Perspectives on Redemption Patterns
Across Intermediary-Sold Distribution
Platforms
September 15, 2011
Dennis Bowden, Senior Research Analyst
dbowden@sionline.com
Evolving Considerations in Intermediary-Sold
Space – Growth vs. Stability
 Continued expansion of fee-based advisory programs
 Within this, recent growth of Rep-as-PM programs, as well as
increasing influence of RIAs
 Increasing consideration around asset stability features
across platforms
 Evolving economics of intermediary-sold fund distribution
 Asset velocity differences across platform and FA types
 Platform and FA characteristics
 Demand trends
 Portfolio construction methodology
 Assessing holistic, long-term opportunity sets across
different intermediary-sold distribution avenues
2
Assessing the Fee-Based Platform Landscape –
Rep-as-PM Programs Growing Rapidly
Coates-Tracked National BD Wrap Platform Breakout Proportional Assets by Program Type
70%
70%
60%
60%
Non-Discretionary Rep-as-Advisor
50%
50%
40%
Home Office Model Portfolio-Based
40%
30%
30%
20%
20%
10%
10%
Discretionary Rep-as-PM
Source: Coates Analytics Distribution Management System / SI Analysis
3
2'1
1
Q
1'1
1
Q
4'1
0
Q
3'1
0
Q
2'1
0
Q
1'1
0
Q
4'0
9
Q
3'0
9
Q
2'0
9
Q
1'0
9
Q
4'0
8
Q
3'0
8
Q
Q
Q
2'0
8
0%
1'0
8
0%
FA Demand Differences: US Style Box Equity Sales – PostCrisis Decline in Share within FA & Investor Controlled Wrap
Platforms; Continued Significance via Home Office Models
US Style-Box Equity Sales as a % of Total Equity Sales Coates-Tracked Mutual Fund Wrap Platforms
80%
80%
70%
60%
60%
50%
Non-Discretionary Rep-as-Advisor
50%
40%
40%
30%
30%
20%
Discretionary Rep-as-PM
20%
Source: Coates Analytics Distribution Management System / SI Analysis
4
1
Q2
'1
1
Q1
'1
0
Q4
'1
0
Q3
'1
0
0
Q2
'1
Q1
'1
9
Q4
'0
9
9
Q3
'0
Q2
'0
Q1
'0
Q4
'0
Q3
'0
Q2
'0
Q1
'0
9
0%
8
0%
8
10%
8
10%
8
% of Total Platform Equity Sales
Home Office Model-Based
70%
Alternative Strategies (Market-Neutral / Long-Short, Commodity,
Natural Resources, Bear Market): Most Favored by Rep-as-PM
Advisors
Alternative Equity Sales as a % of Total Equity Sales Coates-Tracked Mutual Fund Wrap Platforms
80%
Discretionary Rep-as-PM
70%
70%
Non-Discretionary Rep-as-Advisor
60%
60%
Home Office Model-Based
Source: Coates Analytics Distribution Management System / SI Analysis
5
'11
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Note: Alternative Equity includes market neutral/long-short, commodities, natural resources and bear market strategies
'11
0%
'10
0%
'10
10%
'10
10%
'10
20%
'09
20%
'09
30%
'09
30%
'09
40%
'08
40%
'08
50%
'08
50%
'08
% of Total Platform Equity Sales
80%
Platform Redemption Patterns – Balancing Growth Potential
with Asset Stability Considerations
Monthly Redemption Rates - All Long Term Funds
January 2008 - June 2011
18%
18%
Total Industry (ICI)
Rep as PM
Rep as Advisor
Home Office Model
Commission-Based
16%
14%
12%
10%
16%
14%
12%
10%
6
11
May-
11
Mar-
Jan-1
May-
Mar-
Jan-1
May-
Mar-
Jan-0
May-
Mar-
Jan-0
Source: Coates Analytics Distribution Management System / ICI / SI Analysis
1
0%
10
Jul-1
0
Sep-1
0
Nov10
0%
10
2%
0
2%
09
Jul-0
9
Sep-0
9
Nov09
4%
09
4%
9
6%
08
Jul-0
8
Sep-0
8
Nov08
6%
08
8%
8
8%
Asset Stability Characteristics Across FeeBased Platform Types
 Rep-as-PM
 Overall more tactical management of client assets
 Full discretion to quickly adjust clients’ portfolio exposure
 Tech advances increasingly allowing easier trading across a
number of client accounts with a single action
 Non-Discretionary Rep-as-Advisor
 Relatively stable rate of asset velocity within largest asset base
among Nat’l BD wrap platforms
 Client approval needed before trades can be executed
 Home Office Model-Based
 Display sustained periods of strong asset stability
 But mixed with significant redemption spikes due to systematic
portfolio rebalances
7
Gauging Redemption Rate Experiences and Expectations;
Avoiding the Potential Misleading Nature of Averages
Frequency of Monthly Redemption Rate Occurrences by
Wrap Platform Type: June 2009 - June 2011
Rep-as-PM
30
Rep-as-Advisor
Home Office Model
# of Monthly Occurrences
Equity Funds
30
Bond Funds
24
25
25
21
20
20
16
15
20
17
15
13
10
10
7
5
5
5
4
3
00
0
1
4
2
0
00
0
5
1
2
0
5
0
Below
2%
2% to 3.5% to Above
3.5%
5%
5%
Below
2%
Source: Coates Analytics Distribution Management System / ICI / SI Analysis
8
2% to 3.5% to Above
3.5%
5%
5%
Rep-as-PM vs. Rep-as-Advisor Programs – Equity Fund Asset
Velocity Significantly Higher and More Volatile within Rep as
PM Platforms
Discretionary Rep-as-PM Monthly Redemption Rates by
Fund Type: January 2008 to June 2011
Alternative Equity
Non-US Equity
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
US Style Box Equity
Alternative Equity
Non-US Equity
Jan
-0
Ma 8
r-0
Ma 8
