Robert Pozen and Theresa Hamacher November 17, 2011

1. Most Likely to Succeed:
Leadership in the Fund Industry
Robert Pozen
Senior Lecturer, Harvard Business School
Senior Fellow, Brookings Institution
Theresa Hamacher, CFA
President, NICSA
November 17, 2011

2. 2
What Leads to Success in the
Fund Industry?
1. Dedication to asset management
2. Private ownership/control of firm

3. Agenda
• The evidence
─ Market share trends
─ M&A trends
• The limits of the financial supermarket
• The example of the Big Three
• The public–private model
3

4. Largest Fund Complexes: 2010
4
Rank Fund Complex Market Share
1 Vanguard 12.1%
2 Fidelity 11.3
3 American Funds (Capital Group) 9.4
4 PIMCO 3.7
5 JPMorgan Chase 3.5
6 Franklin Templeton 3.2
7 BlackRock 3.0
8 Federated 2.4
9 T. Rowe Price 2.4
10 BNY Mellon 2.3
Dedicated asset managers highlighted.
Source: Investment Company Institute

5. Top 25 Fund Complexes
5
Source: Investment Company Institute
1990 2000 2010
Dedicated asset managers
Market share 39.8% 43.2% 55.3%
Number of firms 13 11 14
Total top 25 market share 76.2% 71.0% 73.6%

6. Herfindahl–Hirschman Index (HHI)
6
HHI Concentration Level
Below 1,000 Unconcentrated
1,000–1,800 Moderate
Above 1,800 High
HHI for mutual fund industry (Dec. 2010): 465
Source: Investment Company Institute, 2011 Investment Company Factbook

7. Top 10 Fund Complexes
Rank 1990 2000 2010
1 Fidelity Fidelity Vanguard
2 Merrill Lynch Vanguard Fidelity
3 IDS/Shearson American Funds American Funds
4 Dreyfus Putnam Funds PIMCO
5 Vanguard Morgan Stanley JPMorgan Chase
6 Franklin Janus Franklin Templeton
7 Federated Invesco BlackRock
8 Dean Witter Merrill Lynch Federated
9 Kemper Franklin Templeton T. Rowe Price
10 American Funds Smith Barney/Citi BNY Mellon
7
Firms new to the top 10 in 2000 and 2010 are highlighted.
Source: Investment Company Institute

8. Life Cycle of an Asset Manager
• Lots of new entrants
─ Low barriers to entry
─ Niche fund products
─ Other companies market and service
• Many new entrants close shop or stay small over the
next decade
• Successful firms get to tipping point
─ Develop full product line
─ Own marketing/servicing
─ Enter retirement space
• Or choose to be acquired
8

9. U.S. Fund Sponsor M&A
($ billions)
9
Deals with a publicly disclosed value of $50 million or greater. Data for 2000–2010 are for all
asset managers, not just fund sponsors.
Sources: Merrill Lynch; Thomson Reuters information provided by Goldman Sachs.

10. Deal Valuations
10
Deals with a publicly disclosed value of $50 million or greater. Data are for all asset managers,
not just fund sponsors.
Source: Thomson Reuters information provided by Goldman Sachs.

11. Diversified Firms as Buyers
1993–2001
• Banks and insurers acquire asset managers
─ Mellon/Dreyfus
─ Higher growth of earnings
─ Diversification of income
• European firms particularly active
─ Deutsche Bank/Zurich Scudder
─ Seeking global diversification
─ Most did not achieve major U.S. presence
─ Though there were exceptions: Invesco
11

12. Diversified Firms as Buyers
1993–2001
• Brokerage firms expand proprietary fund families
─ Morgan Stanley acquires Van Kampen and MAS
─ Lehman/Neuberger
─ American Express/Threadneedle
• U.S. asset managers buy high-net-worth managers
─ Franklin/Fiduciary Trust, Alliance/Sanford Bernstein
─ Leverage investment skills
─ Add customized services
─ Invesco’s acquisition of AIM is an exception
12

13. Dedicated Firms as Buyers
2002–2006
• BlackRock and Legg Mason key buyers
─ BlackRock buys State Street Research, Quellos, and Merrill
Lynch unit
─ Legg Mason bought Private Capital, Permal, and Salomon
Smith Barney unit
• Focus on distribution by Merrill Lynch and Smith
Barney, not on fund management
─ Clients want choice of best funds
─ Regulatory scrutiny of conflicts
13

14. Dedicated Firms as Buyers
2002–2006
• Leveraged buyouts of asset managers with help
of private equity firms
─ Nuveen
─ Marsico
• Conditions were very favorable
─ Good cash flow from managers
─ Interest rates still low
─ Flexible loan conditions
14

15. Credit Crisis–Driven Divestitures
2007–2010
• Insurers in trouble sold asset managers
─ Marsh McLennan sold Putnam to Great West of Canada
─ AIG sold asset management arms to Bridge Partners
─ Lincoln National Life sold Delaware Management
to Macquarie (Australia)
• Brokers in trouble also sold asset management units
─ Lehman sold Neuberger Berman
─ Morgan Stanley sold Van Kampen to Invesco
15

16. Credit Crisis–Driven Divestitures
2007–2010
• In U.S. and U.K., Treasury put heavy pressure on
large banks to accept federal capital along with
restrictions on dividends and executive
compensation
─ To help redeem federal capital, Bank of America
sold Columbia Management to Ameriprise
─ To help avoid taking government capital, Barclays
sold BGI, its asset management business, to BlackRock
16

17. Top 10: Dedicated vs. Diversified
2010
Rank
Dedicated
1 Vanguard
2 Fidelity
3 American Funds
4 PIMCO
6 Franklin Templeton
7 BlackRock
8 Federated
9 T. Rowe Price
17
Highlighted firms have a strong money market fund base.
Source: Investment Company Institute
2010
Rank
Diversified
5 JPMorgan Chase
10 BNY Mellon

18. Limitations of the Financial
Supermarket
• Open architecture
─ Client demand
─ Regulatory scrutiny
• Challenges of cross-selling
─ Divergent customer bases
─ Training demands
• Retention of investment professionals
─ Culture
─ Compensation
• Volatility of investment performance
─ Difficult for public firms
18

19. The Big Three
19
Rank 1990 2000 2010
1 Fidelity Fidelity Vanguard
2 Vanguard Fidelity
3 American Funds American Funds
5 Vanguard
10 American Funds
Combined
share
18.7% 25.1% 32.8%
Source: Investment Company Institute

20. The Example of the Big Three
• Organization
─ Non-hierarchical
─ Informal voice in key issues
• Compensation
─ Partners get stake in asset management business
─ Executives comfortable with PM compensation
• Privately held
─ No public reporting
─ Continuity of ownership (vs. generational transfers)
20

21. The Public–Private Hybrid
• Various forms
─ Dual share class: Federated
─ Concentrated ownership: Franklin Templeton, BlackRock,
T. Rowe Price
• Advantages
─ Valuation of stock options
─ Currency for acquisitions
─ Controlled by management
─ Long-term, investor culture
21

22. Top 10: Private and Hybrid
2010
Rank
Private
1 Vanguard
2 Fidelity
3 American Funds
22
2010
Rank
Public–Private Hybrid
6 Franklin Templeton
7 BlackRock
8 Federated
9 T. Rowe Price

23. Role Reversal
1990–2000
From outsiders. . .
Diversified financial
firms
Banks
Insurers
Brokers
23
2010
. . . to insiders
Dedicated asset
managers
Majority of top 25
complexes
With majority of fund
assets

24. 24
www.nicsa.org/thefundindustry