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RAPPORTS

NATIONAUX 2005
2nde partie (Italy à USA)
ème
19 rencontre de l’IIFA
INTERNATIONAL INVESTMENT FUNDS ASSOCIATION
(ASSOCIATION INTERNATIONALE DES FONDS D’INVESTISSEMENT)

WASHINGTON, OCTOBRE 2005

ASSOCIATION FRANÇAISE DE LA GESTION FINANCIERE
31, rue de Miromesnil. 75008 Paris - Téléphone 01 44 94 94 00 - Télécopie 01 42 65 16 31
ITALY COUNTRY REPORT 2005

1. Economic and Financial Background

The Italian economy has shown some modest sign of recovery in 2004 with a growth of total GDP
of 1.2% and of GDP per capita of 3.1%, and a reduction in the unemployment rate, now at 7.4%.
Also inflation continued its positive trend with a further decrease from 2.7% in 2003 to 2.2% in
2004.

The stock market experienced a positive year with the S&P/Mib index achieving + 14,9% in 2004
and a further move in the level of stock market capitalization as % of GDP reaching now 43.1%.

Table 1: Key Economic Indicators

2003 2004
Population (million) 57.6 57.9
GDP (EUR billions) 1,301 1,351
Real GDP growth (%) 0.5 1.2
Inflation rate (%) 2.7 2.2
Unemployment rate (%) 8.7 7.4
Stock market capitalisation (EUR billions) 485 581
Stock market capitalisation (% of GDP) 37.4 43.1
Bond market capitalisation (EUR billions) 1,732 1,792
Bond market capitalisation (% of GDP) 133.1 135.7
Household gross savings ratio (%) 10.4 n.a.
Household financial wealth (EUR billions) 2.909 3.100 (e)
Average per capita financial wealth (EUR) 50,503 53,540 (e)

2. Key Trends in the Global Market

The total amount of asset under management continued growing, albeit at a lower pace than 2003,
showing a 5% increase over the previous year and taking the market size of the Industry to € 589
bn., above its record level of year 2000. However this positive result hides a substantial negative
record in terms of net sales compensated by the positive performance of markets and fund
managers.

The net sales of open-ended funds (UCITS and non-UCITS) were in 2004 negative for € 4.6 bn.
This was the result of the negative sale record of UCITS products only partly compensated by the
positive results achieved by non-UCITS funds (+6,6 bn. €).

2004 figures for UCITS shows a shift in the composition of asset under management away from
nationally domiciled UCITS (-3,7%) toward foreign funds, increasing 5.9 bn. € (+ 29%) and
UCTIS promoted by national providers but domiciled abroad (+17,9%), the latter reaching a share
of total assets of 24,6% from 16.6% five years ago. The inflow of investment into foreign
domiciled funds it is however not sufficient to compensate the outflow from nationally domiciled
funds.

The impact of the flows of investment between different type of funds led to a change in the
composition of the assets managed by investments funds: while at the end of 2004 domiciled
funds were 67.6% of the total, the previous year they accounted for 71,8%, on the other side both
all foreign registered funds, whether promoted by Italian or Foreign asset mangers, gained share,
respectively from 22,3% to 25,2% and from 5,8% to 7,3% .

Confirming the attraction of non traditional products, noticeable is also the growth of non-UCITS
products whose weight on overall asset under management reached almost 4% thanks to a
doubling of hedge and real estate fund size.

Closed-end funds with € 9,5 bn of assets accounted for 1,6% of total asset under management in
2004, up 61% from the previous year.

Table 2: Net Assets of the Fund Industry in Italy
(EUR billions)

of which:

Nationally Nationally UCITS domiciled
Total assets under domiciled domiciled abroad and promoted
Year management UCITS * Non-UCITS by national providers
2000 585.5 457.8 2.8 97.4
2001 556.1 414.0 6.2 107.8
2002 504.6 370.4 8.5 100.4
2003 561.2 390.4 12.7 123.1
2004 589.1 375.7 22.7 145.2
*Funds of funds included

3. Key Trends in the UCITS Market

In 2004 the market of UCITS was marked by a dramatic fall in net sales of nationally domiciled
UCITS reaching € –25,2 bn by the end of the year only partly counterbalanced by an increase in
UCITS domiciled abroad (€ +13,9 bn) bringing the overall figures for total UCITS sold in Italy to
€ –11,3 bn. The origin of the negative result is due to a decrease in virtually all categories, each
loosing more then 6%, the only exception being balanced fund which gained 4.3% in net sales
over last year. The growing appeal to Italian investor of foreign domiciled products seems to stem,
on one side, from the more favourable administrative climate found by asset managers outside
Italy, on the other from the Italian taxation system which, at present, sets a more attractive regime
for foreign funds.

In terms of industry structure, the mergers of funds and the restructuring of products have led to a
decrease in the number of existing funds while the number of new funds launched in 2004
compared to the previous year was reduced by a third: the outcome has been the confirmation of
the trend towards larger funds started in 2003.

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Despite the positive performance of the stock market and the low level of interest rates,
considering the industry structure in terms of asset allocation, the weight of the different
investment categories has remained virtually unchanged compared to 2003 showing a low share of
assets invested in equity while more than 20% of funds remain invested in the money market. The
only relevant change can be found in the growth (+7.9%) of the investment in balanced funds.

Table 3: Number and Net Assets of UCITS

Average net
Number of Total net assets Net sales
Year Fund launches assets per fund
UCITS (EUR bn) (EUR mio)
(EUR mio)
2000 1,014 193 457.8 452 -1,572
2001 1,182 175 414.0 350 -18,087
2002 1,212 84 370.4 305 -12,328
2003 1,189 92 390.4 328 7,949
2004 1,142 61 375.7 329 -25,248

Table 4: UCITS Assets by Fund Type
(EUR billions)

2000 2001 2002 2003 2004
As a % of As a % of As a % of As a % of
Net Asset Net Asset Net Asset Net Asset Net Asset As a % of total
total total total total

Equity 157.1 34.3% 112.4 27.1% 73.9 20.0% 76.1 19.5% 74.4 19.8%
Bond 158.2 34.6% 162.0 39.1% 156.7 42.3% 153.8 39.4% 148.9 39.6%
Balanced 120.0 26.2% 93.1 22.5% 64.0 17.3% 64.4 16.5% 69.5 18.5%
Money Market 22.5 4.9% 46.7 11.3% 75.7 20.4% 96.1 24.6% 83.0 22.1%
Others
Total 457.8 100.0% 414.0 100.0% 370.4 100.0% 390.4 100.0% 375.7 100.0%

Table 5: Net Sales of UCITS by Fund Type
(EUR millions)

2000 2001 2002 2003 2004
As a % of As a % of As a % of As a % of As a % of
Net sales Net sales Net sales Net sales Net sales
total total total total total
Equity 40,957 n..s. -18,358 n..s. -9,332 n..s. -4,483 n..s. -5,799 n..s.
Bond -52,657 n..s. -135 n..s. -9,867 n..s. 3,560 n..s. -13,057 n..s.
Balanced 9,474 n..s. -21,382 n..s. -20,394 n..s. -4,502 n..s. 2,828 n..s.
Money Market 653 n..s. 21,788 n..s. 27,266 n..s. 13,374 n..s. -9,220 n..s.
Others
Total -1,573 n..s. -18,087 n..s. -12,328 n..s. 7,950 n..s. -25,248 n..s.

4. Key Trends in Other Nationally Regulated Funds and in Other Funds

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Table 6: Net Assets of Other Nationally Regulated Funds
(EUR millions)

Year end 2000 2001 2002 2003 2004
Hedge funds - 761 2,139 5,269 10,732
Real Estate funds 1,601 2,686 3,393 4,414 8,017
Special funds 415 1,639 1,563 1,321 2,236

For the third year, hedge funds recorded a 3 digit increase quickly becoming the most attractive
investment category amongst nationally domiciled products. Along the same lines, also real estate
funds – close end funds - have shown, over the past 5 years, compound growth rate of 50%.
The reason of the success of real estate funds lies both in their positive performance (+7,8%
average for real estate funds in 2004, source: Nomisma) and in their favourable fiscal regulation
according to which the income generated by the fund can be reinvested before tax.

5. Industry Structure

Italian asset management industry is clearly dominated by management companies belonging to
the largest banking and insurance Groups in Italy: the 5 top players in the Italian fund market
remain the same as last year, whether we consider only domestic products or both home and
foreign domiciled funds. The proportion of foreign domiciled funds these companies manage
varies from ARCA who only manages products registered in Italy to Pioneer Investments whose
65% of assets under management are domiciled abroad.

The level of concentration in the industry appears to be slowly decreasing with the top 5
accounting for only 60% of total asset under management of investment funds compared to over
62% last year.

As for portfolio management, besides the largest fund managers, also the two largest Italian
insurance companies are include in the top 5.

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Table 7: Investment Management Companies

Assets under Assets under
Fund management management of Fund management management of
companies home domiciled companies home and foreign
investment funds domiciled
(EUR mio) investment funds
(EUR mio)
GRUPPO INTESA 71,594 SANPAOLO – IMI 106,416
SANPAOLO - IMI 53,724 GRUPPO INTESA 79,395
PIONEER
FINECO - GRUPPO INVESTMENTS - Gr.
BANCARIO CAPITALIA 30,859 UNICREDITO IT. 78,122
FINECO - GRUPPO
PIONEER INVESTMENTS BANCARIO
- Gr. UNICREDITO IT. 26,856 CAPITALIA 32,540
ARCA 26,427 ARCA 26,427
TOP 5 209,460 TOP 5 322,900
Industry Total 388,871 Industry Total 537,420

Assets being Assets being
managed in your managed by
Fund management country by members Fund management members of your
companies or pure asset of your national companies or pure asset national association
managers association under managers under individual
individual portfolio portfolio
management/mandat management/manda
e te and investment
(EUR Mio.) funds
(EUR Mio.)
LE ASSICURAZIONI
GENERALI 76,094 SANPAOLO – IMI 172,867
PIONEER
INVESTMENTS - Gr.
SANPAOLO - IMI 61,027 UNICREDITO IT. 124,117
PIONEER INVESTMENTS
- Gr. UNICREDITO IT. 52,157 GRUPPO INTESA 109,315
LE ASSICURAZIONI
GRUPPO INTESA 33,656 GENERALI 85,712
FINECO - GRUPPO
BANCARIO
RAS 21,745 CAPITALIA 43,337
Top 5 244,679 Top 5 535,348
Industry Total 391,802 Industry Total 915,684

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6. Regulatory & Fiscal Developments

6.1 In August 2003 the Italian Parliament passed a piece of legislation (Legislative Decree 1
August 2003/n.274) transposing the UCITS III Directive and delegating the Bank of Italy
and CONSOB to draft the implementing regulation.

In 2004 both the Bank of Italy, working on investment limits, and CONSOB, dealing with
the regulation on the simplified prospectus, have published consultation papers and asked
for advice from the Industry. Assogestioni has actively contributed to the debate in both
areas.

The publication of the regulation is expected for early 2005 (has indeed taken place in
April 2005). The main provisions, in addition to those provided for in the UCITS
Directive, are:
- a relaxation of investment limits for non-UCITS products opening up new
investment opportunities for hedge funds
- the introduction of the obligation to declare in the Fund Prospectus the average
retrocession to the distributors of the management fees

6.2.1. Regarding the other EU directives to be adopted at national level, neither the Distance
Marketing Directive nor the Prospectus Directive nor the Taxation of Savings Directive
have yet been transposed into national legislation, however the latter is expected to be
transposed into the framework of Italian legislation in early 2005.

6.2.2. In addition to the work on the incorporation into national regulation of the provision of
UCITS III, other significant regulatory developments were in the area of taxation of real
estate funds. On the 1st of January 2004 the tax reform previously approved entered into
force: it provides that no tax is levied on the fund itself while a withholding tax is applied
on profit received though distribution, redemption or sales of units.

6.3. 2004 was also the year of the reform of corporate law which entailed the broadening of the
types of financial instruments that can be issued by a company and the introduction of new
models of governance that can be adopted as an alternative to the traditional one. Specific
rules have been set applying to those management or investment companies that intend to
modify their system of governance.

7. Investment Management Governance

A survey carried out by Assogestioni among its members in April 2004 has shown that 74% of
total AUM are managed by companies adopting the Association Self Regulatory Code of Conduct.
The Code, issued in 2001 and revised in 2004, focuses on issues regarding the independence of
Management Company from their shareholders, in particular

ƒ Prohibition for the executive directors of the Management Company to be also executive
directors of its shareholding company or of other companies of the same group or of the
investee companies
ƒ Presence of independent directors in the Board of the Management Company
ƒ Strict regulation concerning dealing with related parties
ƒ Rules to discipline contracts with suppliers and counterparts, especially if belonging to the
same group of the Management Company
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ƒ Dispositions on voting in the Annual General Meeting of investee companies

The largest groups, those that due to their group structure are potentially more exposed to conflicts
of interest between the management companies and their group, have adopted the protocol to
manage 90% of their funds; in the same way 90% of the adopters have adopted the protocol in all
its provisions. Assogestioni intends to continue promoting the Code and monitoring the actual
implementation.

On the front of promotion of the good corporate governance amongst investee companies, in 2004
Assogestioni has taken part in the annual general meetings of the top 30 companies listed in the
Italian stock market (MIB30), highlighting possible areas of improvement in the field of Corporate
Governance. The actions taken (or not) by the companies will be under scrutiny over the next
years.

7. Trends in Product Development and Competition

Hedge fund have continued their positive trend in terms of net inflow of funds in countertendency
with the rest of the industry: in 2004 again total assets invested in hedge funds have doubled
reaching 14 bn euros, their weight in the Italian industry more than doubling from 1.3% to 2.3%.

Closed-end real estate funds have also experienced an extraordinary growth with an inflow of
funds almost 4 times that of 2003 taking the overall amount of asset to over € 8 bn . Although
often open to the general public, real estate funds have attracted a strong interest particularly from
institutional investors: at the end of 2004 there were 27 real estate funds of which 8 dedicated to
institutional investors and 3 out of 5 funds launched in 2004 were dedicated to institutional
investors.

As for competing products, the traditional competition coming from life insurance products
appears to be still growing although at a lower pace compared with the past, with life insurance
recording a growth rate of new capital inflow of only 1.6% (source: Ania). These products
continue to benefit from less strict obligations than mutual funds in terms of transparency of costs
and performance although measures promoting transparency, such as the publication of a form of
prospectus, are under discussion.

On the other side, ETF, a relatively new product to the Italian market, although still a small
presence, are enjoying increasing popularity with +145% in numbers of contracts underwritten and
a net asset value of €8.8 bn (source: Borsa Italiana).

8. Standardization Efforts

Since its inception, Assogestioni has contributed to the work of the IPC in drafting and adapting
the GIPS to Italian Fund Industry. In 2004 it participated to the consultation supporting AIMR’s
effort to develop provisions to be added to the GIPS standards addressing the use of leverage and
derivatives and the requirement of disclosure of the tracking error.

As for transparency of fees, in 2004 CONSOB, issued a draft and carried out consultations on the
new regulation adopting UCITS III Directive: the document included a provision that indicated
that retrocession to distributors will have to be specified in the fund prospectus. The regulation is
to be approved in 2005.

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9. Development in Fund Based Pension Products

Fund based pension schemes have increased in 2004 by a substantial 28% bringing the total funds
to over € 8.1 bn.. However, this form of pension provision is expected to pick up only after the
much discussed pension reform.

In October 2004 the Italian Parliament has passed a new piece of legislation requiring the
Government to draft a pension reform covering both compulsory and complementary retirement
schemes. The guiding principle of the reform is the promotion and development of second and
third pillar pension provisions; this should be achieved, among other things, by:
ƒ Redirecting into complementary pension schemes those funds - TFR or Trattamento di
Fine Rapporto - currently set aside by the employers through the duration of a contract
with an employee and paid out to the employees at the end of their employment contract.
According to the guidelines drafted by the Parliament, the fund generated in this way
would as a default flow to a second pillar pension fund unless otherwise requested by the
employee.
ƒ Enhancing competition amongst supplier by creating a levelled playing field amongst
providers and improving portability
ƒ Establishing more favourable tax breaks for contribution into complementary pension
schemes and income generated by retirement provisions.

The pension reform is to be presented to the Parliament by September 2005. The reform in
expected to generate an inflow of approximately € 15 bn. into retirement provisions.

As for the IORP Directive, it has not been transposed into national legislation yet however on
some of the key issues, the orientation of the legislator is already know. In particular:
− The directive is expected to be applied directly to the pension fund and not to the
Management company, despite the fund not having legal personality.
− As for the possibility of entrusting the management of a fund to a third party, that is
already provided for in the current Italian legislation albeit with some regulatory
limitations according to which at least some activities have to be retained by the
management company promoting the fund.
− It also appears to be the intention of the Italian regulator to apply domestic labour and
welfare regulations to all fund managers, both national and foreign.

Table 8: Investment Funds in European Retirement Provision
(EUR billions)

Open-ended
Unit-linked Traditional
and closed-
life insurance life insurance Traditional
ended Other
contracts schemes pension funds
pension
(PIP) (PIP)
funds
Assets under
8.1 1,6(e) 29.9 -
management
Assets invested in
- - - - -
investment funds
Use in pension pillar
2nd 2nd 2nd 2nd -
(1rst. 2nd or 3rd pillar)

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10. Other Activities of the Association

In 2004 Assogestioni launched its new training and educational activity by organizing a training
programme aimed at junior professionals already working or about to start a career in the asset
management industry: the 50-hour programme covered both regulatory and financial subject at an
introductory level and was carried out by Assogestioni staff and professionals from the
Management Companies. The successful initiative was the first step of a much wider and longer
term strategy of promotion of the industry culture and knowledge base both amongst professionals
active in the industry and in related sectors but also amongst the general public. The plan for 2005
includes events to take place across Italy designed to create opportunities for encounter between
the public of investors and fund managers and advance the knowledge and understanding of asset
management products.

Always with the aim of promoting the Industry core values to a wider audience, in 2004
Assogestioni carried out an institutional advertising campaign through the press, billboards and
radio. The campaign was awarded by "Milano Finanza Global Awards 2005" as best financial
communication of 2004

The training activity and the advertising campaign complement and integrate the already well
established bi-annul meetings organized by the Association. In 2004 the key-note speakers were
Prof. Luigi Zingales from the University of Chicago for the March AGM who spoke about the cost
of regulation, and Prof. Alberto Alesina Dean of Economics at Harvard University discussing the
case for liberalism in Italy.

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Japan Country Report 2005

1. Economic and Financial Background

Real GDP: 2.6 % in 2004, 1.2 % in first quarter 2005
Unemployment Rate: 4.6 % in fiscal year 2004 (from April 2004 to March 2005),
4.4 % in April 2005
Official Discount Rate: 0.1 % since September 2001
Consumer Price Indices: -0.1% in fiscal year 2004, 0.0 % in April 2005
Stock Market (Nikkei 225): 11,448 yen (2004/12), 11,584 yen (2005/6)
Foreign Exchange Rate (Yen per U.S. Dollar): 104.21 yen (2004/12),
110.62 yen (2005/6)

2. Key Trends in Assets under Management and Flows (In billion)

Type of Total Net Assets Net Flows
Funds June 2004 June 2005 (July 2004-June 2005)
Yen US $ Yen US $ Yen US $
Stock Funds 24,810 228 32,037 289 6,418 58
Bond Funds 10,752 99 9,736 88 -1,024 -9
MMF 4,039 37 3,303 29 -736 -7
Total 39,601 365 45,076 407 4,658 42

(Note) 1. Stock funds include also balanced funds.
2. Bond funds include short-term bond funds other than MMF. The assets of such
short-term bond funds amounted to 6,394 billion yen (US$ 57 billion) at the
end of June 2005
3. In addition to publicly offered securities investment trusts listed above, there
were also privately placed securities investment trusts of 18,946 billion yen
(US$ 171 billion) at the end of June 2005.
4. Exchange Rate: 108.43 yen (2004/6), 110.62 yen (2005/6)

The total net assets of stock investment trusts increased from 24.8 trillion yen at the
end of June 2004 to 32.0 trillion yen at the end of June 2005. This increase of 7.2
trillion yen resulted from the net inflow of 6.4 trillion yen and portfolio appreciation of
0.8 trillion yen during this period.
The total net assets of bond investment trusts decreased from 10.7 trillion yen at the

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end of June 2004 to 9.7 trillion yen at the end of June 2005. This decrease of 1.0 trillion
yen resulted from the net outflow of 1.0 trillion yen during this period.
The total net assets of MMF decreased from 4.0 trillion yen at the end of June 2004 to
3.3 trillion yen at the end of June 2005. This decrease of 0.7 trillion yen resulted from
the net outflow of 0.7 trillion yen during this period.
As a result, the total net assets of Japanese investment trusts increased from 39.6
trillion yen at the end of June 2004 to 45.0 trillion yen at the end of June 2005.

3. Regulatory and Self-Regulatory Developments (including Tax)

1. Raise of Upper Limit of Contributions to Defined Contribution Plans
The upper limit of contributions to defined contribution plans was raised in October in
2004 as follows.
Type of DC Plan Before Revision After Revision
(Per Year) (Per Year)
Corporate Type (in addition to DB plan) 432,000 yen 552,000 yen
(US$ 3,905) (US$ 4,990)
Corporate Type (without DB plan) 216,000 yen 276,000 yen
(US$ 1,952) (US$ 2,495)
Individual Type (without DB plan and 180,000 yen 216,000 yen
corporate-type DC Plan) (US$ 1,627) (US$ 1,952)
Individual Type (Self-employed) 810,000 yen Unchanged
(US$ 7,322)

2. Improvement of Prospectus
As the result of the amendment to the Securities and Exchange Law, the prospectus
was divided into following two parts in December 2004:
a. First part is the prospectus, which must be delivered to investors.
b. Second part is the statement of additional information, which is delivered to
investors on their request.

3. Sales of Funds by Post Offices
The Law for Permitting Japan Post to Distribute Investment Trusts passed the Diet in
December 2004. The Japan Post plans to start the sales of funds at its post offices this
autumn. The expansion of the distribution channel is expected to enhance the
investor’s convenience.

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4.& 5. Corporate Governance & Fund Governance

1. Enactment of Company Law
A. The new Company Law was enacted in June 2005 by integrating three laws related
to the company system such as the Commercial Code. It will become effective in
2006 except for some provisions.
B. The main points of the new Company Law are as follows.
— Abolishing minimum number requirement of directors
— Permitting director’s dismissal by the ordinary resolution at the general
meeting of stockholders
— Introducing the Japanese-version of LLC.
— Abolishing the minimum capital requirement
— Issuing no share certificates in principle
— Removing restrictions on frequency of dividend payment

6. Product Development

There were no major product developments.

7.Others Major Issues and Developments

1. Consideration of Investment Service Law (provisional name)
In keeping the pace with the financial deregulation, financial products offered to retail
investors have been increasingly diversified. However, different financial products are
regulated by different laws at present, while some types of products are not regulated
at all.
Therefore, the Financial Services Agency (FSA) determined to enact the Investment
Service Law, which will broadly regulate financial products on cross-sectional basis.
The Investment Service Law is anticipated to consist of the rules for sales and
solicitations as well as the rules for asset managements and custodies. The sales
activities regulations and asset management activities regulations of the Investment
Service Law are expected to be applied for distributors or managers of investment
trusts. The FSA began to make the preparation for drawing up the bill.

2. Consideration of Amendment to Trust Law
The Ministry of Justice has considered the sweeping amendments to the Trust Law.
The Investment Trust Law, which governs investment trusts, is positioned as the
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special law of the Trust Law. Therefore, the sweeping amendments to the Trust Law
are expected to exercise the great influence on the investment trust system. The
amendments, which would be considered to exercise the great influence on the
investment trust system, include “merger of trusts”, “method of making decisions in
case of trusts with multiple beneficiaries”, “revision of trust” and “duty of loyalty.” The
Ministry of Justice plans to submit the bill to the ordinary session of the Diet in 2006.

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Korea Country Report 2005

Asset Management Association of Korea
1. Economic and Financial Background

1) General economic development

In 2004 exports grew 30.4% year-on-year to USD257.7 billon, while in the first half of 2005
exports increased 11.1% to USD 138.8 billion. This growth was attributed to the global
economic recovery, particularly the recovery in the USA. Meanwhile, imports rose 25.1%
year-on-year in 2004, but they only rose 14.2% in the first half of 2005 because of the
appreciation of the Korean won against the US dollar. The unemployment rate and
consumer price index both recorded similar levels of growth in the first half as the 3.7% and
3.6% respectively recorded in 2004.

The Korean economy is likely to recover to its potential growth level as, despite volatile
external conditions, growth is expected in the second half led by domestic demand.

2) Financial environment

Starting at 4.22% as of July 2004, the yield on 3-year treasury bonds declined to the 3%
level from mid-August; however, it started to rise from the early part of this year to reach
the 4% level before declining again to the 3% level after March this year.

The KOSPI1, starting from 778.03 points, has maintained an upward trend in the period
from July 2004 ~ June 2005. In particular, it reached the 1,000 point level, which is the
highest point for five years. In spite of some concerns such as rising oil prices and a
slowdown in the world economy, the upward trend of the KOSPI is forecast to continue
since the surge has stemmed from investment by retail investors in Regular Savings Plan,
which started to become popular last year.