y-0
8
Jul
-08
Sep
-0
No 8
v-0
Jan 8
-0
Ma 9
r-0
Ma 9
y-0
9
Jul
-09
Sep
-0
No 9
v-0
Jan 9
-1
Ma 0
r-1
Ma 0
y-1
0
Jul
-10
Sep
-1
No 0
v-1
Jan 0
-1
Ma 1
r-1
Ma 1
y-1
1
US Style Box Equity
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jan
-0
Ma 8
r-0
Ma 8
y-0
8
Jul
-08
Sep
-0
No 8
v-0
Jan 8
-0
Ma 9
r-0
Ma 9
y-0
9
Jul
-09
Sep
-0
No 9
v-0
Jan 9
-1
Ma 0
r-1
Ma 0
y-1
0
Jul
-10
Sep
-1
No 0
v-1
Jan 0
-1
Ma 1
r-1
Ma 1
y-1
1
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Non-Discretionary Rep-as-Advisor Monthly Redemption
Rates by Fund Type: January 2008 - June 2011
Discretionary Rep-as-PM Platforms
Number of Monthly Redemption Rate Occurrences
June 2009 through June 2011
Below 4%
4% to 6%
6% to 8%
US Style Box Equity
0
10
12
Non-US Equity
4
12
8
Alternative Equity
0
3
12
Source: Coates Analytics Distribution Management System / SI Analysis
9
Above 8%
3
1
10
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
A Closer Look at FA Behavior: Differences in Rep-as-PM
vs. Rep-as-Advisor Redemption Rates
Wrap Platform Comparison: Monthly Redemption Rate Difference Discretionary Rep-as-PM minus Non-Discretionary Rep-as-Advisor
Number of Monthly Occurrences: June 2009 through June 2011
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
US Style Box Equity
Below 2%
Non-US Equity
2% to 3.5%
Alternative Equity
3.5% to 5%
Source: Coates Analytics Distribution Management System / SI Analysis
10
Above 5%
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
Home Office Model Platforms – Periods of Stability Very
Similar Across Styles; Scale of Spikes Varying
Home Office Model-Based Monthly Redemption Rates
January 2008 - June 2011
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
US Style Box Equity
Alternative Equity
Jan
-0
Ma 8
rMa 08
y-0
8
Jul
-0
Se 8
p-0
No 8
v-0
Jan 8
-0
Ma 9
rMa 09
y-0
9
Jul
-0
Se 9
p-0
No 9
v-0
Jan 9
-1
Ma 0
rMa 10
y-1
0
Jul
-1
Se 0
p-1
No 0
v-1
Jan 0
-1
Ma 1
rMa 11
y-1
1
Non-US Equity
Source: Coates Analytics Distribution Management System / SI Analysis
11
24%
22%
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Platform Opportunity Sets: Rep-as-PM’s High Asset Velocity
(but High Growth) vs. Rep-as-Advisor & Home Office Model’s
Relative Stability
New Sales Rate minus Redemption Rate Spread by
Wrap Platform Type: All Equity Funds
6%
6%
Rep as PM
Rep as Advisor
Home Office Model
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
-2%
-2%
Ma
Feb
Jan
r-1
0
Ap
r-1
Ma 0
y-1
0
Jun
-10
Jul
-10
Au
g-1
0
Sep
-10
Oc
t-1
0
No
v-1
0
De
c-1
0
Jan
-11
Feb
-11
Ma
r-1
1
Ap
r-1
Ma 1
y-1
1
Jun
-11
4%
-10
5%
-10
5%
Source: Coates Analytics Distribution Management System / SI Analysis
12
Assessing the Characteristics of Equity Fund
Opportunity Sets
Average Monthly New Sales Rate Minus Redemption Rate Spread
January 2010 through June 2011
Rep-as-PM
Rep-as-Advisor
Home Office Model
US Style Box Equity
0.1%
0.5%
0.3%
Non-US Equity
1.5%
1.4%
1.0%
Alternative Equity
2.8%
2.8%
1.3%
Source: Coates Analytics Distribution Management System / SI Analysis
 US Style Box Equity
 Led by Rep-as-Advisor, but lowest spread among styles within each
platform
 Non-US Equity
 Lower redemptions via Rep-as-PM advisors leads to greater opportunity
 Alternative Equity
 Rep-as-PM: asset velocity – high sales outweigh high redemptions
 Rep-as-Advisor: asset stability – lower redemptions compensate for lower
sales
13
Implications Moving Forward
 Expansion of fee-based advisory programs continues to
bring higher asset velocity features to growing segments
of fund business
 Increasingly converse relationship between growth and asset
stability within expanding segments of the FA-sold marketplace
 Implications around product focus and development,
sales force compensation, and other aspects of overall
distribution strategy
 Growing importance in analyzing holistic combination of
new business and asset stability considerations
14
How Can Fund Firms Respond?
 Aggregate redemption stats alarming, but Rep-as-PM advisors (and
RIAs) can still represent valuable relationship opportunities
 Influence of such advisors growing rapidly as trend toward greater FA
discretion continues
 High-net-worth client base

 Increased importance of FA segmentation and targeting around both
growth and asset stability considerations
 Particularly within high-velocity segments such as Rep-as-PM and RIA
 Segments of these advisor bases with strong asset stability
characteristics in your firm’s core strategies?
 Ability to rethink / retool certain aspects of revenue sharing
arrangements with key distribution partners?
 Potential to tie payment levels more directly to redemption/holding period
metrics?
 Revenue sharing grid based on FA holding period?
15
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