Portfolio Management: An Overview (Ch. 4)

Chapter 4 Portfolio Management: An Overview

PresenterVenueDateThis chapter provides an explanation of why a portfolio approach is important to all types of investors in achieving their financial goals. A comparison is made of the financial needs of different types of individual and institutional investors. An outline is provided for the steps in the portfolio management process. The chapter concludes with a discussion of the types of investment management products that are available to investors and how they apply to the portfolio approach.

DISCLAIMER: Candidates should understand that this presentation is NOT a substitute for a thorough understanding of the CFA Program curriculum. This presentation is also NOT necessarily a reflection of all the knowledge and skills needed for candidates to successfully complete questions regarding this topic area on the CFA exam.

1The Portfolio PerspectiveEvaluate in isolation?Evaluate as a portfolio?LOS: Explain the importance of the portfolio perspective.Pages 140-142

The portfolio approach means evaluating individual securities in relation to their contribution to the investment characteristics of the whole portfolio, rather than in isolation.

2EXHIBIT 4-3 Cumulative Wealth Index of Sample of Shares Listed on HKSE

Source: DatastreamLOS: Explain the importance of the portfolio perspective.Page 143

Cumulative returns from Q2 2004 through Q2 2008 for five companies listed on the Hong Kong Stock Exchange (HKSE) are shown in Exhibit 4-3.3Yue Yuen IndustrialCathay Pacific AirwaysHutchinson WhampoaLi & FungCOSCO PacificEqually Weighted PortfolioMean annual return7.3%8.7%12.3%32.8%14.2%15.1%Annual standard deviation20.2%25.4%18.1%29.5%31.3%17.9%Mean annual return, randomly selected security = 15.1%Annual standard deviation, randomly selected security = 24.9%Diversification ratio = 17.9% 24.9% 71%Source: DatastreamEXHIBIT 4-4 The Importance of the Portfolio PerspectiveLOS: Explain the importance of the portfolio perspective.Pages 142-144

Portfolios can generally offer the equivalent expected return of individual securities with lower overall volatility of returns.

Suppose you want to invest in one of these five securities next year. There is a wide variety of riskreturn trade-offs for the five shares selected. If you believe that the future will replicate the past, then choosing Li & Fung would be a good choice. For the prior four years, Li & Fung provided the best trade-off between return and risk. In other words, it provided the most return per unit of risk. If there is no reason to believe that the future will replicate the past, however, it is more likely that the risk and return on the one security selected will be more like selecting one randomly. Randomly selecting one security each quarter results in an average annualized return of 15.1% and an average annualized standard deviation of 24.9%.

Alternatively, you could invest in an equally weighted portfolio of the five shares, which means that you would invest the same dollar amount in each security for each quarter. The quarterly returns on the equally weighted portfolio are just the average of the returns of the individual shares. As reported in Exhibit 4-4, the equally weighted portfolio has an average return of 15.1% and a standard deviation of 17.9%.

Because the mean return is the same, a simple measure of the value of diversification is calculated as the ratio of the standard deviation of the equally weighted portfolio to the standard deviation of the randomly selected security. This ratio may be referred to as the diversification ratio. In this case, the equally weighted portfolios standard deviation is approximately 71% of that of a security selected at random.4EXHIBIT 4-5 Optimal Portfolios for a Sample of HKSE Shares

Optimal PortfoliosSource: DatastreamLOS: Explain the importance of the portfolio perspective.Page 145

The previous example compared the performance of an equally weighted portfolio with that of a single security. If we select the portfolios with the best combination of risk and return (using historical statistics as our expectations for the future), we produce the set of optimal portfolios shown in Exhibit 4-5.

In addition to illustrating that the diversified portfolio approach reduces risk, Exhibit 4-5 also shows that the composition of the portfolio matters. For example, an equally weighted portfolio (20% of the portfolio in each security) of the five shares has an expected return of 15.1% and a standard deviation of 17.9%. Alternatively, a portfolio with 25% in Yue Yuen Industrial (Holdings), 3% in Cathay Pacific, 52% in Hutchison Whampoa, 20% in Li & Fung, and 0% in COSCO Pacific produces a portfolio with an expected return of 15.1% and a standard deviation of 15.6%. Compared with a simple equally weighted portfolio, this composition provides an improved trade-off between risk and return because a lower level of risk was achieved for the same level of return.

