Building on Success

1
Building on Success

• February 22, 2000
• James S. Riepe
• T. Rowe Price Associates

2
Building on Success

• 1990s -- A Decade of Unparalleled Growth
• 2000 Beyond -- Continued Evolution
• Distribution
• Service Technology
• Investments
• The Future

3
Complacency?

• Competition continues to increase
• Penetration shifts to Share of Wallet
• Market returns are not sustainable
• Investors are smarter and more demanding

• Capacity exceeds demand

4
1990s

• A Decade of Unparalleled Growth

5
Assets of Financial Intermediaries
21.0
11.0
CAGR 4.4
16.6
9.7
-1.3
6
Fund Industry Growth

• 1979 1999
• Mutual Funds 524 7,500
• Mutual Fund Assets 0.1T 6.2T
• Shareholder Accounts 10M 200M
• Household Ownership 6 44
• New Flows to MFs 31B 364B

7
Fundamental Growth Drivers

• Economic 1979 1999e CAGR
• Personal Income 2.1T 7.1T 6
• Household Financial Assets 4T 27T 10
• SP 500 Composite 107 1,350 14
• Behavioral
• IRA Assets 0.02T 2.1T 26
• 401(k) Assets 0.0T 1.5T 30

8
What's Behind the Success?

• Transparency
• Reputation and regulation
• Low expenses and professional management
• Diversification
• Daily valuation
• Convenience -- 800 numbers and PC access

9
Is Growth Sustainable?

• 1979 1999e CAGR
• Personal income 2T 7T 6
• Household fin. assets 4T 27T 10
• - MF holdings 0.1T 5T 20
• - Percent in MF 3 19

• 1979 1999e
• Personal income 2T 7T
• Household fin. assets 4T 27T
• - MF holdings 0.1T 5T
• - Percent in MF 3 19

• 1979 1999e CAGR 2019e
• Personal income 2T 7T 6 23T
• Household fin. assets 4T 27T 10 182T
• - MF holdings 0.1T 5T 20 153T
• - Percent in MF 3 19 129

• 1979
• Personal income 2T
• Household fin. assets 4T
• - MF holdings 0.1T
• - Percent in MF 3

10
Long-Term Fund Growth
11
2000 Beyond

• Continued Evolution of the Industry

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Continued Evolution

• Investor expectations vs. reality
• Integrity vs. lowest common denominator
• Scale vs. value

• Financial vs. hard assets

13
Continued Evolution

• Distribution

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Pre-1990s Distribution
Banks
Brokers
Insurers
MF Companies
Securities
Deposits Credit Cards
Mutual Funds
Insurance Annuities
Investors
15
Distribution Today -- and Tomorrow
Banks
Brokers
Insurers
MF Companies
Consultants
Planners
Affinity Groups
Employers
Retirement Plans
Marketplaces
Wraps
Deposits
Securities
Insurance
Mutual Funds
Credit Cards
Annuities
Investors
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Investor Confusion Competition

• Over 700 managers 7,500 funds
• 131 Lipper categories
• NASCAR and funeral home funds
• Would you like a free toaster?
• Discounts . . . sweepstakes . . . cash bonuses .
  . . airline miles
• Free funds as loss leaders for other
  products/services
• Internet funds -- Watch us invest your money.

17
Trends Affecting Distribution

• Responsibility for retirement has shifted to
  individuals
• Consumers seek solutions and demand convenience
• Growing awareness of implications of investment
  costs
• Availability of alternative investment vehicles

18
Trends Affecting Distribution

• Brokers switch to asset-based fees
• E-commerce has accelerated pace and scope of
  change
• Technology increases transparency which
  accelerates commoditization
• Unbundling of product sale from relationship sale

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Continued Evolution

• Service Technology

20
Contact Media
Prospect
Customer
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Importance of Service

• Critical for retention
• Direct -- establishes relationship beyond the
  product
• Intermediary -- empowers the middleman to be more
  effective
• Quality of service experience is compared every
  day

22
Role of Technology Pervasive Growing

• On-Line Trading

• 6M on-line investors
• Hyper-active traders now nearly 10
• Two-thirds of Schwab trades are on-line
• Annual turnover for average on-line trader is 95

