The summary is: 1) Dedicated asset management firms that are privately owned, like Vanguard, Fidelity, and American Funds, have seen increasing market share over time compared to diversified financial firms. 2) Mergers and acquisitions in the fund industry have shifted from diversified banks and insurers buying asset managers in the 1990s, to dedicated asset managers like BlackRock and Legg Mason being the main buyers in the 2000s. 3) Privately held dedicated asset managers have organizational structures and compensation models better suited for long-term investment performance compared to publicly traded financial conglomerates.

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