Analysis of the Mutual Fund Industry of U.S.A , China and India Summer Project for the MMS program

1. Mutual Fund Industry:
An Intercontinental
Analysis (U.S.A, China &
India)
Prepared by Kaushal Sharma
Summer Internship Project
8th July, 2012

2. Not including the entire presentation, feel free to shoot a
message for the entire presentation

3. Table of contents
• Purpose
• Objectives
• Research Methodology
• Data Analysis & Interpretation:
– Introduction – MF Market
Worldwide
– Growth in AUM in past 4 years
– Total Sales & Redemptions –
Worldwide
– Markets
• U.S.A
• China
• India
Marketwise
• MF Structure & Industry
– Types of Funds
– MF Industry
– Market composition by Fund Type
– Net assets held by investors
– Household ownership of MF
– Top AMC’s by AUM
• Fund Mobilisation
• Fees & Expenses
• Regulations & Taxation
– Disclosure
• Distribution & Sales

4. Purpose of the project
• To understand the mutual fund industry & the
mutual fund market, inclusive of distributors
& customers, as prevalent in the countries of
U.S.A, India & China

5. Objectives of the project
• To find out the size of the mutual fund industry in India, USA
& China
• To find out the mutual fund structure in the 3 countries
• To find out the rules & regulations pertaining to Mutual Fund
establishment & operations
• To find out the fund mobilisation in recent years
• To find out the top AMC’s, schemes & most preferred scheme
type
• To find out about the mutual fund distribution scenario in the
above specified markets

6. Research Methodology
• Exploratory Research
• Data Collection Sources:
– Secondary Data gathered from various research
reports, news & articles, securities regulatory
websites, AMC & Distributor websites, Bloomberg
& Lipper Insights
• Data analysis – sorting, charts & other analysis
done using microsoft excel

7. Data Analysis &
Interpretation

8. Introduction – MF market worldwide
• No. of countries facilitating mutual fund investments – 47 Countries
• Worldwide Mutual Fund Industry is worth 26.84 Trillion USD (Year end
2012)
• Total number of mutual fund schemes worldwide is 73243 schemes (as on
2012)
• Luxembourg & Republic of Korea have the highest number of schemes,
9435 & 9121 respectively
• USA, Brazil & France have 7000+ mutual fund schemes
• Of the 1 trillion club according to AUM, the countries of Brazil & Australia
have the highest CAGR of 20.66% & 14.04 % respectively (from 2006-2012)
• Countries with MF market exceeding 1 Trillion USD – 7
– USA, Brazil, Luxembourg, France, Ireland, Hong Kong & Australia
*The MF industry in U.K stands at approximately 0.99 Trillion $
Source: ICI Factbook – 2013, Year End 2012

9. America, 15.14
Europe, 13.05
Asia and Pacific,
1.07
Africa, 0.86
WORLD
Mutual Fund Industry Size (in
USD Trillion) :
Total: 26.84 Trillion USD
Introduction – MF market worldwide
• The Mutual Fund Industry across the
world handles assets worth 26.84
Trillion Dollars (year end 2012)
• Continent of America constitutes
more than half of these assets,
around 15.14 trillion $’s – 56.40 %
share
• Second is Europe at 13.05 trillion $’s
– 48.62 % share
• Asia & Pacific MF market comprises
of approximately 4% of the
worldwide MF industry
• Africa is the lowest at 3.20 % market
share
Data Source: ICI Factbook – 2013, Year End 2012

10. Growth in AUM in past 4 years
• The MF industry worldwide grew
at a CAGR of 9.3% (2008-2012)
• There was a decline in AUM by
almost 9,13,726 USD million in
the year 2011
• The fastest growth has been
achieved by the African Market
which comprises of the country
of South Africa only, CAGR being
15.90% *
• The Asia & Pacific market grew by
a CAGR of 10.27 % *
• Europe – CAGR 5.72 % *
• America – 7.43 % *
$0
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
2008 2009 2010 2011 2012
World
America
Europe
Asia and Pacific
Africa
In USD
Millions
Year
AUM
Growth:
Worldwide
Data Source: ICI Factbook – 2013, Year End 2012* Till the year 2012, year end data

11. Total Sales & Redemptions - Worldwide
• The total net sales stood at 17.02
USD Trillion for the year 2012
• New sales stood at 16.83 USD
Trillion
• The worldwide sales has declined
over the past 5 years
• The total sales grew over a period of
10 years till 2007 – 2008 but has
shown a declining trend post 2008
0.00
5.00
10.00
15.00
20.00
25.00
30.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Worldwide Total MF Sales (Trillon $'s)

12. Mutual fund structure – U.S.A
Reference: Securities Exchange Commission (SEC) http://www.sec.gov/investor/pubs/sec-guide-to-mutual-funds.pdf
• SEC recognises Open-ended funds as Mutual Funds & includes closed-
ended funds, UTI’s & ETF’s as other types of funds
• Board of directors – 40% directors to be independent directors
• Custodian – custody of funds assets
• Fund house/ Investment Advisor – handles fund portfolio
• Transfer agent, Dividend disbursing agent
• Governed under Investment Company Act, 1940