5Key Tenets of Modern Portfolio TheoryLOS: Explain the importance of the portfolio perspective.Pages 148-149

These tenets can, in large part, be attributed to the work of Markowitz (1952), Sharpe (1964), Lintner (1965), and Treynor (1961). Their view of risk is the basis of the well-known capital asset pricing model (CAPM).

6Representative Investment Motives for Individual InvestorsLOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Page 149

A defined contribution (DC) plan is a pension plan in which contributions rather than benefits are specified.

For example:United States401(k) plansUnited KingdomGroup personal pension plansAustraliaSuperannuation plans

With DC plans, individuals will invest part of their wages while working and then expect to draw on the accumulated funds to provide income during retirement or to transfer some of their wealth to their heirs.

The employee accepts the investment risk and is responsible for ensuring that there are enough funds in the plan to meet their needs upon retirement.

7Examples of Institutional InvestorsLOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Page 150

8EXHIBIT 4-10 Institutional Assets (in US$ billions)

Source: OECD, Recent Trends in Institutional Investors Statistics (2008).LOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Page 150

Exhibit 4-10 shows the relative size and growth rates of the key categories across the Organization for Economic Co-operation and Development (OECD) countries. Investment funds are the largest category, with insurance companies and pension funds not far behind. The relative importance of these categories does vary significantly across the individual OECD countries.9Investment Returns?Defined Benefit Pension PlansDefinedBenefitLOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Pages 150-151

A defined benefit (DB) pension plan is a type of pension plan in which an employer promises a specified monthly benefit when an employee retires that is predetermined by a formula based on the employee's earnings history, tenure of service, and age, rather than depending on investment returns.

Plan managers need to ensure that sufficient assets will be available to pay pension benefits as they come due. The plan may have an indefinitely long time horizon if new plan members are being admitted or a finite time horizon if the plan has been closed to new members. Even a plan closed to new members may still have a time horizon of 70 or 80 years. For example, a plan member aged 25 may not retire for another 40 years and may live 30 years in retirement. Hence, pension plans can be considered long-term investors. In some cases, the plan managers attempt to match the funds assets to its liabilities by, for example, investing in bonds that will produce cash flows corresponding to expected future pension payments. There may be many different investment philosophies for pension plans depending on funded status and other variables.

10EXHIBIT 4-11 Top Ten U.S. University Endowments by Asset Value

Source: NACUBO, 2008 NACUBO Endowment Study (January 2009).LOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Page 151

University endowments are established to provide continuing financial support to a university and its students (e.g., scholarships).

Exhibit 4-11 shows the top 10 U.S. university endowments by assets as of year-end 2008. In terms of non-U.S. examples, the University of Oxford, United Kingdom, and its various colleges were estimated to have a total endowment of 4.8 billion as of 2004 and the University of Cambridge, United Kingdom, and its colleges, 5.3 billion. These were by far the largest endowments in the United Kingdom. The third largest, University of Edinburgh, was 156 million. The French business school INSEADs endowment was valued at 105 million as of 2008.11EXHIBIT 4-12 Top Ten U.S. Foundation Endowments by Asset Value

Source: Foundation Center (2009). LOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Pages 151-152

Charitable foundations invest donations made to them for the purpose of funding grants that are consistent with the charitable foundations objectives. Many charitable foundations are substantial investors.Large foundations are most common in the United States but also exist elsewhere. A typical investment objective of an endowment or a foundation is to maintain the real (inflation-adjusted) capital value of the fund while generating income to fund the objectives of the institution.

Exhibit 4-12 lists U.S. grant-making foundations ranked by the market value of their assets based on the most current audited financial data in the Foundation Centers database as of 5 February 2009. Large foundations are most common in the United States, but they also do exist elsewhere. For example, the Wellcome Trust is a U.K.-based medical charity that had approximately 13 billion in assets as of 2008. The Li Ka Shing Foundation is a Hong Kongbased education and medical charity with grants, sponsorships, and commitments amounting to HK$10.7 billion.12Banks, Insurance Companies, and Investment CompaniesLOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Pages 153-154

Banks accept deposits (liabilities) and extend loans (assets). Concerns exist about how funds should be invested when deposits are not used to make loans.Legal restrictions on banks owning equity investments are possible.Investments need to be low risk and liquid in the event that depositors wish to withdraw funds.

