Frost & Sullivan North American Lifecycle Funds Analyst Briefing

North American Lifecycle Funds Market – What is driving its enormous growth?

Kavitha Chakravarthy, Research Analyst

Business and Financial Services, Asset Management

October 21, 2008

2

Focus Points

� Introduction

� Market Analysis

� Investment Analysis

� Conclusion

3

• Frost & Sullivan’s Financial Research team has recently completed an extensive review

of investment opportunities in the North American lifecycle funds market.

• The study highlights the growth segments in the North American lifecycle funds market,

and identifies specific investment themes and opportunities within the market.

• It includes a comprehensive overview and in-depth financial analysis of the North

American lifecycle funds market covered by Frost & Sullivan.

Introduction

4

• Lifecycle funds

• Lifecycle exchange traded funds

Segments Included

Scope of Research

Major Industry Participants

• Fidelity Investments

• Vanguard

• T Rowe Price

• Principal Investors

• American Century Investments

• Barclay’s Global

• DWS - Scudder

• Mass Mutual

• TIAA - CREF

• Russell Investments

• Wells Fargo Advantage

• Vantage Point Funds

• TDAX Fund, Inc.

5

Focus Points

� Introduction

� Market Analysis

� Market Overview� Historic Growth� Market Trends� Segment Analysis


� Investment Themes� Growth Monitor

� Conclusion

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Lifecycle Funds Market and the Current Financial Crisis

• Retirement plans in the U.S. have lost around $2 trillion (20% of the assets) in the past 15 months due to the current financial crisis.

• Withdrawals and loans on 401(k) plans are on the rise.

• The depletion of retirements assets is expected to delay people’s retirement.

• Investors that are near retirement age are expected to be the worst hit by the current economic crisis.

Market Analysis

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Lifecycle Funds Market and the Current Financial Crisis Cont…

• Around 90% of the lifecycle funds assets are comprised of retirement assets. (March 2008)

• The current financial downturn will have a neutral or a marginally negative effect on the demand for lifecycle funds.

• Lifecycle funds are based a glidepath approach of asset allocation. The near target date funds have lesser exposure to equity and are insulated from the current crisis. The distant target date funds have a higher exposure to equity. However, distant target date funds have sufficient time to recover.

• Lifecycle funds are likely to witness increased participation from 401(k) in 2008.

• The lifecycle funds market in the U.S. was $185 billion in March 2008, up from $183 billion in December 2007.

Market Analysis

8

5 7 9 12 1526

44

71

114

183 185

0

20

40

60

80

100

120

140

160

180

200

Life

cycle

Fund A

ssets

($ B

illio

n)

1998 2000 2002 2004 2006 2008 Q1

Year

Historic GrowthMarket Analysis

Historic Growth Market Trends Segment Analysis

Source: Investment Company Institute and Frost & Sullivan

Lifecycle fund assets grew at a Compound

Annual growth rate (CAGR) of

48.7 percent (1998 – 2007)

Post stock market downturn in 2002

Pension Protection Act,2006

9

0.250.22

0.17

0.14

0.10

0.08

0.05

0.020.03

0.010.03

0.00

0.05

0.10

0.15

0.20

0.25

0.30

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Q1

Year

Mark

et S

hare

(%

)Market Trends

Market Analysis


Source: Frost & Sullivan

Market share of lifecycle funds in the total retirement funds

market has been steadily increasing and

was 0.25% in March 2008

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Market TrendsMarket Analysis



5 9 15 2539 3818

30

48

79

122 125

8

11

22

21 211111 964

23

5

1

22

113

0

50

100

150

200

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Q1

Year

Life

cycle

Fund A

ssets

($ B

illio

n)

Individual Retirement Accounts Defined Contribution Plans Other Plans

Lifecycle funds get a majority of its investments from retirement accounts. In 2007, retirement assets accounted for 88% of the total lifecycle fund assets in the U.S.

