Issues Facing the Asset Management Industry

1 Navigating a Challenging EnvironmentIssues Facing the Asset Management IndustryTop Issues Facing Asset ManagersPrimary challenges that Citi sees our Asset manager clients facing1 General ObservationsOperational EfficiencyRegulatory ComplexityRisk ManagementMarket VolatilityGrowthRegulatory ComplexityRegulatory complexity is a constantly evolving concern for the industryNew regulations require that advisors to private funds to register with the SEC as investment advisers, submit new information on Form ADV In order to comply with FATCA, additional data will need to be collected, analyzed and reported Asset managers will need to work with their service providers to put in place systems to comply with data computation and reporting requirementsPrivate Fund Managers to submit data on new form PF, intended to provide the government with a measure of systemic riskThe SEC is taking steps to investigate and bring enforcement cases in the Asset Management Industry Enforcement staff is investigating practices (ineffective compliance program, abuses involving valuation, sales practices and disclosure, allocations of expenses and securities, performance claims, insider trading, and other types of compliance programs)Investors, clients and prospective clients looking for greater transparency and confidence that the manager has strong compliance and internal controlsCompliance ProgramSafeguarding Investor AssetsPersonal ConflictsInstitutional ConflictsValuationInsider TradingInvestment GuidelinesAnd RestrictionsMarket PracticesRegulatory ReportingTradingRisk DisclosuresRegulatory Risk Considerations2 General ObservationsRisk ManagementFactors to consider.

2 Steps to takeEconomic Risks Economic uncertainty and resulting correlation and convergence of risk factors credit, market, liquidity and valuation risk during heightened market volatility and stress Need for a proactive and risk Management programTax Risks Tax no longer an adjunct function, becoming fully integrated part of the firm s risk Management functionExternal Forces Increasingly complex regulatory climate significantly increased demands for risk oversight Investors expect institutional quality governance, processes and controls from their Asset managersRegulatory AgenciesSEC conducting investigations stemming from problems that emerged from the financial crisisIRS (and global counterparts) have increased activities, performing audits (firms need to prepare form audits)Risk Management programs to place greater emphasis on emerging risksAdjustManagers are looking to reassess their taxfunctions which are being asked to address new compliance requirements and more complex strengthening the linkages between risk, regulations and business strategy.

3 As well as a focus on operational, compliance, service provider, tax, fraud, and liquidity risksFocus3 General ObservationsMarket VolatilityRegulatory challenges , data demands, and evolving market dynamics are influencing the priorities for Asset managersTransparencyNew awareness among Asset Management stakeholders including investors, consultants and regulators has created a demand for transparency in fund Management Rethinking of organizational structures and governance models Greater voice of the shareholder More frequent due diligenceData Dependency4 General ObservationsNew and evolving Asset classes create agreater need for data Highly sophisticated system needs with the ability for real-time reporting drives up technology costs. Build vs. buyLegacy and disparate systems create the need for consolidated Dashboard reportingNeed for data experts in-house vs. outsourced Investor Dynamic$ in Net Inflowssince 2008, captured by primarily 10 Industry playersFlows have been mainly into (1) Passive Products, (2) Outcome-oriented Products, and (3) Alternative products Most players are only dominant in one category.

4 Only 25% of the Top 10 are dominant in 2, and only 1 is dominant in all 3 categories$400Bn in outflows from relative return equity strategiesGlobalization & EMs Driving Global GrowthGrowth by 2030 Global trade flows: $37Tr to $122Tr, w/EM driving 72% of growth Global equity market cap: $44Tr to $185Tr, w/EM driving 70% of growth EM companies in FT Global 500: 134 to 284 Significant Deleveraging(by European Banks)European Asset deleveraging: - in assets need to be placed with new ownersLower ongoing lending capacityLiquidity Pools Need to be InvestedGlobal corporate cash $ Sovereign Wealth Fund assets of $ to grow to $12-15Tr by 2020 Global Need for Credit Additional global credit need of $100Tr by 2020 Includes ~$30b for infrastructure Increasing Complexity of Liquidity ManagementEconomic uncertainty and low interest ratesEvolving regulatory / tax environmentRising pension fund liabilities and funding gapsMacroeconomic and Industry TrendsGrowth Keys to Success:Strong brand positionsRestructuring to strengthen market position, revenue and earningsStrong cultureKey talent acquisition and retentionInnovative product offeringBetter analytics for distributors and end investorsImproved customer experience and transparencyOptions for growth two schools of thought5 General ObservationsOpportunities.

