee Ratios of
Funds with Many Small Accounts are Higher than
for Funds with a Larger Average Account Size
12
Small Cap Equity Transfer Agent Fee Ratios of
Funds with Many Small Accounts are Much Higher
than for Funds with a Larger Average Account Size
(contd)
13
Collapse of Average Account Size And TNAs
Triggered a Fee Ratio Spike

• With stock funds average retail account size cut
  by about half (from 16000 to less than 10000
  the median account size is much lower today at
  maybe 5000) TA fee ratios spiked for many
  funds by over 10 basis points
• Asset declines also result in small increases in
  other non-management fee ratios (with increases
  bigger for tiny funds) as well as in ratios for
  management fees among funds with breakpoints in
  place
• In total current expense ratios among many
  equity funds are 10 15 or 20 basis points
  higher than what they averaged in 2008 (during
  the funds latest Fiscal year)
• For the investor holding todays average equity
  account balance (of maybe 8000-9000) this
  expense ratio increase translates to 12 in
  additional fees each year or about 1 monthly

14
Funds with Expense Caps Cost of Fee
Reimbursement High

• A widespread issue caps on Total Expense Ratio
  TA fee ratio Unified Fee Ratios TER at or
  under peer median TER lt 70 of peers etc
• 2009s collapsed advisory fee revenues and other
  cost dynamics result in unprecedented
  profitability pressures on investment companies
• Expense caps add to such pressures an extra 15
  b.p. reimbursement esp. for a large fund is
  meaningful
• (Beyond stock funds need to maintain a positive
  yield forces money market mutual funds into fee
  waivers certain bond funds may also be driven by
  the same influences to implement such waivers)

15
Expense Caps Deliberations Peer Group
Comparisons My Funds TER Today Peer Funds
(Lower) TERs from 2008

• A fixed expense cap my funds March 2009
  (higher) TER vs. peer funds (lower) TER from
  Fiscal 2008
• A relative TER cap (keep at median of peer
  funds) my Funds TER today vs. peer funds last
  years (lower) median Or todays (higher)
  median
• Either way how to determine a peer group
  analytically appropriate for both management and
  trustees and how to estimate hypothetical
  current TERs for peer funds
• (Back to Mr. Donohue What standard will the
  board employ to determine any such cap
  modification)

16
Funds with Expense Caps Contd

• Much reduced profitability coupled with fee
  reimbursements are concerns for virtually every
  advisor funds trustees
• These unprecedented challenges are here to stay
• Early responses by some managers and trustees
  remove or relax expense caps more to come (SI
  can share such data with you)
• Some may consider recapture arrangement (not
  simple note section 8.05 of the AICPAs
  Investment Company Accounting and Audit Guide
  consult with your auditor)
• SI assistance monitoring expense cap changes
  daily peer group benchmarking etc.
• More in our soon-to-be-published study

17
Peer Group for 2009 15(c) Review Not Easy This
Time

• Funds are typically benchmarked vs. similarly
  invested funds with comparable assets under
  management on average during the funds latest
  fiscal year
• But March 2009 asset levels of many equity funds
  are roughly half of what they averaged during the
  funds latest fiscal year and their current fees
  are higher
• 15(c) in 2009 just replicate the commonly used
  methodology of the past or go beyond

18
Peer Group for 2009 15(c) Review Not Easy This
Time (Contd)

• Should you supplement 09 15(c) (based on fiscal
  2008 fee data for the fund and its peers) with a
  report on funds current estimated fee ratios vs.
  peer group hypothetical current fees
• If so should it be part of the 15(c) process or
  a separate analysis
• How to adjust the methodology for peer selection
  and for the estimation of hypothetical current
  TERs for such funds How to create an
  analytically appropriate methodology for
  management and trustees
• Your suggestions Some of SIs ideas are in our
  coming report
• The good news in 2010 fiscal 2009 data likely
  appropriate for application of the traditional
  15(c) approach.