5 8 812 15

26

4471

115

183 185

11

Market TrendsMarket Analysis



5235

50

131127174

289

366

528

318

466

682

0

200

400

600

800

1000

1200

1400

1600

No. of Life

cycle

Funds

2003 2005 2007 2008

Year

2000-2014 Category 2015-2029 Category 2030+ Category

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Market Share

Fidelity

49.4%

T Row e

20.2%

Others

5.3%

Principal

investors

5.6%Vanguard

19.5%

Market Analysis



Note: Others include American Century Investments, American Independence, Barclay's Global, DWS Scudder, Mass Mutual, Putnam Investments, Russell Investments, TIAA - CREF

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Segment AnalysisMarket Analysis

Lifecycle FundsMarket

CAGR 2008-1416.9%

Approval of Lifecycle Funds as a Qualified Default Investment

Alternative

Competition from Lifestyle Funds and other mutual funds

Attractiveness of Lifecycle Funds to

Investors

Competition among 401(k) Plan Providers

leading to an increased demand

Indecisiveness among Investors over

Investment Decisions

Risk arising out of Uncertainty

Unsuitable for Risk-averse Investors

Relatively Young Market

Lack of CustomizationIsolated

Approach to Investing

Rigid Glide Path Lack of Benchmarks



Industry Enhancers

Industry Inhibitors

Industry Challenges

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Focus Points

� Introduction

� Market Analysis

� Market Overview� Historic Growth� Market Trends� Segment Analysis


� Investment Themes� Growth Monitor

� Conclusion

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Investment ThemesInvestment Analysis

Investment Themes Growth Monitor


1. Emergence of Lifecycle Exchange Traded Funds

2. Automatic Enrollment into Lifecycle Funds by 401(k) Plans

3. Transfer of Funds from Lifestyle Funds to Lifecycle Funds

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1. Emergence of Lifecycle Exchange Traded Funds

119119111

93

138

146170 170 176

5 5 55

6 6 6 6 6

0

20

40

60

80

100

120

140

160

180

200

Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08

Month

Hybrid E

TF Assets

($ M

illio

n)

1

2

3

4

5

6

7

No. of H

ybrid F

unds

Hybrid ETF Assets No. o f Hybrid Funds


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2. Automatic Enrollment into Lifecycle Funds by 401(k) Plans

83.86

53.13

31.77

19.6911.37

7.005.684.77

0

10

20

30

40

50

60

70

80

90

2000 2001 2002 2003 2004 2005 2006 2007

Year

401(k

) A

ssets

Investe

d in

Life

cycle

Funds (

$ B

illio

n)


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3. Transfer of Funds from Lifestyle Funds to Lifecycle Funds

26.7

25.0

29.2

35.5

39.4

45.1

52.0

50.0

54.2

59.9

73.3

75.0

70.8

64.5

60.6

54.9

48.0

50.0

45.8

40.1

0 20 40 60 80 100

1998

2000

2002

2004

2006

Year

Market Share in Mutual Fund Retirement Assets (%)

Lifecycle Fund Assets Lifestyle Fund Assets


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Growth MonitorInvestment Analysis



Target Date 2000 - 2010

3.06.48.2CAGR (2008-2014) (%)

26.3

32.8

50.7

50.9

31.6

Bond

(%)

24.843.66.39.8AmCent LIVESTRON Inst

46.9

25.1

35.5

37.3

Equity

(%)

6.3

5.4

6.6

6.7

Growth Rank (%)

42.11770.0Fidelity Freedom 2000

13.872.9DWS LifeCom Retir S

11.9105.2Barclays Gbl Inv LP Ret I

26.81080.0Fidelity Freedom 2005

Cash and Others

(%)

Assets under Management

($ million)

Fund Management

Company

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Conclusion

• Lifecycle funds are becoming an increasingly popular investment option for retirement savings and a preferred investment for the automatic enrollment of defined contribution plans.

• The North American lifecycle funds market is a relatively nascent one, and is experiencing rapid growth and introduction of new investment mechanisms based on the principle of lifecycle investing such as lifecycle exchange traded funds, target date portfolio, and target date index.

• The North American lifecycle funds market is a concentrated one, with the top three participants holding a combined market share of 89 percent in 2007.

• The North American lifecycle funds market is expected to grow at 16.9 percent in the next seven years (2008 to 2014).

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For Additional Information

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Frost & Sullivan North American Lifecycle Funds Analyst Briefing