5 Fragmented M&A sector with little activityMarket is mature, sustainable organic growth difficult to achieveM&A can create a competitive advantage, which could increase efficienciesNorth American Asset Management firms are likely to return to the market when the conditions improvePrivate Equity Firms are playing a growing role in the new deal-making, with participation only likely to improveOrganicM &AOperational EfficiencyDemands on Asset manager operations functions are growing due to expanded regulatory oversight, new rules and new and more complex Asset classes and investment strategies and growing investor expectations Reporting requirements require sophisticated systems to support requests, especially when real-time data is requiredMarket volatility has concentrated the attention of Asset managers on their operational processes as a way to control costs Many Asset managers are seeking greater multi- Asset class coverage within their support platformFocusing on technology and operations enhancements to drive efficiencies Asset Managers investing more heavily in data Management strategies and platforms to improve efficiency, Management reporting, and compliance reporting and oversight Many managers have multiple legacy systems, often with different technology platforms (thereby making gathering data inefficient)

6 Workflow Management tools are increasingly being used to standardize both system and operational processes to improve efficiency, increase transparency, and create and increased STP rateAsset managers are seeking to drive operational efficiencies in response to Industry -wide drivers such as fee compression and flat or decreasing Asset levelsEffective execution of a talent strategy is challenged by firm growth (either organic or through acquisitions), as well as the significant increase in necessity of large compliance / risk departments The use of alternative talent pools models to mange supply and demand peaksProfits post-2008 are 20% lower, creating a need for focused operating discipline5 General ObservationsChallengesRisk complexity and market volatility Transparency / Reporting, Independent Valuations OTC appetite Risk managementGrowth Different Asset classes / new products, Geographic expansion New client segmentsOperational efficiencies Outsourcing Offshoring Geographic location, Service model requirements, Governance modelsAre these your challenges ?

7 Did we miss any?How are you dealing with these?How should Citi deal with these challenges and how can we assist you in the best possible way?6 General ObservationsBreakout Session GroupsGroup 1 Room ESalientVictoryLegal & GeneralAEGONF orward JanusGroup 2 Room GMorgan CreekUBSG oldman SachsApollo ScoutGroup 3 Room FBlackRockFidelityWellingtonFranklin TempletonOppenheimerFidelityDimensional7 General Observations[TRADEMARKSIGNOFF:addtheappr opriatesignofffortherelevantlegalvehicle ] 2013 Citibank, 2013[NameofLegalVehicle][Nameofregulator ybody.] ,peerfinancialinstitutions,NGOsandotherp artnerstofinancesolutionstoclimatechange ,developindustrystandards,reduceourownen vironmentalfootprint, suniqueroleinpromotingsustainabilityincl ude:(a)releasingin2007aClimateChangePosi tionStatement,thefirstUSfinancialinstitu tiontodoso;(b)targeting$50billionover10y earstoaddressglobalclimatechange:include ssignificantincreasesininvestmentandfina ncingofrenewableenergy,cleantechnology,a ndothercarbon-emissionreductionactivitie s;(c)committingtoanabsolutereductioninGH GemissionsofallCitiownedandleasedpropert iesaroundtheworldby10%by2011;(d)purchasi ngmorethan234,000 MWhofcarbonneutralpowerforouroperationso verthelastthreeyears;(e)establishingin20 08theCarbonPrinciples; ;(f)producingequityresearchrelatedtoclim ateissuesthathelpstoinforminvestorsonris ksandopportunitiesassociatedwiththeissue ;and(g) ,whereappropriate, ,renewableenergyandmitigationIRS Circular 230 Disclosure: Citigroup Inc.

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