Insurance companies receive premiums for the policies they write and need to invest these premiums in a manner that will allow them to pay claims. Investments need to be relatively conservative given the necessity of paying claims when due.Life insurance companies have longer time horizons than non-life (property/casualty, auto, home, etc.) insurance companies as a result of different expectations of when payments will be required under different policies.

Investment companies that manage mutual funds are also institutional investors.A mutual fund is likely to invest in a particular category of investments, such as U.S. small-capitalization equities. Mutual funds may also have certain limits and restrictions that apply to their investments, either as set by regulation and law or as decided by the board of directors of the investment company.13EXHIBIT 4-13 Sovereign Wealth Funds by Asset Value

Source: SWF Institute (www.swfinstitute.org).LOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Pages 154-155

Sovereign wealth funds (SWFs) are government-owned investment funds.Some funds have been established to invest revenues from finite natural resources (e.g., oil) for the benefit of future generations of citizens. Others manage foreign exchange reserves or other assets of the state. Some funds are quite transparent in nature, whereas relatively little is known about the investment operations of others.

The largest SWF, managed by Abu Dhabi Investment Authority, is funded with oil revenues that amounted to US$627 billion as of March 2009. 14EXHIBIT 4-14 Summary of Investment Needs by Client Type

LOS: Discuss the types of investment management clients and the distinctive characteristics and needs of each.Page 155

Exhibit 4-14 summarizes how investment needs vary across client groups. In some cases, generalizations are possible. In others, needs vary by client.15Steps in the Portfolio Management ProcessLOS: Describe the steps in the portfolio management process.Pages 156-159

The investment policy statement (IPS) may state a benchmarksuch as a particular rate of return or the performance of a particular market indexthat can be used in the feedback stage to assess the performance of the investments and whether objectives have been met. The IPS should be reviewed and updated regularly (for example, either every three years or when a major change in a clients objectives, constraints, or circumstances occurs).

Decisions that need to be made in the asset allocation of the portfolio include the distribution between equities, fixed-income securities, and cash; subasset classes, such as corporate and government bonds; and geographical weightings within asset classes. Alternative assetssuch as real estate, commodities, hedge funds, and private equitymay also be included.

Security analysts will then use their detailed knowledge of the companies and industries they cover to assess the expected level and risk of the cash flows that each security will produce. This knowledge allows the analysts to assign a valuation to the security and identify preferred investments. The portfolio manager will then construct the portfolio, taking into account the target asset allocation, the security analysis, and the clients requirements as set out in the IPS.

A portfolio needs to be continuously monitored and reviewed following construction. Reasons for rebalancing:Security analysis has changed because of changes in prices and fundamentals.Portfolio weightings have drifted from intended levels.Clients needs or circumstances have changed.The performance of the portfolio must be measured, which includes assessing whether the clients objectives have been met. Has the return requirement been achieved?How has the portfolio performed relative to any benchmark that has been set?Do the clients objectives need to be reviewed and perhaps changes made to the IPS?

16Sell-Side Firm vs. Buy-Side FirmLOS: Describe the steps in the portfolio management process.Page 159

Once the portfolio manager has decided which securities to buy and in what amounts, the securities must be purchased. In many investment firms, the portfolio manager will pass the trades to a buy-side tradera colleague who specializes in securities tradingwho will contact a stockbroker or dealer to have the trades executed.

17Pooled InvestmentsLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 160

18EXHIBIT 4-17 Investment Products by Minimum Investment

LOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 160

Although the array of products is staggering, there are some general categories of pooled investment products that represent the full range of what is available. At one end are mutual funds and exchange-traded funds in which investors can participate with a small initial investment. At the other end are hedge funds and private equity funds, which might require a minimum investment of US$1 million or more. In this context, the amount of funds that an individual or institution can commit to a particular product has a significant impact on which products are available. Exhibit 4-17 provides a general breakdown of what investment products are available to investors based on investable funds.19Mutual Funds: Open-End Funds vs. Closed-End FundsLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Pages 160-162