< Major Economic and Financial Indicators>

Year (End of) 2000 2001 2002 2003 2004
Economy
GDP Growth (%) 8.5 3.8 7.0 3.1 4.6(p)
GDP (USD Billion) 511.8 482.0 546.9 608.0 680.1-
Per Capita GNI (USD) 10,841 10,160 11,499 12,720 14,162
Gross Savings Ratio (%) 33.7 31.7 31.3 32.8 34.9
CPI (yoy, %) 2.3 4.1 2.7 3.6 3.6
Unemployment Rate (%) 4.4 4.0 3.3 3.6 3.7
Finance
Yield on CP (91 days, %) 7.3 5.0 4.9 4.6 3.61
Yield on Treasury Bonds (3 yrs., %) 7.2 5.7 5.1 4.8 3.28

1
Korea Composite Stock Price Index (KOSPI) is a representative indicator in the Korean stock market.
KOSPI (Point) 504.6 693.7 699.8 810.7 895.9
Trade and Foreign Exchange
Import (USD Billion) 159.1 138.0 152.1 175.5 219.6
Export (USD Billion) 175.9 151.4 162.5 197.6 257.7
Trade Balance (USD Billion) 16.9 13.4 10.4 22.1 38.2
Current Account (USD Billion) 12.2 8.6 6.1 12.3 27.6
Exchange Rate (KRW/USD) 1,259.7 1,326.1 1,200.4 1,197.8 1,043.8
Foreign Currency Reserves (USD
95.9 102.8 121.4 155.4 199.1
Billion)

2. Key Trends in flows and assets under management

1) Total assets

The total net assets of investment funds amounted to USD165.6 billion as of the end of June
2005, an increase of 23.6% (USD31.6 billion) over the end of June 2004.
As the KOSPI has continued to rise during the period July 2004 ~ June 2005, total net assets,
except for hybrid funds, have enjoyed an upward trend: equity funds, bond funds, and money
market funds (MMFs) increased by 54.4% (USD4.6 billion), 19.8% (USD11.6 billion), and
30.5% (USD16.3 billion) respectively compared with June 2004, while hybrid funds
decreased by 9.9% (USD3.1 billion).

Most investment funds are contractual type, which accounted for 95.7% of total assets at the
end of June 2005. Corporate type funds accounted for only 4.3% of total assets, a decline of
2.0% points from a year ago.

<Changes in total net assets> <Percentage by investment classification
as of the end of June 2005>
(USD billion)
180 165.6
160
141
131 134
140 123 Others
118 Equity
120
6.6% 7.5% Bond
100
32.6%
80 Hybrid 18.2%
60
40
20
0
MMF 35.2%
Jun. Jun. Jun. Jun. Jun. Jun.
2000 2001 2002 2003 2004 2005

2) Percentage of Securities Holdings to Market Capitalization

(a) Stock holdings of investment funds as a percentage of the total listed amount of stocks
by market capitalization increased to 4.0% as of the end of June 2005 from 3.5% a year

IIFA Oct. 2005 - Washington
ago.

(b) Bond holdings of investment funds as a percentage of the total amount of listed bonds by
market capitalization increased to 22.1% as of the end of June 2005 from 18.4% a year
ago.

3) Trends concerning international investment funds

(a) Onshore Funds exclusively for Foreigners (OFFs)

Thanks to the upward trend in the KOSPI, onshore funds exclusively for foreigners
enjoyed huge inflows of 107.8% (USD 2,256 million) in the year from June 2004 to
USD4,349 million. This continued growth of the OFFs indicates that the Korean market
has been attractive to foreign investors.

(b) Overseas Investment Funds (OIFs)

As OIFs have gained favorable attention from investors since 2000, the funds,
established by domestic fund management companies to invest overseas, have enjoyed
considerable popularity. The net assets of OIFs amounted to USD7,217 million as of the
end of June 2005, an increase of 125% over the end of June 2004.

<Trends of OFFs> <Trends of OIFs>

(USD Million) (USD Million)

5,000 8,000
7,217
4,349
7,000
4,000
6,000

5,000
3,000
4,000
2,093 3,207
2,000 1,816 3,000
2,146
1,322 1,666
1,101 2,000
975
1,000 1,000 723
446
0
0
00

02

04

05
01

03
20

20

20

20

20
20
2

3

4

5
1
00

00

00

00

00
00

n.
20

n.

n.

n.

n.

n.
2
2

2

2

2

Ju
n.

Ju

Ju

Ju

Ju

Ju
n.

n.

n.

n.

n.
Ju

Ju

Ju

Ju

Ju

Ju

IIFA Oct. 2005 - Washington
(USD Million)

5,000
(c) Offshore Funds 4,348

4,000

3,000
2,326

2,000 1,793

1,000 776

159 286

-
Jun. Jun. Jun. Jun. Jun. Jun.
2000 2001 2002 2003 2004 2005

Assets of offshore funds, which are year to June 2005. It is expected that
set up outside Korea by foreign fund more investors will be interested in
management companies and offshore funds because of lower
registered with the Financial domestic interest rates and the
Supervisory Service for sale in Korea, fluctuations in the domestic stock
increased by 86.9% (USD2,022 market.
million) to USD4,348 million in the

IIFA Oct. 2005 - Washington
3. Regulatory and self regulatory developments (including tax)

1) Legal developments

The National Assembly approved on September 10, 2004 a bill that allows the establishment
of private equity funds (PEFs) in order to channel more money into stock investments,
corporate restructuring, and social overhead capital spending. Previously, asset management
companies could create such funds in the form of a mutual fund only for the purposes of
merger or acquisition (M&A). The law became effective from December 5, 2004.

<Major Contents>
Classification Contents
Offering - Private placement form
Minimum - Individuals: 2 billion won
investment amount Institutions: 5 billion won
- Participation in management
Purpose
- May use Special Purpose Company (SPC)
Life time of the fund - 15 years
- Not allowed to sell equities within 6 months
Management limits - Leverage and debt guarantee should be less than 10% of
fund assets
Fair Trade Law &
- Exempt from Holding Company Law and Fair Trade Law
Financial Holding
for 10 years from establishment.
Company Law
- Korea Development Bank only to participate in
infrastructure and restructuring
- Industrial Bank of Korea only to support small and
medium sized firms
Limits for
- Conglomerates are subject to the 4% limit on bank
state-owned banks
ownership if they are the largest shareholder and have
and conglomerates
voting rights in a private equity fund.
- The same limit will apply if affiliates of different
conglomerates collectively hold more than a 30% stake in
a private equity fund.
- Report to the FSC within 5 days any stake of more than
Investment in banks
4% in any bank.

2) New tax regulations

N/A

4. Corporate Governance & Fund Governance – major developments

With the introduction of the Indirect Investment Asset Management Business Act (I2AMBA) in
January 2004, the governance duties of a trustee or a custodian have been strengthened. Also,
the fund’s proxy voting for its property has been emphasized and more asset managers have
become more active in exercising their rights than before.

IIFA Oct. 2005 - Washington
5. Product Development – major changes

The Corporate Pension Plans is scheduled to start from Dec. of 2005. The plan will apply to
companies with five or more employees, and they may choose either defined benefits (DB),
defined contributions (DC), or continue with the severance payment scheme. In addition,
employees at companies with 30 or fewer employees may choose Individual Retirement
Accounts (IRA). After 2008, a presidential decree will decide when the scheme should be
introduced for workplaces with less than five persons. It has been reported that the market size
of corporate pensions may reach about USD 95 billion by 2010.

Financial institutions can participate as an Investment Manager and/or as a Custodian in the
form of bank trusts and insurance contracts. The Investment Manager can provide investment
products, advisory services, record keeping, administration, etc., and this role can be
undertaken by various financial institutions including asset management companies, banks,
insurers, and securities companies.

6. Other major issues and developments

1) Plan to establish an Education Center

AMAK has been in discussions with the regulatory body to establish an education center in
order to put more effort into investor education. Under this project, AMAK is going to
utilize the ”Investment Stability Fund” established in 1998 for financial stability. Since its
primary purpose had been achieved, it added investor education as its goal in 2003. The
assets of the Fund totalled USD26.9 million as of the end of March 2005.

2) Activities of AMAK

AMAK has played an import role in improving disclosure as more retail investors, who are
not sophisticated investors, have needed greater disclosure and more information about
funds. To meet the needs of these investors, AMAK has developed its website so that it is
more easily accessible and understandable with a wider range of information. More
specifically, AMAK’s website shows that an asset management company shall make a
disclosure on its organization, human resources, financial statements, capital raising and
operations, and management indicators such as soundness, profitability, productivity, etc.
through AMAK. Also, regarding funds, AMAK shows the prospectus, Portfolio
Management Report, Investment Performance, and Performance Ranking of funds. Also,
AMAK discloses the NAV per unit and the composition of the portfolio of all contractual
and corporate type funds on a weekly basis. Regarding ad-hoc disclosure, an asset
management company of an investment trust or an investment company shall publicly
disclose the matters such as changes in fund managers; decision on delaying or resuming
redemption and reasons thereof, etc. through AMAK.

IIFA Oct. 2005 - Washington
LUXEMBOURG COUNTRY REPORT 2005

1. Economic and financial background

Table 1: Key Economic Indicators

2003 2004
Population (million) 0.4521 0.455*
GDP (EUR billions) 22.9 25.043
Real GDP growth (%) 2.1 4.2
Inflation rate (%) 2.12 2.23**
Unemployment rate (%) 4.13 4.5***
Stock market capitalisation (EUR billions) 29.59777 36.89061
Stock market capitalisation (% of GDP) 126.08 147.3
* as of 01/01/2005
** average annual rate
*** as of 12/2004

2. Key trends in flows and assets under management

2004 was a year of exceptional growth in the Luxembourg investment fund industry. Net
assets under management grew by 152.92 billion euros to reach 1106.2 billion euros at 31
December 2004. In absolute terms, this growth rate has only been surpassed once, in 1999 at
the peak of the 1990s stock market boom, when net assets increased by a record 247.7 billion
euros.

This strong growth rate has continued into 2005, with an impressive increase of 16.6% in the
first six months of the year. Net assets managed by Luxembourg funds thus reached
1289.787 billion euros at the end of June 2005. Strong net subscriptions and a positive impact
of financial markets pushed the net assets under management to a new record level of
1337.565 billion euros at the close of July 2005.

Between end of June 2004 and end of June 2005, net assets under management have grown by
23.2 percent or 243 billion euros. 60 percent of this increase can be attributed to net new
investment by private and institutional investors. During the twelve months under review,
these invested a net 146.8 billion euros into Luxembourg investment funds. Market

1
As of 01/01/2004.
2
As of 01/04/2004.
3
As of 12/2003.

IIFA Oct.2005 - Washington 1
performance contributed some 96.1 billion euros to the growth of the Luxembourg fund
sector.

Following the re-classification of funds in the wake of the UCITS III Directive made by the
CSSF, certain money market instruments and other short term securities were integrated with
the category “fixed income securities”. At June 2005, total assets held in this investment class
were 625.56 billion euros as published by the CSSF. This explains why the assets held in
“pure” fixed income funds is only 436.35 billion euros in the below table.

The same procedure was applied to equities, where UCIs investing in non-listed securities and
venture capital were integrated in the CSSF statistics and show 444.62 billion euros instead of
441.5 billion euros.

Following a period of consolidation in 2003, when the number of legal entities domiciled in
Luxembourg fell from 1941 to 1870 and the number of sub-funds from 7055 to 6819, the year
2004 saw a strong rebound with the creation of a net 99 new legal entities and a total of 361
new units (single funds and sub-funds). The number of Luxembourg investment funds thus
reached 1968 at the end of 2004. Together with the 7134 sub-funds offered by 1226 umbrella
structures, investors had a choice of 7876 different portfolios.

At the beginning of 2005 the creation rate of new funds accelerated further. During the first
six months of the year, 57 new legal entities were created, of which 18 stand alone funds and
39 umbrella funds. The latter created 313 sub-funds, which increased the total number of
portfolios on offer by 331 to 8207.

During recent years, the average net assets held in Luxembourg investment funds have
increased steadily. Between 2002 and 2004, the average rose by 30%, from 108.1 million
euros to 140.5 million. During the first six months of 2005, net assets per fund rose by another
11.9% to reach 157.15 million euros.

Total Of which:
Total assets
number UCITS nationally domiciled Non-UCITS nationally domiciled
under
of Average net
management
fund Net assets assets by Net assets Average net assets
(Eur bn) Number Number
End of units (Eur bn) funds (Eur (Eur bn) by funds (Eur m)
period m)
June
2004 1 046,82 7 679 970,00 6 717 144,41 76,82 962 79,85
Dec.
2004 1 106,22 7 876 1 024,98 6 855 149,52 81,24 1 021 79,57
June
2005 1 289,78 8 207 1 185,94 7 079 167,53 103,84 1 128 92,06
NB: UCITS is used in the sense of publicly offered open-end funds investing in transferable securities and money market funds.

IIFA Oct.2005 - Washington 2
Of which:
Total Assets Total
under Number Fixed income Equity Balanced Money Market Others
mana- of
gement fund
Net Net Net Net Net
(Eur bn) units assets assets assets assets assets
End of Number Number Number Number Number
(Eur (Eur (Eur (Eur (Eur
period bn) bn) bn) bn) bn)
June
2004 1 046,82 7 679 345,09 2 076 343,92 2 860 69,53 876 198,70 594 89,58 1 273
Dec.
2004 1 106,22 7 876 375,37 2 209 368,43 2 870 77,36 933 189,51 524 95,56 1 340
June
2005 1 289,78 8 207 436,35 2 310 441,50 2 908 95,16 1 018 197,43 518 119,34 1 453

3. Regulatory and self regulatory developments

3.1. Transposition of EU Commission’s recommendations on UCITS III

Further to the 2004 European Commission’s recommendations4, the CSSF published a
circular on 5 April 2005 providing detailed guidelines in relation to the use of derivatives
under the new UCITS Directives (Circular 05/176). These guidelines cover among other the
issues of risk assessment systems, limitation of global risk, or market and leverage risk
assessment standards for sophisticated and non-sophisticated products.

3.2. Transposition of EU Directives in the national framework

Taxation of Savings Directive. On 12 April 2005, the Luxembourg Parliament adopted the
draft law implementing Directive 2003/48/EC of 3 June 2003 on the taxation of savings
income in the form of interest payments.5 ALFI has drafted guidelines on the Savings
Directive for its members.

Distance Marketing Directive. A draft bill of law implementing the Directive on the distance
marketing of consumer financial services (2002/65/EC) was deposited with the Luxembourg
Parliament on 18 October 2004 (draft bill no.5389). In the draft bill, Luxembourg intends to
adopt an approach where the legislation of the place of establishment of the supplier applies,
without prejudice to the right of the parties to choose another law governing their contract.
Nevertheless, when (i) the habitual residency of the consumer is situated within the EU and
(ii) the contract has been proposed, concluded or executed within the territory of one or more
Member States of the EU, the consumer may not be deprived of the protection granted by the
European legislation regarding the distance marketing of financial services to consumers as a
result of the fact that the relevant agreement is governed by the law of a non-Member State.
Consequently, Luxembourg law shall apply in this last case, except if the provisions of the
Rome Convention on the law applicable to contractual obligations dated 19 June 1980
(80/934/EEC) designates the law of another Member State which has implemented the
European legislation regarding the distance marketing of financial services to consumers".
This text will undoubtedly have an impact on the administration of websites used by financial

4
Commission Recommendation 2004/383/EC of 27 April 2004 on the use of financial derivative instruments for
undertakings for collective investment in transferable securities (UCITS) and Commission Recommendation 2004/384/EC of
27 April 2004 on some contents of the simplified prospectus as provided for in Schedule C of Annex I to Council Directive
85/611/EEC.
5
Loi du 21 juin 2005 transposant en droit luxembourgeois la directive 2003/48/CE du 3 juin 2003 du Conseil de l'Union
européenne en matière de fiscalité des revenus de l'épargne sous forme de paiement d'intérêts.

IIFA Oct.2005 - Washington 3
services providers, whether for information or transaction purposes. ALFI will assess the
implications of the draft law over the next few months.

Prospectus Directive. On 29 June 2005, the Luxembourg Parliament adopted the draft law
implementing Directive 2003/71/EC on the prospectus to be published when securities are
offered to the public or admitted to trading. The law of 10 July 2005 lays down a framework
for the drawing up, scrutiny and distribution of prospectuses to be published where
transferable securities are offered to the public or admitted to trading on a regulated market.
The content of the directive is implemented in part II of the law, which targets public offers of
securities and admission of securities to trading on a regulated market which is being
harmonised at the Community level. Prospectuses drawn up in accordance with Part II of the
law will therefore be able to benefit from a single European passport, meaning that
prospectuses benefiting from the European passport on account of their approval by the
competent authority of a Member State are allowed to proceed to an offer to the public or
admission to trading on any other Member State’s regulated market by way of a simple
notification. Part III of the law concerns the regime applicable to public offers of securities of
a low amount as well as admissions to trading on a regulated market outside the scope of the
directive. As they are outside of the community framework, they do not benefit from the rules
on the mutual recognition of prospectuses. Although it is inspired by the rules foreseen in part
II, the content of the prospectus is simplified. Finally, part IV sets up a regime specific to
Luxembourg applicable where securities are admitted to trading on a market which is not on
the list of regulated markets published by the European Commission.

IORP Directive. Two statutes implementing the Directive on the Activities of Institutions for
Occupational Retirement Provision (IORP Directive) have been adopted by the Luxembourg
Parliament on 29 June 2005.6 The implementation of the Directive in Luxembourg concerns
three legal texts in particular: the law of 8 June 1999 creating pension funds in the form of
pension savings companies with variable capital (sepcav) or pension savings associations
(assep), the grand-ducal regulation of 31 August 2000 implementing article 26(3) of the law
of 6 December 1991 on the insurance sector and relative to pension funds subject to
prudential supervision by the Commissariat aux Assurances (CAA), and the law of 8 June
1999 concerning the occupational pension schemes. For the implementation of the Directive,
the Luxembourg legislator has chosen to maintain the autonomy of these existing texts and to
cover them by a first statute fixing a general framework governing the activities and the
surveillance of IORPs. The second statute implementing the Directive concerns IORPs in the
form of sepcav and assep and proposes a series of adaptations of the legal framework
applicable to these IORPs. The social and labour law applicable to IORPs authorised in
another state will vary depending on the type of vehicle. According to the new law, the
Inspection Générale de la Sécurité Sociale (IGSS) will inform the IORP’s home country
authority of the relevant social and labour provisions under Luxembourg law that will apply
(including the law of 8 June 1999 concerning the occupational pension schemes). The
information will then be communicated to the IORP by its home country authority.

3.3. Other regulatory developments at national level that impact fund management

Anti-money laundering law. The law of 12 November 2004 transposes into Luxembourg law
Directive 2001/97/EC on the prevention of the use of the financial system for money
laundering purposes. The law extends the professional obligations as regards the fight against
money laundering to the fight against terrorist financing. It also adopts a new, horizontal and

6
Laws of 13 July 2005.

IIFA Oct.2005 - Washington 4
intersectorial approach. The scope of the existing anti-money laundering law has been
broadened and now also applies for instance to pension funds, undertakings for collective
investment marketing their units or shares and management companies within the meaning of
the law of 20 December 2002. CSSF Circular 05/188 purports to describe the changes brought
about by the law of 12 November 2004 that concern the professionals of the financial sector
subject to the supervision of the CSSF and to provide details on the way these professionals
should implement the new legal provisions as regards professional obligations.

CSSF Circular 04/151. Further to the Ministerial Decree of 5 July 2004 which had modified
the internal regulations of the Luxembourg Stock Exchange, the CSSF adopted Circular
04/151 which lays down the prospectus requirements for foreign funds wishing to be listed in
Luxembourg. These provisions facilitate among other the listing of offshore hedge funds on
the Luxembourg Stock Exchange.

CSSF Circular 05/177. On 6 April 2005 a new Circular abolished Section II of chapter L of
the IML Circular 91/75 which provided for the submission to the CSSF of advertising
material to be used by those responsible for the placing of fund units or their agents where
such material is not subject to the supervision of the competent authorities of the countries
where it is used.

4. Corporate governance

(…)

5. Fund governance

The last year has been marked by an increased amount of initiatives relating to fund
governance. ALFI took several official positions i.a. in the context of the report issued by the
EU Expert Group on Asset Management as well as with regards to the implementation of
UCITS III. ALFI's working group "Corporate Governance and Code of Ethics" is currently
finalising a new version of the ALFI Code of Conduct based on the EFAMA high level
principles as well as new developments within IOSCO, the EU Institutions (Commission,
CESR ....) but taking into consideration the specificities of the pan-European business model
implemented by the Luxembourg Fund industry. This model stresses the role of the depositary
bank and the auditor as elements of independent oversight.

6. Product developments

6.1. Trends in new fund introductions

2004 was a year marked by several significant product innovations which have helped to
establish Luxembourg as a major and fast growing financial centre for alternative asset
classes. Following the new law on securitisation vehicles passed in March, the law on
SICARs (venture capital vehicles) was enacted in June 2004. This latter piece of legislation
opens up new opportunities for fund promoters with the introduction of an innovative vehicle
that is flexible while at the same time benefiting from regulatory approval. The new SICAR
law has introduced the regime of “qualifying investor”, a concept that may well be extended

IIFA Oct.2005 - Washington 5
to other product areas in the future. There were twenty SICARs in Luxembourg at the time of
writing these lines.

6.2. Top selling fund products

During the twelve months period under review, the number of hedge funds under
administration in Luxembourg has grown by nearly 42% from 86 to 122. The number of
hedge fund portfolios (stand alone funds plus compartments of multiple compartment funds)
has even grown by 85.2% from 129 to 239. 73 out of the 122 legal entities and 170 out of the
239 hedge fund portfolios are domiciled in Luxembourg. Net assets under management with
the hedge funds under administration in Luxembourg have more than doubled to reach 22.38
billion euros, compared to 9.8 billion euros at the end of June 2004. Roughly 19 billion euros
are held in funds domiciled in Luxembourg.

The Luxembourg fund of hedge fund sector is also developing rapidly. 407 funds of hedge
funds were under administration in Luxembourg at the end of June 2005, compared to 289 at
the close of June 2004. The number of fund of hedge fund portfolios under administration in
Luxembourg has reached 863 at the close of June 2005, compared to 644 one year before. 412
of these fund portfolios are domiciled in Luxembourg. Net assets under management with
these funds have reached 64.328 billion euros, compared to 45.576 billion euros at the end of
June 2004.

7. Other major issues and developments

In July 2005, the European Commission published a Green Paper on the enhancement of the
EU framework for investment funds. The Paper reviews the functioning of the legislative
framework for investment funds provided for by the UCITS Directive and invites
consideration and comment on a range of proposals aimed at boosting the efficiency of the
single market for investment funds. ALFI is currently preparing its answers to the nineteen
questions raised by the Commission in its Green Paper.

IIFA Oct.2005 - Washington 6
MALAYSIA COUNTRY REPORT –2005
XIX INTERNATIONAL INVESTMENT FUNDS ASSOCIATION ANNUAL CONFERENCE 2005

A. Economic and Financial Background

Despite the slower growth on the external front, Malaysia delivered a solid GDP growth of 5.7%
during the period under review. The first quarter of 2005 GDP of 5.7% year-on-year was
achieved on the back of strong manufacturing, services and agriculture sectors growth. The
Malaysian economy expanded by 4.1% in the second quarter of 2005 with private sector activity
continued to be the main driver of growth.

However, this growth may be dampened slightly by the continuing high oil prices which have
permeated into every facet of the consumer lives. Compared to our neighboring countries in the
Asia/ Pacific region, Malaysia is slightly better placed to cushion the high oil prices, as we are
now the only net oil exporting economy in the region other than Brunei.

In July, Bank Negara Malaysia (BNM) or the Central Bank of Malaysia announced the lifting of
the 7 year Ringgit peg to the USD( 1 USD to RM3.80) and a managed float was introduced
whereby its value is being determined by economic fundamentals. In a statement released by
BNM, it said that it will continue to monitor the exchange rate against a basket of currencies. At
the time of the unpegging, the Ringgit was close to its fair value. Consequently, the exchange
rate of the Ringgit has not shifted significantly following the adoption of a managed float
regime.

B. Key Trends in Flows and Assets Under Management

1. Asset Under Management

(a) Total Net Asset Value as at 30 June in RM (billion)

June 2005
2003 2004 2005 USD
(billion)*
Total Net Asset Value (NAV)** 63.49 74.89 88.45 23.28
Bursa Malaysia Market
Capitalisation 532.45 653.94 688.63 181.22
(Malaysian stock exchange)
% of NAV to Bursa Market
11.92% 11.45% 12.84% -
Capitalisation
Source: Securities Commission, Malaysia
*USD1 = RM3.80

IIFA Oct. 2005 - WASHINGTON 1
** Includes private and government-sponsored funds

During the period July 2004 to June 2005, the unit trust industry saw vibrant growth. The size of
the industry in terms of net asset value (NAV) grew 18.11% to reach RM88.45 billion
(US$23.28 billion) as at end-June 2005. The country’s unit trust investments represents 12.84%
of the market capitalisation of Bursa Malaysia.

As at 30 June 2005, there were a total of 36 registered unit trust management companies
managing a total of 301 funds.

