Mutual Fund Industry: An Intercontinental Analysis (U.S.A,

China & India)

Prepared by Kaushal Sharma

Summer Internship Project8th July, 2012

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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

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

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

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

Data Analysis & Interpretation

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

America; 15.14Europe; 13.05

Asia and Pacific; 1.07Africa; 0.86

WORLDMutual 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

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 % * 2008 2009 2010 2011 2012

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

$30,000,000

WorldAmericaEuropeAsia and PacificAfrica

In USD Mil-lions

Year

AUM Growth:

Worldwide

Data Source: ICI Factbook – 2013, Year End 2012* Till the year 2012, year end data

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 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Worldwide Total MF Sales (Trillon $'s)

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

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

Expense12b-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

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

2008 2009 2010 2011 20120.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

Total net assets (Billions USD)

2008 2009 2010 2011 20127,300

7,400

7,500

7,600

7,700

7,800

7,900

8,000

8,100

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

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 Funds59%Hybrid Funds

7%

Bond Funds26%

Money market funds

8%

Composition of Funds by fund type in US MF Industry

Domestic Equity Funds33%

World Equity Funds12%

Bond Funds26%

Money Market Funds21%

Hybrid Funds8%

US Mutual Fund Assets by Fund Type

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

2008 2009 2010 2011 20120

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

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 )

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

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

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

Top AMC’s by AUMUSA - Top 10 AMC's by AUM (MF)

Rank Name AUM (billion $'s)

Market Share %

AUM (May, 2012) Growth %

1 Vanguard 1733 17.13 1406 23.262 Fidelity Investments 1050 10.38 872 20.413 American Funds 1001 9.9 857 16.804 PIMCO 590 5.83 491 20.165 Franklin Templeton Investment Funds 416 4.11 348 19.546 T. Rowe Price 369 3.64 297 24.247 JP Morgan 199 1.97 156 27.568 Dimensional Fund Advisors 186 1.84 140 32.869 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

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

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

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

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)

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)

2002 20120

20

40

60

80

100

120

100

7788

797461

Equity funds Hybrid Funds Bond Funds

Basis Points Year

Expense Ratio for fund types

Since 2002,Bond Funds Expense – 17.6% dropEquity Funds Expense – 23% dropHybrid Funds Expense – 10.2% drop

Data Source: ICI Factbook – 2013, Year End 2012

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

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

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

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

China