A mutual fund is a comingled investment pool in which investors in the fund each have a pro rata claim on the income and value of the fund. The value of a mutual fund is referred to as the net asset value (NAV). At the end of the third quarter of 2008, the Investment Company Institute reported over 48,000 mutual funds in more than 23 countries with a total net asset value of approximately US$20 trillion.Open-end funds accept new investment money and issue additional shares at a value equal to the net asset value of the fund at the time of investment. Funds can also be withdrawn at the net asset value per share. Closed-end funds do not accept new investment money. New investors invest by buying existing shares, and investors in the fund liquidate by selling their shares to other investors. Hence, the number of outstanding shares does not change. Unlike open-end funds, closed-end funds can sell for a premium or discount to net asset value depending on the demand for shares.One consequence of the open-end structure is the need to liquidate assets that the portfolio manager might not want to sell at the time to meet redemptions. Conversely, the inflows require finding new assets in which to invest. As such, open-end funds tend not to be fully invested but rather keep some cash for redemptions not covered by new investments. Closed-end funds do not have these problems, but they do have a limited ability to grow. Of the total net asset value of all U.S. mutual funds at the end of 2008 (US$9.6 trillion), approximately only 2% were in the form of closed-end funds.

20Mutual Funds: No-Load Funds vs. Load FundsLoadLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 162

For no-load funds, there is no fee for investing in the fund or for redemption, but there is an annual fee based on a percentage of the funds net asset value. For load funds, a percentage fee is charged to invest in the fund and/or for redemptions from the fund, in addition to asset management fees. Load funds are usually sold through retail brokers who receive part of the up-front fee. Overall, the number and importance of load funds has declined over time.

21Money Market FundsLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Pages 164-165

In the United States there are two basic types of money market funds: TaxableInvest in high-quality, short-term corporate debt and federal government debt.Tax-freeInvest in short-term state and local government debt.

At the end of 2008 in the United States, there were approximately 540 taxable funds with about US$3.3 trillion in net asset value and approximately 250 tax-free money market funds with a total net asset value of about US$490 million.

Because money market funds are essentially cash holdings, the presumption of investors is that the net asset value of a money market fund is always US$1.00 per share. In September 2008, two large money market funds broke the buck; that is, the net asset value of the shares fell below US$1.00 per share. This drop in value caused investors to question the safety of money market funds and resulted in a massive outflow of funds from money market funds. This outflow continued until the U.S. Federal Reserve intervened to provide short-term insurance for some money market funds. This insurance, although similar to bank deposits, was limited in scope and time.

22EXHIBIT 4-21 Bond Mutual Funds

LOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 165

A bond mutual fund is an investment fund consisting of a portfolio of individual bonds and, occasionally, preferred shares. Investors in a bond mutual fund hold shares, which accounts for their pro rata share or interest in the portfolio. The advantage is that an investor can invest in a bond fund for as little as US$100, which provides a stake in a diversified bond portfolio in which each individual bond may cost between US$10,000 and US$100,000.

The major difference between a bond mutual fund and a money market fund is the maturity of the underlying assets. In a money market fund, the maturity is as short as overnight and rarely longer than 90 days. A bond mutual fund, however, holds bonds with maturities as short as 1 year and as long as 30 years.23Stock Mutual Funds: Active vs. Passive ManagementLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 166

Historically, the largest types of mutual funds based on market value of assets under management are stock or equity funds. At the end of the third quarter of 2008, the worldwide investment in stock mutual funds totaled around US$8.6 trillion, with approximately US$4 trillion of that in U.S. stock mutual funds.

The first index fund was introduced in 1976 by the Vanguard Group. At the end of 2008, index funds held approximately 13% of the total net asset value of stock mutual funds.

The higher fees for actively managed funds reflect the goal to outperform an index, whereas the index fund simply aims to match the return on the index. Higher fees are required to pay for the research conducted to actively select securities.

The level of trading in an actively managed fund is much higher than in an index fund, which has obvious tax implications. Mutual funds are required to distribute all income and capital gains realized in the portfolio, so the actively managed fund tends to have more opportunity to realize capital gains. This results in higher taxes relative to an index fund, which uses a buy-and-hold strategy. Consequently, there is less buying and selling in an index fund and less likelihood of realizing capital gains distributions.

24Exchange-Traded Funds (ETFs)LOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 167

ETFstrade like closed-end funds,have prices that track net asset value like open-end funds,are typically index funds, andpay dividends out to the shareholders, whereas index mutual fund investors usually reinvest dividends.

