--- MAY 25, 2007 ---

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NEW TIBURON RESEARCH REPORT --
INDEXING & EXCHANGE TRADED FUNDS

Tiburon is pleased to announce its new research report titled A Comprehensive Overview of the Market-Linked Products Industry, Including Indexed Separate Accounts, Index Mutual Funds, & Exchange Traded Funds. This updated report provides readers with an understanding of the market-linked products industry, and this release includes some key highlights and future predictions from the report

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Context Setting

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to release its latest research report. This report to provides financial services executives with a cutting edge understanding of market-linked products, including index mutual funds, exchange traded funds, and the often overlooked giant indexed separate accounts.

Please click the image above to view the table of contents for Tiburon's new research report A Comprehensive Overview of the Market-Linked Products Industry

This is Tiburon's second draft of this report. It is 359 pages in length. Tiburon’s first draft of this report was published in 2006; that draft organized all Tiburon research on the market-linked products industry into one report. This second draft of this report focused on fleshing out the history chapter, adding structure to the appendix, and reformatting the underlining Power Point pages

Key Highlights

This report has a long list of interesting facts to share.

Evolution of the Market-Linked Products Business

This chapter of the report introduces the investment product polarization, and addresses historical developments, product definitions, market growth, investment styles & recent innovations, six key drivers of the market, five utilization strategies, three disadvantages, leading manufacturers, and leading markets:

  • There are seven growing investment products, including indexed separate accounts, index mutual funds, exchange traded funds, hedge funds, venture capital & private equity, real estate, and other alternative investments
  • Market-linked products emerged through four phases, including the emergence of indexed separate accounts, the emergence of index mutual funds, growth in indexing, and the emergence of exchange traded funds
  • Over 100 companies offer market-linked products, the majority of which offer index mutual funds
  • The number of index mutual funds and exchange traded funds have grown dramatically to include nearly 600 funds; there are nearly 400 index mutual funds and over 200 exchange traded funds
  • Assets in market-linked products are nearing $4 trillion; indexed separate accounts dominate the market with over $3 trillion; assets in index mutual funds are over $500 billion and assets in exchange traded funds are $433 billion
  • Flows to market-linked products are $300 billion and quickly growing
  • Market-linked products can have four different investment styles, including US equity, US fixed income, international & global equity, and international & global fixed income
  • Market-linked product innovations include leveraged, inverse, custom, enhanced, and personalized indexing
  • There are six key drivers of the market-linked products market, including the focus on Modern Portfolio Theory & asset allocation, difficulty in beating returns, lower expense ratios, less turnover & more tax efficiency, the volatile stock market, and the stock analysts & mutual funds scandals
  • Five utilization strategies for market-linked products include index portfolio strategies, core & explore strategies, completion strategies, holding pattern strategies, and sector rotation strategies
  • There are three disadvantages of market-linked products, including the lack of certain products, admitting defeat, and ignorance of corporate governance
  • Barclays dominates the market in terms of number of products offered
  • Barclays and State Street each have over $1 trillion in assets in market-linked products, making up over half the market
  • Barclays and State Street dominate assets in every investment style; State Street is really the only major player in the US fixed income market
  • The defined benefit plans, independent advisors, and fee-accounts & TAMPs markets account for two-thirds of market-linked product assets

Indexed Separate Accounts
This section of the report specifically addresses indexed separate accounts, including their market growth & current status, investment mechanics, leading managers, and leading markets:

  • There are over 50 indexed separate accounts companies with fairly flat growth
  • Assets in indexed separate accounts are over $3 trillion, with steady growth, and flows of $200 billion
  • Barclays Global Investors and State Street Global Advisors lead the indexed separate accounts business, each with over $1 trillion in assets
  • The defined benefit plans and independent advisors markets account for over half of indexed separate accounts market assets

Index Mutual Funds
This section of the report specifically addresses index mutual funds, including their market growth & current status, investment mechanics, leading manufacturers, and leading markets:

  • Over 70 companies offer index mutual funds, but the majority offer less than five funds
  • Assets in index mutual funds are over $500 billion and are experiencing steady growth
  • Dimensional Fund Advisors, Pro Funds, Rydex, and Vanguard each offer over 40 index mutual funds, and when combined, they account for half the market
  • Vanguard controls over one-third of index mutual funds assets with nearly $200 billion
  • Especially noteworthy is the fact that the defined contribution plans market dominates assets and flows in index mutual funds