13. Types of Funds
• Money Market Funds
• Bond Funds
• Stock Funds
– Growth
– Income
– Index
– Sector
• Multi class structure:
Different fee & expense
structure for each class
Front end
Load
Back end
Load
CDSC
Annual
Expense
12b-1
Fee
Class A Y N N Y Y
----
lowest among
classes
Class B N N Y Y Y
can
convert
Reduces
with time
Class C Y* Y* N Y Y
cannot
convert
*either a front or
back end load
Highest
among
classes
Multi Class Structure of Funds

14. Mutual Fund Industry : USA
• The number of funds has
decreased gradually since 2002
• There were 7596 funds listed as
on 2012 year end (excluding
fund of funds)
• This decline had no impact on
the AUM or sales
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
2008 2009 2010 2011 2012
Total net assets (Billions USD)
7,300
7,400
7,500
7,600
7,700
7,800
7,900
8,000
8,100
2008 2009 2010 2011 2012
Number of funds
• Total Net assets stood at
13,119.94 Billion $’s in 2012
• Growth of 12.2 % since 2011
• Grew at a CAGR of almost 8%
(2008-2012)
• Net Assets of ETF’s stood at $1.4
trillion
Data Source: ICI Factbook – 2013, Year End 2012

15. Market Composition by Fund Type
• Out of the total net assets of
more than 13 trillion $’s &
7000+ funds:
• 59% of equity related funds
have a 45% share in the Net
assets of the US MF Industry
• 8% of money market funds have
21% share in net assets
• Bond funds have a share of 26%
of the total net assets while
hybrid funds have a 8% share
Equity
Funds
59%
Hybrid
Funds
7%
Bond
Funds
26%
Money
market
funds
8%
Composition of Funds by fund
type in US MF Industry
Domestic
Equity Funds
33%
World Equity
Funds
12%
Bond Funds
26%
Money
Market
Funds
21%
Hybrid
Funds
8%
US Mutual Fund Assets by Fund Type

16. Net Assets held by Investors
• The net assets in mutual funds held by individual
investors has increased by almost 42% since 2008
• Individual investors are the major investors
• Institutional investment is more or less constant in
the past 5 years
• Individual Investment by fund type:
– 48.08 % of 111,43,175 Million* $’s is invested in
equity funds
– 27.38 % invested in bond funds
– 15.96 % in money market funds
– 8.59 % in hybrid funds
• Institutional investment by fund type:
– 48.14% of 19,02,046 Million* $’s invested in money
market funds
– 30.32% in equity funds
– 19.74% in bond funds
– 1.8% in hybrid funds
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
2008 2009 2010 2011 2012
Net assets held by investor type
Total Net Assets of Mutual Funds Held in Individual and
Institutional Accounts
Individual accounts
Institutional accounts*
In Million $'s
Year
Data Source: ICI
Factbook – 2013
*Data as on 2012 (Year End )

17. Continued…
• Since 2008, investment in bond funds by individual investors
grew at a CAGR of 21%, which also grew by almost 200% since
2002, highest CAGR among different fund types
• Individual investment in money market funds declined at a
rate of 9% each year
• Bond funds have also gained popularity among institutional
funds who seek a minimum risk investment. The total
investment grew at 22% CAGR since 2008

18. Household ownership of MF
• 92.4 million individuals
• 1,90,000 $’s median household financial assets,
• 80,000 $’s median income
• 1,00,000 $’s median household mutual fund investment

19. Continued…
• 48% MF investors are college graduates
– 93% are saving for retirement
– 27% are saving for education
– 50% hold MF to reduce taxable income
• 56% of investors obtained investment
information online
• 21% of investors bought or sold investments
online
Data Source: ICI, U.S Census Bureau – 2012 May

20. Top AMC’s by AUM
USA - Top 10 AMC's by AUM (MF)
Rank Name
AUM (billion
$'s)
Market
Share %
AUM (May,
2012)
Growth
%
1 Vanguard 1733 17.13 1406 23.26
2 Fidelity Investments 1050 10.38 872 20.41
3 American Funds 1001 9.9 857 16.80
4 PIMCO 590 5.83 491 20.16
5 Franklin Templeton Investment Funds 416 4.11 348 19.54
6 T. Rowe Price 369 3.64 297 24.24
7 JP Morgan 199 1.97 156 27.56
8 Dimensional Fund Advisors 186 1.84 140 32.86
9 Oppenheimer Funds 174 1.72 142 22.54
10 BlackRock 172 1.7 145 18.62
Source: AMC websites, MorningStar.com FundFlow Report
Data as on May, 2013
Data excludes funds of funds & money market funds