(b) Analysis by Fund Type as at 30 June ( covers only funds managed by private companies and
excludes government sponsored funds)

2003 2004 2005
Fund Type USD (mil)
No. RM (mil) No. RM (mil) No. RM (mil)
*
Stock 84 2,964.53 101 14,798.6 116 15,938.2 4,194.28
Balanced 20 6,954.22 31 3,905.00 37 4,518.54 1,189.08
Bonds 20 529.42 29 5,749.79 41 8,424.91 2,217.08
Money Market 6 4,010.49 9 2,236.67 14 4,158.47 1,094.33
Islamic 41 147.43 52 4,900.62 65 6,569.96 1,728.94
Guaranteed 2 12,347.9 4 374.98 9 837.88 220.49
Total 173 26,954.0 226 31,965.7 282 40,448.0 10,644.20
Source : Lipper Asia Ltd
Based on funds managed by companies that have provided fund information to Lipper Asia Ltd
* USD1 = RM3.80. Figures may not tally due to rounding up.

2. Distributions of Investment Funds

Sales by Distribution Channels for 12-month period Distribution channels continue to
ended 31 Dec 2004 play a key role in the growth of
the industry. More intense
competition sets in among
distributors, particularly the
institutional unit trust agents.
18%
Tied Agents Similar to last year, the financial
49% institutions is the most frequently
Financial Inst.
used distribution channel,
5% garnering 49.0% of the total sales
Others 28%
Management registered during the reporting
Co. period, followed by direct sales of
unit trust management companies
(28.0%) and tied agents (18.0%).
Source: Securities Commission, Malaysia.

IIFA Oct. 2005 - WASHINGTON 2
C. Regulatory and Self-Regulatory Developments

1. Regulatory Development

(a) Guidance Note

Funds with a limited offer period/close-ended in nature, where there are no sales or
repurchases of units after the offer period are now partially exempted from complying with
the daily disclosure of unit selling and repurchase prices, sales charge and repurchase
charge in major newspapers. These funds are nevertheless still required to disclose the
remaining daily disclosure requirements i.e. unit NAV and annual management fee daily in
newspaper.

(b) Further Liberalisation of foreign exchange administration rules by Bank Negara Malaysia

Since 1 April 2005, further investment liberalisation were granted for unit trusts to invest
overseas – unit trust companies may now invest abroad the full amount of NAV attributed
to non-residents and up to 30% (increased from the previous limit of 10%) NAV attributed
to residents. It allows the unit trust companies to offer more variety in terms of unit trust
products like country specific or sectoral specific to the investors to meet their differing
investment objectives and to enhance investor returns.

It is hoped that by liberalising the investment rules, our investors will be able to have
access to regional and global investment opportunities and thus be able to build a wide
range of portfolio investments. With this increase in permitted amount to invest abroad, we
have seen some unit trust management companies forging strategic alliances with their
foreign partners. This is with an aim to tap into their foreign partners investment expertise
and knowledge to launch local funds for residents and non- residents alike for higher
returns.

(c) Guidelines on Online Transaction and Online Activities in Relation to Unit Trusts

Issued in November 2004, the Guidelines aim to promote continued technological
innovation in the capital market and enhance the efficiency of the market infrastructure.
While this was introduced to reduce distribution costs, it has not caught on with the
investors and most would still like to meet face to face with the unit trust consultants
before concluding a purchase. Unit trust is still primary a “sold product” and not a “bought
product” and thus the heavy reliance on distribution intermediaries for the growth of the
industry.

(d) Revision of Guidelines on Real Estate Investment Trusts(REIT)

The objective of the revision was to further accelerate the growth and establish a vibrant
and competitive property trust/real estate investment trust (REIT) industry in Malaysia. It
also facilitated the move towards a disclosure-based environment, including improvement
in terms of efficiency in fund-raising exercises.

Regulatory efforts to revitalise the REITs were very evident from the revised guidelines
issued by the Securities Commission late last year which aims to iron out the problems
faced by the earlier property trust companies. The new guidelines allow non-financial

IIFA Oct. 2005 - WASHINGTON 3
institutions to participate in the REITs industry as management companies. The new
players which are mainly property developers and owners should be able to give a higher
rate of success as they are the masters of the property trade.

More importantly, potential tax issues that could have derailed REITs were addressed in
the form of exemptions from Real Property Gains Tax(RPGT) and stamp duties for
vendors who sell the properties to the companies that manages the REITs. In Malaysia, the
highest RPGT rate on disposal of properties is 30% and the minimum is 5%. With the
exemption, vendors will not be liable for any RPGT. Further REITs are exempted from tax
on income distributed if at least 90% of its income to its unit holders is distributed
annually.

(e) Guidelines on Exchange-Traded Funds

The release of guidelines in June 2005 is to facilitate the introduction of exchange-traded
funds (ETF). The introduction of ETFs adds variety to the current class of investment
funds listed on the stock exchange, and is in line with capital developments in other
regional markets.
The first ETF bond fund was ABF Malaysian Bond Index and was offered on the Bursa
Malaysia (Malaysian stock exchange). ABFM invests in a basket of Ringgit –denominated
government and quasi- government bonds. It provided investors with a low cost and index
driven investment vehicle, allowing flexible and easy access to participate and invest in the
Malaysian bond market.

(f) Five new licenses to foreign fund managers

The SC has announced five new licences to be issued to leading global stock brokers to
establish operations in Malaysia. These foreign stock brokers will be allowed to own 100%
equity and will be allowed to participate in the institutional segment of the Malaysian fund
management industry. These five brokers are:-
1. CLSA
2. Credit Suisse First Boston (CSFB)
3. JP Morgan Chase & Co.
4. Macquarie Bank
5. UBS

Aberdeen Asset Management is at the present moment the only fund manager allowed to
operate in Malaysia.

(g) Market timing

FMUTM addressed the issue of market timing by fixing 4.00 pm as the cut off time to
receive all application for sales and redemptions by the unit trust management companies ,
an hour before the stock market closes at 5.00 pm. Thus this allows adequate time for the
unit trust management companies to compile all relevant information before sending to the
trustees for valuation purposes. Any applications received after the 4.00 pm cut off time is
treated as the next day transaction and will be valued using next day prices.

IIFA Oct. 2005 - WASHINGTON 4
2. Self-Regulatory Development

FMUTM has in May 2005 submitted to the Securities Commission a proposal to be a Self
Regulatory Organisation (SRO) for the investment management industry. For some time,
FMUTM has been a trade association for the industry but with the growth of the industry fund
size steadily over the years, it is only appropriate that FMUTM should be a more effective
membership body. The added responsibilities envisaged by FMUTM would be enforcing
compliance, discipline and imposing of penalties on errant members, issuing Standards and
Practice Notes relating to the good practices and fund governance and also provide support to
members in terms of investors’ education, continuing education to intermediaries etc. It is
envisaged that the Securities Commission will still maintain an oversight role as a regulator if
our proposal is accepted.

D. Major Development in Corporate/ Fund Governance

a. In the early part of the year, Securities Commission merged the licences issued to asset
managers and unit trust management companies and with that a single licensing regime was
adopted. As both entities can technically perform similar operations like units trust operations
and boutique fund management, it only makes sense the dawning of a new trend where the asset
managers and unit trust management companies merge to become one entity. Lately, we have
seen the mergers coming through since it more economical to maintain operations using shared
resources and manpower.

E. Product/ Pensions Development

We have commissioned a consultant to help us to prepare a Private Pension Plan proposal, and
we are in the midst of fine-tuning the details before forwarding to the government. In principle,
this Private Pension Plan is to complement the existing mandatory contributions made by the
employees to the Employees Provident Fund (EPF). A survey has shown that most monies
received by the retirees from the EPF is insufficient to fund their old age. The EPF scheme while
it is mandatory for working people to contribute, has not made it compulsory for the self
employed to contribute to the scheme. Thus most of the self employed have not started to build
their retirement eggs to meet that eventuality.

The proposed Private Pension Plan to be submitted by FMUTM to the government aims to
address the two issues namely to encourage the employees to save more other than through the
EPF and the self employed to start planning and saving now before it is too late.

IIFA Oct. 2005 - WASHINGTON 5
Netherlands Country Report 2005

1. Economic and Financial Background

Table 1: Key Economic Indicators

2003 2004
Population (million) 16.3 16.3
GDP (EUR billions) 454 466
Real GDP growth (%) -0.8 1.4
Inflation rate (%) 2.2 1.2
Unemployment rate (%) 3.8 6.4
Stock market capitalisation (EUR billions)* 477 491
Stock market capitalisation (% of GDP)* 105.1 105.4
Bond market capitalisation (EUR billions)* 318 no longer available
Bond market capitalisation (% of GDP)* 66.7 no longer available
Household gross savings ratio (%) 9,7** 10.1***
Household financial wealth (EUR billions) 640** 673***
Average per capita financial wealth (EUR) 39,506** 41,288***
* Listed on Euronext Amsterdam, issued by Dutch resident
** Year 2002 revised
*** Year 2003

2. Key Trends in the Global Market

Table 2: Net Assets of the Fund Industry in the Netherlands
(EUR billions)

of which:

Nationally Nationally UCITS domiciled
Total assets under domiciled domiciled abroad and promoted
Year management UCITS Non-UCITS by national providers
2000 106,099* 89,348* 16,751 -
2001 96,297* 78,506* 17,791 -
2002 79,188* 65,525* 13,663 -
2003 87,214* 73,418* 13,796* -
2004 89,100 74,618 14,482 -
* Revised

Investors in the Netherlands are still very reluctant to invest in equity funds. Fixed income
dominates cash flow figures, which are still very low. Equity funds suffered from redemptions, as
investors appear to have cashed in small profits in fund performances. Equity funds in the
Netherlands account for 48% of all investment funds. Investors are switching from European
equity to more worldwide investments. The nationally domiciled Non-UCITS shown above are
real estate funds, whilst leverage is not included in the real estate funds’ assets under management
shown.
p. 2

3. Key Trends in the UCITS Market

Table 3: Number and Net Assets of UCITS

Average net
Number of Total net assets Net sales
Year Fund launches assets per fund
UCITS (EUR bn) (EUR mio)
(EUR mio)
2000 473 - 89,348* - 12,608
2001 522 - 78,506* - 3,515
2002 566 - 65,525* - 4,867
2003 593 - 73,418* - 3,515*
2004 542 - 74,618 - -1,900
* Revised

Although the funds showed better performance in 2004, the increase of funds’ assets under
management show little progress since some Dutch funds where moved to Luxembourg. This fact
also accounts for the negative cash flow (net sales) in 2004. Overall, these figures show that the
public still has confidence in third party asset management in The Netherlands, and has not been
shocked by the fund management scandals that occurred in the US.

Table 4: UCITS Assets by Fund Type
(EUR billions)

2000* 2001* 2002* 2003* 2004
Net % of Net % of Net % of Net % of Net % of
assets total assets total assets total assets total assets total
Equity 56.44 63.17 46.03 58.63 31.35 47.85 34.53 47.03 33.49 44.88
Bond 11.03 12.34 12.69 16.16 14.58 22.25 18.4 25.06 19.54 26.19
Balanced 10.13 11.34 9.72 12.38 8.94 13.64 9.13 12.44 9.98 13.37
Money Market 4.54 5.08 1.34 1.71 1.09 1.66 1.34 1.83 1.34 1.8
Fund-of-Funds - - - - - - - - - -
Other 7.21 8.07 8.73 11.12 9.56 14.59 10.02 13.65 10.27 13.76
Total 89.35 100.0 78.51 100.0 65.52 100.0 73.42 100.0 74.62 100.0
* Revised

Table 5: Net Sales of UCITS by Fund Type
(EUR millions)

2000 2001 2002 2003* 2004
Equity 9,356 1,938 1,403 465 -3,962
Bond 814 2,174 1,593 2,458 975
Balanced 1,828 1,022 942 -13 503
Money Market -1,173 -3,024 -230 216 5
Fund-of-Funds - - - - -
Other 1,783 1,405 1,159 389 579
Total 12,608 3,515 4,867 3,515 -1,900
* Revised

IIFA Oct. 2005 - WASHINGTON
p. 3

The negative cash flow for Equity funds in 2004 is predominantly caused by the migration of
some Dutch located funds to Luxembourg. People in The Netherlands have shown a clear
preference for the bond market in 2005.

4. Key Trends in Other Nationally Regulated Funds

Table 6: Net Assets of Other Nationally Regulated Funds
(EUR billions)

2000 2001 2002 2003 2004
Real estate 16.751 17.791 13.663 13.796* 14.482
Alternative management - - - - -
Special funds - - - - -
Other - - - - -
Total - - - - -
* Revised

5. Regulatory & Fiscal Developments

5.1. Transposition of EU Commission’s Recommendations on UCITS III into the National
Framework

• Simplified Prospectus

The Netherlands already introduced a key features document for all kinds of investment
products (for banking, insurance and funds) in 2002. The European simplified prospectus
will now become the model for all investment funds in The Netherlands, both UCITS and
Non-UCITS. In The Netherlands a risk assessment model has been developed for
investment products by the Dutch supervisor on the financial markets, the AFM, and the
University of Tilburg, based upon value-at-risk principles. The outcome of this model will
be incorporated in the simplified prospectus as a risk indicator to accommodate the public.
The Commissions’ recommendations on the Total Expense Ratio (‘TER’) are incorporated
in the Dutch simplified prospectus.

• Derivatives
The use of derivatives for broad portfolio management by UCITS is allowed in The
Netherlands.

5.2. Transposition of Other EU Directives in the National Framework

• Taxation of Savings Directive
The Savings Directive has been fully implemented in the Dutch tax law system and came
into force as of 1 July 2005. There are specific guidelines issued in The Netherlands by the
Tax Department.

• Distance Marketing Directive
The Distance Marketing Directive has been implemented in the Dutch law system.

IIFA Oct. 2005 - WASHINGTON
p. 4

• Prospectus Directive
The Prospectus Directive has been fully implemented as of 1 July 2005.

5.3. Other Regulatory Developments at National Level that Impact Fund Management,
Including in the Area of Taxation

In June 2005 the Dutch government announced big changes in the treatment of investment funds,
both in the area of regulation and in tax treatment.

Although tax treatment has always been rather neutral for Dutch investors, international operating
Dutch asset managers have been setting up funds in countries like Luxembourg and Ireland for
their international distribution programs. Over the past few years, some large asset managers,
looking for tax neutral fund treatment to serve the international investor, even started to migrate
Dutch funds to Luxembourg. No doubt this development was to the detriment of the size of the
Dutch asset management industry, as the Dutch Fund and Asset Management Association
(‘DUFAS’) has been advocating.

Important tax changes that will start to have effect as of 1 January 2006, are the full abolition of
the capital tax1 and the introduction of tax transparent2 investment funds to serve the international
fund market. ‘Tax transparent’ in this respect means that there is no levying of taxes at the level of
the fund, but at the level of the investors in the fund. Thus is investing in funds (indirect investing)
made comparable with the treatment of investors that invest directly on the financial markets in
listed companies and other investment titles.

On the regulatory front, the obligation for Dutch SICAV’s to have a stock listing will be abolished
as of 1 September 2005. Next to this development, the system of continuously trading of fund
shares on the stock exchange market, will be simplified to bring this in line with distribution
policies in other European countries3.

6. Investment Management Governance

• DUFAS enhanced the EFAMA Code of Conduct for asset managers, which was approved
in 2004.

• Active exercising of shareholder rights by fund managers and other institutional investors,
based upon international accepted good governance principles for companies, becomes a
common practice in The Netherlands.

• Recognizing the international trend for better governance of fund investments, The
Netherlands is looking for instruments to serve that purpose. A committee, chaired by
Professor Jaap Winter who before advised the European Commission in the area of

1
Capital tax, comparable with the Luxembourg tax d’abonnement, amounts to a one time levy of 0,55% on the issuing
of new share capital by investment funds and other companies, established in The Netherlands.
2
At present Dutch funds have to distribute on a yearly basis their profits (income on the investment portfolio of the
fund: dividends and interest payments on fixed income investments) to their investors by way of dividend. Dividend
witholding tax of 25% is levied on the distribution of dividends, that can be regained, dependant on the tax treatment
of the investor.
3
Most countries know a distribution policy in which investors are offered the opportunity to buy or sell their shares in
a fund only once a day. The system is based on a forward pricing policy that fully satisfies the international investors’
needs.
IIFA Oct. 2005 - WASHINGTON
p. 5

European company law and governance aspects, introduced a set of recommendations for
fund governance that are the basis for discussion on the regulatory governance
environment. As ordinary investment funds in no way differ from other investment
products that are offered by banks, insurance companies or securities firms, a solution for
better governance is sought for on the level of the asset management company. It is not
very practical nor effective for large fund managers to incorporate governance on the level
of each of their funds. Thereby, in The Netherlands no distinction will be made for UCITS
III asset management companies and ISD/MiFiD companies. DUFAS is advocating a
flexible fund governance system, in which asset management firms can make some tailor-
made choices, to a certain extend based upon what they are used to in their country of
origin. For instance, additional governance controls by the external auditors, the
depositary, the supervisory or non-executive directors of the management company, or
installing of a special compliance committee.

7. Trends in Product Development and Competition

Competing products to investment funds – in particular structured securities, have attracted the
interest of the Dutch regulators. Level playing field with funds for alternative investment products
should be provided for on a European level. Discussions on this topic at the level of CESR are
followed with great interest in The Netherlands.

8. Standardisation Efforts

Information on initiatives to develop industry-wide standards, for instance, in the areas of risk
disclosure, disclosure of fees to increase transparency and efficiency in the industry, have been
described under paragraph 5. The Netherlands follows the recommendations of the European
Commission on the simplified prospectus in this respect.

9. Development in Fund Based Pension Products

The Netherlands, based upon a system of pension funds already introduced around 1950, provide
for a retirement savings system that is among the best in the world.

10. Other Activities of the Association

Actual information on the association’s activities can be derived at the DUFAS office in The
Hague, The Netherlands, or on the DUFAS website: www.dufas.nl

Main issues at the center of our domestic lobbying activities are in the area of creating tax
transparent funds, simplifying fund distribution and fund governance principles as described
above. On these topics regular conferences & workshops for members are organised, which
occasionally are open for participation by none-DUFAS members.

• Market Statistics

DUFAS, in co-operation with the Dutch Central Bank (‘DNB’) provides for fund market statistics
in The Netherlands. The statistics are circulated to DUFAS members on a quarterly basis.

IIFA Oct. 2005 - WASHINGTON
Country Report for New Zealand
Prepared by Vance Arkinstall, Chief Executive,
The Investment Savings & Insurance Association

Background

New Zealand is a financially sophisticated and developed South Pacific country with a population
of 4 million people.

The NZ economy is traditionally heavily based on agricultural exports. Over recent times New
Zealand dependence on dairy, meat and wool exports has reduced as a result of increased exports
in horticulture, fishing, and manufacturing and strong growth in tourism.

Australia (our closest neighbour) is our largest trading partner followed by the US and Japan.
Recent expansion of trade has been the fastest into Asia.

General Economic Development

New Zealand’s growth as measured by gross domestic product (GDP) stagnated through the late
1980s and early 1990s. Growth picked up through the 1990s but at a level below OECD averages.

From 1997 performance has improved with GDP growth averaging 3.0% - for 2004 the annual;
average GDP growth was 4.8%, but for 2005 GDP growth is slowing rapidly.

On current forecasts NZ’s real GDP growth is expected to average 3.3% over the period to the end
of 2008 ahead of expected average growth of 2.6% across the OECD.

New Zealand’s inflation performance improved markedly through the 1990s and early 2003 after a
period of high inflation (highest of the OECD) through the 1980s. New Zealand’s recent inflation
record is:

1999 2000 2001 2002 2003 2004 2005 (P) 2006(P)
1.0% 1.7% 3.1% 2.6% 2.5% 1.5% 2.75% 3.0%

New Zealand has a low income per capita compared to other countries.
NZ Income Distribution
Income of $38,000 and below 2,410,000 78.6%
Income over $38,000 436,000 14.2%
Income over $60,000 220,000 7.2%
(Source: IRD income distribution)

Low income levels coupled with a hostile environment for savings have had an important bearing
on the slow growth of the funds management industry.

Savings and Private Households

NZ has a poor personal savings record and has consistently ranked at the bottom of OECD
surveys.

Household Savings Rate (% of disposable income)

2000 2001 2002 2003 2004 2005(P) 2006(P)
-1.5 -5.4 -4.5 -11.0 -12.3 -4.25 -6.25

(Source: Reserve Bank of NZ Monetary Policy Statement June 2005)

Consistent with many developed countries household debt has soared, from 58% of household
income in 1991 to approaching 115%. Outstanding balances on credit cards have increased by
over 50% in the past 3 years.

Taxation System

Features of the NZ tax system include the fact that most of the tax revenue results from a broadly
based income tax and consumption tax (GST) which produces 85% of the Government’s revenue.
Also NZ’s income tax is only moderately progressive in nature.

The tax rates applying in NZ are:

Personal Rates
Taxable income $1 Tax Rate %
0 – 38,000 19.5
38,001 – 60,000 33.0
over 60,000 39.0

Company Tax Rates
All companies taxed at 33%.

Goods and Services Tax (GST)
Levied at 12.5%.

Aspects where the NZ tax system varies from most similar overseas countries include:

IIFA Oct. 2005 - WASHINGTON
• Lack of threshold level of income tax before tax is payable. (Although tax credits are
available for low-income families.)
• Lack of special incentives and exemptions in our income tax and GST bases, such as tax
incentives or exemptions for retirement savings.
• Lack of a capital gains tax. (Note: however, that managed funds are required to pay tax at 33%
on realised capital gains. In most circumstances an individual who invests directly in equities
will not incur any tax on capital gains unless they are deemed to be a “trader”.)

Taxation System Disadvantages New Zealand Savers

In 1992 NZ adopted a voluntary model for retirement savings. This anticipated that if a “neutral
playing field” exists without taxation intervention, then savers will have the option to save at the
level and through the vehicles that suit their personal needs.

The voluntary model has resulted in:

No incentives – NZ does not offer any particular taxation incentives to encourage saving (though
a higher income individual may benefit from a 6 cent tax advantage by contributing to an
employer sponsored superannuation scheme). This 6 cent advantage is available to low income
workers but it is optional for the employer to decide to offer this advantage – the take up has been
low.

No compulsion – NZ does not operate any form of compulsion to save. However, it is argued that
New Zealand Superannuation, which is funded out of general taxation, is a compulsory savings
scheme.

NZ savers disadvantaged

The New Zealand taxation system contains serious obstacles to the managed funds industry.
• Those savers earning at the lowest marginal tax rate of 19.5% are taxed at 33% on the
investment return of superannuation and life insurance policies. However Unit Trusts do allow
individual savers to be taxed at the correct rate.
• Managed investments are taxed at 33% on realised capital gains. Direct investment by an
individual saver would not normally attract capital gains tax.

The neutral taxation environment that was a central requirement of the voluntary model has never
been achieved and this coupled with a low personal earning level has resulted in personal saving
growing in the manner predicted.

Moves to reform the New Zealand taxation system are under way – refer to the comment under
“Initiatives to Improve Personal Savings Levels”.

IIFA Oct. 2005 - WASHINGTON
Demographics

NZ is in a similar demographic position to most western countries with a rapidly ageing
population.

The dependency ratio (ratio of 65+ to employed) currently stands at 25%. By 2020 it is predicted
to be 35%, peaking at close to 60% by 2040.

The fiscal consequence is that the cost of Government sponsored superannuation will grow from a
current 4% of GDP to over 9% by 2040. The combined effect of increasing retirement provision
costs and increasing health costs will place considerable pressure on Government to fund an
ageing population.

Government spending on health care and retirement provisions is predicted to increase from the
current levels of 32% to around 40% of GDP by 2040. It is expected that personal taxation may
need to increase by as much as 30%.

Government Old Age Provision

Public retirement income is provided through New Zealand Superannuation (NZS). This is a flat
rate universal entitlement which is funded out of general taxation on a pay-as-you-go basis.

Individuals qualify on attaining age 65. Rates are reviewed each year and adjusted for movements
in the average weekly wage. The test requires payment for a married couple to equate to 65% of
the average wage. There are no means or asset tests applying to eligibility.

To reduce the future fiscal cost of NZS, Government has introduced “pre-funding” from 2001,
which requires Government to set aside a sum determined annually by Treasury (currently $2
billion per annum) from surpluses, which is separately invested and will be called upon from
approximately 2025 to ease the fiscal burden. Predictions suggest that pre-funding will account
for approximately 14% of NZS.

NZ Superannuation is a generous, simple and cost effective vehicle for delivering public provided
retirement income that serves New Zealand very well.

Leading Fund Managers and Assets under Management

The 5 largest funds are:
Market Share
ING/ANZ 19.6%
ASB Group Investments(owned by Commercial Bank of Australia) 19.3%
AMP 10.0%
Westpac/BT 9.8%
Asteron/NZGT 8.2%

IIFA Oct. 2005 - WASHINGTON
Of the largest fund managers, 3 involve Australian-owned trading banks (ANZ, CBA and
Westpac).

The breakdown of individual (retail) funds at 30 June 2005 was as follows:

6/04 6/05
Equity Funds: 2484.6 2358.7
Bond Funds: 1628.4 1397.7
Money Market: 963.4 1079.0
Balanced Funds: 5100.8 4947.3
Other 4477.9 5142.7
Total $14655.1 $14925.4
($NZ Millions)

Total by Product Categories – Retail Funds
6/04 6/05 Change
Investment Trusts 7806.4 8174.1 +4.7%
Superannuation Trusts 5464.6 5461.4 -
Insurance Bonds 1384.1 1289.9 -6.7%
$14235.3 $14655.1 +1.8%
($NZ Millions)

Initiatives to Improve Personal Savings Rates

• Government has undertaken a review of the options to remove/reduce the barriers and
distortions contained in the taxation system which act against saving. A discussion document
has been released which is generating widespread comment.

