Breakfast Presentationby the

Investment Company Institute

October 24, 2013

Cincinnati, Ohio

Karrie McMillan, ICI General Counsel

Rochelle Antoniewicz, ICI Senior Economist

Michelle Mesack, ICI Financial Services Policy Director

Annette Capretta, Deputy Managing Director of Independent Directors Council

Overview

• What is ICI?

• What is IDC?

• State of the Industry

• Key Policy Initiatives

• Congressional Update

2

What is ICI: Mission

• Advance the interests of investment companies, their shareholders, directors and advisers

• Encourage adherence to high ethical standards by all industry participants

• Promote public understanding of investment companies

3

Who is ICI: Our Role

ICI StaffLegal and Regulatory Government Affairs Research

Public Communications Operations

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MEMBER PRIORITIES—

INVESTOR FOCUS

POLICYMAKERS MEDIA FINANCIAL INTERMEDIARIES

What is ICI: Advocacy for Funds and their Shareholders

• Goal: Preserve the integrity and efficacy of investment companies as a vehicle to deliver investment services

• Policy making bodies – U.S. and foreign, federal and state, legislative and regulatory, SROs, standards setting bodies, etc.

• Subjects – securities regulation, tax, pension, commodities

• Other constituencies – trade groups, think tanks, academics, commentariat

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What is ICI: Advocacy for Funds and their Shareholders

WHAT WE BRING

• Research and data• Presence in Washington – and beyond• One industry voice• Clear focus, comprehensive approach

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WHAT WE SEEK

• Sound regulation serving funds and investors• Tax policies promoting savings and investment• Policies building retirement security

What is IDC: Mission

• Advance director education;

• Encourage director engagement and interaction;

• Assist in the formulation of public policy positions; and

• Promote public understanding of the role and responsibilities of directors and the operation of fund boards

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IDC Offerings

• Conferences Annual Fund Directors Conference in Chicago

(October/November) Spring Workshop in Washington, DC (with ICI’s

General Membership Meeting) (May)

• Webinars (free for independent directors)

• Regional chapter meetings

• Board Update, monthly electronic publication

• Memos on regulatory, legislative and other developments

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Recent Trends in the Fund Industry

• Moderate outflows from bond funds because of rising rates. Little impact on the bond market. Demographics indicate long-run demand for fixed-

income funds.

• Stories about a “great rotation” from bonds to domestic stocks are overblown. Actively managed domestic equity mutual funds

have substantially smaller outflows. Inflows to stock funds remain concentrated in ETFs,

index, international, and balanced funds.9

Bond Fund Flows, the Bond Market, and Underlying Long-Run Demand

Net Flows to Bond Mutual Funds Related to Bond Returns

11

1990–2013*Percentage of total net assets Percentage points

*Data are through September 2013.1Net new cash flow to bond funds plotted as a 3-month moving average of the share of NNCF in previous month assets. The data exclude flows to high-yield bond funds.2Year-over-year change in the Citigroup Broad Investment Grade Bond Index.Sources: Investment Company Institute and Citigroup

2013*

Net new cash flow1

Total return on bonds2

Until Recently Had Strong Demand for Bond Mutual Funds and ETFs

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Cumulative flows and net share issuance of bond mutual funds and ETFsBillions of dollars, 2007–2013*

*Data are through September 2013. Bond mutual fund flows include net new cash flow and reinvested dividends.Sources: Investment Company Institute and IndexUniverse

Bond mutual funds

Bond ETFs

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As Interest Rates Rose, Demand for Bond Funds Dropped

Billions of dollars, 2013

Sources: Investment Company Institute and IndexUniverse

Bond Funds Had Inflows in May Despite Rise in Rates

• May 2013 Yield on the 10-year

Treasury rose 47 bps in May following Fed officials’ tapering remarks.

Bond fund flows remained positive in May.

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1

1Cummulative change in the 10-year Treasury note from May 1, 2013

Bond Fund Outflows in June Followed Rise in Rates

• June 2013 Outflows from bond funds

began in early June. Yield on 10-year Treasury

was little changed until Bernanke’s press conference on June 19, then rose 32 bps to end of week (June 21).

Bond fund outflows were concentrated in the week following that jump in rates.

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1

1Cummulative change in the 10-year Treasury note from May 1, 2013

Continued Outflows from Bond Funds over Summer

• July, Aug. & Sept. 2013 Moderate outflows in

bond funds in July and September.