ETFs prices track net asset value due to an innovative redemption procedure. ETFs are created by fund sponsors that determine which securities will be included in the basket of securities. To obtain the basket, the fund sponsors contact an institutional investor that deposits the securities with the fund sponsor. In return, the institutional investor receives creation units that typically represent between 50,000 and 100,000 ETF shares. These shares can then be sold to the public by the institutional investor. The institutional investor can redeem the securities held in the ETF by returning the number of shares in the original creation unit. This process prevents meaningful premiums or discounts from net asset value. 25EXHIBIT 4-23 Types of Exchange-Traded Funds (ETFs) January 2009

Source: Investment Company Institute, Exchange-Traded Fund Assets, January 2009 (25 February 2009).LOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 168

A breakdown of the types of ETFs is shown in Exhibit 4-23.26Separately Managed Account (SMA)LOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 169

A separately managed account (SMA)is also commonly referred to as a managed account, wrap account, or individually managed account,is an investment portfolio managed exclusively for the benefit of an individual or institution, andallows for individual shares to be held directly by the investor, and in return for annual fees, an individual can receive personalized investment advice.

The key difference between an SMA and a mutual fund is that the assets are owned directly by the individual. Therefore, unlike a mutual fund, the investor has control over which assets are bought and sold and the timing of the transactions. Moreover, in a mutual fund there is no consideration given to the tax position of the individual asset. In an SMA, the transactions can take into account the specific tax needs of the investor. The main disadvantage of an SMA is that the required minimum investment is usually much higher than it is for a mutual fund. Usually, the minimum investment is between US$100,000 and US$500,000.

27Hedge FundsLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 170

Hedge funds are not readily available to all investors. They require a minimum investment that is typically US$250,000 for new funds and US$1 million or more for well-established funds. In addition, they usually have restricted liquidity that could be in the form of allowing only quarterly withdrawals or having a fixed-term commitment of up to five years. Management fees are not only a fixed percentage of the funds under management, but managers also collect fees based on performance. A typical arrangement would include a 1% to 2% fee on assets under management and 20% of the outperformance as compared with a stated benchmark.

A vast majority of hedge funds are exempt from many of the reporting requirements for the typical public investment. Hedge fund strategies generally involve a significant amount of risk because of the liberal use of leverage, strategy complexity, and the extensive use of derivatives.

28Hedge Fund StrategiesLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Pages 170-171

This list of strategies is not all-inclusive; there are many other strategies.

Convertible ArbitrageBuying such securities as convertible bonds that can be converted into shares at a fixed price and simultaneously selling the stock short.Dedicated Short BiasTaking more short positions than long positions.Emerging MarketsInvesting in companies in emerging markets by purchasing corporate or sovereign securities.Equity Market NeutralAttempting to eliminate the overall market movement by going short overvalued securities and going long a nearly equal value of undervalued securities.Event DrivenAttempting to take advantage of specific company events. Event-driven strategies take advantage of transaction announcements and other one-time events.Fixed-Income ArbitrageAttempting to profit from arbitrage opportunities in interest rate securities. When using a fixed-income arbitrage strategy, the investor assumes opposing positions in the market to take advantage of small price discrepancies while limiting interest rate risk.Global MacroTrying to capture shifts between global economies, usually using derivatives on currencies or interest rates.Long/ShortBuying long equities that are expected to increase in value and selling short equities that are expected to decrease in value. Unlike the equity market neutral strategy, this strategy attempts to profit from market movements, not just from identifying overvalued and undervalued equities.29Buyout and Venture Capital FundsLOS: Describe, compare, and contrast mutual funds and other forms of pooled investments.Page 171

Buyout and venture capital fundsinvest in private rather than public equity,do not plan on holding equity for the long term and will eventually liquidate equity positions,require a minimum investment and place restrictions on liquidity, andhave management fees that are based on funds under management in addition to a performance fee.

Buyout funds raise money specifically for the purpose of buying public companies and converting them to private companies, restructure the purchased company for the purpose of increasing cash flow, and plan to liquidate their investment in three to five years either through an initial public offering (IPO) or a sale to another company.

Venture capital fundsprovide financing for companies in their start-up phase,play a very active role in the management of the companies in which they invest, andmake a large number of small investments with the expectation that only a small number will pay off.