The industry is hopeful that a number of positive changes will result, with possible
implementation from 2007 (however, this timeline is very tight).

• A Task Force review has been completed and reported back to Government on possible
regulation of investment advisers. Change is certain and encouraged by the industry.

The Task Force report promotes a co-regulation regime, with responsibilities apportioned
between approved self-regulatory professional bodies and a Government appointed regulator.

Introduction of the final regulation is expected possibly from 2008.

• From April 2007 Government will introduce “KiwiSaver”, a voluntary work-based saving
scheme. Employers will be required to automatically enroll new employees (and enroll
existing employees who choose to opt in).

New employees will have a period during which they decide whether to remain in
“KiwiSaver” and they can decide to opt out. Contributions will be deducted by the employer
from the employee’s earnings at a selected rate of either 4% or 8%.

IIFA Oct. 2005 - WASHINGTON
Inland Revenue will collect contributions along with tax and the “KiwiSaver” contributions
will be passed on to private savings providers.

The plan provides portability and a $1000 cash contribution from Government following 3
months membership. “KiwiSaver” also provides a home deposit subsidy of up to $5000 from
Government.

New Zealand leads the world with this plan which is novel in that it relies on new employees
choosing not to opt out of the scheme. The Government-provided incentive is relatively
minor. The expectation of Government is that, once enrolled, inertia will act to maintain
participation.

Distribution of Investment Funds
The main channels for distribution are adviser/broker networks which it is estimated account for
90% of retail distribution.

The use of internet sites has been limited to the provision of information. No significant move to
the internet as a form of distribution has appeared to date.

Cross-border distribution largely occurs between NZ, Australia and UK based open-ended
company products (OEICs).

Legal Developments

New Zealand regulation is disclosure based (governed by the Securities Act and Regulations).
Product issuers are required to provide subscribers with an investment statement containing key
facts about the investment. Subscribers can request a prospectus which provides significantly
greater detail. However relatively few subscribers do request a prospectus.

The investment advice industry is similarly free of major regulation, again the New Zealand
approach is disclosure based.

The differences between New Zealand’s lightly regulated approach and Australia’s highly
prescriptive model are increasingly creating difficulties for New Zealand product providers and
advisers. The close proximity of the countries results in high levels of migration but New Zealand
product providers and advisers are prohibited from communicating in any manner with existing
clients who have moved to Australia. They cannot be seen to be marketing, selling or providing
advice unless they are licensed under Australian financial sector regulations.

The New Zealand Government has just launched a review of legislation covering products and
providers, one of the objectives of which is to achieve greater harmonization with Australian
regulation. It is too early to provide any assessment of the impact of the review.

The review of products and providers also includes reviewing regulation relating to the provision
of advice and will incorporate the findings of a final report from the Task Force on the Regulation
of Financial Intermediaries.

IIFA Oct. 2005 - WASHINGTON
Over the next two years the industry in New Zealand (product providers and advisers) will be
subject to possibly far-reaching change.

Broadly, the New Zealand industry welcomes moves to increase consumer confidence in the wider
industry.

Regulatory News Concerning Investment Funds
New Zealand has a low level of regulation of the managed funds industry (products and advisers)
compared with many overseas jurisdictions.

Activities of this Association

The Investment Savings and Insurance Association (“ISI”) website www.isi.org.nz contains
information relating to initiatives and public announcements.

V E Arkinstall
Chief Executive, Investment Savings & Insurance Association of Inc

IIFA Oct. 2005 - WASHINGTON
Norway Country Report 2005

1. Economic and Financial Background

Table 1: Key Economic Indicators

2003 2004
Population (million) 4.5 4.6
GDP (EUR billions) 186 205
Real GDP growth (%) 0.3 2.9
Inflation rate (%) 2.5 0.4
Unemployment rate (%) 4.2 4.1
Stock market capitalization (EUR billions) 81.9 113.1
Stock market capitalization (% of GDP) 44.0 55
Bond market capitalization (EUR billions) 52.2 63.6
Bond market capitalization (% of GDP) 28.0 31
Household gross savings ratio (%) 9.1 10.1
Household financial wealth (EUR billions) 190.5 206
Average per capita financial wealth (EUR) 42.346 44.783

Output growth in the Norwegian economy has been strong since mid-2003. Higher demand and
output in connection with low level of interest rates have made a positive contribution to growth in
the Norwegian economy. World prices for important Norwegian export goods (oil) are high. In
spite of the strong upturn in the Norwegian economy, employment growth has been relatively
modest. Equity prices have risen substantially since the spring of 2003. Oslo Stock Exchange was
up 38.5% in 2004 and 19,7% in the first half of 2005.

2. Key Trends in flows and assets under management

Table 2: Net Assets of the Fund Industry in Norway
(EUR billions)

Year Total assets under management

2001 17.844
2002 15.783
2003 18.647
2004 23.500
30.06.2005 25.371

The general economic recovery in the Norwegian economy had positive effects on the Norwegian
investment market in the past years. Since year-end 2002 net assets of Norwegian domiciled
investment funds have increased by 60% (calculated in Euro).
p. 2

Norwegian retail investors are widely internationally diversified as far as equity funds are
concerned, but domestically focused in their investments in bond funds and money market funds.
However, retail investor’s activity has been very low since the turn of the century.

Table 3: Net Sales of the Norwegian Fund industry by Fund Type
(EUR millions)

2001 2002 2003 2004 30.06.2005
Equity -129 -272 534 954 221
Bond -28 -19 978 838 358
Balanced 23 -53 280 133 85
Money Market 801 544 439 504 310
Total 668 200 2,231 2.408 974

Overall, there has been positive net acquisition in all fund types since 2002. Equity funds investing
in the Norwegian market have, however, had a negative net acquisition both in 2004 and so far in
2005.

3. Regulatory and self regulatory developments

• UCITS III Directives Transposition into the National Framework

All elements of the UCITS III Directives have been implemented, except for the simplified
prospectus.

• Transposition of Other EU Directives into the National Framework

The Distance Marketing Directive was implemented this summer.

The directive on markets in financial instruments is estimated to be implemented next summer.

• New Tax Rules at National Level

The Parliament adopted a tax reform in December 2004, leading to changes in the taxation of
capital gains and dividends for equities. Shortly described, companies and investment funds will
not have to pay tax on capital gains and dividends for equities, whereas private investors will have
to pay 28% tax on annual capital gains and dividends exceeding the level of return from
government bonds. The tax reform does not contain discriminatory cross boarder tax barriers.

4. Corporate Governance – major developments

At the end of 2004 several Norwegian organisations and institutions (among others the Norwegian
Mutual Fund Association) updated a preliminary and one year old national code on corporate
governance principles for listed companies. The recommendation has already become an
important benchmark for companies listed on the Oslo Stock Exchange, based on the concept of
“comply or explain”.

IIFA Oct. 2005 WASHINGTON
p. 3

5. Fund governance
On fund governance issues, the Norwegian Mutual Fund Association published a recommendation
in April 2003, promoting active corporate governance practices and transparency (on web-sites,
etc.) on proxy voting activity, etc..

Fund governance has note been a hot issue in Norway so far. The Norwegian Act on mutual Funds
requires that at least one third of the members of the supervisory board of the management
company must be elected by the unit holders of the funds and these representatives do also carry
some specific responsibilities, ensuring that unit holder’s interests are taken properly care of.

6. Product Development

There is nothing new to report, except from competition from new alternative products as
structured bonds and real estate investment vehicles.

7. Other major issues and developments

The Norwegian Mutual Fund Association has made (mandatory) industry standards and industry
recommendations on the following issues:

• Standards

- Fund categorisation, standardised reporting of fund performance, risk measures and fees. (The
association has no plans to adopt the fixed-income European Fund Categorisation.)
- Practice in regard to subscriptions and redemptions of fund shares.
- Marketing of investment funds.
- Personal investments by fund management company employees.

• Recommendations

- Corporate governance (internal and external).
- Principles on how to measure the value of less liquid fund assets.
- Criteria on selecting relevant benchmarks for equity funds.
- Principles when calculating NAVs for equity funds with international mandates.
- Principles in regard to independent directors.
- Recommended practice in regard to the 5/10/40%-diversification rules.
Recommendations on valuation of non-liquid equities.

IIFA Oct. 2005 WASHINGTON
PAKISTAN COUNTRY REPORT 2005
Mutual Funds Association of Pakistan – MUFAP
XIX IIFA Conference, Washington, DC, USA

1. General and Economic Development

Pakistan’s economy continues to gain strength. The outgoing fiscal year, FY-05, has indeed been
an eventful year for Pakistan’s economy which has mounted a strong recovery with a sustained
improvement in prospects. The most important achievements and milestones of the year FY-05
include: a higher than targeted growth in real GDP (8.4 %) supported by a strong growth in large
scale manufacturing (15.6%), a sharp pick up in agriculture (7.5 %), with highest ever production
of cotton (14.6 million bales) and wheat (21.1 million tons), a continuing robust performance in
service sector (7.9%) and extraordinary strengthening of consumer demand; exist from IMF
Program; a double digit 12% growth in per capita income reaching $736; investment upturn
gaining a stronger footing, particularly private sector investment, which remained buoyant
owing to a rare confluence of various developments, strong growth in the consumption of energy
reflecting rising level of economic activity; fiscal deficit remaining almost on target at 3.3% of
GDP; high rates of export and import growth; sustained high level of workers’ remittances at $
4.2 billion; continued accumulation of foreign exchange reserves and a stable exchange rate; a
sharp decline in public debt (61.7% of GDP) and external debt burden (32.5% of GDP); higher
than targeted collection of taxes; continuation of privatization program at robust momentum;
continued rising trend in Foreign Direct Investment (FDI); Pre-payment of expensive external
loan as well as a successful return to the international capital markets through the floatation of a
Euro-bond and Islamic-bond (Sukuk); and most importantly, the passing of the Fiscal
Responsibility and Debt Limitation Act 2005.

Against the above achievements, the economy however, witnessed some negative developments
during FY-05, which include: highest inflation at 9.3% in eight years, the government is taking
various anti-inflationary measures such as improving the supply situation of essential
commodities and tightening of monetary policy by the central bank; slipping of current account
balance into the red after posting surpluses for three consecutive years, the deterioration in the
current account is driven by substantially wider trade deficit owing to higher oil import bill and
hefty rise in non-oil non-food imports fueled by strong domestic demand.

Major Economic and Financial Indicators

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

IIFA Oct.2005 -WASHINGTON 1
(July-June) (July-June) (July-June) (July-June) (July-June) (July-June)
Economy
GDP Growth % 3.90 1.80 3.10 5.10 6.40 8.40
GDP (USD Billion) 3,529.345 3,594.124 3,705.718 3,895.252 4,144.319 4481.516
Per Capital Income (USD) 526 501 503 582 652 736
Fiscal Deficit (% of GDP) 6.5 5.3 5.7 3.7 3.3 3.3
CPI (%) 3.6 4.4 3.5 3.1 3.9 9.3
Unemployment Rate (%) 7.82 7.82 8.27 8.27 8.27 7.69
Karachi Stock Exchange 1520.70 1366.44 1770.11 3402.47 5280.96 7450.12
100 Index (Points) 30-06-05

Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
(July-June) (July-June) (July-June) (July-June) (July-June) (July-March)
Trade & Foreign Exchange
Import (USD Billion) 10.309 10.729 10.340 12.220 15.470 14.500
Export (USD Billion) 8.569 9.202 9.135 11.160 12.270 10.200
Trade Balance (USD Billion) (1.740) (1.527) (1.205) (1.060) (3.200) (4.300)
Current Account (USD (1.143) (0.513) 1.275 4.070 1.806 (1.358)
Billion)
Exchange Rate (PKR/USD) 52.045 63.4010 60.1246 57.7429 57.9165 59.6850
30-06-05
Foreign Currency Reserves 1.968 3.220 6.432 10.719 12.328 13.000
(USD Billion) 30-06-05

This all round improvement in country’s economy was possible primarily due to strong macro-
economic management and structural reforms pursued by the government.

2. Financial Environment

Pakistan financial markets witnessed significant changes in FY-05 due mainly to a major reform
process which has been going on for the last several years. The principle focus of such reforms
initiatives has been the consolidation of the various aspects of the financial services sector which
included among others a strong framework for effective risk management.

The State Bank of Pakistan (SBP) has also strengthened its regulatory capacity during FY-05. It is
now more pro-active in aligning its regulatory profile in a rapidly changing domestic and global
financial environment. The bank regulation and supervision are now fully compliant with the
international standards and codes. As a consequence of such reforms, Pakistani banks have been
strengthened to compete with foreign banks both in the domestic and international markets. As
the first generation of reforms in financial sector of Pakistan has been completed successfully, the
SBP is planning for the second generation of reforms to further deepen the financial sector and
integrate it into the global economy. Financial sector reforms have brought marked improvement
in the financial health of the commercial banks in terms of capital adequacy, profitability and
asset quality and also greater attention to risk management.

During FY-05, the SBP changed its monetary policy stance from easy to measured tightening and
at year end, it moved rather aggressively to tame inflation. The SBP avoided a sledge-hammer
policy to ensure that the current economic upturn is not de-railed. As a result, the interest rate
environment remained relatively investment friendly for most part of the year FY-05 as weighted
average lending rate remained negative in real term and private sector credit rose to a record Rs.
370 billion. The WA lending rate was 4.63% in July 2004 and by end March 2005 it moved to
6.57% - 194 basis points increase in the lending rate. The WA deposit rate, however increased

IIFA Oct.2005 -WASHINGTON 2
only by 23 basis points during the same period. The yield on 6 months treasury bills moved up-
ward rather sharply - increasing from 2.52% in July 2004 to 7.08% in April 2005 - an increase of
456 basis points in 10 months. The export refinance rate which is linked with 6 months Treasury
bill rate was adjusted upward by 150 basis points to 6.5% in May 2005. The SBP also raised the
discount rate by 150 basis points to 9.0% in April 2005 from 7.5% in November 2002, strongly
signaling the increase in the lending rate.

Change in auction cut offs (6 m T-bills) Discount rate and 3 m T-bills

Policy transmission

During FY-05, the distribution of credit to private sector was highly broad based as almost all
sectors of the economy availed substantial credit. Manufacturing sector claimed 41% in the net
credit expansion to private sector. Within manufacturing, textile sector received the lion share
(62.8%). The commerce sector was another important sector which availed Rs. 38.6 billion or
11.5% of the total private sector. Consumer loans consisting of auto finance (Rs. 32.6 billion),
personal loans (Rs.27.4 billion), housing finance (Rs. 14 billion) and credit cards (Rs. 3.2 billion)
amounted to Rs. 77.2 billion or 23% to total private sector credit expansion.

IIFA Oct.2005 -WASHINGTON 3
Credit to Private Sector

The Commercial banks in the private sector have so far given a satisfactory performance since
their inception, registering an overall growth in the deposit base and profits and are maintaining
healthy credit profiles. The non performing loans (NPLs) of commercial banks, specialized banks
and DFIs’ have declined during the first nine months of FY-05 from Rs. 220 billion in June 2004 to
203.7 billion in March 2005, a reduction of 7.4%. Net NPLs to net advance ratio (for domestic
operation) has been declining continuously through the successive quarters and has reached to
only 3.6% at end December 2004.

Net NPL/Net Advance

IIFA Oct.2005 -WASHINGTON 4
Banks’ total deposit (including those of the government) increased by Rs. 206.6 billion during
July-March FY-05 compared with Rs. 187.3 billion in the corresponding period of FY-04.

The Currency composition of total deposits has remained almost the same during FY-05 as in the
preceding year with a dominant contribution from Rupee deposits. The major factor that
contributed to the overall slowdown in Rupee deposit growth has been the rising upward
pressures on the exchange rate during FY-05 that increased the relative attractiveness of foreign
currency deposits (FCDs).

Cumulative FCAs

As a result of successful implementation of the successive reform measures, the capital market in
Pakistan has grown by leaps and bounds during FY-05 and has emerged as one of the important
pillars of the economy. Under the new privatization strategy, the government of Pakistan is
selling off its shares of state controlled enterprises by listing them on the bourses as well with a
view to broadening and deepening the capital markets. However, stock market in Pakistan
during FY-05, has also witnessed extra ordinary volatility. The Karachi Stock Exchange (KSE)
witnessed an accelerated rise during the year until March 15, 2005. The KSE-100 Index rose from
5,210 in July 2004 to peak at 10,303 on March 15, 2005 – an increase of 5,093 points or 98%. The
stock market turned bearish since March 16, 2005 as the KSE-100 Index dropped to as low as
6,939 on April 12, 2005 from its peak of 10,303 – showing a decline of 3,364 points or 32.7%. Such
a sharp rise in index and a subsequent steep decline represented abnormal and unhealthy
movements in the equity market.

With these developments on economic and financial horizons, it may be concluded that
Pakistan’s economy is no longer fragile and its balance of payments is no more vulnerable to
external stocks. Wide ranging structural reforms, prudent macro-economic policies, financial
discipline and consistency and continuity in policies have transferred Pakistan into a stable and
resurgent economy.

3 Mutual Fund Industry in Pakistan

3.1 History

Pakistan was the pioneer in the field of Mutual Funds in the South Asia Region, when it launched
National Investment Trust (NIT), an open-ended mutual fund in 1962, followed by the
establishment in 1966 of Investment Corporation of Pakistan (ICP), which launched a series of

IIFA Oct.2005 -WASHINGTON 5
close-ended mutual funds. Both NIT and ICP were established in the public sector. However, it
(Pakistan) subsequently failed to maintain the tempo of the initiative taken in the field until early
nineties mainly due to following reasons:

(i) Frequent changes in economic policies
(ii) High rates of alternative investment such as National Saving Schemes (NSS)
(iii) Capital outflow
(iv) Limited investment options
(v) Profusion of risk free investment options in Government securities
(vi) Lack of awareness among the general public about collective investment schemes
(vii) Lack of aggressive marketing and distribution network

In the early nineties, after the country’s capital market witnessed an upsurge, the private sector
mutual funds were first time launched in Pakistan. In the long and deep recession of 1996-2000,
the mutual fund industry badly suffered due mainly to lack of investment philosophy and
prudent decision making and as a result Net Asset Values (NAVs) dropped, growth got frozen
and concept got badly hit. However, by the turn of the century particularly from the FY-02
onwards, Pakistan market witnessed an unprecedented growth spurned due to many factors,
but mainly due to segregated divesture of ICP to private sector, remarkable improvements in
country’s economic and financial indicators, global trends and favorable regulatory environment.

3.2 Current Status

During the last couple of years, the industry has made a remarkable and phenomenal growth not
only in its size and category (open end funds and closed end funds) but also in product
diversification and market penetration.

As of now, there are twenty asset management companies in Pakistan which are registered with
Mutual Funds Association of Pakistan (MUFAP). These companies are managing thirty three
funds, nineteen (19) in closed end sector and fourteen (14) in the open end sector with total net
asserts under management respectively at Rs. 85.216 billion and Rs. 38.922 billion totaling Rs.
124.138 billion as of 30-06-2005 (Annexure – I).

Mutual Funds 33

Closed-end Mutual Funds 19 Open-end Mutual Funds 14

Equity Funds 17 21 Equity Funds 4

Bond / Income / Money Market 0 6 Bond / Income / Money Market Funds 6

0
Balanced Funds 2 4 Balanced Funds 2

Islamic Funds 0 2 Islamic Funds 2

Rs. in bn
Open-end Funds
Closed-end Funds
36.071

2.851
IIFA Oct.2005 -WASHINGTON 6
New products including Shariah Compliant Products are being offered these days in the market
and more products derived from variable and fixed income securities are proactively being
developed to suit investors’ risk and return profile, their cash flow needs etc. The new products
to be offered after the clearance from the regulator, Securities & Exchange Commission of
Pakistan (SECP) include Pension Funds, Real Estate Funds, Infrastructure Funds, Sector Specific
Funds etc.

It is heartening to note that private sector has now come to play an important role in the market
and due to their active participation and introduction of reforms from time to time, the mutual
funds industry during the past one decade has recorded tremendous and significant growth in its
net assets. However, the current size of the industry at Rs.124.138 billion is still much below the
respectable level and as percentages of bank deposits and GDP at 5.08%and 2.77% respectively is
much lower than the comparative figures in the region let alone those of the global mutual funds
industry. All stakeholders including MUFAP are therefore striving hard and making serious and
sincere efforts to utilize the resources available at their disposal to get maximum out of the
untapped potential of the industry to achieve its size at least comparable with its counterparts in
the region.

NAV as % of GDP

NAV as % of Bank Deposits

IIFA Oct.2005 -WASHINGTON 7
3.3 Performance

The industry has shown significant performance during the period after the FY-02 due to sprouts
of mutual funds on its horizon with new and innovative products designed specifically for both
corporate and individual investors. The all round performance of the industry during the last 3-4
years has improved the size of its assets by approximately over 400 % from Rs. 25 billion in FY–02
to Rs. 130 billion as on March 31, 2005. The facts indicate that the NAVs of the mutual funds
industry relative to the outstanding stock of National Saving Schemes (NSS) instruments has
risen from 3 % in FY–02 to 10 % in FY–04 despite the fact that NSS traditionally has been a
favored heaven. The industry has gained this popularity due to its improved and disciplined
behavior, governmental support, development of specialized innovative products, and enabling
and investment friendly environment.

Net Assets Under Management

125 Rs. 124 bn

Rs. 97 bn
100
Rs . billion
80

60
Rs. 51 bn
40 Rs. 25 bn
20

0
FY02 FY03 FY04 FY05

IIFA Oct.2005 -WASHINGTON 8
The recent years have not only seen the revival of the mutual fund industry in Pakistan but also
the activity shifting from the public sector to the private sector coupled with increase in the
attractiveness of open-ended funds as compared to closed end funds.

Net Asset Value and number of
Public & Privet Sector Mutual Funds
As of June 30th, 2005
70
63.126 61.012
60
50

Rs. In 40
32
Billion 30
20
10
1
0

No. of Funds NAVs

3.4 Future Outlook:

The future outlook of the mutual funds industry is very promising and encouraging. The
industry holds several exciting opportunities for both corporate and individual investors
including the retired persons in view of the following factors:

(i) At present, the mutual fund sector is set to attract growing public attention owing to
better investment prospects and effective role in bringing about betterment in the national
economy. An improvement in economic fundamentals particularly during the past three
years and achievement of GDP growth of 8.4 % during FY-05 have provided a platform to
mutual funds industry to grow exponentially.

(ii) These days, mutual fund sector is becoming popular among the investors due to the fact
that the sector is now focusing on specialized financial products aimed at niche markets
with a view to cater to the requirement of all types of investors ranging from ultra
conservative to the risk seekers. These specialized products are expected to attract grater
public attention for investment in mutual fund sector in years ahead.

IIFA Oct.2005 -WASHINGTON 9
(iii) A market based interest rate structure has already been put in place. The high level of
interest rates available on short term, risk free government papers and bank deposits in
the past had acted as a disincentive for conservative investors. However, the said
rationalization of interest rates has improved the prospects of investment by individual
investor in mutual fund sector as an attractive mode of investment in comparison to
traditional National Saving Schemes (NSS) and bank deposits. The recent increase of
around 2% in interest rate on various NSS instruments may impact on the investment of
mutual funds industry but it is expected that this impact is to be very minor in view of all
round progress made by mutual fund industry during the last three years and as a result
attractive pay-outs were declared by the mutual funds for their investors.

(iv) The performance of the mutual funds industry has generally kept pace with the
performance of the stock market. At present, though the stock market is not performing
that superior as prior to March, 2005 due to liquidity crunch pending smooth phasing out
of Badla Financing with Margin Financing. However, this phase of the market is short
lived as recently a new instrument in the name of Continuous Finance System (CFS) has
been introduced in the market with mutual agreement to overcome this problem and
market has responded positively to this move. If the stock market continues to perform
better and attract investment both from corporate and small investors as is expected, then
it is a precursor for better future prospects of mutual funds industry in Pakistan.

(v) The effective monitoring of operations of mutual funds and other Non Banking Finance
Companies (NBFCs) by SECP has improved the confidence of investors in Pakistan to a
great extent. SECP has brought in a sea change in regulations under which mutual funds
managers are vetted with a fine toothcomb, their responses and management staff have
to meet stringent standards and there is a continuing monitoring of not only their
performance but also of how they do business. The confidence thus improved will pave
the way for further investment in mutual fund sector.

(vi) It has been established in recent March 2005 stock market crisis that small investors who
had made investment through mutual funds are comparatively not suffered much in
terms of erosion of share prices as compared to those involved directly in the market. This
has enhanced investors’ confidence in mutual funds which as a result will attract more
investments in the mutual fund sector.

(vii) The recent permission granted by SBP to local mutual funds to invest 30% of their assets
abroad with a cap of US$ 15 million has enhanced the image of mutual funds among the
investors and as a result the investor confidence which will lure them to make large
investments in the mutual fund sector who will in turn in a better position to offer
attractive returns out of their earnings from the investment portfolio to be developed on
the basis of independent and prudent investment decisions after taking proper and due
assessment of the markets abroad and various risks associated with them.