21. Continued…
• The top 10 AMC’s together control about 58.2% of the whole mutual U.S.
Mutual Fund Industry
• Top 5 AMC’s manage around 47.35%
• Top 3 largest AMC’s control more than 1/3rd of the Mutual Fund Assets of
the U.S
• ‘Vanguard’ the largest AMC by size manages around 1733 Billion USD of
total Mutual fund Assets
• Majority of the top schemes by AUM are debt oriented schemes
• Equity related schemes are slowly catching up in AUM size
• The expense ratio & management fees are high in debt oriented schemes
as compared to equity oriented schemes

22. Fund Mobilisation
Source morningstar.com; Data: May, 2013
• Investors added $38.6
billion into long-term funds
in the month of May
• Equity funds have lost
around $60.08 billion in
the past 1 year
• The largest gainers have
been taxable bond funds
with an inflow of $268.2
billion
• There has been a positive
inflow for international
equity funds
Fund Mobilisation data for Long term funds

23. Fund Mobilisation by Fund Families
• Vanguard leads the net
mobilisation both yearly
and in the past month
(may)
• 8 among the 10 top fund
families have a positive
net mobilisation
• The collective net inflow
of the top 10 fund
families was $22.1 billion
• American Funds is the
only AMC which has seen
a negative yearly inflow
of funds
Source morningstar.com; Data: May, 2013

24. Fees & Expenses
• Asset weighted expense ratio is least expensive than anywhere in world
• Economies of Scale result in low fees
• Management fees contain breakpoints that reduce fees above set asset
levels
• Less than 25% funds charge an entry load*
• Fulcrum fees – performance fees undergoes a symmetrical reduction for
underperformance
• Shareholder Fees
– Sales charge (Front Load), Purchase fee (to fund), Deferred sales charge (on sale -
broker), Redemption fee (paid to fund), Exchange fee (fund), Account fee (imposed by
fund)
• Annual fund operating expenses
– Management Fee (fund), Distribution or service fees (12b-1) (broker), Other expenses,
Total annual fund operating expenses (expense ratio)
*(source: Global Fund Investor Report – Morningstar, June 2013)

25. Continued…
• Ongoing Expenses (Indirect) –
included in funds expense ratio
• Portfolio Management
• Fund Administration
• Daily fund accounting
• Shareholder services
• Distribution charges (12-b1 fees)
• Sales Loads (Direct) – paid directly
by investors
• Front-end loads (Entry loads – on
purchase)
• Purchase fees – paid to fund & not
broker
• Back-end loads (on redemption)
• Over Time loads (level loads)
100
77
88
79
74
61
0
20
40
60
80
100
120
2002 2012
Equity funds Hybrid Funds Bond Funds
Basis
Points Year
Expense Ratio for fund types
Since 2002,
Bond Funds Expense – 17.6% drop
Equity Funds Expense – 23% drop
Hybrid Funds Expense – 10.2% drop
Data Source: ICI Factbook – 2013, Year End 2012

26. Regulations & Taxation
• Multiple Regulators
– Securities Exchange Commission – Primary Authority
– Commodities Futures Trading Commission – When funds invest
through derivatives
• MF’s Regulated under Investment Company Act, 1940
• FINRA – Financial Industry Regulatory Authority – Self Regulatory
Authority for Securities Firms
– Interprets SEC’s legal framework for sales & Advertising
• Funds required to be audited once a year by an independent body
• Fund Custodian
– Safekeeping of Fund’s assets
– Can act as transfer agent and/or dividend-disbursing agent
• Soft dollar arrangements are allowed provided they are disclosed

27. Continued…
• Employee sponsored 401(k) & IRA accounts enjoy tax incentives
• Capital gains earned within fund shares are taxable, hence reduced
reinvestment & lower after-tax returns
• Short-term gains through funds are taxed at investor’s full marginal
income tax rate
• Investors are responsible for taxes themselves, funds do not withheld
taxes
• Returns are hypothetically reduced by around 1.65% post taxation

28. Disclosure
• Funds must publish manager’s names & tenures in prospectus
• SEC requires funds to submit Statement of Information that
includes managers compensation & investments in the funds they
manage
• Offering documents are required to contain a monetary illustration
of fees, which allows investors to see how much they would pay
hypothetically in dollar amounts
• Total expense ratios presented on both prospective & historical
basis
• Fund documents to be updated annually
• Quarterly, semi annual & annual reports to be filed with SEC
• Commissions paid to be disclosed in prospectus
• Full long & short holdings to be published in financial statements

29. Distribution & Sales
• Distribution channels:
– Independent advisors
– Fund supermarkets
– Traditional brokerage
– Direct from the fund house
– Banks & Insurance companies
• 80% of funds are sold via distributors (outside of 401(k) plans)
• Minimum investment is between $1000 & $1500, can be waived off
for automatic investment plans
• Higher commissions as inducements for selling specific funds is
permitted in U.S., provided they are disclosed
• Directed brokerage arrangements are prohibited
• Sales contests to promote sales of funds is allowed with little
regulation

30. China