London, 26 April 2007Manooj Mistry

1
The Potential of Exchange Traded Funds for
Pension Funds

• London, 26 April 2007 Manooj Mistry

2
The Case for ETFs
Investment Products Group
3
The old view Active vs Passive

• Active Management
• Pros
• Potential to beat the market - Alpha
• Possibility to reduce portfolio risk
• Cons
• Higher costs
• Low transparency
• Zero sum game

• Passive Management
• Pros
• Pure Beta exposure
• Low fees
• No manager risk
  
  
• Cons
• Bias to overvalued companies
• Only market exposure

4
Active Management

• A zero sum game
• Performance of active managers is normally
  distributed around the market return

Likelihood
Below the market
Better than the market
10 Market Performance
5
Costs of active Management

• USA Europe

6
Importance of costs

• Costs reduce the returns
• After costs, the average active manager
  underperforms the market

Likelihood
Below the market
Better than the market
8.8
10 Market Performance
Impact of costs
7
Indexing vs. Active Investing
Source Lipper as of 30 March 2007 (in EUR)
8
Active vs Passive Allocation

• How to maximise the opportunity/cost trade-off

A Optimist C Pessimist B Realist

• Source Roland RousseauAlpheta Rising,
  Deutsche Bank Company Research, 2007.

9
So what are the vehicles for indexing ?

• Swaps
• Futures
• Securitised Products certificates/notes/warrants
  
• Traditional Funds
• Exchange Traded Funds

10
Why are ETFs ideal?

• Combine the best features of funds and listed
  securities
• Diversified
• Listed on exchanges with active market making
• Pricing Transparency
• Low costs
• Regulated (UCITS 3)
• They are NOT derivatives
• Large range of products available

11
Shaping the future with ETFs

• Use ETFs as the building blocks of active
  portfolios
• Use skill of fund manger to create alpha
• Maximise asset allocation efficiency
• Reduce running costs of portfolio
• Reduce risk in portfolio
• Active Passive Investment Strategies
• Short term cash allocation
• Active asset allocation core satellite
• Strategic asset allocation
• Filling in the gaps

12
Potential of the ETF market
Investment Products Group
13

• Global ETF assets to exceed 1 trillion by 2010
• US has over 800 ETFs with over 450 billion AuM
  (March 07)
• Europe has over 350 ETFs with over 100 billion
  AuM (March 07)

14
Passive investing is becoming more popular

• Over 30 of the new AuM in the US went into
  passive instruments of which close to 70 went
  into ETFs

McKinsey / Institutional Investor U.S.
Institute Asset Management Benchmark Survey
15
Pensions market is growing

• Globally pension funds hold 23.23 trillion USD
  AuM, with a growth rate of 7.5 for the last 10
  years assets

16
Potential of the retail market in Europe

• Private investors are not yet active in ETFs
• In the US approx 50 of new AuM in 2006 came from
  private investors
• In Europe less than 15 of new AuM came from
  private investors
• ETF saving plans or fund of ETFs do not exist in
  Europe
• Continental Europe dominated by securitised
  products such as certificates/warrant
• Low cost/easy to issue
• Germany over 140,000 issued
• Estimated AUM of 300bn in Germany and
  Switzerland
• UCITS 3 allows for more structuring opportunities
  which can be applied to the ETF market

17
ETFs are getting even better
Investment Products Group
18
ETF Product Evolution
Country Indices
Regional Benchmarks
Alternative indices
Market Cap
Structured eg reverse
ETF Product Menu
Global countries
Commodities
Sectors
Fixed Income
Global Benchmarks
Property
Style Value/Growth
Emerging Markets
Next evolution Semi Active / Active Indices ?
19
More Style and Structured ETFs being launched

• Europe 131 ETFs launched in 2006 (78)
• 77 new ETFs launched in Q1 2007 (350 in total)
• 80 sector ETFs (37 launched in 2006)
• 40 style fundamental Indices
• 16 structured/managed ETFs
• US 153 new ETFs launched in 2006 (64)
• 131 new ETFs launched in Q1 2007 (439 in total)
• 57 of new ETFs launched in 2006 were on style
  indices
• 125 sector ETFs
• 180 style fundamental indices
• 50 structured or dynamic ETFs

20
Innovations in index tracking within ETFs

• Emergence of swap based ETFs to deliver better
  tracking performance
• Inefficiencies in traditional index replication
  strategies
• Not ideal for large number of index constituents
• Not ideal for illiquid index constituents
• Most indices do not reflect the real world
• Real World factors can impact tracking error and
  performance
• Timing of dividend payments
• Tax treatment/timing of dividends
• Index turnover and transaction costs
• Swap based ETFs can reduce impact of real world
  factors
• Fund Performance Index Performance less fees

21
Tracking Error Comparison Swap ETFs vs
Traditional ETFs
(Excludes enhancements possible through stock
lending to reduce impact of fees)
Index turnover
Tax treatment of dividends
Costs / Tracking Error
Timing of dividend payments
Total Expense Ratio
Traditional Index Tracking
Swap-based Index Tracking
22
Tracking Performance (excluding enhancements)
Benchmark
Swap based ETF
Performance
Traditional ETF
Time
23
Tracking Performance (including enhancements)
Enhancement may be achieved due lending fees
and better treatment of dividends paid by index
constituents
Swap based ETFs
Traditional ETFs
Benchmark
Performance
Time
24
Conclusions

• Institutional investors will increasingly use
  ETFs in their portfolios to increase efficiency
  and maximise their alpha potential
• European ETF market will continue to grow with
  increased demand from institutions and retail
  market
• Variety and number of ETFs growing providing the
  desired solution for investors
• ETFs are becoming even better with lower tracking
  errors

25
Deutsche Bank Research

• ETF Special reports Weekly ETF reports
  Quantitative Research

26
Thank you

• db x-trackers
• Manooj Mistry Thorsten Michalik
• 44 207 545 1037 49 69 910 30 728
• manooj.mistry_at_db.com thorsten.michalik_at_db.com
• Website www.dbxtrackers.com
• Reuters DBETF
• Bloomberg DBETF ltGOgt

27
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