19
In Closing 2009 Investment Managers Focus -
Adapting to Change

• Preserving the organization and its intellectual
  capital (and talent recruitment) thru 2009-2010
• (Like in the 01-03 period) Focusing on core
  products key revenue producing investments what
  really matters near-term financially (PMs sales
  retention process)
• Cost savings fund line rationalization
• My companys top 3 priorities now define them
  then re-orient entire organization to address
  them (people projects away from top priorities
  may suffer)
• SIs DNA helping you Adapt to Change

20
Memo Assistance from Strategic Insight

• Read on

21
Strategic Insight Initiatives To Help You Today
and in Coming Years

• On-demand support SI On-Call
• Research on how to Adapt to Change
• Data e-mail alerts to monitor how funds and
  managers evolve
• Fee data (Simfund) fee guidance board education
• Client Forum (first one on Apr. 6th)
• Major studies on opportunities
• And more.

22
SI Helping Hands in Your Adapting to a Changed
Investment Environment

• 25 analysts researchers on-call development
  adaptations board education sub-advisory
  15(c) growth outside the US
• Evolution in sales and marketing approaches new
  directions
• Yield products (note Simfunds data on
  distribution rates)
• Guaranteed retirement income innovations
• Investment innovations globally new offerings
  successful in raising assets
• Which established funds have persistent inflows
  and why
• How fund lines are rationalizing evolving
• Relationship retention redemptions
• Which small companies are growing and why
• MA opportunities
• Assisting people in transition
• Major studies on opportunities (4 in publication
  already).

23
SI On-Demand Research Common Client Questions
Recently

• Fee modifications expense cap approaches
• Developments in the taxable bond fund marketplace
  
• Redemption Trends
• Developments in the municipal bond fund
  marketplace
• Changes to investment strategies or restrictions
  in the face of recent market conditions
• Money market fund yields and adaptation to
  low/negative yield environment
• Distribution trends in the face of a changing
  financial services market landscape.

24
SI Helps You Monitor Changes Filed With the SEC
Each Day

• User-customizable Daily Alert e-mail of all
  Fund/VA SEC filing changes you care about via
  SimfundFiling.com and AnnuityInsight.com
• Instantly link to Latest Prospectus and its Key
  Data
• Weekly synopsis new funds SEC filings
• Fund and VA detailed fee data subadvisory fees
  opportunities (Simfund)
• Research library on-call (AnnuityInsight.com
  Sionline.com)

25
SI Consultative Book Series

• ETFs Looking Ahead (2/09)
• Guaranteed Living Benefits beyond VAs (3/09)
• Global Fund Distribution Best Practices Key
  Trends and Opportunities to Grow Sales Worldwide
• Asia Fund Management Investing in the Future
  2008 Edition
• And more in 2009.

26
SI Client Forum April 6th in NYC

• An afternoon of learning from your peers and from
  SIs thought leaders
• Reach Strategic Insight (sibel_at_sionline.com) to
  learn more.

27
Closing Thoughts

• Leadership empathy community and protection
  collaborate and protect each other confidence in
  America beyond The Valley
• Mutual funds have been used by Americans to
  invest in the future of America and in the
  future of our connected world. That conviction
  will re-emerge as funds transparency
  liquidity and a protective regulatory framework
  make them superior to alternatives
• Collaboratively defend and grow what is built
  to do this in an informed and reflective way you
  need to increase the learning consciousness of
  all in the firm as well as its trustees
• Strategic Insight and its 70 associates can
  help as we have already done for over 22 years.

28
SI Research Services Already Used by Managers of
90 of U.S. Fund Industry Assets and Globally
by over 60 Leading Managers Distributors

• Simfund The Worlds Databases for Mutual Fund
  Competitive Intelligence
• SI On Line.com
• 15(c)
• Strategic Insight Global.com
• Annuity Insight.com
• SimFund Filing.com
• Strategic Insight 212.944.4455
• Avi_at_sionline.com Kshine_at_sionline.com