Nearly $24 billion in outflows in second half of August.

Last week of Aug., interest rate on 10-year Treasury fell 9 bp despite $10 billion outflow from bond funds.

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1Cummulative change in the 10-year Treasury note from May 1, 2013

1

Monthly Mutual Fund Gross Purchases and Sales of Fixed Income Securities Are Small Share of Primary Dealer Transactions

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Percentage, January 2012–August 2013

*U.S. Government primary dealer transactions consist of U.S. Government, federal agency, and mortgage-backed securities transactions with others outside the inter-dealer market.Sources: Investment Company Institute and the Federal Reserve Bank of New York

*

Percentage of households owning mutual funds and households’ mutual fund assets, 2013

Mutual Fund Assets Are Concentrated Among Individuals 45 or Older

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Age of head of household

66%

81%

Source: 2013 ICI Annual Mutual Fund Shareholder Tracking Survey

Average Allocation to Equity in 401(k) Accounts Declines With Age

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Percentage of 401(k) account balances allocated to stocks by age, 2011

Age

Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” ICI Research Perspective and EBRI Issue Brief (December 2012)

Stock Fund Flows and the “Great Rotation”

Net Flows to Equity Mutual Funds Related to Stock Price Performance

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1990–2013*

*Data are through September 2013.1Net new cash flow to equity funds is plotted as a six-month moving average.2The return on equities is measured as the year-over-year change in the MSCI All Country World Total Return Index. Sources: Investment Company Institute and Morgan Stanley Capital International

2013*

Billions of dollars Percentage points

Net new cash flow1

Total return on equities2

Pressures on Actively Managed Domestic Equity Mutual Funds

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Net new cash flow, billions of dollars, yearly, 2000–2013*

*Data are through August 2013.Source: Investment Company Institute

Mutual Fund Investors Concentrate Their Assets in Lower-Cost Funds

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Percent, 1998–2012

1The industry average expense ratio is measured as an asset-weighted average.Note: Figures exclude mutual funds available as investment choices in variable annuities and tax-exempt mutual funds.Sources: Investment Company Institute and Lipper

1

Some of the Outflows from Domestic Equity Mutual Funds Have Gone to ETFs

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Cumulative flows and net share issuance of domestic equity mutual funds and ETFsBillions of dollars, 2007–2013*

*Data are through August 2013. Equity mutual fund flows include net new cash flow and reinvested dividends.Source: Investment Company Institute

Aug-13

Domestic equity ETFs

Actively managed domestic equity mutual

funds

Index domestic equity mutual funds

Investors Have Diversified Internationally

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Cumulative flows and net share issuance of world equity mutual funds and ETFsBillions of dollars, 2007–2013*

*Data are through September 2013. World equity mutual fund flows include net new cash flow and reinvested dividends.Sources: Investment Company Institute and IndexUniverse

World equity mutual funds

World equity ETFs

Investors Gravitating to Balanced Funds

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Cumulative flows of balanced mutual fundsBillions of dollars, 2007–2013*

*Data are through September, 2013. Balanced mutual fund flows include net new cash flow and reinvested dividends.Source: Investment Company Institute

401(k) Participants Pared Back Equity Exposure, Not Fled Equity Market

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Note: Equities include equity funds, company stock, and the equity portion of balanced funds. “Funds” include mutual funds, bank collective trusts, life insurance separate accounts, and any pooled investment product primarily invested in the security indicated. Components may not add to 100 percent because of rounding.Source: Tabulations from EBRI/ICI Participant-Directed Retirement Plan Data Collection Project; see Holden, VanDerhei, Alonso, and Bass “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2011,” ICI Research Perspective and EBRI Issue Brief (December 2012)

Percentage of 401(k) participants by age, year-end

20s 30s 40s 50s 60sAge

Year

Percentage of account balance invested in equities

Summary of Demand for Funds in 2013

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Mutual fund net new cash flow and ETF net share issuanceBillions of dollars, monthly, 2013*

*Data are through September 2013. Components may not add to total due to rounding.Sources: Investment Company Institute and IndexUniverse

Key Policy Initiatives

• Money Market Funds Stable NAV messaging Research-based analysis of alternative reform ideas Advocacy reached SEC, Federal Reserve, Treasury

and all other FSOC members Strong media response and Hill outreach

• Exchange-Traded Funds Rapid responses to concerns about product’s

operations Maturing product; no longer “darling of the press” SEC rule?