(viii) The mutual funds industry is at present looking at the retirement savings market in terms
of options like the defined benefits to ensure a predetermined pension to a retiree or
defined contribution schemes to determine the benefits for retiring persons depending
upon the profitability of investments by the mutual funds. The government is keen to
develop pension schemes and is encouraging mutual funds industry to come forward and
develop such schemes.

Given the mix of superior performance of the sector in the past few years and the provision of
attractive and specialized products, it is expected that, mutual funds will continue to experience

IIFA Oct.2005 -WASHINGTON 10
healthy growth and in the not too distant future will make greater contribution towards the
economy of the country.

3.5 Regulatory framework for Mutual Funds

In 1971, the government of Pakistan for the first time allowed the private sector to
establish mutual funds in the closed end segment only and announced Investment
Companies and Investment Advisors Rules - 1971 (IC & IA Rules) for their formation
and management. However, it subsequently in 1995 released Asset Management
Company Rules and established the regulatory framework for the open-ended mutual
funds with SECP as the main regulatory body. In 2003, both the IC & IA Rules and the
AMC Rules were repealed and replaced by the Non-Banking Finance Companies
(Establishment & Regulation) Rules, 2003. Hence, in order to launch and manage open-
end/closed-end funds, an NBFC has to be established under which separate licenses for
Asset Management and Investment Advisory Services have to be obtained.

The primary goal of the SECP, who governs mutual funds in Pakistan, is to protect
investors and to promote economic development through regulation. The SECP monitors
and regulates the primary and secondary market and in particular the securities market
and related market intermediaries. It regulates and monitors NBFCs including mutual
funds, and modarabas. It is also responsible for monitoring related institutions such as
the Central Depository Company, Credit Rating Institutions, Leasing and Insurance
companies. In addition, it maintains oversight of the accountancy profession and has
been active in pursuing reforms to improve transparency and disclosure in corporate
reporting.

Asset Management Companies (AMCs) and Investment Advisors (IAs) are required to
exhibit a higher level of integrity and transparency in their activities by the SECP. The
SECP reviews published accounts of the mutual funds and IAs and AMCs to ensure their
compliance with relevant laws and regulations. In doing so, it seeks to ensure
transparency in the financial reporting and compliance with relevant laws, with the aim
of protecting the interests of shareholders, creditors and other stakeholders.

The recent buoyancy in the stock market in general and the resultant growth in the
mutual funds industry is to some degree attributable to an effective monitoring and
regulatory regime, which has given investors a lot of confidence. The SECP thus acts as
an efficient and dynamic regulatory body that fosters principles of good governance in
the corporate sector of Pakistan, ensures proper risk management procedures in the
capital market, and protects investors through responsive policy measures and effective
enforcement practices.

The SECP has been actively pursuing a capital market reform program geared towards
the development of a modern and efficient corporate sector and capital market, based on
sound regulatory principles that provide an impetus for high economic growth.

IIFA Oct.2005 -WASHINGTON 11
3.6 Tax Regulations

The present government has taken certain bold steps which have brought positive effects
on the capital markets in general and mutual fund industry in particular. Income Tax
Ordinance, 2001 has provided certain incentives directly relating to the mutual funds.
Some of these are;

i) any income of mutual fund is exempt from tax if not less then 90 per cent of
its income as reduced by the capital gains is distributed amongst its
shareholders. The capital gain being exempt from tax can be retained by the
mutual funds.

ii) dividend income received by mutual funds would also qualify for the
aforesaid exemption. In case of non fulfilling of the aforesaid condition the
income arising to mutual fund would be chargeable to tax at the rate of 37
per cent as is applicable to a private company if not listed on stock exchange.
In case of enlistment on stock exchange the rate of tax would be 35 per cent

iii) mutual funds are also exempt from payment of withholding tax on its
income from the following sources:

a) Dividend

b) Profit on debit from deposits maintained with a banking company or
financial institution or investment in securities issued by Federal
Government or Provincial Government or a local authority

c) Brokerage or commission

iv) Non profit organizations which enjoy approval under section 2 (36) of the
Income Tax Ordinance, 2001, have been permitted to make investment of
unutilized funds in any mutual funds registered with the SBP and SECP, as
the case may be. Previously such institutions could only invest in
government securities.

3.7 MUTUAL FUNDS ASSOCIATION OF PAKISTAN – MUF AP

MUFAP, which was organized in 1996, is incorporated as a public limited company by guarantee
under section 42 of the Companies Ordinance 1984, with the status of a non- profit organization.
Some of the objectives of MUFAP are as under:

(i) To play a role in the development of capital markets by promoting and developing the
mutual funds industry.
(ii) To disseminate information about mutual funds industry and individual mutual funds to
help investors make better investment decisions and bring healthy competition to the
market.

IIFA Oct.2005 -WASHINGTON 12
(iii) To present issues and concerns of mutual funds industry to the SECP and other relevant
government bodies.
(iv) To educate common investor about advantages of mutual funds.
(v) To develop links with foreign mutual fund associations.
(vi) To establish minimum standards of ethical behavior for its members.

The Board of Directors of MUFAP consists of the following:

™ Mr. Zaigham Mahmood Rizvi – Chairman, MUFAP
(Chairman and Managing Director–House Building Finance Corporation – HBFC)

™ Mr. Tariq Iqbal Khan – Vice-Chairman, MUFAP
(Chairman and Managing Director–National Investment Trust – NIT)

™ Mr. Mohammad Ali Khoja – Member
(Chairman - PICIC Asset Management Limited)

™ Mr. Mohammad Najam Ali – Member
(C.E.O - ABAMCO Limited)

™ Mr. Mohammad Habib-Ur-Rahman – Member
(Vice-Chairman & C.E.O - Atlas Asset Management Limited.)

™ Mr. Mohammad Shoaib – Member
(C.E.O - Al Meezan Investment Management Limited.)

MUFAP has recently redefined its mission and vision to revamp the association and is at present
striving to become a self regulatory organization to install discipline among its members and that
in turn promote confidence to the investors at large.

A few of the practical steps taken by MUFAP, which are immensely benefiting the industry, are
as under:

(i) MUFAP has developed a user friendly website by the name of www.mufap.com.,
disseminating essential information on various funds, the fund managers, the stock
market as well as the regulatory environment under which open and close end funds
operate.

(ii) MUFAP has conducted workshops, seminars, conferences, talk shows etc. to educate the
investors and to train the relevant people of the industry with a view to enhancing the
concept of investment in mutual funds. Recently, MUFAP organized a talk show program
consisting of thirteen (13) episodes on Indus TV channel “Indus Plus” and also a
workshop on “Compliance and Ethics” aimed at upgrading the knowledge of participants
from the mutual funds industry.

(iii) MUFAP has been submitting budget proposals on behalf of its members regularly to the
government for incorporation in the Federal Budget aimed at improving returns for the
investors and as a result to encourage further investments in mutual funds.

(iv) MUFAP has submitted issues and concerns of the industry from time to time to the concerned
government authorities such as SECP, Tax Authorities etc. and has been instrumental in

IIFA Oct.2005 -WASHINGTON 13
establishing liaisons and smooth working relationship between the industry and these
government authorities.

(v) MUFAP has instituted a system whereby performance of its constituting units is being
constantly and consistently evaluated for honoring and rewarding them on the basis of a
well formulated and considered criteria at the Performance Excellence Awards Ceremony
organized by it every year. MUFAP believes that this will provide an opportunity in
educating the investors as well as in improving their awareness on performance of funds
operating in the market besides encouraging healthy competition among these funds

(vii) During the past three years, MUFAP has actively pursued affiliations in the global market
of mutual funds and as a result the mutual funds industry in Pakistan is now receiving
global recognition as in the 10th Asia Oceania Regional Meeting organized by
International Investment Funds Association (IIFA) in Philippines from 7th to 11th March,
2005, Pakistan has been accepted to host 12th Asia Oceania Regional Meeting of funds to
be held in 2007. The IIFA is the association of investment funds from around thirty (30)
countries all over the world. MUFAP has also received invitation for 2005 International
Investment Funds Conference to be hosted by Investment Company Institute, USA at
Willard Intercontinental Hotel, Washington, D.C USA from October 18-21, 2005. The
international mutual funds associations with which MUFAP has established links are as
under:

™ Investment Company Institute – ICI USA
™ The Investment Funds Institute of Canada – IFIC
™ The Securities Association of China – SAC
™ Hong Kong Investment Funds Association – HKIFA
™ Association of Luxembourg Fund Industry – ALFI
™ Asset Management Association of Korea – AMAK
™ Association of Mutual Funds in India – AMFI
™ Securities Investment Trust & Consulting Association of R.O.C.
™ Federation of Malaysian Unit Trust Mangers – FMUTMs
™ Investment Company Association of the Philippines – ICAP
™ Association of Mutual Funds in Bangladesh – AMFB

3.8 Conclusion

While the outcome of the outgoing fiscal year (FY-05) has given sources of optimism, some
lessons from this year should form the guiding principles for going forward. First and foremost
is that Pakistan should rely least on the support price mechanism and rely more on the non-price
mechanism to enhance agricultural output. Second, livestock sector accounts for almost one half
of the agricultural value added – much more than major crops – therefore, proportionate
attention must be given to this sector which has remained neglected for many decades. The
policy of concentrating on four (4) major crops is a self defeating policy as far as overall
agricultural is concerned. Livestock, minor crops, fishing and forestry need equal attention – they
together account for 70% of agriculture. Third, credit booms are difficult to foresee, therefore,
Pakistan needs to remain vigilant, especially in situations where rapid credit growth is
accompanied by current account deficit and higher inflation. Containment of credit booms
usually requires strengthened surveillance of the banking system and close scrutiny of corporate
borrowing during periods of rapid economic growth.

IIFA Oct.2005 -WASHINGTON 14
As regards, the mutual funds industry in Pakistan, it is heartening to note that the industry has
come out of the crawling age and now started growing. These days, the mutual fund industry is
generating keen interest among a growing number of investors. It is attracting fund managers
and leading players of industrial and corporate sector as sponsors. Moreover, it has been
providing versatile and attractive investment avenues to the general public while paying
comparatively reasonable returns based on dividend yields and capital gains. In the recent years,
SECP has taken a number of steps to promote the development of mutual funds industry. These
measures envisage multifaceted reforms to help the industry in managing its risks prudently,
give operational autonomy, and reduce fragmentation as well as to protect investors’ interest.
Comprehensive disclosure requirements at the time of public offering and subsequent reporting
on the affairs of funds have been prescribed and enforced. In addition, managers have been
given flexibility to establish their trusts or companies as well as to float equity, debt or hybrid
funds. These steps of the SECP to promote equity markets in general and mutual funds industry
in particular are in line with overall macro-economic policies of the government and will help
boost investment in mutual fund sector in years ahead.

IIFA Oct.2005 -WASHINGTON 15
TOTAL NET ASSETS AS ON JUNE 30, 2005

ASSET MANAGEMENT NET ASSETS IN
NAME OF FUNDS
COMPANIES RUPEES
ABAMCO LIMITED UNIT TRUST OF PAKISTAN
3,443,554,171.00
UTP-ISLAMIC FUND
947,203,093.00
UTP-INCOME FUND
1,377,869,309.00
ABAMCO CAPITAL FUND
3,029,021,639.00
ABAMCO COMPOSITE FUND
3,390,263,627.00
ABAMCO STOCK MARKET FUND
1,447,549,408.00
ABAMCO GROWTH FUND
898,375,827.00
BSJS BALANCED FUND LIMITED
1,623,909,484.00
SUB TOTAL
16,157,746,558
GOLDEN ARROW SELECTED STOCK
AKD ASSET MANAGEMENT LTD.
FUND 626,339,000
AL MEEZAN IVESTMENT
MEEZAN ISLAMIC FUND
MANAGEMENT LTD. 2,005,999,881.44
MEEZAN BALANCED FUND
1,226,636,210.86
AL MEEZAN MUTUAL FUND
1,670,877,625.00
SUB TOTAL
4,903,513,717.30
ARIF HABIB INVESTMENT
PAKISTAN STOCK MARKET FUND
MANAGEMENT LTD. 2,712,985,677
PAKISTAN INCOME FUND
3,706,551,639
PAKISTAN STRATEGIC ALLOCATION
FUND 3,651,951,123
PAKISTAN CAPITAL MARKET FUND
1,960,419,508
METRO BANK - PAKISTAN
SOVEREIGN FUND 887,578,854
PAKISTAN PREMIER FUND LIMITED
2,207,133,420
SUB TOTAL
15,126,620,221
ASIAN CAPITAL MANAGEMENT
ASIAN STOCKS FUND LTD.
(PVT.) LTD 830,066,427
ATLAS ASSET MANAGEMENT
ATLAS INCOME FUND
LTD. 1,153,855,905
ATLAS STOCK MARKET FUND
918,413,126

IIFA Oct.2005 -WASHINGTON 16
ATLAS FUND OF FUNDS
526,582,791
SUB TOTAL
2,598,851,822
CROSBY ASSET MANAGEMENT
CROSBY DRAGON FUND
LTD. 419,990,632
DAWOOD CAPITAL
DAWOOD MONEY MARKET FUND
MANAGEMENT LTD. 1,835,846,865
FIRST DAWOOD MUTUAL FUND
504,988,208
SUB TOTAL
2,340,835,073
FAYSAL ASSET MANAGEMENT
FAYSAL BALANCED GROWTH FUND
LIMITED 1,761,354,643
FIRST CAPITAL INVESTMENTS FIRST CAPITAL MUTUAL FUND
LTD. LMITED 142,561,852
NATIONAL INVESTMENT TRUST NATIONAL INVESTMENT TRUST
61,012,000,000
PICIC ASSET MANAGEMENT
PICIC INVESTMENT FUND
COMPANY LTD. 5,882,730,000
PICIC GROWTH FUND
9,047,049,000

SUB TOTAL 14,929,779,000
PRUDENTIAL FUND
PRUDENTIAL STOCK FUND LIMITED Not Available
MANAGEMENT LTD
SAFEWAY MANAGEMENT LTD. SAFEWAY MUTUAL FUND LIMITED
881,711,936
UNITED ASSET MANAGEMENT
UNITED MONEY MARKET FUND
COMPANY LTD. 3,033,170,443
GRAND TOTAL 124,764,541,324

IIFA Oct.2005 -WASHINGTON 17
Portugal Country Report 2005

1. Economic and Financial Background

Table 1: Key Economic Indicators

Dec-2003 Dec-2004
Population (million) 10.5 10.5
GDP (EUR billions) 130.5 135.0
Real GDP growth (%) -1.1 1.0
Inflation rate (%) 3.3 2.5
Unemployment rate (%) 6.5 7.1
Stock market capitalisation (EUR billions) 91.4 113.3
Stock market capitalisation (% of GDP) 70 83.9
Bond market capitalisation (EUR billions) 62.4 53.7
Bond market capitalisation (% of GDP) 47.8 39.8
Household gross savings ratio (%) 11.8 -
Household financial wealth (EUR billions) 150.6 -
Average per capita financial wealth (EUR) 14 297.5 -
Sources: INE – Portugal; Euronext Lisbon; Banco de Portugal

In 2004, the Portuguese Economy inverted the recessive trend and registered a modest but still
positive growth. The preliminary figures indicate that Portuguese GDP grew, in 2004, 1,1%, which is
smaller than the forecasted figure for the Euro Area (1,8%).

The rise in the oil price and the problems in some of the countries to where Portuguese companies
export the most explain part of this relatively poorer performance.

These difficulties were reflected in the unemployment rate, which rose to 7,1%, one of the highest
figures ever registered in Portugal.

However, despite all the conditionings, mention should be made to the decrease in the inflation rate
to 2,5%, which is still higher than the average for the Euro Area (2,1%).

Nevertheless, Portuguese stock market was one of the best performers in Europe, accumulating gains
of 12,6%, which reflects the health of Portuguese listed companies.

2. Key trends in flows and assets under management
Table 2: Net Assets of the Fund Industry in Portugal
(EUR billions)

UCITS domiciled
of which:
abroad and
promoted by
Nationally Nationally national providers
Total assets under domiciled domiciled (**)
Year management UCITS (*) Non-UCITS
Dec-2000 24.959 20.545 4.414 -
Dec-2001 25.423 20.525 4.907 0.189
Dec-2002 25.623 20.156 5.467 0.220
Dec-2003 28.708 22.310 6.398 0.310
Dec-2004 31.465 23.420 8.045 0.341
June 2005 33.504 24.592 8.913 0.530
* Including Funds- of-funds
** - Source CMVM – includes only the amounts sold through retail channels to the public. (Not included in Total Assets under
Management)

As of June 2005, Portuguese investment fund industry registered the highest figure ever in term of
Assets under management (AuM), which amounted for almost 33,5 billion Euros, a 11,6% increase
from the year before. The total assets under management represented about 25 % of the Portuguese
GDP.

UCITS remains the largest group, representing around 73.4% of total AuM, which increased 7.6%
since June 2004. However UCITS have been loosing weight for Non-UCITS that grew between June
2004 and June 2005 24,5%. The increasing demand for Real Estate Funds explains part of Non-
UCITS performance as these Funds were responsible, as of June 2005, for over 7,5 billion in AuM,
14,5% more than the year before, but the best performers were Other Non-UCITS that include a new
category of Funds called “Special Investment Funds”. There were 16 of these Funds with a total of 1
billion Euro of Assets under Management, 10 times higher than in June 2004.

At the end of June 2005 the amount marketed by foreign fund managers on the Portuguese market
accounted to 530 million Euros, a substantially increase in relation to June 2004. It should be noticed;
however, that this figure, provided by the Portuguese Supervisor (CMVM), includes only the amounts
sold through retail channels to the public and does not contains the institutional sales.

Table 3: Number and Net Assets of UCITS

Average net
Number of Total net assets Net sales
Year Fund launches assets per fund
UCITS* (EUR bn) (EUR mio)
(EUR mio)
Dec-2000 243 44 20.545 84.5 -
Dec-2001 248 15 20.525 82.8 174.5
Dec-2002 210 7 20.156 96 172.2
Dec-2003 201 8 22.310 111.0 1,399.9
Dec-2004 199 10 23.420 117.7 617.2
June 2005** 206 15 24.592 119.4 1177.8
* Including Funds-of-funds
** - The number of Fund launches and the amount of net sales are related to the period between June 2004 and June 2005.

At the end of June 2005, the number of Portuguese UCITS reached 206, 5 more than the year before.
Between June 2004 and June 2005, 15 new funds were launched and 10 were extinct.

IIFA Oct. 2005 - WASHINGTON 2
Net Sales were responsible for 67.7% of the increase in the AuM observed between June 2004 and
June 2005 with the accumulated figure registering a total of 1177.8 million Euro at the end of the first
half of 2005. However, it represents less 15.9% than the previous year. Net Sales in UCITS were,
somewhat prejudiced by new types of Funds launched (Non-UCITS), which competed with them for
investment. Excluding Real Estate Funds for which there is no figure, Non-UCITS registered 774.3
million Euros in Net Sales.

Table 4: UCITS Assets by Fund Type
(EUR billions)

Dec-2001 Dec-2002 Dec-2003 Dec-2004 June 2005
Net % of Net % of Net % of Net % of Net % of
assets total assets total assets total assets total assets total
Equity 2.231 10.9 1.387 6.9 1.562 7.0 1.740 7.4 1870 7.6
Bond 7.021 34.2 7.269 36.1 8.931 40.0 9.831 42.0 10634 43.2
Balanced 1.757 8.6 1.459 7.2 1.553 7.0 1.760 7.5 1308 5.3
Money Market 7.631 37.2 8.927 44.3 9.272 41.6 8.879 37.9 8704 35.4
Fund-of-Funds 1.884 9.2 1.114 5.5 0.945 4.2 1.018 4.3 1191 4.8
Other - - - - 0.048 0.2 0.193 0.8 885 3.6
Total 20.525 100.0 20.156 100.0 22.310 100.0 23.420 100.0 24592 100.0

Portuguese investor continues to behave very conservatively in regards with the type of Fund it
invests in. That conclusion is sustained by the fact that almost 79% of the total AuM is invested in
Money Market Funds and Bond Funds. Since 2003, a shift has been being observed from Money
Market Funds to Bond Funds, with the latter growing 13.6%, between June 2004 and June 2005,
while the first decreased 3%.

Equity Funds rose 8.3% from June 2004 to June 2005, driven by performance, as these Funds
registered 49 million Euros of negative net sales. Balanced Funds dropped 21.4% but it was the result
of the transformation of one Fund into another category. During last year, net sales accounted for
almost 160 million Euro.

In 2004 and the first half of 2005 an inversion in the downside trend was observed in Funds of
Funds, which registered the first positive annual growth since 1999 with investors “betting” once
again in these products. It continues to be observed an increase in Funds of Funds applications in
Funds domiciled abroad, especially in Luxembourg, which allows a better diversification of
investments.

Table 5: Net Sales of UCITS by Fund Type
(EUR millions)

June
2000 2001 2002 2003 2004
2005*
Equity - -207,7 -233.3 45.8 -9.5 -49.0
Bond - 714,1 184.5 1,496.1 782.4 928.9
Balanced - -480,3 -294.8 -18.0 129.3 157.9
Money Market - 1,083.4 1,147.2 204.0 -481.3 -175.3
Fund-of-Funds - -935 - 631.4 -236.3 51.5 114.4
Other - - - 47.6 144.9 200.8
Total - 174.5 172.2 1,399.9 617.2 1177.8
* - Net sales registered between June 2004 and June 2005

IIFA Oct. 2005 - WASHINGTON 3
Bond Funds were, last year, the most attractive for investors, receiving a total of 928.9 million Euro of
Net Sales, while Money Market Funds registered an outflow of 175.3 million Euro.

Despite de good performances, equity funds registered negative net sales in part because investors
wanted to realize de gains they were being accumulating since end 2002.

Another well performing category was Balanced Funds, which includes some special vehicles for
retirement saving gathering 157.9 million Euros in net sales.

Table 6: Net Assets of Other Nationally Regulated Funds
(EUR billions)

2000 2001 2002 2003 2004 June 2005
Real Estate Funds 3.401 4.166 5.015 5.850 7.050 7.520
Alternative management - - - - - -
Special funds - - - - - -
Other* 1.018 0.742 0.452 0.547 0.995 1.393
Total 4.419 4.907 5.467 6.398 8.045 8.913
* Include Guaranteed Funds and Closed-Ended Funds and “Special Investment Funds”

As already mentioned above, Real Estate Funds constitute the major slice of Other National
Regulated Funds representing more than 84% of them. The number of funds also increased to 71,
twelve more than in June 2004. The fact that investors consider these instruments as riskless
investment made them very attractive as shown by the increase in AUM.

As for other, mention should be given to a new type of Fund established in the new Regulation
15/2003, called “Special Investment Funds”. These are Non-UCITS Funds with a wider and more
flexible investment range. They are dedicated to institutionals or wealthier individuals. At the end of
June 2005 there were already 16 Funds managing 1001 million Euros.

When transposing UCITS III Directive to Portuguese Law, National authorities allowed Mutual Fund
Management Companies (MFMC) to develop other activities such as Real Estate Fund Management
and Discretionary Asset Management. Therefore, since almost all of Portuguese Financial Groups had
one company especially dedicated to each of these businesses, they begun to merge them into the
MFMC, which led to a concentration of Assets under Management in larger companies.

For the moment, some groups merged the three companies into the MFMC, others let the Real Estate
Fund Management Company (REFMC) out of this merger, at least for the time being, and others
have not made any merger until now.

Top 5 Investment Fund Management Companies were responsible, at the end of the first half of
2005, for a little more than 67% of Assets under Management by Mutual Funds and Real Estate
Funds, and if consider the Top 10, the market share rises to 77%.

As for Discretionary Asset Management, the business is concentrated in the 4/5 biggest Companies,
some of them are MFMC. The top 5 companies manage 21,6 billion Euro, which represents around
95% of the total (including only the Discretionary Asset Management carried out by Pure Asset
Managers and MFMC)

IIFA Oct. 2005 - WASHINGTON 4
3. Regulatory and self regulatory developments

The transposition of the UCITS Directives continued to be a focus of interest to APFIPP. The new
legal and regulatory framework came into force on January 1, 2004, and APFIPP sought to
accompany this process of progressive adaptation by its Members and to monitor those issues that
appeared in the meantime, throughout the year, and it will continued to do so until the end of the
transitory period (end of 2005).

A special attention was also due to the developments seen in this area in the other Member States of
the EU and the work undertaken by the CESR – Committee of European Securities Regulators, as
mandated by the European Commission within the scope of the implementation of UCITS III. The
following issues are highlighted: a) The two Recommendations issued by the European Commission
during April 2004, concerning the use of financial derivatives instruments by UCITS and the content
of the simplified prospectus; b) The public consultation in connection with a number of guidelines
designed to clarify several issues that have been raised in connection with the transitory period for
implementation of the New Directives, so as to avoid greater disparity between various countries; c)
The definition of assets eligible for investment by the UCITS, clarifying the present provisions of the
Directive.

In what concerns other European Directives, Decree-Law 62/2005, of March 12th, transposed the
Taxation of Savings Directive to Portuguese Law. Further regulation on the implementation process
was established through Ministerial Order on June, namely the specification of the legal forms to
report information to the authorities and its timetables.

