mutual fund update gail weiss managing director sungard wealth management

Mutual Fund UpdateGail Weiss

Managing Director

SunGard Wealth Management

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Agenda

Market Demographics Profile of Shareholders Trends in the US 12b-1 Fees Proposed Reforms Money Market Fund Reforms International Trends

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Market Demographics

Worldwide Mutual Fund assets (Trillions of US dollars, end of quarter)

Source: Investment Company Institute, Worldwide Mutual Fund Assets and Flows Third Quarter 2010. Washington, DC, January 27, 2011.

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Market Demographics

Worldwide Assets of Equity, Bond, Money Market and Balanced/Mixed Funds(Billions of US dollars, end of quarter)


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Market Demographics

Percent of Worldwide Fund Assets by Type of Fund


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Market Demographics

Percent of Worldwide Fund Assets by Region


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Profile of Shareholders

51.6 Million U.S. Households Owned Mutual FundsPercentage of all U.S. households, 2010

Total number of U.S. households: 117.5 million

The median age of individuals

heading households that owned

mutual funds was 50.

Forty-six percent of these individuals

had college or postgraduate degrees.

Seventy-five percent of U.S.

households that owned mutual funds

consisted of couples that were

married or living with a partner.

Investment decision-making was a

shared responsibility in 62 percent of

mutual fund–owning households.

Source: Investment Company Institute, Profile of Mutual Fund Shareholders, 2010. Washington, DC, February, 2011.

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Profile of Shareholders

In 2010 the “typical” mutual fund–owning head of household: was middle-aged, employed, educated, married or living with a partner, and

shared investment decision-making with his or her spouse or partner; was of moderate financial means, with $80,000 in household income and

$200,000 in household financial assets; owned investments other than mutual funds, including individual stocks,

and had over half of the household’s financial assets (excluding the primary residence) invested in mutual funds;

had $100,000 invested in four mutual funds, including at least one equity fund;

owned mutual funds inside an employer-sponsored retirement plan, such as a 401(k) plan, 403(b) plan, 457 plan, SEP IRA , SAR -SEP IRA , or SIMPLE IRA ;

owned mutual funds outside employer-sponsored retirement plans, primarily through the sales force channel; and

was confident that mutual funds could help him or her reach financial goals.

Source: Investment Company Institute, Profile of Mutual Fund Shareholders, 2010. Washington, DC, February, 2011.

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Trends in the US

Long-term funds – stock, bond and hybrid funds – had a net inflow of $26.57 billion in February. Up from an inflow of $24.39 billion in January. Stock funds posted an inflow of $12.97 billion in February. Up from an inflow

of $19.71 billion in January. World equity funds (US funds that invest primarily overseas) posted an inflow

of 3.71 billion in February. Down from an inflow of $8.26 billion in January. Funds that invest primarily in the US had an inflow of $9.26 billion in February.

Down from an inflow of $11.45 billion in January. Hybrid funds posted an inflow of $5.93 billion in February. Down from an

inflow of $6.52 billion in January. Bond funds had an inflow of $7.67 billion in February compared to an outflow

of $1.84 billion in January. Taxable bond funds had an inflow of $11.99 billion in February. Up from an

inflow of $10.56 billion in January. Municipal bond funds had an outflow of $4.32 billion in February compared to

an outflow of $12.4 billion in January.

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Trends in the US (continued)

Money market funds had an inflow of $12.02 billion in February compared to an outflow of $75.61 billion in January. Funds offered primarily to institutions had an inflow of $15.78 billion. Funds offered primarily to individuals had an outflow of $3.76 billion.

Source: Investment Company Institute, Trends in Mutual Funds Investing. Washington, DC, March 30, 2011.

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Mutual fund investors in 2010 paid lower average expense ratios in stock funds, but bond fund expense ratios remained unchanged. The asset-weighted average expense ratio for stock funds fell from 86

basis points in 2009 to 84 basis points in 2010. The asset-weighted average expense ratio for bond funds stayed the same, at 64 basis points.

Stock fund investors on average paid 95 basis points in fees and expenses in 2010. Down 3 basis points from 2009.

Bond fund fees and expense declined by 1 basis point to 72 basis points in 2010.

The average maximum sales load on stock funds was 5.3%, however the average actual sales load was only 1.0% due to load fee discounts on large purchases and fee waivers for purchases in 401(k) plans.