Exchange Traded Funds
This section of the report specifically addresses exchange traded funds, including their market growth & current status, investment mechanics, additional market key drivers, three additional investment strategies, seven disadvantages, leading manufacturers, and leading markets:

  • There are 344 exchange traded funds with nearly $433 billion in assets; they are the fastest growing market-linked investment product, but still account for less than 5% of the assets in traditional mutual funds
  • There are five recent exchange traded fund product innovations, including fixed income exchange traded funds, global & international exchange traded funds, commodity exchange traded funds, socially responsible exchange traded funds, and currency exchange traded funds
  • The investment mechanics of exchange traded funds include authorized participants assembling portfolios of futures, options, or stocks, which are placed in trusts; in exchange for securities, authorized participants are given exchange traded fund creation units
  • Six participant types are involved in the exchange traded funds market, including fund sponsors, trustees, authorized participants, exchanges, index licensors, and options exchanges
  • Exchange traded funds come in three structures, including open-ended funds, unit investment trusts, and grantor trusts; the majority of exchange traded funds are structured as open-ended funds, but many of the leading funds are structured as unit investment trusts
  • Exchange traded funds specifically have ten additional key drivers; the five relating to market timers include no redemption or short-term trading fees, liquid & continuously priced, the advantageous short sell rule, their eligibility for margin purchases, and the ability to place stop-loss, market, & limit orders; the five key drivers relating to cost-focused financial advisors and consumers include their incrementally lower expenses, improved transparency, broader benchmarks, additional tax efficiency, and lack of cash drag
  • Three additional utilization strategies exist for exchange traded funds, including managed portfolios, short strategies, and trading exchange traded fund options
  • There are seven disadvantages relating specifically to exchange traded funds, including transaction expenses, bid/ask spreads, the inability to use automatic investment plans, tracking errors, some non-qualified dividends if indexes change, the inability to reinvest dividends, and the inability for unit investment trust and grantor trust structured funds to lend out securities for income
  • The exchange traded fund market is concentrated, with five major and four minor players
  • By offering over 100 exchange traded funds, Barclays Global Investors dominates over half of the market in terms of the number of products offered, but State Street and Powershares are taking some share
  • Barclays and State Street have over half of the assets in the exchange traded funds market; Barclays captures three-quarters of flows
  • The independent advisor and fee-accounts & TAMPs markets account for the greatest share of assets and flows in exchange traded funds

Markets & Distribution Channels
There are three types of channels for all types of market linked products, including traditional, institutional, and other markets & distribution channels:

  • Defined contribution plans, defined benefit plans, and endowments & foundations define the institutional channels; overall these channels account for over $2 trillion of market-linked product assets
  • Traditional retail channels utilize indexed separate accounts, index mutual funds, and exchange traded funds
  • Exchange traded funds offers in 401(k) plans would reduce plan costs & fiduciary liability, but the market has been slow to penetrate because of transaction costs
  • Other markets & distribution channels for market-linked products include fee-accounts & TAMP programs, life insurance & annuities, separate account managers, mutual funds, hedge funds, and non-US markets

Future Predictions for the Market-Linked Products Business
This chapter of the report provides predictions on the growth of the market-linked products market, as well as indexed separate accounts, index mutual funds, and exchange traded funds:

  • Assets in market-linked products should surpass $8 trillion in assets by the end of the decade and flows should surpass $500 billion
  • Leveraged, inverse, custom, enhanced, and personalized indexing in market-linked products will all experience growth
  • Other market-linked product trends include some impractical indexes being disbanded and continued index licensor consolidation
  • Indexed separate accounts assets will surpass $6 trillion by the end of 2010; the rise of leveraged, inverse, custom, enhanced, and personalized indexed separate accounts will help contribute to this growth
  • Index mutual funds assets should surpass $1 trillion by 2010, with the help of increasing number of new funds; index mutual fund leader Vanguard will continue to dominate in the future
  • The number of companies offering exchange traded funds will surpass 50 by 2010, as new exchange traded fund firms may include both new and existing market-linked product companies
  • Exchange traded funds will become the mutual funds of the 21st century as assets in exchange traded funds surpass $1 trillion by the end of the decade; this growth will drive assets in exchange traded funds to nearly surpass separately managed accounts and hedge funds
  • Custom exchange traded funds will experience continued growth and assets should surpass $3 billion by 2010; enhanced exchange traded funds will also continue to grow, with assets expected to surpass $12 billion, and new companies to enter such as Dimensional Fund Advisors and Firsthand Capital
  • New exchange traded fund products will include leveraged, inverse, and actively managed exchange traded funds; also, load exchange traded funds may be coming, as well as funds that transition from closed-end structures to exchange traded fund structures
  • Specifically, actively managed exchange traded funds may debut within the next year, after years of scrutiny by the SEC; innovation will continue to be proposed to overcome the transparency issues of actively managed exchange traded funds
  • Four markets will be further penetrated by exchange traded funds, including exchange traded funds gaining broader acceptance into 401(k) plans, exchange traded funds growing in annuity products, exchange traded funds growing inside fee-accounts & TAMP programs, and utilization by independent advisors increasing
  • The fee-only financial advisor and fee-accounts & TAMPs markets will continue to gain share in the exchange traded fund market
  • Barclays Global Investors will remain the dominant exchange traded fund provider in terms of the number of products, assets, and flows
  • Smaller exchange traded fund firms will likely sell out to gain larger distribution opportunities, demonstrated by Powershares and its acquisition by Amvescap
  • Overall, market-linked products will experience market expansion, product innovation, the continued dominance of leading players & markets, and other market trends

To better understand the developments in the hedge funds industry, executives can purchase Tiburon's Hedge Fund research report where the key learnings highlighted above are covered in greater detail. Please contact Brian Cotter at BCotter@TiburonAdvisors.Com.

More Information
The following links will open specific pages on Tiburon's web site:

Related Releases

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Tiburon Strategic Advisors

Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer market research & strategy consulting services to all types of financial institutions and investment managers:

  • The firm has served over 300 corporate clients and completed almost 1,000 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets.
  • Tiburon holds a series of CEO Summits semi-annually for its executive-level clients. The next CEO Summit is scheduled for October 9-10, 2007 at the Ritz Carlton Hotel in San Francisco, CA. 2008-2009 dates are April 10-11, 2008 (New York, NY), October 14-15, 2008 (San Francisco, CA), April 9-10, 2009 (New York, NY), and October 7-8, 2009 (San Francisco, CA). Attendance is by invitation only and attendance at each Summit is limited to 100 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights. Please contact Tiburon’s Managing Principal Chip Roame at CRoame@TiburonAdvisors.Com or (415) 789-2541 if you are a Tiburon client and have an interest in attending a future Tiburon CEO Summit.
  • Tiburon offers thirteen online business benchmarking tools that are available to all types of financial advisors in an effort to help them benchmark their business practices and build more successful businesses. The sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors, www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 advisors have used these tools. By completing one of the online surveys, financial advisors can access a FREE copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results.
  • Tiburon has published twenty-six ~300-400+ page research reports, which offer detailed analyses of growing business segments; each is available for $5,000; these reports can be ordered by contacting Brian Cotter at BCotter@TiburonAdvisors.Com or (415) 789-2546.
  • Tiburon’s weekly research releases, like this one, are emailed for free to interested industry executives, media representatives, conference planners, and individual financial advisors. Over 40,000 industry executives now receive these releases. Feel free to sign up to receive future research releases at Tiburon’s web site (www.TiburonAdvisors.Com) if this release was passed to you by a colleague and you would like to receive them directly in the future.
  • Tiburon recently added a president of its research, tools, & database business, and the firm plans to expand its workforce in 2007 and 2008. New research managers will develop proprietary research content for Tiburon research reports and client projects and new marketing managers will enhance the firm's web site, weekly research releases program, and the firm's relationships with media representatives, conference planners, and its clients & executive program members. The firm is also seeking to add principal candidates and possibly a chief consulting officer in 2007 or 2008.
  • Tiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon’s executive programs directly or ask that they be included in any ongoing Tiburon project.

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