With regard to Real Estate Funds further adaptations to its legal and regulatory framework were
introduced during 2004, based on the experience acquired after the revision implemented in 2002,
with the aim of turning their business more flexible. Thus, as happened with the alteration of the
legislation that gave rise to Decree-Law 60/2002, of March 20, and to CMVM Regulation 8/2002,
APFIPP co-operate actively with the CMVM and the Secretariat of State for the Treasury and for
Finance by means of several comments and suggestions that it sent to these entities. Of the main
alterations introduced to this sector by this revision of legislation, the following are underlined:
a) New possibilities of Investment such as investment in property companies and in countries other
than Member States of the European Union;
c) Increase of debt ratios;
d) The Real Estate Fund Management Companies can provide property consultancy and manage
individual property assets;
e) Admission of new types of Property Funds, such as Forestry Funds and Funds of Real Estate
Funds.

In relation to developments concerning taxation, it can be highlighted that in the State Budget for
2005 it was established the ending of tax benefits when entering into Personal Equity Saving Plans
and Personal Retirement / Education Saving Plans, which, although having specific legislation, could
be set up as an Investment Fund. The applications made to these products were tax deductible until a
certain limit and now this tax allowance has been removed.

4. Corporate Governance

Amendments to CMVM’s Regulation and to the Recommendations concerning Corporate
Governance issues and an update of the duties to submit financial information are at the moment
under public consultation, with the aim of following the recent work of the European Commission
and of OCDE.

IIFA Oct. 2005 - WASHINGTON 5
5. Fund Governance

CMVM launched in the beginning of April a proposal for modifications to Regulation 12/2000 on
Financial Intermediation, which also applies to Investment Funds Management Companies. The
proposed changes envisaged an improvement in Investor Protection and the main differences can be
summarized as follows: a) an increase in the Financial Intermediary responsibility towards the
supervisor; b) mandatory existence of a Compliance department; c) obligation of registration of the
Persons in charge in all areas of the Financial Intermediary; d) elaboration of an Annual Report of
Control.

6. Product Development

The new regulation for Investment Funds, Regulation 15/2003, established a new type of Fund called
“Special Investment Funds”. “Special Investment Funds” are Non-UCITS Funds and can invest in
nearly all type of securities and do not need to comply with the limits laid down in the UCITS
Directive. This is one of the reasons why they are dedicated only to institutional and wealthier
individuals. At the June of 2005 there were already 16 Funds managing more than 1001 million Euros.
Some examples of “Special Investment Funds” that have been launched are: Funds of Real Estate
Funds, Funds of Hedge Funds, Art Funds, and Guaranteed Funds.

Regulation 15/2003 also introduced another type of Fund, the so-called Flexible Funds. These are
UCITS Funds and have to respect the Directive in what concerns the securities it can invest in and
the limits of dispersion but they are not bind to an investment policy, which enables them to change
from equity Funds to Bond Funds or Money Market Funds and any other combinations of Money
Market Instruments, Units of Funds, Shares, Bonds, etc.

On other hand, in 2004 appeared the first Index Equity Fund, a Portuguese Equity Fund, which
follows the PSI 20 Index.

7. Other major issues and developments

As customary, APFIPP presented its suggestions for the 2005 Budget, of which we underscore the
taxation associated with the Social Security reform, with a view to the Retirement Education Savings
Plans and the Pension Funds being considered privileged vehicles in its stimulation, as a result of their
strengthening of the so-called 3rd pillar.

With regard to Pension Funds, one of the major items during the last months has been the update of
the legal framework of Pension Funds and the transposition to Portuguese Law of Directive
2003/41/EC of June 3, on the activities and supervision of institutions for occupational retirement
provision, which has to be transposed by the Member State's by September 23, 2005.

IIFA Oct. 2005 - WASHINGTON 6
SINGAPORE COUNTRY REPORT 2005

1. Statistics as at 30 June 2005

AUM AUM No. of
(in Millions of S$) (in Millions of Funds
US$)
Equity Funds
Pure Equity 8,828.68 5235.22 193
Equity Fixed Term* 4,207.81 2495.14 66

Bond Funds
Pure Fixed Income 3,288.27 1949.87 45
Fixed Income Fixed Term* 520.10 308.4 18

Money Market
Funds 220.29 130.62 5

Balanced Funds
Pure Balanced 3,209.66 1903.26 40
Balanced Fixed
Term* 547.25 324.5 9

Others# 203.46 120.64 10

Total 21,025.52 12,467.65 386

* Guaranteed or Protected Funds. Source : Standards & Poors
# includes hedge funds, floor funds and convertible funds

Note: US$: local currency exchange rate on June 30, 2005: 1.6864
Data does not include offshore funds registered for sale in Singapore.

2. Trends

Industry growth

The asset management industry (institutional and retail) in Singapore grew by 23% in 2004, putting
the assets managed by Singapore-based financial institutions at S$572.6 billion.

The number of investment fund professionals in Singapore has increased to 1135 in 2004 from 986 in
2003, comprising 761 portfolio managers, 340 investment analysts and 34 asset allocators and
strategists.

The unit trust segment of the industry grew slightly with AUM increasing to S$19.8 b. Equity funds
and balanced funds Collective Investment Schemes (CIS) grew by 21% and 59% respectively in 2004,
while Capital Guaranteed/Protected Funds CIS experienced declines in terms of both number and
AUM.

Asia accounted for 51% of CIS investments, up 4% from 47% at end 2003.

IIFA Oct.2005 - WASHINGTON 1
Funds in Asia Pacific ex Japan equities attracted large net flows whilst investors sold global equity and
technology funds.

Asia-Pacific countries remain the main source of funds for Singapore based asset managers in 2004,
accounting for 46% of total funds sourced. Although in 2004, funds sourced from the Middle East
and South Asia grew 76% and 53% p.a.

Penetration rate of unit trusts

The percentage of unit trusts, as measured against fixed deposits and savings deposits, has increased
slightly from 9.4% in June 2004 to 9.59% in Dec 2004.

Distribution

Unit trusts in Singapore are distributed mainly by the major banks. New channels have come up i.e.
electronic distributors and fund platforms are also emerging.

Pressures are increasing on these fund distributors to demonstrate value add in exchange for the fees
paid.

Fund administration

The Central Provident Fund Board (CPF) may be considering the establishment of Master
Administrator. This is envisaged to be the hub for the administration of all CPF transactions including
investor registration, custody of assets and settlement functions.

Funds Automation – IMAS, the Information and Communication Authority of Singapore gathered
representatives from the various associations to form the Electronic Financial Services Technical
Committee (eFSTC). A Memorandum of Understanding was signed adopting the ISO 20022 as the
standard for electronic messaging. It is hoped that the industry will adopt this international messaging
standard when building their own infrastructure.

3. Legal and Regulatory development

Regulatory news concerning investment funds

No regulatory changes this year.

IMAS has started work with the Monetary Authority of Singapore to look into a collaborative effort
to promote mutual funds recognition within the region. This is to a large extent motivated by the
funds passportability discussions in Europe under the UCITS III developments. Together with
IOSCO convergence, it would be logical to intuit that a common overlay of supervisory rules and
regulations may be possible and hence reciprocal recognition of jurisdictions and funds a likelihood.
A 2-prong approach i.e. government to government and association to association may be the right
approach to bring about a beneficial outcome.

New tax regulations

No new tax regulations were introduced in the period under review.

IIFA Oct.2005 - WASHINGTON 2
4. Corporate Governance – major developments

IMAS worked with PricewaterhouseCoopers and the NUS Business School Corporate Governance
and Financial Reporting Centre to produce the Corporate Governance Survey of Institutional
Investors 2005. The findings of this survey will be considered in the Council on Corporate Disclosure
and Governance discussions.

http://www.imas.org.sg/cmaweb/attachments/publication/CG_&_II_survey_2005.pdf

IMAS will be working to promote:
• Institutional shareholder proxy -voting at AGMs.
• Active engagement with Management of the companies that our members invest in, to
safeguard investor interests.

5. Fund Governance

Funds in Singapore follow a unit trust structure where a Trustee is required to be appointed. The
Trustee is seen as the independent party who monitors fund compliance to the investor guidelines and
the prevailing rules and regulations.

6. New Products

An increasing number of hedge funds have set up in Singapore. In Hedge Fund monthly, it was
reported that Singapore accounted for 20 % of all new launches in the Asia Pacific region. For year
ending 2004, Singapore has USD 2.8 billion out of Asia Pacific total of US$ 60 billion. However these
funds are not available to the retail public.

The Singapore Exchange is working to make available exchange traded hedge funds.

7. Other comments and outlook

Global Investment Performance Standards (GIPS)
The Investment Management Association of Singapore was recently approved as country sponsor for
Global Investment Performance Standards (GIPS). IMAS will encourage industry members to adopt
this performance presentation standard and will be recommending this to be included in fund
manager selection criteria for institutional investors in Singapore.

Future growth of the fund industry

The government has been active in encouraging the development of the financial planning industry
with specific focus on retirement planning. One prime concern is the ageing population of the
country and the fear that many have not actively managed their investments to adequately prepare
them for retirement funding. There has been progressive liberalization of the Central Provident Fund
(CPF) scheme to allow the population more options in the use of their pension monies for investment.
There is an estimated S$104b available for investment, of which only $29b has been actually used.

Alongside the liberalization there have been also other changes to the scheme. One significant change
is in the allocation of assets. The amount available for individual stocks has been reduced to 35%
while no limit is placed on approved unit trusts. Unit trusts currently form a relatively low amount

IIFA Oct.2005 - WASHINGTON 3
(11%) of the investments with the bulk of the invested monies going into insurance (67%) and stocks
(22%).

The government has recently announced that it will re-examine Singapore’s social security system, and
may consider taking on the role of aggregator, as well as to build a default pension plan where
members will have to opt out. They are also looking at lowering the costs of investments.

Cost pressure

The relative small size of many Singapore unit trusts means that expense ratios can be higher than 3%
for some funds. Front-end loads, even after discounts, are typically in the region of 2-3%. There are
further charges if the transaction is effected with the CPF pension funds. A recent study was done
and it costs US$26 each transaction through the system. Distributors still continue to enjoy the bulk
of front-end loads, as well as a large percentage of the trail fees.

IMAS is working with the Life Insurance Association, in conjunction with the CPF and the and the
MAS to work on revamping the present commission-based sales charges into lower annual advisory
fees, which would better align the interests of investors with advisors.

IIFA Oct.2005 - WASHINGTON 4
19TH INTERNATIONAL INVESTMENT FUNDS ASSOCIATION CONFERENCE
UNITED STATES OF AMERICA 2005

SOUTH AFRICA COUNTRY REPORT 2005

1. ECONOMIC AND FINANCIAL BACKGROUND

GDP

The world economy has grown briskly, recording a growth rate of approximately 5% during 2004. The
South African economy also experienced favorable growth with the real gross domestic product for 2004
increasing to 3,2%. GDP moved up to 3,3% during the first quarter of 2005, with further increases
expected for the rest of the year.

Increases in unemployment during the third quarter of 2004 occurred in both the public and private
sectors, however the upward trend was negated by an increase in levels of employment during the closing
months of 2004 and the beginning of 2005. High levels of unemployment (approx 26,5%) remains an
intractable problem facing policy makers. The government has announced an investigation into the
efficiency of the labor market, in particular the youth unemployment rates. The main thrust of the
programme is investment in physical infrastructure so as to create more jobs and provide extensive training
opportunities.

Exchange rates

Following the appreciation of the rand by more than 15% against the US dollar for the year ending June
2004, the rand continued its appreciation against the US dollar by a further 11% to December 2004 before
backtracking to early 2004 levels during June 2005. Due to the positive sentiment of the South African
economy, the performance of the rand has remained consistently strong against major world currencies.

Inflation

The Consumer Price Inflation (CPI) increased from 1,2% per annum to 3,4% towards the end of June
2005. The recovery of the rand exchange rate during the past two years has influenced the price formation
process in the domestic economy, which has subsequently driven inflation down to historically low levels.
However, a current record increase in global oil prices, through their impact on fuel costs, has put further
upward pressure on inflation as the year progresses.

During the course of the year ending June 2005, the prime lending rate has been reduced by a further 0,5
percentage points to current levels of 10,5%, the lowest it has been since February 1980.

Savings of private households

Gross household savings as a percentage of gross domestic product recovered from 2% in 2002 to 2,5% in
2003 and 2004 but fell back to an average of 2% in the first half of 2005. Although the current downward
trend in the consumer price inflation figures as well as the decrease in the prime lending rates increased
household disposable income, household spending increased at a faster pace resulting in a decrease in
household saving.

IIFA Oct.2005 - WASHINGTON 1
2. KEY TRENDS IN FLOWS AND ASSETS UNDER MANAGEMENT
(Appended: Table of statistics 1 July 2000 – 30 June 2005)

Collective Investment assets increased by 38% to R348 billion (US$52,5 billion) during the year to end June
2005. This was an increase of 31,8% in US Dollar terms.

The local All Share Index increased by 44,3% against that of 18,8% for the MSCI, in rand terms, over the
year, with a resultant 49,6% increase in equity fund assets. Local equity funds experienced net inflows of
R2,6 billion for the year ending June 2005 .

However, continuing market volatility and the introduction of the Financial Advisory and Intermediary
Services Act has resulted in advisors and brokers encouraging investors into more secure and balanced
portfolios, with a large increase in the number of absolute return funds on offer. As a result, the major
flows continued into fixed interest funds (65,4%) and balanced funds (29,5%) in spite of the lower returns.

The safer haven money market funds attracted R25,2 billion, 49% of total net inflows for the year, with
these assets now accounting for 32,9% of those of the total industry.

The advisor and investor cautiousness has resulted in equity exposure of industry assets falling from 56,4%
to 31% in the last five years, with many investors not benefiting from the excellent returns generated by the
local market, compared to other bourses.

The number of local managers of collective investment schemes increased marginally from 25 at end June
2004 to 26 at the end of the period.

3. REGULATORY AND SELF-REGULATORY DEVELOPMENTS (INCLUDING TAX)

The Financial Advisory and Intermediary Services Act (FAIS) became law in November 2002, and became
effective 30 September 2004. The purpose of the Act is to regulate financial planners and advisors as well
as product suppliers, in the giving of financial advice.

The Financial Intelligence Center Act (FICA) prescribes that all clients of financial institutions should be
identified and that their identification be verified before any transaction can be concluded. The Act also
required that all existing clients should have been identified and verified by end of June 2004. As a result of
the impracticalities of identifying and verifying existing clients within the prescribed timeline, National
Treasury introduced, by way of exemption, a progressive approach in terms of which clients that are
corporate entities and partnerships had to be identified and verified by 31 October 2004 and all natural
persons by 30 June 2005.

4. CORPORATE GOVERNANCE

Corporate governance

In terms of legislation and the deeds of all collective investment schemes, the manager of a scheme has the
right to vote at any meeting or on any issue pertaining to the assets of a portfolio and the manager has an
obligation to act in the best interests of the investors. The industry is finalising standards, based on
international best practice, for all its members to ensure sound corporate governance is maintained in the
issuers of underlying securities and to provide firm guidance on shareholder activism and responsibilities.

IIFA Oct.2005 - WASHINGTON
Fund governance

South African collective investment schemes currently operate under trust structures and legislation
requires total independence of the trustee in relation to the manager to ensure impartial administrative and
fiduciary oversight of the daily operation of the schemes. The deeds of each portfolio specify daily cut-off
times applicable to all investors. An industry standard regulates the manager's ability to trade in
participatory interests of a portfolio in the scheme it manages to ensure that all investors are treated
equally.

The ACI is in the process of introducing the compulsory publication of total expense ratios (TER) when
performance is quoted. Provisions are being made for the calculation of a TER on audited annual financial
statements and an indicative TER which is recalculated on a quarterly basis, for publication purposes.

The introduction of International Financial Reporting Standards into South Africa has brought about
serious challenges for collective investments. The ACI is discussing the consequences on fund accounting,
pricing and financial reporting with the accounting profession and the regulator.

5. PRODUCT DEVELOPMENT

Hedge funds

The Regulators and the industry have, over the past three years, been discussing a regulatory framework for
the regulation of hedge funds in South Africa. Whilst it is possible in terms of existing legislation to offer
hedge funds through insurance products and wrappers, hedge funds are not permitted to market directly to
the public.

Towards the end of 2003, a Discussion Paper on the Regulation of Hedge Funds was circulated for
comment. Early in 2004, the responses were considered in detail. The process has not yet been finalised
but there are indications that the Regulators may permit two separate categories of hedge funds:

ƒ A regulated category within the collective investment arena.
ƒ An unregulated category which will be sold to qualified investors.

Portfolio managers and intermediaries will be required to meet strict fit and proper standards that are yet to
be finalized.

Pension fund issues

The existing pension funds regulation is out of date and currently under review. This has paved the way
for further negotiation by the Association in an attempt to add a national tax pre-paid retirement product
to the existing tax-deferred options currently offered. It is the Association’s view that collective
investments would find favor as an investment vehicle in a pre-paid tax structure, such as the well known
ISA’s in the UK or IRA’s in the US.

It has also been proposed that existing collective investments that meet the prudential guidelines set out in
the current Pension Funds Act, be accorded retirement vehicle status in their own right in order to provide
a simple and portable pension plan – something that does not yet exist in South Africa.

OEIC’s

Open-ended investment companies (OEIC’s) are provided for in the new Collective Investment Schemes
Control Act, which was legislated early in 2003, but implementation is difficult due to structural problems
caused by the limitations of South African corporate law. This is being addressed by the Association,
together with the Regulator and the Registrar of Companies.

IIFA Oct.2005 - WASHINGTON
Third party funds

The other consequence of the FAIS Act is a surge in the number of third party funds on offer, largely
funds of funds or multi-manager funds i.e. portfolios in the name of third parties but under the legal
control of managers, but generally with asset management and distribution handled by the third party
company. This includes broker funds where large broking houses are shifting existing money into
portfolios under their own name. This is currently the largest area of activity in the South African market.

6. OTHER MAJOR ISSUES AND DEVELOPMENTS

Financial Sector Charter

The Financial Sector Charter was voluntarily developed by the sector over the last two years and
constitutes a framework and establishes the principles upon which Black Economic Empowerment will be
implemented in the financial sector.

The Charter aims for the following:

ƒ the long term financial stability and soundness of the sector and its capacity to finance economic
growth and to facilitate domestic and international commerce
ƒ to enhance appropriate and effective access to financial services for a greater segment of the
population
ƒ developing a savings culture
ƒ improving the pool of intellectual capital in the sector by investing in black skills development and
training
ƒ the development of black strategic and operational leadership
ƒ diverse organisational cultures
ƒ triple bottom line accountability
ƒ increasing the representation of black people as employees, managers, suppliers and owners of equity
ƒ increasing the number and quality of black firms providing services and products to the financial
services industry
ƒ promoting entrepreneurial development
ƒ directing savings towards targeted investments of national priority

This naturally has huge implications and opportunities for the collective investments industry, especially in
terms of empowerment financing and access.

The industry has developed a proposal for the introduction of an industry solution for a voluntary product,
at exceptionally low minimums. It is further proposed that government incentives those members of the
community who do not benefit from tax breaks, by means of a grant, to save towards their children’s
education. Canada has a similar scheme. Although this would require a policy change, government has
shown some interest in developing the concept further with the industry.

Exchange Traded Funds (ETF)

After the conversion of the first three exchange traded funds into collective investments in 2004, a second
scheme comprising two portfolios has recently been launched which will track the London and European
stock indices. Two other existing ETFs are considering registering as Collective Investment Schemes as
well, showing a growing trend for cost effective products to be marketed, particularly into the retirement
market.

IIFA Oct.2005 - WASHINGTON
The cost debate

This year has seen the first real upsurge in consumerism as far as costs are concerned. A local actuary won
best paper at the Actuarial Society of South Africa’s annual awards, for a paper highlighting the costs of
retirement investing in South Africa. Although only three CIS companies currently offer CISs in a
retirement wrapper, they were found to be substantially cheaper than the comparative life vehicles, the
traditional domain of voluntary retirement saving in South Africa (pillar 3).

The paper has received an astonishing amount of publicity and the Collective Investment industry has
benefited greatly as a result, particularly in its lobbying efforts with government in order to achieve
comparable status to the life industry in the retirement savings market (refer the retirement reform
comments in the product development section).

IIFA Oct.2005 - WASHINGTON
ASSOCIATION OF COLLECTIVE INVESTMENTS - SOUTH AFRICA
Statistics for 12 months to 30 June annually

2000 2001 2002 2003 2004 2005

TOTAL ASSETS (Rm)
General Equity Funds 40680 47419 51248 38887 47491 67856
Specialist Equity Funds 23024 20253 22274 19660 24423 39743
Sub-total 63704 67672 73522 58547 71914 107599
Balanced/Mixed Funds 6996 9027 16881 17905 32190 52468
Property _ _ 1469 3013 4670 10771
Fixed Interest Funds
Fixed Income Funds 4088 5413 5595 6252 8241 9743
Bond Funds 9259 13235 17861 21694 21222 25002
Money Market Funds 35080 34708 50875 67054 88367 114381
Other Sector 562 3807 11890 17490 22973 28076
Sub-total 48989 57163 86221 112490 140803 177202
Fund of Funds 6643 11419 27018 22940 27643 44867
Grand Total 119689 133862 178093 191955 249577 348040

TOTAL NET FLOWS (Rm)
General Equity Funds 3624 4619 -3908 -3966 1789 2494
Specialist Equity Funds 3076 -1895 551 312 1865 95
Sub-total 6700 2724 -3357 -3654 3654 2589
Balanced/Mixed Funds -1029 1407 7156 2293 10636 11581
Property _ _ 81 1172 1450 3610
Fixed Interest Funds
Fixed Income Funds 2184 2756 4732 346 2947 2077
Bond Funds 762 966 340 2386 586 1655
Money Market Funds 12285 1263 17243 15989 21030 25174
Other Sector 389 3108 8029 5627 4641 4739
Sub-total 15620 8093 30344 24348 29204 33645
Fund of Funds 3622 4379 12552 412 1590 6017
Grand Total 21291 12224 34224 24159 44944 51425

NUMBER OF FUNDS
General Equity Funds 72 88 109 115 110 113
Specialist Equity Funds 105 114 114 108 92 91
Sub-total 177 202 223 223 202 204
Balanced/Mixed Funds 61 77 116 137 166 216
Property _ _ 4 6 11 19
Fixed Interest Funds
Fixed Income Funds 15 15 14 15 12 10
Bond Funds 25 32 38 39 41 41
Money Market Funds 21 24 24 28 25 26
Other sector 2 8 18 27 40 54
Sub-total 63 79 94 109 118 131
Fund of Funds 39 69 119 133 151 201
Grand Total 301 358 437 475 497 570

TOTAL NUMBER OF MANAGERS 31 29 28 29 25 26

South Africa CtyRep 2005.xls
Korea Country Report 2005

Asset Management Association of Korea
1. Economic and Financial Background

1) General economic development

In 2004 exports grew 30.4% year-on-year to USD257.7 billon, while in the first half of 2005
exports increased 11.1% to USD 138.8 billion. This growth was attributed to the global
economic recovery, particularly the recovery in the USA. Meanwhile, imports rose 25.1%
year-on-year in 2004, but they only rose 14.2% in the first half of 2005 because of the
appreciation of the Korean won against the US dollar. The unemployment rate and
consumer price index both recorded similar levels of growth in the first half as the 3.7% and
3.6% respectively recorded in 2004.

The Korean economy is likely to recover to its potential growth level as, despite volatile
external conditions, growth is expected in the second half led by domestic demand.

2) Financial environment

Starting at 4.22% as of July 2004, the yield on 3-year treasury bonds declined to the 3%
level from mid-August; however, it started to rise from the early part of this year to reach
the 4% level before declining again to the 3% level after March this year.

The KOSPI1, starting from 778.03 points, has maintained an upward trend in the period
from July 2004 ~ June 2005. In particular, it reached the 1,000 point level, which is the
highest point for five years. In spite of some concerns such as rising oil prices and a
slowdown in the world economy, the upward trend of the KOSPI is forecast to continue
since the surge has stemmed from investment by retail investors in Regular Savings Plan,
which started to become popular last year.

< Major Economic and Financial Indicators>

Year (End of) 2000 2001 2002 2003 2004
Economy
GDP Growth (%) 8.5 3.8 7.0 3.1 4.6(p)
GDP (USD Billion) 511.8 482.0 546.9 608.0 680.1-
Per Capita GNI (USD) 10,841 10,160 11,499 12,720 14,162
Gross Savings Ratio (%) 33.7 31.7 31.3 32.8 34.9
CPI (yoy, %) 2.3 4.1 2.7 3.6 3.6
Unemployment Rate (%) 4.4 4.0 3.3 3.6 3.7
Finance
Yield on CP (91 days, %) 7.3 5.0 4.9 4.6 3.61
Yield on Treasury Bonds (3 yrs., %) 7.2 5.7 5.1 4.8 3.28

1
Korea Composite Stock Price Index (KOSPI) is a representative indicator in the Korean stock market.
KOSPI (Point) 504.6 693.7 699.8 810.7 895.9
Trade and Foreign Exchange
Import (USD Billion) 159.1 138.0 152.1 175.5 219.6
Export (USD Billion) 175.9 151.4 162.5 197.6 257.7
Trade Balance (USD Billion) 16.9 13.4 10.4 22.1 38.2
Current Account (USD Billion) 12.2 8.6 6.1 12.3 27.6
Exchange Rate (KRW/USD) 1,259.7 1,326.1 1,200.4 1,197.8 1,043.8
Foreign Currency Reserves (USD
95.9 102.8 121.4 155.4 199.1
Billion)

2. Key Trends in flows and assets under management

1) Total assets

The total net assets of investment funds amounted to USD165.6 billion as of the end of June
2005, an increase of 23.6% (USD31.6 billion) over the end of June 2004.
As the KOSPI has continued to rise during the period July 2004 ~ June 2005, total net assets,
except for hybrid funds, have enjoyed an upward trend: equity funds, bond funds, and money
market funds (MMFs) increased by 54.4% (USD4.6 billion), 19.8% (USD11.6 billion), and
30.5% (USD16.3 billion) respectively compared with June 2004, while hybrid funds
decreased by 9.9% (USD3.1 billion).