Money market fund fees and expenses fell 7 basis points in 2010, to 26 basis points. Down from 33 basis points in 2009.

Source: Investment Company Institute, In 2010, Stock Fund Expense Ratios Dropped; Bond Fund Expense Ratios were Flat. Washington, DC, March 24, 2011.

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Stock Fund Expense Ratios are related to Stock Fund Assets

Source: Investment Company Institute, In 2010, Stock Fund Expense Ratios Dropped; Bond Fund Expense Ratios were Flat. Washington, DC, March 24, 2011.

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12b-1 Fees Proposed Reform

SEC proposed significant changes to the current mutual fund distribution framework, including rescission of Rule 12b-1 under the 1940 Act, in July, 2010 (Release Nos. 33-9128).

SEC proposed new rule 12b-2 which would allow funds to continue to charge limited “marketing and service fees” subject to a 25 basis point annual cap.

The adoption of amendments to Rule 6c-10 to permit funds to deduct an “ongoing sales charge” from fund assets in excess of the marketing and service fee as an alternative to a traditional front-end sales load, but which would be subject to a cumulative fee cap on sales charges.

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12b-1 Fees Proposed Reform (continued)

A substantial reduction in the duties imposed on fund boards by eliminating the requirement for boards to adopt and annually approve distribution plans and make special findings relating to the payment of asset-based distribution fees,

The adoption of rule and form amendments to require enhanced disclosure of sales charges, marketing and service fees and other fees in mutual fund registration statements, shareholder reports, and transaction confirmations, and other documents

The adoption of amendments to Rule 6c-10 that will permit mutual funds to establish classes of shares to sell through broker-dealers that would determine their own sales compensation, rather than simply imposing the sales charges described in the prospectus as required under current law.

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Compliance Dates and Transition Period The SEC contemplates the new rules becoming effective within 60 days of

publication of the final rule release, and funds are permitted to rely on the new rules at such time.

The SEC will most likely allow a compliance period after the effective date for funds to come into compliance with the new rules with respect to shares issued after the compliance date.

For shares issued prior to the compliance date, a five-year grandfathering period will most likely apply to allow funds to continue to deduct fees pursuant to Rule 12b-1 as it exists today. New sales would not be permitted in a grandfathered share class after the compliance date, but dividends or other distributions on the grandfathered shares could be reinvested in the same share class.

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Compliance Dates and Transition Period After the five-year period, the grandfathered shares would be required to be

converted or exchanged into a class that does not deduct an ongoing sales charge. However, such class could charge a Rule 12b-2 marketing and service fee, except that such marketing and service fee cannot be higher than the Rule 12b-1 fee charged on the grandfathered shares in the most recent fiscal year before the class’s conversion.

Recordkeeping Obligations to Track Fund Shareholders If adopted, the Proposal would require mutual funds (or their service

providers or financial intermediaries) to track the cumulative amount of sales charges that an investor pays on the purchase of fund shares. Similar to the way they handle the administration of monitoring for breakpoint discounts in fund sales loads, mutual funds are likely to push this requirement down to their selling broker-dealers and other financial intermediaries.

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Money Market Reforms

SEC Rule 2a-7 and other new rules and amendments to the Investment Company Act of 1940 Goals:

Tighten the maturity and credit quality standards of money market funds

Impose new liquidity requirements Effective Date: May 5, 2010

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SEC Rule 2a-7 Requirements Portfolio Quality

Second Tier Securities Limits Restricting a fund from investing more than 3% of its assets

in Second Tier securities, compared with the current limit of 5%.

Restricting a fund from investing more than one-half of 1% of its assets in Second Tier securities issued by any single issuer, compared with the current limit of the greater of 1% or $1 million.

Restricting a fund from buying Second Tier securities that mature in more than 45 days, compared with the current limit of 397 days.

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SEC Rule 2a-7 Requirements Portfolio Quality (continued)

Eligible Securities Board of Directors are required to designate four or more

NRSROs, any one or more of whose short term credit ratings the money market fund would look to in determining whether a security is eligible

At least once each calendar year, that designated NRSRO credit ratings are sufficiently reliable

Money market funds are responsible for identifying designated NRSROs in Form N-MFP

Asset Backed Securities No longer will there be a requirement to rate asset backed

securities at least by one NRSRO in order to be eligible

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SEC Rule 2a-7 Requirements Portfolio Maturity

Weighted Average Maturity (WAM) limits Reduced from 90 to 60 days

Weighted Average Life (WAL) limits The new rule restricts WAL to 120 day. Previously there

was no limit.