23
Role of Technology

• Stockjungle.com -- SP Index Fund

• Zero expenses -- no fees, operating expenses, or
  brokerage costs
• 2 redemption fee -- shares held
• Maximum investment of 10,000
• Fund reports, prospectuses, and statements must
  be delivered electronically
• Managed funds, with fees, also will be offered

24
Role of Technology

• MetaMarkets.com -- OpenFund

• Real-time posting of portfolio holdings and
  trading history
• Bulletin board postings about trades from manager
• Soliciting investment advice through message
  boards, chat rooms, and on-line polls
• Webcam above trading floor

25
Role of Technology

• HP and UCLA have molecules behaving as memory
  chips
• Next step . . . create 16 bit memory chips in a
  square less than 100 billionths of a meter --
  smaller than a white blood cell
• Molecular memory chip should be lab-ready by 2001

(Science Magazine)
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Role of Technology

• Current nine month cycle of doubling bandwidth
  will accelerate rapidly
• Lucent Technologies currently has the ability to
  fit 864 fiber-optic strands -- each carrying 5
  trillion bits per second -- into a single cable
  sheath

(Gilden Technology Report)
27
Role of Technology

• Chips are headed toward infinite speed at zero
  cost. So is bandwidth. The radical new software
  and e-commerce business models that will follow
  in their wake can only be guessed at. But their
  arrival is a sure bet.

Rick Karlgaard -- Publisher, Forbes.com
28
Near-Term Application

• Natural language phone service
• Statements-on-demand
• Full relationship pop-up screens
• Interactive electronic correspondence

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Continued Evolution

• Investments

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U.S. Markets

• 1979 1989 1999
• Value of publicly
• traded U.S. stocks 1.4T 3.5T 13.8T
• DJIA 839 2,753 11,497
• SP 500 108 353 1,469
• NASDAQ Comp. 151 455 4,069

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Tech Stock Phenomenon

• Tech stocks now comprise 30 of SP 500 (vs. 7
  in 92) and 55 of NASDAQ
• Internet stocks up 176 in 99
• Average tech fund up 130 . . . worst tech
  fund returned 36 (vs. 21 for SP 500)
• More than 200 funds had returns 100 in 99 vs.
  6 in 98 . . . 24 funds were up 200 in 99

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Tech Stock Phenomenon

• Qualcomm up 2,618
• Earnings 31 cents/share . . . recent share
  price 162 . . . P/E 578 (SP 28x)
• First 1M stock -- Yahoo Japan
• 1.2M/share
• Up from 18K/share at IPO 11/94 (6,600)
• Change in valuation metrics
• P/E ? Price-to-Revenue ? Price-to-Fantasy

33
Tech Stock Phenomenon

• A reminder
• Over 900 biotech firms were started in early
  90s . . . only a small number survived and only
  a handful became large, successful companies

34
The Tulipomania -- 17th Century

• I. Many individuals grew suddenly rich. A
  golden bait hung temptingly out before the
  people, and they rushed to the tulip-marts, like
  flies around a honey pot.

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The Tulipomania

• II. At last, however, the more prudent began to
  see that this folly could not last for ever. It
  was seen that somebody must lose fearfully in the
  end. As the conviction spread, prices fell,
  confidence was destroyed, and a panic set in.

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The Tulipomania

• III. Many who, for a brief season, had emerged
  from the humble walks of life, were cast back
  into their original obscurity. And many who
  started rich saw their fortunes ruined beyond
  redemption.

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The Future
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External -- Future Influencers

• Market returns
• Baby Boomer demographics
• Mutual fund as the vehicle of choice
• Retirement income fear
• Electronic commerce

40
Need to Understand How to Compete

• How to segment customers
• How to confront open architecture
• How to spend technology dollars
• How to develop and manage e-commerce initiatives
• Costs of being too early vs. too late

41
Asset Management Business Less Attractive

• Substantial overcapacity
• Operating costs too high
• Margins squeezed
• Strong brand and consistent performance
• Distribution changing
• Technology expenditures

42
Tenets for Success

• Listen to your customer
• Put the customers interest first
• Act with integrity

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