Most investment funds are contractual type, which accounted for 95.7% of total assets at the
end of June 2005. Corporate type funds accounted for only 4.3% of total assets, a decline of
2.0% points from a year ago.

<Changes in total net assets> <Percentage by investment classification
as of the end of June 2005>
(USD billion)
180 165.6
160
141
131 134
140 123 Others
118 Equity
120
6.6% 7.5% Bond
100
32.6%
80 Hybrid 18.2%
60
40
20
0
MMF 35.2%
Jun. Jun. Jun. Jun. Jun. Jun.
2000 2001 2002 2003 2004 2005

2) Percentage of Securities Holdings to Market Capitalization

(a) Stock holdings of investment funds as a percentage of the total listed amount of stocks
by market capitalization increased to 4.0% as of the end of June 2005 from 3.5% a year

IIFA Oct. 2005 - Washington
ago.

(b) Bond holdings of investment funds as a percentage of the total amount of listed bonds by
market capitalization increased to 22.1% as of the end of June 2005 from 18.4% a year
ago.

3) Trends concerning international investment funds

(a) Onshore Funds exclusively for Foreigners (OFFs)

Thanks to the upward trend in the KOSPI, onshore funds exclusively for foreigners
enjoyed huge inflows of 107.8% (USD 2,256 million) in the year from June 2004 to
USD4,349 million. This continued growth of the OFFs indicates that the Korean market
has been attractive to foreign investors.

(b) Overseas Investment Funds (OIFs)

As OIFs have gained favorable attention from investors since 2000, the funds,
established by domestic fund management companies to invest overseas, have enjoyed
considerable popularity. The net assets of OIFs amounted to USD7,217 million as of the
end of June 2005, an increase of 125% over the end of June 2004.

<Trends of OFFs> <Trends of OIFs>

(USD Million) (USD Million)

5,000 8,000
7,217
4,349
7,000
4,000
6,000

5,000
3,000
4,000
2,093 3,207
2,000 1,816 3,000
2,146
1,322 1,666
1,101 2,000
975
1,000 1,000 723
446
0
0
00

02

04

05
01

03
20

20

20

20

20
20
2

3

4

5
1
00

00

00

00

00
00

n.
20

n.

n.

n.

n.

n.
2
2

2

2

2

Ju
n.

Ju

Ju

Ju

Ju

Ju
n.

n.

n.

n.

n.
Ju

Ju

Ju

Ju

Ju

Ju

IIFA Oct. 2005 - Washington
(USD Million)

5,000
(c) Offshore Funds 4,348

4,000

3,000
2,326

2,000 1,793

1,000 776

159 286

-
Jun. Jun. Jun. Jun. Jun. Jun.
2000 2001 2002 2003 2004 2005

Assets of offshore funds, which are year to June 2005. It is expected that
set up outside Korea by foreign fund more investors will be interested in
management companies and offshore funds because of lower
registered with the Financial domestic interest rates and the
Supervisory Service for sale in Korea, fluctuations in the domestic stock
increased by 86.9% (USD2,022 market.
million) to USD4,348 million in the

IIFA Oct. 2005 - Washington
3. Regulatory and self regulatory developments (including tax)

1) Legal developments

The National Assembly approved on September 10, 2004 a bill that allows the establishment
of private equity funds (PEFs) in order to channel more money into stock investments,
corporate restructuring, and social overhead capital spending. Previously, asset management
companies could create such funds in the form of a mutual fund only for the purposes of
merger or acquisition (M&A). The law became effective from December 5, 2004.

<Major Contents>
Classification Contents
Offering - Private placement form
Minimum - Individuals: 2 billion won
investment amount Institutions: 5 billion won
- Participation in management
Purpose
- May use Special Purpose Company (SPC)
Life time of the fund - 15 years
- Not allowed to sell equities within 6 months
Management limits - Leverage and debt guarantee should be less than 10% of
fund assets
Fair Trade Law &
- Exempt from Holding Company Law and Fair Trade Law
Financial Holding
for 10 years from establishment.
Company Law
- Korea Development Bank only to participate in
infrastructure and restructuring
- Industrial Bank of Korea only to support small and
medium sized firms
Limits for
- Conglomerates are subject to the 4% limit on bank
state-owned banks
ownership if they are the largest shareholder and have
and conglomerates
voting rights in a private equity fund.
- The same limit will apply if affiliates of different
conglomerates collectively hold more than a 30% stake in
a private equity fund.
- Report to the FSC within 5 days any stake of more than
Investment in banks
4% in any bank.

2) New tax regulations

N/A

4. Corporate Governance & Fund Governance – major developments

With the introduction of the Indirect Investment Asset Management Business Act (I2AMBA) in
January 2004, the governance duties of a trustee or a custodian have been strengthened. Also,
the fund’s proxy voting for its property has been emphasized and more asset managers have
become more active in exercising their rights than before.

IIFA Oct. 2005 - Washington
5. Product Development – major changes

The Corporate Pension Plans is scheduled to start from Dec. of 2005. The plan will apply to
companies with five or more employees, and they may choose either defined benefits (DB),
defined contributions (DC), or continue with the severance payment scheme. In addition,
employees at companies with 30 or fewer employees may choose Individual Retirement
Accounts (IRA). After 2008, a presidential decree will decide when the scheme should be
introduced for workplaces with less than five persons. It has been reported that the market size
of corporate pensions may reach about USD 95 billion by 2010.

Financial institutions can participate as an Investment Manager and/or as a Custodian in the
form of bank trusts and insurance contracts. The Investment Manager can provide investment
products, advisory services, record keeping, administration, etc., and this role can be
undertaken by various financial institutions including asset management companies, banks,
insurers, and securities companies.

6. Other major issues and developments

1) Plan to establish an Education Center

AMAK has been in discussions with the regulatory body to establish an education center in
order to put more effort into investor education. Under this project, AMAK is going to
utilize the ”Investment Stability Fund” established in 1998 for financial stability. Since its
primary purpose had been achieved, it added investor education as its goal in 2003. The
assets of the Fund totalled USD26.9 million as of the end of March 2005.

2) Activities of AMAK

AMAK has played an import role in improving disclosure as more retail investors, who are
not sophisticated investors, have needed greater disclosure and more information about
funds. To meet the needs of these investors, AMAK has developed its website so that it is
more easily accessible and understandable with a wider range of information. More
specifically, AMAK’s website shows that an asset management company shall make a
disclosure on its organization, human resources, financial statements, capital raising and
operations, and management indicators such as soundness, profitability, productivity, etc.
through AMAK. Also, regarding funds, AMAK shows the prospectus, Portfolio
Management Report, Investment Performance, and Performance Ranking of funds. Also,
AMAK discloses the NAV per unit and the composition of the portfolio of all contractual
and corporate type funds on a weekly basis. Regarding ad-hoc disclosure, an asset
management company of an investment trust or an investment company shall publicly
disclose the matters such as changes in fund managers; decision on delaying or resuming
redemption and reasons thereof, etc. through AMAK.

IIFA Oct. 2005 - Washington
Spanish Association of Investment Funds and Companies

XIXth IIFA CONFERENCE
18th–21Th October, 2005. WASHINGTON

SPAIN COUNTRY REPORT 2005

1. ECONOMIC AND FINANCIAL BACKGROUND.
• Economic growth increased in 2004, once again, following the generalised recovery of global markets.
The key to this trend lay in the maintenance of construction and real estate activities, as well as in a
strengthening of domestic demand produced by household investment and spending, in spite of a
decrease in foreign demand.

• Good figures accompanied the stock market throughout 2004. The Ibex-35 index ended 2004 with an
18% rise (28% in 2003), which reflected the strength of the national economy and “blue chips”
companies results. Estimates for the year 2005 are also positive in line with 2004 results.

• Growth rates in private consumption between 2,3% and 4% in the last seven years. Due mainly to the
lowest mortgage rates in 40 years, real state investment by households continued to fuel demand for
non-financial assets during 2001-04, whereas the household net acquisition of financial assets did not
follow suit.

2. KEY TRENDS IN FLOWS AND ASSETS UNDER MANAGEMENT.
• In 2004, the Spanish UCITS industry’s assets rose by 15% to EUR 233 billion. This can be seen as a
very positive performance in the context of the prevailing financial markets, especially the equity
markets that showed advances of 25%. However investors’ preferences for this product type have not
occurred, in spite of the continued low interest rates that depressed the performance of money market
and short-term bond funds.

• After three years of net outflows and very slightly positive net sales in 2002, that trend was inversed in
2003 (25 EUR billion of net sales) and continued in 2004 to amount EUR 24 billion, due to strong net
inflows into Equity Guaranteed Funds (Funds with guarantee base on equity derivatives), which
amounted to EUR 2,2 Billion.

• The number of UCITS increases slightly in 2004, because of the continuing process of structural
mergers of UCITS.

• It is important to mention that 53% of Equity Fund assets come from Equity Guaranteed Funds.

IIFA Oct.2005 - WASHINGTON 1
Spanish Association of Investment Funds and Companies

EVOLUTION BY CATEGORIES
% VARIATION NET SALES
Assets and net sales
Dec-02 Dec-03 Dec-04 Jun-05 2005 2005
(Billion Euros) 2004 2004
Jan-Jun Jan-Jun
MONEY MARKET FUNDS 53,3 57,9 56,7 54,0 -2% -5% -1,1 -2,5
BOND FUNDS 54,8 58,7 67,0 73,7 14% 10% 7,3 6,6
Domestic 38,2 44,8 50,6 56,0 13% 11% 8,6 5,5
International 1,5 1,3 2,0 2,2 54% 10% 0,4 0,2
Guaranteed 15,1 12,6 14,4 15,5 14% 8% -1,7 0,9
BALANCED 23,1 25,0 34,4 40,1 38% 17% 6,8 3,8
Domestic 13,5 17,5 21,7 25,4 24% 17% 3,9 2,5
International 9,6 7,5 12,7 14,7 69% 16% 2,9 1,3
EQUITY FUNDS 39,6 60,6 75,0 83,7 24% 12% 11,4 4,4
Domestic 3,6 5,6 7,8 8,7 39% 12% 1,1 0,1
International 13,4 18,5 27,5 31,0 49% 13% 8,1 0,8
Guaranteed 22,6 36,5 39,7 44,0 9% 11% 2,2 3,5
TOTAL 170,8 202,2 233,1 251,5 15% 8% 24,4 12,3

a) EQUITY FUNDS:
- At 31 December 2004, the assets amounted Euro 75,0 Billion, compared with Euro 60,6
Billion at the beginning of the year. This high increase was basically based on positive
performance of global equity markets and positive net inflows in Equity Funds, which reach to
11,4 Billion. Equity Guaranteed Funds assets amounted to 39,7 Billion and their net sales
reached to 2,2 Billion.
- First semester of 2005: Equity Funds have increased their assets up to Euro 83,7 Billion,
which represents an increase of 12% in six months. This increase is based on the strong net
inflows, especially in Equity Guaranteed Funds (which amounted to 44,0 Billion), and the
good performance of the stock exchanges all over the world. Net inflows in Equity Funds in
this period amounted Euro 4,4 Billion (3,5 Billion into Guaranteed).

b) BOND FUNDS:
- During 2004: the assets raised from Euro 58,7 Billion to Euro 67,0 Billion in December 2004,
that is to say a increase of 14%, mainly based on net subscriptions in Short Term Bond Funds.
- First semester of 2005: these Funds have increased their assets in 10%, up to Euro 73,7
Billion, due to strong inflows of Short Term Bond Funds and to positive performances of
Bond Markets.

c) MONEY MARKET FUNDS:
- At 31 December 2004, the assets amounted Euro 56,7 Billion, compared with Euro 57,9
Billion at the beginning of the year, that is to say a 2% decrease , due to negative net sales of
1,1 Billion. Their weight in the total of managed assets was increased from 29% to 24% during
2004 mainly due to net outflows.

- First semester of 2005: The evolution of the assets in the first half of 2005 continues with the
same trend of last years, due to the good returns of Equity Funds in 2004. So, the assets in this
six months decreased to 54,0 Billion from 56,7 Billion, which shows a slight drop of 5%.

2 IIFA Oct.2005 - WASHINGTON
Spanish Association of Investment Funds and Companies
d) BALANCED FUNDS:
- During 2004, the assets increased from Euro 25,0 Billion to Euro 34,4 Billion, that is to say an
increase of 38%.
- First semester of 2005: these Funds have increased their assets up to Euro 40,1 Billion. This
increased is mainly based on returns of this kind of Funds, and net inflows of 3,8 Billion in six
months.

e) REAL STATE FUNDS:
- During 2004 the assets increased from Euro 2,8 billion to Euro 4,4 Billion, that is to say an
increase of 55%.
- First semester of 2005: the assets managed have increased from Euro 4,4 Billion up to Euro
5,5 Billion, with a 26% of increase, due to net inflows and good performance of real estate
investments.

3. REGULATORY AND SELF REGULATORY DEVELOPMENTS (INCLUDING TAX):
• UCITS III Directive transposition:

At the end of 2003, the new UCITS Law 35/2003 in November 4th was approved, and came into force
in February 2004. This new legal framework transposes the Directives 2001/108/CE and
2001/107/CE. Nonetheless, the Decree that develops the Law 35/2003 has not been approved yet (a
final draft was circulated in July 2005), and it is expected to come into force in November 2005.

The Decree will develop more than forty issues mentioned within the Law 35/2003, but Spanish
regulation, in any case, had introduced in 2001 most of the new issues referred to “products” approved
by UCITS III Directive (Funds of Funds, Index Funds, etc.).

Spanish regulation introduced in 1998 the simplified prospectus (“folleto reducido”), with similar
guidelines and aims than the prospectus now called “simplified”. The Decree, that will be approved
soon, transposes almost literally the Directive. Therefore, the recommendations contents of the
Commission about the simplified prospectus, are supposed to be updated by low standing regulation,
Orders from the Economy Ministry or by CNMV (Spanish supervisor) Rules.

Regarding to derivatives, Spanish regulation since 1997 do not differ, in a general overview, with
Directive guidelines, but will be adapted. The Decree that will develop Law 35/2003 lays down with
more detail than actual Decree, and will be finished off with low standing regulation.

The Decree will take into account the additional risk assumed because of the utilization of derivatives
(underlying assets), regarding to the diversification limits in one single issuer.

• OTHER EU Directives transpositions:

− TAXATION OF SAVINGS DIRECTIVE (deadline: 1 Jan. 2004)

Law 62/2003 introduced taxation of savings directive into Spanish regulation. This framework has
been developed by Royal Decree 1778/2004 of July the 30th, and by Economy Ministry rule
EHA/2339/2005,of July 13th

Law 62/2003 considers deductions as a payment on account, in accordance to article 11 of
mentioned Directive.

IIFA Oct.2005 - WASHINGTON 3
Spanish Association of Investment Funds and Companies
Spanish legislation follows the “information principle”. In virtue of this, are subject to
information the whole incomes that come from the transmission or refund of UCITS units. So
Spain decide not to take advantage of article 6.1, to include as payments the proportion of income
that come from deposits and fixed assets interests.

Payments from UCITS returns are included, even though assets mentioned in the Directive
represents no more than a 15% of UCITS Assets. The certificate mentioned in the Directive
article 13.1.b that permits beneficiaries to require the deduction exemption, will be draw up in ten
working days.

− PROSPECTUS DIRECTIVE (deadline: 1 July 2005)

Royal Decree-Law 5/2005 transposed Directive 2003/71/CE of November the 4th into Spanish
regulation. One of the principal questions treated was the possibility offered to the bond issuer to
choose the regulator, therefore, the regulatory legislation for the prospectus approval.

4. CORPORATE GOVERNANCE. MAJOR DEVELOPMENTS:
Above mentioned Decree will develops Law 35/2003; and will include the following issues:
- Information to shareholders and investor interested. Law 35/2003 lays down the TER ratio (Total
Expense Ratio) and demands a quarterly (on request) and half year report, even an information leaflet
to report new investors.
- Affiliated transactions between involved parts, to preserve the different interests.
- Management companies’ obligation to exercise the voting rights, under certain conditions (hold more
than 1% stake in a single company over a minimum 12 months).

5. FUND GOVERNANCE:

• Fund governance:
Decree will exclude the SICAV obligation to be quoted on stock market. These instruments, quoting
actually, will not have to make a takeover bid. Up to the publication of the referred Decree, SICAV
will be subject to the specific UCITS regulation, but without the requirements applicable to quoted
securities.

• Governance of management company:
The next Decree will develop the guidelines laid down by Law 35/2003 about the general and internal
code of conduct, affiliated transactions and independence of the depositary.

6. PRODUCTS DEVELOPMENT. MAJOR CHANGES:
• The next Decree will develop the following issues: ETFs, Hedge Funds and Funds of Hedge Funds.
As in Spain, during the last years, Guaranteed Funds had been very attractive for investors, because
they were concerned about the evolution of the equity markets during 2000-2002, these products could
have a good acceptance by investors, as they look for absolute returns.

4 IIFA Oct.2005 - WASHINGTON
Spanish Association of Investment Funds and Companies

7. OTHER MAJOR ISSUES AND DEVELOPMENTS:
• Private pension regulation has had, among others, the following developments:
− Developments on contributions to pension schemes
The new pension scheme for civil servants has already starts to work. Last July 2004 the
Government and the civil servants trade unions approved the rules of the pension scheme that
nowadays covers 510.000 employees in Spain (nearly the same size as number of participants in
second pillar pension schemes until 2004). The Government transferred 60 millions as the first
contribution which will be annually.

− Developments coming

Implementation of IORP Directive: draft Law 121/000032 was presented to the Parliament last
April 8th. This legal text implements article 20 of the IORP Directive related to the cross border
activity, and it is expected to come into force within this year.

Tax Issues: draft Law 121/000023 was presented to the Parliament last February 11th. Spain is
involved in an infringement procedure by European Commission, like another seven EU
countries. This Draft Law will avoid different tax treatment between foreign and domestic
schemes, in respect on contributions tax deductions.

IIFA Oct.2005 - WASHINGTON 5
19TH ANNUAL ASSEMBLY OF THE INTERNATIONAL FUNDS ASSOCIATIONS
OCTOBER 2005, WASHINGTON

SWEDEN COUNTRY REPORT 2005

1. Economic and financial background

Table 1: Key Economic Indicators

2003 2004
Population (million) 9.0 9.0
GDP (USD billion) 335 385
Real GDP growth (%) 1.5 3.6
Inflation rate (%) 1.3 0.4
Unemployment rate (%) 4.9 5.5
Stock market capitalisation (USD billion) 318 407
Stock market capitalisation (% of GDP) 95 106
Bond market capitalisation (USD billion) 216 221
Bond market capitalisation (% of GDP) 65 63
Household gross savings ratio (%) 8.6 8.4
Household financial wealth (USD billion) 516 611
Average per capita financial wealth (USD) 57,590 67,815

The Swedish economy grew by 3.6 percent during 2004, well above the European average but below world
average. The growth was mainly export driven while domestic consumption turned out lower than expected.
The continuous increase in unemployment, from 4.9 to 5.5 during 2004 and the high savings ratio contributed
to the low growth in household demand. GDP growth for 2005 is predicted to remain strong; a foreseen
decrease in export is expected to be compensated by increasing domestic household consumption. Prices
increased by a very low 0.3 percent during 2004 in spite of the fact that the Central bank lowered the repo rate
from 2.75 to 2.0 percent during 2004.

2. Key trends in flows and assets under management

Table 2: Total assets by fund type, US$ Billion

2004-06-30 2005-06-30 As a % of total
Equity funds 70,8 93,2 56
Balanced funds 19,9 25,2 15
Bond funds 13,0 17,0 10
Money Market funds 21,6 24,7 15
Fund-of-funds 1,7 3,3 2
Other funds 1,6 2,2 1
TOTAL 128,5 165,7 100

Total assets increased by US$ 37 billion, or29 percent, during the period. Although the net
sales during the period was positive the increase was mostly due to the strong development
of the equity funds, which make up to more than half of the total fund market.

IIFA Oct.2005 - WASHINGTON 1
Table 3: Total net sales by fund type, July 2004 - June 2005
US$ Million As a % of total
Equity funds 4 250 43
Balanced funds 1 054 11
Bond funds 1 870 19
Money Market funds 1 248 13
Fund-of-funds 1 371 14
Other funds 185 2
TOTAL 9 977 100

Equity funds still dominate the net sales. Among the other fund types net sales for bond funds and fund-of-
funds have increased while balanced and money market funds have decreased their net sales compared to the
previous period. Net sales in equity funds are mostly from households investing indirectly into funds via
pension vehicles. For their direct investment in funds, the households chose bond funds and fund-of-funds.

3. Regulatory and self regulatory developments (including tax)
UCITS III
The UCITS III recommendations issued by the European Commission have been or are being transposed by
way of being included in ordinances issued by the Swedish Financial Supervisory Authority (FI).

Taxation of Savings directive
The Taxation of savings Directive has been transposed into Swedish law in two steps. The Directive was first
implemented by a “blanket law” and implemented in greater detail with effect as from 1 July 2005. The tax
authorities will issue specific guidelines.

Distance marketing directive
The Directive has been implemented by an Act (Distans- och hemförsäljningslag 2005:59) with effect as from
1st April. The overlap with the information requirements in the new UCITS-directive, and especially the
Simplified Prospectus was not addressed in the implementation, which means that the fund managers have to
adhere to the information requirements in both Directives.

Prospectus Directive
The directive has been implemented by amending the existing regulatory framework. The changes entered into
force new on the 1st July 2005.

The Money laundering Directive
The Money laundering Directive has been implemented and the Swedish Act entered into effect on 1st January
2005. The Swedish Financial Supervisory Authority (FI) has published ordinances as of 1st of July 2005. The
Swedish Investment Fund Association (SIFA) is currently working with FI on fund operation specific
interpretations.

National Act on price information
A new national Act on price information (Prisinformationslag 2004:347) entered into force on 1st October
2004. The purpose of the Act is to promote good price information to consumers. The Act applies in principle
to all services and goods and establishes framework principles on correct and distinct price information and
cost-per-unit-prices. The Act is subsidiary to other product-specific legislation and the responsibility for
supervision and publishing of ordinances has been delegated from the Government to the Swedish Consumer
Agency who will present a report during the autumn of 2005.

4. Corporate governance - major developments

IIFA Oct.2005 - WASHINGTON 2
The Association issued its Code of Conduct for fund managers in December 2004. The Code implements the
EFAMA High Level Principles and is effective as from 1 July 2005. The Code covers fund governance as well
as governance of management company issues. Examples of topics covered are conflicts of interest, fees,
independent board members and remuneration principles.

5. Fund governance
In the implementation of UCITS III ordinances by FI, the regulator put down in the ordinances a number of
business practice rules, which previously was part of the FI good practice recommendations. The regulation
contains among other things rules on dealing with complaints, ethical rules, governance issues etc. Also the
Associations´ Code of Conduct for fund managers fully entered into force.

6. Product developments
Many fund companies introduced fund-of-funds during the end of 2003 and during 2004 funds-of-funds
attracted an impressive 12 percent of total net sales. Funds investing in China and Eastern Europe (especially
the Baltic States and the Balkans) gained a lot of attention during the year.

7. Other major issues and developments
The IORP directive (2003/41/EC) on occupational pensions is under way of being implemented in Sweden.
The implementation has been taken care of by introducing the new rules into existing legislation on insurance
operations. SIFA in our comments had wished for a stand-alone functional law exclusively aimed at
occupational pensions, thereby securing flexibility of the framework for possible future changes such as a
widening of the scope to include Asset Managers and Fund Managers. The new Act is proposed to enter into
force on the 1st of January 2006.

IIFA Oct.2005 - WASHINGTON 3
COUNTRY REPORT FOR TAIWAN 2005
2005 International Investment Funds Association Annual Meeting

1. Economic and financial background
Strong global economic growth led to 3.69% (predicted by Directorate-General of Budget,
Accounting and Statistics) GDP growth of Taiwan in 2004, which is the best year since 2001.
That offered impetus to the equity market. During the year from July 1st 2004, the TWSE index
increased 8.04% to 6221.29 and the total market capital raised 14.36% to US$45.62 billion. On
June 30, 2005, there are 1188 listed companies, including those traded on TSEC & GTSM.
However, as the global economic growth rate slowed down and domestic factories moved
production bases abroad in 2Q, the production and export were negatively influenced, making
several research organizations lowered down the GDP growth estimate this year. But the 2Q
GDP ends up to be 3%, slightly accelerating from 1Q’s 2.5% because of the complement of
private consumption. Along with the ongoing global recovery, domestic and infrastructure
investments, and good-shape stock market, 2H is expected to perform well. According to
Directorate-General of Budget, Accounting and Statistics, 2005 GDP growth is expected to stay
at the same level as that of 2004 at 3.65%1.

2. Key trends in flows and assets under management
The exchange rate for New Taiwan dollars to US dollars was at 31.687 to 1 on June 30, 2005.