30SummaryPortfolio approach to investingInvestment management clients: types, characteristics, and needsSteps in the portfolio management processPooled investments31RankInstitutionStateEndowment Funds 2008(US$000 thousands)

1Harvard UniversityMA$36,556,284

2Yale UniversityCT22,869,700

3Stanford UniversityCA17,200,000

4Princeton UniversityNJ16,349,329

5University of Texas SystemTX16,111,184

6Massachusetts Institute of TechnologyMA10,068,800

7University of MichiganMI7,571,904

8Northwestern UniversityIL7,243,948

9Columbia UniversityNY7,146,806

10Texas A&M University System and foundationsTX6,659,352

RankFoundationAssets (US$ thousands000)As of FiscalYear-End Date

1Bill & Melinda Gates Foundation$38,921,02212/31/07

2J. Paul Getty Trust11,187,00706/30/07

3Ford Foundation11,045,12809/30/08

4Robert Wood Johnson Foundation10,722,29612/31/07

5William and Flora Hewlett Foundation9,284,91712/31/07

6W.K. Kellogg Foundation8,402,99608/31/07

7Lilly Endowment 7,734,86012/31/07

8John D. and Catherine T. MacArthur Foundation7,052,16512/31/07

9David and Lucile Packard Foundation6,594,54012/31/07

10Andrew W. Mellon Foundation6,539,86512/31/07

FundAssets as of March 2009 (US$ bns)Inception DateCountry

Abu Dhabi Investment Authority$6271976Abu Dhabi, UAE

SAMA Foreign Holdings431n/aSaudi Arabia

SAFE Investment Company347n/aPeoples Republic of China

Norwegian Government Pension Fund-Global3261990Norway

Government of Singapore Investment Corporation2481981Singapore

National Welfare Fund2202008Russia

Kuwait Investment Authority2031953Kuwait

China Investment Corporation1902007Peoples Republic of China

Hong Kong Monetary Authority Investment Portfolio1731998Peoples Republic of China

Temasek Holdings851974Singapore

Total of top 10 SWFs$2,850

Total of all SWFs$3,582

ClientTime HorizonRisk ToleranceIncome NeedsLiquidity Needs

Individual investorsVaries by individualVaries by individualVaries by individualVaries by individual

Defined benefit pension plansTypically long-termTypically quite highHigh for mature funds; low for growing fundsTypically quite low

Endowments and foundationsVery long-termTypically highSufficient to meet spending commitmentsTypically quite low

BanksShort-termQuite lowSufficient to pay interest on deposits and operational expensesHigh to meet repayment of deposits

Insurance companiesShort-term for property and casualty; long-term for life insurance companiesTypically quite lowTypically lowHigh to meet claims

Investment companiesVaries by fundVaries by fundVaries by fundHigh to meet redemptions

Mutual funds Exchange-traded funds Mutual funds Exchange-traded funds Separately managed accounts Mutual funds Exchange-traded funds Separately managed accounts Hedge funds Private equity funds

As little as US$50US$100,000US$1,000,000 +

Minimum Investment

Type of Bond Mutual FundSecurities Held

GlobalDomestic and nondomestic government, corporate, and securitized debt

GovernmentGovernment bonds and other government-affiliated bonds

CorporateCorporate debt

High yieldBelow-investment-grade corporate debt

Inflation protectedInflation-protected government debt

National tax-free bondsNational tax-free bonds (e.g., U.S. municipal bonds)

Type of ETFEnd of 2008Totals(in US$ millions)Asset Class by Type of ETF as a Percentage of Assets under Management

Broad-based equityTotal MarketLarge CapMid CapBroad-Based, Other

50.6%$266,1617.4%69.4%9.4%3.4%

SectorCommoditiesConsumerFinancialNatural ResourcesReal EstateTechnologyUtilitiesOther Sectors

17.9%94,10138.0%5.0%16.6%7.0%12.8%7.9%4.8%4.6%

Global/iinternational.GlobalInternationalRegionalSingle CountryEmerging Markets

19.7%103,7138.8%41.4%5.6%11.5%42.3%

HybridHybrid

0.0%125100%

BondGovernment BondMunicipal BondCorporate BondInternational Bond

11.8%62,18544.7%3.5%41.4%2.4%

Totals100.0%$526,285