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SEC Rule 2a-7 Requirements Portfolio Liquidity

Daily Liquidity At minimum 10% of taxable money market fund assets

must be in cash, US Treasury securities or securities that convert into cash within one day

Weekly Liquidity At minimum 30% of all money market fund assets must be

in cash, US Treasury securities or other specified government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week.

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SEC Rule 2a-7 Requirements Portfolio Liquidity

Illiquid Securities Money market funds are restricted from purchasing illiquid

securities if, after the purchase, more than 5% of the fund’s portfolio will be illiquid securities which are defined as any security that cannot be sold or disposed of within seven days at carrying value.

Stress Testing Fund managers are now required to examine the fund’s

ability to maintain a stable net asset value (NAV) per share in the event of shocks, such as interest rate changes, higher redemptions and changes in credit quality of the portfolio and report findings to the Fund’s Board.

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SEC Rule 2a-7 Requirements Disclosure Requirements

Portfolio Holdings Disclosure Money market funds are required to post portfolio holdings

on their websites each month and maintain those reports for six months after posting.

Shadow NAV Disclosure Money market funds are required to report detailed portfolio

schedules to the SEC each month using Form N-MFP which includes reporting of a “shadow” NAV, or mark-to-market value of the fund’s net assets, rather than the stable $1.00 NAV at which shareholder transaction occur. This information will be made public by the SEC on a 60-day delay.

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SEC Rule 2a-7 Requirements Processing of Transactions

Money market funds or their transfer agents must have the capacity to redeem and sell at a price based on the current NAV, including shares at prices that do not correspond to a stable NAV

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Key compliance datesMay 5, 2010 – Effective date of amendments and new rules

The amendments to rules 2a-7, 17a-9 and 30b1-6T and new rules 22e-3 and 30b1-7 and new Form N-MFP under the Investment Act of 1940.

May 28, 2010 – Portfolio quality, maturity, liquidity and repurchase agreements

Fund portfolios are required to be in compliance with portfolio quality, maturity, liquidity and repurchase agreements.

June 30, 2010 – WAM and WAL limitsFund portfolios must meet the new maximum WAM and WAL limits.

Oct. 7, 2010 – Website disclosureThe compliance date for public website disclosure.

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Key compliance dates (continued)Dec. 7, 2010 – Reporting to the SEC

All money market funds must begin filling information on Form N-MFP pursuant to rule 30b1-7.

Dec. 31, 2010 – Designation of national recognized statistical rating organizations (NRSROs)

Each fund must disclose the designated NRSROs in its Statement of Additional Information pursuant to amended rule2a-7(a)(11)(iii).

Oct. 31, 2011 – Processing of transactionsFunds must comply with the new requirement to be able to process transactions at a price other than $1.00 pershare.

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International Trends

DTCC Membership opened up to non-US regulated fund companies in early 2009 Multicurrency gross settlement (Euro and Sterling) functionality built,

pending SEC approval Mutual Fund Profile pricing capabilities being expanded to Euro and

Sterling in May, 2011

SWIFT Focus on promotion of ISO 20022 standard Expanding use of Alternative Fund messages

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Europe UK – Retail Distribution Review

Clarity for consumers Remuneration agreements that allow competitive forces to

work in favor of the consumer Standards of professionalism that inspires consumer

confidence and trust EU – Key Investor Information Document (KIID)

Replaces simplified prospectus Standard and harmonized format and presentation 2 page limit Local language required At share class level No civil liability to KIID if consistent with the prospectus

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Asia Pac Region Operational Reform

Processes are largely manual today Evaluation of various automation tools including SWIFT, DTCC,

EuroClear, ClearStream, etc. New service providers emerging offering a variety of solutions

Regulatory Reform Currently little consistency between countries Consideration for a MiFiD passport-type model for region

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Conclusion

There are many reforms occurring in the mutual fund industry today Regulatory Fee Operational

Goals include Transparency Consumer confidence More stabile financial markets

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Questions & Answers

Thank you for participating

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mutual fund update gail weiss managing director sungard wealth management

Documents

mutual funds percentage

stock funds

hybrid funds

world equity funds us

mutual fund update gail

households financial

type of fund source

investment company institute