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Key Policy Initiatives, continued

• SEC Agenda Valuation guidance OCIE/distribution Enforcement

• CFTC and Rule 4.5 Background on rule and lawsuit Implementation of harmonization rules

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Key Policy Initiatives, continued

• Dodd-Frank Act Implementation Over 150 rules or studies potentially affecting

industry Swaps and new clearing mechanisms SIFI designation; OFR Report

• Tax Treatment of Funds Retirement savings initiatives FATCA RIC modernization

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Congressional Update

I. Fiscal Issues:

A) Budget Conference

B) Continuing Resolution to Jan 15

C) Debt Ceiling Raised to Feb 7

II. Tax Reform

OCTOBER 2013 32

Fiscal Issues: Definitions

• Continuing Resolution – funds discretionary government spending at prior fiscal year levels unless “anomalies” are included that alter spending. Can also serve as vehicle for other legislative initiatives

• Debt Ceiling – the amount of money the federal government can borrow

OCTOBER 2013 33

Shutdown and Debt Ceiling

• Government shutdown for 16 days

• Congress reached a deal the day before Treasury Secretary Lew said the US would hit debt ceiling.

OCTOBER 2013 34

October 16th Agreement

• Continuing Resolution – funds government through Jan. 15th at 2013 funding levels

• Debt Ceiling – raised through Feb. 7th

• Budget Conference Committee – Dec. 13th agreed upon date for a budget deal (non-binding)

OCTOBER 2013 35

Budget Conference Committee - Members

• Co-Chairs: Rep. Paul Ryan (R-WI) – Budget Cmmte Chair Sen. Patty Murray (D-WA) – Budget Cmmte Chair

• 29 Members - includes party leaders, veteran negotiators and experts on the budget, taxes and appropriations

OCTOBER 2013 36

Budget History

• First conference committee in 4 years

• House Budget - $967B (sequestration level) Deep spending cuts Balances budget in 10 years

• Senate Bill - $1.058T Includes tax revenue increases Reduced deficits, but does not balance budget

OCTOBER 2013 37

Conference Committee – Key Issues

• Overall Spending Levels/Deficit Reduction

• Tax Revenue Increases vs. Spending Cuts

• Grand Bargain?

• Affordable Care Act (aka ObamaCare)?

OCTOBER 2013 38

Fiscal Issues: Key Facts

• Sequester cuts are $1.2 trillion over 10 years – $80 billion in FY13 (due to ATRA) and $109 billion in the current CR

• The debt has risen $7.9 trillion since October 1, 2007 (FY08)

• Cumulative debt represents 105% of GDP – the greatest amount since the height of WWII

• The FY13 budget deficit is $836 billion – down from 4 straight years of $trillion plus deficits

OCTOBER 2013 39

Fiscal Issues: Key Facts

• 2013 Federal Revenue: $2.8 trillion – most in history – $2.45 trillion in 2012

• Entitlement spending driving deficits / debt:

1) Over the next 10 years mandatory outlays (primarily healthcare and social security) will represent 61% of federal spending

2) Debt servicing will represent 11%

3) Discretionary spending just 27% – portion of budget subject to Congressional Appropriations

OCTOBER 2013 40

CR & Debt Ceiling – Recent ICI Activity

• 9/25 – Briefed Senate Democratic Steering Committee about the consequences of fiscal uncertainty and failing to raise the debt ceiling

• 9/27 – Signed multi industry coalition letter to Congress supporting timely action on CR and the debt ceiling while expressing need to contain spending and reform entitlements

• 10/9 – Invited to brief House Republican Conference about consequences of fiscal uncertainty

• 10/10 – Testified in front of Senate Banking Committee

OCTOBER 2013 41

Fundamental Tax Reform

• Bipartisan, Bicameral interest in moving forward, Chairman Baucus (D-MT) & Chairman Camp (R-MI) “Simpler Taxes for America Tour”

• House Ways & Means working groups

• Senate Finance “blank slate” submissions

OCTOBER 2013 42

Fundamental Tax Reform: Issues

• Lower the Rates, Expand the Base

• Revenue Neutral vs. Revenue Increase

• “Revenue Raisers” are Politically Sensitive Issues – Mortgage tax deduction, retirement savings incentives, charitable deductions

OCTOBER 2013 43

Fundamental Tax Reform: Issues

• Retirement Savings Incentives

• Municipal Bond Tax Treatment

• Roth Treatment Rumors

OCTOBER 2013 44