2.1 Statistics of Assets under Management and Net Flows (US$)

Mutual Fund Assets Net Flows
Types of Fund Growth
End-June 2005 Percentage Jul. 2004 – Jun. 2005
Rate
Equity Funds 10,066,528,077 14.02% 0.74% 74,249,110
Bond Funds 53,675,879,104 74.78% -26.22% -19,079,183,323
Money Market Funds 0 0.00% - 0
Balance Funds 4,468,985,188 6.23% -30.13% -1,927,268,167
Fund of Funds 1,416,794,598 1.97% 21.15% 247,315,281
Exchange Traded
1.92% -2.85%
Funds 1,375,360,429 -40,388,232
Guaranteed Funds 294,851,883 0.41% 0.74% -51,871,001
Index Funds 23,217,847 0.03% -26.22% 23,217,847
REITs 455,483,223 0.63% - 455,483,223
Total 71,777,100,349 100.00% -22.05% -20,298,445,262

1
Business Monitor International’s 2005 GDP growth forecast is 3.4%, slightly lower than the official one.

IIFA Oct.2005 – WASHINGTON 1
2.2 The Chart of Total AUM

Compound Annual Growth Rate: 23.39%

90.0 84.2
78.3
80.0 71.8
68.8
70.0
56.1
60.0
50.0
40.0 33.4 34.6

30.0 23.5
15.0 17.6
20.0
7.9 7.9
10.0
0.0
1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005/6
Fund Size (US$ Billion)

2.3 The Shares of Mutual Fund Market by Category

As of June 2005

Bond Fund
74,79%

Equity Fund
14,02%
Balance Fund
REITs 6,23%
0,63%
Fund of Funds
Index Fund
Exchange Traded Fund 1,97%
0,03% Guaranteed Fund 1,92%
0,41%

2.4 Trends Concerning International Investment Funds

There are 5 funds raised domestically and invested overseas established between the period
from July 2004 to June 2005 and the assets have increased by 0.18%.

IIFA Oct.2005 – WASHINGTON 2
3. Regulatory and self regulatory developments (including tax)
3.1 To foster the sound operation and development of securities investment trust (SITE) and
consulting business (SICE) and to protect investors' interests, on June 30, 2004 the
President promulgated the Securities Investment Trust and Consulting Act (the “Act”),
enacted on November 1,2004. The main aspects covered in the Act are:
i. Expansion of categories for funds and investment.
ii. The allowance of private placement of the securities investment trust funds.
iii. Regulations on the distribution of offshore funds.
iv. Concurrent operation of SICEs and SITEs businesses and by securities firms,
futures trusts firms, futures competent authority. Trust companies may also
concurrently operate discretionary investment services under certain requirements.
v. Improvement of protection for investors and stricter liabilities, including criminal
liabilities, on financial service operators.

3.2 On August 2, 2005, the Securities and Futures Commission (“SFB”) issued the
Regulations Governing Offshore Funds (“the Regulations”). The key points of the
Regulations are as follows:
i. Allowing offshore funds to be offered, sold, advertised, and promoted in Taiwan.
ii. Institutions issuing such funds shall appoint a master agent in Taiwan, make a daily
announcement of the fund’s net asset value, and when there is material information
pertaining to an offshore fund or its management institution the issuer must report it
to the competent authority and make a public announcement.
iii. Master agents and sales institutions shall furnish investors with a prospectus and an
investor information leaflet to help them better understand the fund’s payoff and
risk profiles so that they can formulate their investment strategies and decisions
3.3 Following the passage of the Act and the Regulations, Securities Investment Trust and
Consulting Association (”SITCA”) amended/issued the self-disciplinary regulations such
as “Guidelines For Offshore Fund Advertisement And Business Promotional Activities”,
“Key Points For Offshore Fund Personnel Training Program”, “Guidelines For
Appealing To Member’s Violation Of Self-Disciplinary”, “Regulations Governing The
Mediation Procedures Of Business Disputes”, “Self-Audit And Filing Procedures Of
Securities Investment Analyzing Activities Via Mass Medium By SICEs”, “Key Points For
Offshore Fund Personnel Training Program” and “Guidelines For Offshore Fund
Advertisement And Business Promotional Activities”.

4. Corporate governance - major developments
4.1 SITCA amended its “Best Practices for SITEs and SICEs Corporate Governance” by
referring to the amendment to “Company Law” and “Corporate Governance Best-
Practice Principles for TSEC/GTSM Listed Companies”, and the trade violations by
mutual funds in the United States.

IIFA Oct.2005 – WASHINGTON 3
4.2 Requiring SITEs, SICEs and discretionary service providers to take corporate governance
practice into consideration while making investment decisions and/or offering consultant
services.

5. Fund governance
On 12 May 2005, SITCA issued its operational procedures for the public offering, issuance, sale,
subscription and redemption of investment funds. Major aspects regarding fund governance
in the new operational procedures are as follows:
5.1 SITEs shall enact and strictly adhere to the designated cut-off time policies of
subscription and redemption requests in business days. Requests received after cut-off
time shall be deemed as next business day orders . Above policies shall be specified in the
prospectuses, sale literatures or on SITEs’ websites. Sale agreements between SITEs and
sale agents shall also include the above policies and the identifying and processing
manners of overdue requests.
5.2 SITEs shall deal with all investors fairly and equally as prescribed in the prospectuses. No
favorable purchasing/redeeming terms toward certain investor(s) should be accepted.
5.3 SITEs shall establish a mechanism to time-stamp investors’ purchasing/redeeming order
forms, the same time-stamping and auditable mechanism shall also apply to non-written
orders .
5.4 SITEs shall charge short-term investors redemption fees, which shall belong to the fund
assets. The SITEs, after considering the traits of funds and the majority of beneficiaries’
rights and interests, shall stipulate the identifying criterions and the maximum charge ratio
of short-term trading. The above policies shall make the short-term trading as an
unwelcome practice to be incorporated into the prospectuses.

6. Product development
6.1 Providing high quality wealth management products
Due to deregulations in the past few years, banks and securities firms are now permitted
to provide wealth management service to high-net-worth clients. In reacting to such
deregulations , the SITEs would devote to the developing of customized products such as
private placement funds and discretionary services.
6.2 Developing funds targeting at the pension market
As the Labor Retirement Pension Act has enacted on July 2005, the new pension regime
has stimulated publics’ growing attentions and discussions then ever on the importance of
career financial planning. To address the thriving demands, the SITEs would
continuously develop funds targeting at the pension market, such as “life cycle funds”.
6.3 Asset management consultative services
Due to the fact that investment products are getting more complex and diversified, and
thus beyond the average investors’ ability to comprehend, asset management consulting
business shall design new business models to satisfy the investors’ savvy.

IIFA Oct.2005 – WASHINGTON 4
7. Other major issues and developments
Financial licenses integration (including banking, trust, securities broker & SITE and SICE)
is underway, quite similar to the test modules in Singapore and Hong Kong.

IIFA Oct.2005 – WASHINGTON 5
United Kingdom Country Report 2005

1. Economic and Financial Background

Table 1: Key Economic Indicators

2003 2004
Population (million) 59.6 -
GDP (EUR billions) 1,584 1,635
Real GDP growth (%) 2.5 3.2
Inflation rate (HICP %) 1.4 1.3
Unemployment rate (%) 5.0 4.8
Stock market capitalisation (EUR billions) 1,923 2,072
Stock market capitalization (% of GDP) 121% 127%
Bond market capitalization (EUR billions) - -
Bond market capitalization (% of GDP) - -
Household gross savings ratio (%) 5.3 4.2
Household financial wealth (EUR billions) - -
Average per capita financial wealth (EUR) -

Source: ONS except stock market capitalisation (Eurostat)

After a period of robust UK economic growth, activity is showing clear signs of slowing this year. With
consumer spending weakening sharply during the first half and businesses still cautious over capital
investment, growth has become more export dependent in a global environment which is reasonably
benign, but not without risks to UK performance. In terms of monetary policy, the Bank of England is
attempting to juggle the challenge of nipping inflationary pressures in the bud, while avoiding any further
depressive effect on private consumption levels. Overall, a soft landing this year still appears the most
likely scenario, with GDP growth picking up again through 2006/07.

Stock market performance has been fairly robust with the FTSE continuing its sustained recovery since
2003 and offsetting concern that the equity markets might be adversely affected by strong institutional
selling, notably by pension funds. As the property boom slows and a very strong bond market run comes
to an end, there is also a case for seeing continued further FTSE advances as equities return to favour.
However, a less positive scenario would clearly ensue should current optimism about global economic
performance prove misplaced.
2. Key Trends in flows and assets under management

Table 2: Net Assets of the Fund Industry in the UK
(£ billions)

of which:
Nationally Nationally
Total assets under domiciled domiciled
Year management UCITS Non-UCITS
2001 235.7 220.2 15.4
2002 194.5 181.9 12.7
2003 241.0 225.8 15.2
2004 275.4 257.7 18.3
2005 297.6 279.2 18.4

Funds under management have grown by 8.1% in the half year to the end of June as equity markets
continue to hover close to recovery highs and deliver reasonable returns. At nearly the £300bn mark, funds
under management are at their highest ever level. Overall, gross sales of unit trusts and OEICs amounted
to £32.1 billion YTD, up 17.0% on the previous period. Redemptions also saw a rise but net sales
improved to £3.0bn, an increase of 17% from a depressed comparable period last year. Retail investors
accounted for 83% of net investment, with retail net sales amounting to £2.5 billion. However, this was a
fall off from the comparable half year period when retail net investment amounted to £3.5bn but overall
sales were depressed as institutions liquidated £928mn.This half year institutions have made net investment
of £508mn. At the end of June there were 118 providers offering nearly 2,000 different funds.

Key Trends in the UCITS/fund market

Table 3: Number and Net Assets of UCITS

Total net Average net
Number of Net sales
Year Fund launches assets assets per fund
UCITS (`£ mio)
(£ bn) (£ mio)
2001 1,846 136 220.2 - 10,050
2002 1,874 170 181.9 - 7,009
2003 1,833 147 225.8 - 9,590
2004 1,905 165 257.7 - 4,859
2005 1,909 56 279.2 - 3,977

IIFA Oct.2005 WASHINGTON 2
Table 4: UCITS Assets by Fund Type
(£ billions)

2001 2002 2003 2004 2005
Net % of Net % of Net % of Net % of Net % of
assets total assets total assets total assets total assets total
Equity 173.6 78.7 134.0 73.7 166.9 73.9 190.7 74.0 205.4 73.5
Bond 25.2 11.4 30.1 16.6 37.6 16.7 41.4 16.1 45.9 16.4
Balanced 21.1 9.6 16.8 9.3 20.5 9.1 5.1 9.0 28.2 10.1
Money Market 1.2 0.55 1.3 0.72 1.9 0.86 2.35 0.91 2.56 0.91
Fund-of-Funds - - - - - - - - - -
Other 0.83 0.38 0.70 0.39 0.73 0.30 0.73 0.28 4.50 1.6
102.
Total 220.2 100.0 181.9 100.0 226.2 100.0 257.7 100.0 279.2
0

The asset mix remains dominated by equities accounting for 73.5%, or 205.4bn, of the total funds under
management as at June 2005.This is predominantly invested in UK equities which account for 44% of total
assets followed by global equities which account for 27%. Europe remains the most popular of global
regional areas accounting for 33% of overseas assets under management. Bonds remain fairly static within the
asset mix taking a 16.4% share of the total. Balanced and Specialist funds showed the biggest percentage gains
in assets under management but remain smaller asset classes overall.

Table 5: Net Sales of UCITS by Fund Type
(£ millions)

2001 2002 2003 2004 2005
Equity 6,174 2,920 2,896 3,237 -321.5
Bond 2,850 4,245 6,117 2,323 2,675.3
Balanced 1,657 23 991 1,628 1,630.6
Money Market 128 187 75 -493 348
Fund-of-Funds - - - - -
Other -49 -78 -43 -15 465.7
Total 10,078 6,880 9,590 5,472 3,977

After several quarters in 2004 when equities appeared to be re establishing themselves as the asset category of
choice, the first half of 2005 has been disappointing for net equity sales seeing a net liquidation and net
inflows that have favoured the bond and balanced categories. This has been driven primarily by institutional
clients who have been large net sellers of equity funds unlike the retail investor who remains a net investor.
Retail inflows have been fairly evenly divided between the equity and bond asset categories YTD.

In terms of half yearly gross sales equities continued to outpace bonds with UK equities selling 10.7 bn or
35% followed by global equities at 8.4bn or 28%. Bonds trailed both of these categories at 7.0bn or 23% of
sales. Clearly the net sales figures are being driven by the redemptions in equities at the institutions.

The Balanced Managed saw the greatest growth rate in half yearly gross sales and was the 10th best selling
sector. The 2 best selling sectors, however, were UK All Companies at £6.4bn, up 1% on the comparable
period a year ago and UK Equity Income at £3.8bn, up nearly 50% on the previous period.

IIFA Oct.2005 WASHINGTON 3
Fund sales to retail investors continue to be distributed predominantly via the intermediary channel, 75% of
funds for the first six months of 2005, were bought via this channel. Salesforce/Tied Agents distributed 12%
of gross retail sales and 9% went direct. Salesforce and tied agents, however, remained the dominant force in
ISA distribution with close to 45% of sales.

3. Regulatory & Fiscal Developments
Implementation of UCITS III
The implementation of UCITS III, and making use of the new investment and borrowing powers permitted
under the directive, have been a pre-occupation of a number of members. Several funds have been
authorized which, in particular, take advantage of the wider use of derivatives in funds. Both UCITS
Amending Directives have now been fully implemented in UK regulations. Although the UK was the first
jurisdiction to implement the Product Directive, in November 2002, to date only approximately 15% of
UCITS 1 funds have converted to UCITS III, there is still a long way to go. However, most UK firms now
do have plans in place for convert to UCITS III

Introduction of the Simplified Prospectus
The FSA introduced rules for the implementation of the Simplified Prospectus (SP) in May 2005, to come in
to full effect by the end of September 2005. The SP is a requirement of the UCITS Directive, establishing a
common marketing document for UCITS funds, across the EU. Various additions to the SP are being
required for UK-domiciled funds while they are being marketed within the UK. The new rules have
required some early revision, with the final version not due to be formalised until September.

Cross-border activity
IMA has been particularly active in supporting members’ cross-border activity, within Europe and
elsewhere. We have identified a number of areas where economies of scale and reduction could be achieved
if the EU authorities were to intervene – together with EFAMA we published a report on the simplification
of registration procedures for funds in Europe. We also published a report on facilitating pooling
techniques for funds in Europe. We intend to produce further reports on facilitating mergers of funds and
on simplifying the private placement regime.

Registration: http://www.investmentuk.org/news/research/2005/topic/european/efamaima0405.pdf

Pooling:
http://www.investmentuk.org/press/2005/20050725-01.pdf

EU Commission Green Paper on Enhancement of the Framework for Investment Funds
We have welcomed the Commission Green Paper which seeks to address how the EU regulatory framework
for investment funds in Europe can be improved. It is a very wide-ranging document and responses are
sought by 15 November 2005.

IFRS
Since they are not listed, UK open ended funds are not under an immediate obligation to comply with IFRS.
However, the Accounting Standards Board (ASB) in the UK is committed to converging UK GAAP with
IFRS and this process has already started. Whilst the impact of this has been minimal in 2005, more
substantial changes are anticipated in the near future and we are engaged with both the ASB and the
accounting profession in addressing the key implementation issues that have been identified."

IFRS has also given rise to some financial and operational issues for asset managers, we are actively seeking
a sensible way forward to these

Brokerage and soft commissions
One of the key regulatory issues facing our industry last year was the challenge set by the FSA to improve
transparency in the way in which trading commissions are used to pay for goods and services. Rules limiting
the use of commission to paying for execution and research have now been incorporated into the FSA’s

IIFA Oct.2005 WASHINGTON 4
Conduct of Business Sourcebook, The solution which we put forward at the end of the year, involving
greater disclosure has been accepted by the FSA who have also has accepted that compliance with IMA’s
Pension Fund Disclosure Code will satisfy their requirements. First disclosure reports will be produced for
UK pension fund clients in the first quarter of 2006 for the six month period to December 2005. The FSA
intends to consult further on the appropriate approach in relation to retail funds.

Markets in Financial Services Directive
Much activity has been focused on influencing the discussions of this directive within the EU institutions,
either directly, or through UK Government or through the Financial Services Authority. It is the main EU
financial services directive outside banking, insurance or UCITS and designed to liberalise securities markets
and the operations of investment firms (including asset management companies). While the fundamentals
of the directive are familiar in the UK, the FSA is contemplating a re-write of the existing conduct of
business rules to comply with the requirements of the directive. Implementation is due in 2007.

Capital requirements for asset managers
We have been actively engaged in discussion of the Capital Requirements Directive, designed to implement
the Basel requirements in Europe. We have welcomed the recognition of the fact that the business of asset
management is different from other financial services and should be subject to an expenditure based
requirement. Currently a key area of focus for the IMA is ensuring that the detailed requirements of Pillar 2
are appropriate for the asset management sector

Standardisation efforts
Over the last year or so, IMA has considerably extended its library of industry good practice documents and
model legal documentation, for both operators of authorised investment funds (AIFs) and for investment
managers.

In light of the revised UCITS Directive, the FSA's fundamental review of the rules for authorised funds and
other market developments (such as the market timing incidents in the USA), we have over the last year
drawn up:
- model constitutional documentation for both authorised unit trusts (AUTs) and OEICs;
- supplements to ISDA Master Agreements for AIFs using OTC derivatives;
- model "short form" reports for investors; and
- guidelines on risk management processes (especially when using derivatives), controls to counter market
timing activities, the use of fair value pricing, the design and use of performance fees, and "swinging single
pricing".

For investment managers we have agreed with the British Banking Association model clauses for use in
terms of business between investment managers and banks when undertaking FX transactions (the issue
being that our members act as agent for their underlying clients, and they do not disclose to the banks'
dealing desks which clients any particular trade is being made on behalf of). We also undertook a major
review of our model terms of business for discretionary fund management (for institutional and private
clients) and, with other bodies representing institutional investors in the UK equity market, drew up a
Statement of Principles on shareholder engagement. Finally, our Pension Fund Disclosure Code has been
enhanced to respond to the Government and FSA's concerns about the "unbundling" of brokerage
commissions between execution and research (or other) services.

Treating Customers Fairly
The FSA has launched an initiative to encourage firms to review business models and practices in order to
enhance the fair treatment of customers. Firms’ senior managements are expected to consider whether, for
example, their product literature is fair and aimed at the correct target market, the complaints handling
process is helpful for customers, and that the remuneration policies of the firm do not lead to customers
being disadvantaged.

Cost of Regulation Project
The Financial Services Practitioner Panel and the FSA have commissioned research on the overall cost of
regulation in the UK. A report is due to be presented to the FSPP and the FSA before the end of 2005, so

IIFA Oct.2005 WASHINGTON 5
that it can be taken into account in FSA’s business planning for next year. There has been rising concern
about the incremental costs of different aspects of regulation originating in both UK and the EU. The
scope of this original report is limited, but further work is likely to be commissioned next year.

Simplification of the taxation regime
A major piece of policy work by IMA was the publication of Investing in Savers, IMA’s radical proposals for
the simplification of the taxation of investment funds. These remain under discussion with the authorities.

Finance Act 2005
The “Reformation of Taxation of Collective Investment Schemes” was one of the objectives of the 2005
Finance Act. The Treasury will be given powers to change the rules without having to go through the full
legislative process.

Initially, and to a large extent, the regulations will re-state the existing tax treatment of authorised funds.
The most controversial change relates to the taxation of recently introduced Qualified Investor Schemes
(QIS). The tax authorities are concerned about abuse so where an investor has more than a 10% holding in
a QIS, the fund will lose its AIF and tax will be payable on its capital gains in the hands of investors. These
rules will not apply to certain types of investors i.e. pension funds, charities, companies carrying on life
insurance and certain nominees.

4. Corporate governance/ shareholder activism
The results of the IMA’s second survey on engagement between fund managers and companies found that
fund managers are more transparent about their engagement and increasingly seek to engage with the
companies in which they invest. The results show an increase in the number of managers who make their
engagement policies publicly available. They also demonstrate that engagement is integrated into the
investment process. With one exception all the managers surveyed employ staff dedicated to corporate
governance and/or SRI and numbers of staff in this role have increased by 10% from 2003.

5. Fund Governance
The IMA has undertaken the most comprehensive review of UK authorised collective investment
schemes since the introduction of OEICs in 1998. Its findings indicated that the existing UK governance
model for collective investment schemes does not require fundamental restructuring. It did however;
make 23 recommendations to enhance the existing model. Copies of the press release and review are
available at http://www.investmentuk.org/press/2005/20050307-01.asp

6. Development in Fund Based Pension Products
The UK is currently undertaking a major reform of private pensions. The Pensions Act 2004 (which creates
a new Pensions Regulator, and establishes a Pension Protection Fund) complements the radical tax
simplification in the Finance Act, which from April 2006 will replace today’s eight separate tax regimes with
one single regime. The key features of the new simplified regime are: that individual members will enjoy tax
relief on pension contributions over their lifetime, up to a total fund value of £1.5 million; and that the
maximum annual pension contributions will be £215,000 per person. Administration of the simplified
regime can be conducted through an account, which an asset manager could operate without having to
establish a life company. Assets held in the account could then be onwardly invested through investment
funds, in much the same way as assets held in an Individual Savings Account can be invested through
investment funds.

7. Other major developments

IIFA Oct.2005 WASHINGTON 6
Location choice in the investment management industry
Even as our industry continues to face challenges from UK and EU policy-makers the UK remains a leading
global centre for asset management as well as a significant contributor to the UK economy. IMA, together
with the Corporation of London, published a study of the UK asset management industry examining
location choice in the industry, the competitive position of the UK as a centre for asset management, and
the major influences, including regulation and tax, which may affect this position in the future. While the
research concluded that the UK is quite secure as a centre for asset management, at least in the short-term, it
did throw up some interesting considerations with respect to the regulatory environment within which we
operate.

Investor education
Our work on financial capability continues through the FSA’s Financial Capability Strategy and the Personal
Finance Education Group as well as through publication of our range of fact sheets. A new addition to our
range has been a guide on the Child Trust Fund.

Our newly designed website, with its Investor Section, is intended to provide existing and potential investors
with a one stop shop to investment funds. We also have a new service providing fund price listings via the
website.

IIFA Oct.2005 WASHINGTON 7
UNITED STATES COUNTRY REPORT 2005
1. Economic and Financial Background

For the year ending June 2005, the U.S. economy and financial markets remained firm, despite
skyrocketing energy prices. The economy grew at an annual rate of 3-1/2 percent from June 2004 to
June 2005. Continued economic growth helped to push the unemployment rate down by ½
percentage point to 5 percent over the period. Major stock price indexes rose between 4-½ percent
and 6-½ percent, though well below the double-digit increases posted in the prior year. Stock price
gains likely were dampened by the slowing growth of corporate profits and expectations that higher
oil prices will crimp profit growth further. The price per barrel of crude oil climbed over 50 percent
during the twelve-month period ending June 2005.1 Short-term interest rates ratcheted up, as the
Federal Reserve steadily tightened monetary policy with overnight interest rates rising 200 basis points
to 3-¼ percent. The yield curve flattened noticeably, as longer-term interest rates fell between ¾ to 1
percentage point. The U.S. dollar rose about 1 percent relative to other major currencies.

Moderate stock price performance contributed to somewhat reduced demand for mutual
funds investing in stocks (including funds investing in a mixture of stocks and bonds, known as
hybrid funds). Investors added $172 billion of net new cash2 to these funds from June 2004 through
June 2005, down from the $280 billion recorded in the previous twelve months. However, falling
interest rates and the commensurate increase in bond prices caused bond fund returns to rebound.
Bond fund investors added $26 billion during the twelve months ending in June 2005 compared to an
outflow of $59 billion in the previous year. The higher level of short-term interest rates prompted
investors to stem substantially their withdrawals from money market funds. Money funds had
outflows of $116 billion over the period July 2004 to June 2005, about half that of the previous twelve
months.

2. Key Trends in Flows and Assets Under Management

o Statistical Update on US Mutual Fund Activity

At the end of June 2005, total mutual fund assets in the U.S. were $8.216 trillion, with 54.4%
($4.47 trillion) in equity funds, 22.7% ($1.867 trillion) in money market funds, 16.2% ($1.334 trillion)
in bond funds and 6.6% ($545 billion) in hybrid funds.

The $8.216 trillion in total assets represents an increase of $625 billion or 8.2% over the level
of June 2004. This increase reflects a 13.1% ($519 billion) increase in equity funds, a 4.3% ($84
billion) decrease in money market funds, a 9.1% ($111 billion) increase in bond funds and a 16.9%
($79 billion) increase in hybrid funds.

The number of funds as of June 2005 was 7,952, down from 8,092 the year before.

From July 2004 to June 2005, net new cash flow to long-term funds was $198 billion, down
ten percent from the previous year. New sales and exchange sales totaled $1.663 trillion, or 29% of

1Since June 2005, energy prices have continued to soar reflecting supply shortages and leading to
expectations of a near-term temporary slowing in economic activity.
2 Net new cash flow equals new sales less redemptions plus net exchanges.

IIFA Oct.2005 WASHINGTON 1
total assets at the beginning of the period. Redemptions and exchange redemptions of long-term
funds were $1.465 trillion, or 26% of assets.

From year-end 1990 to the first quarter of 2005, the percentage of household financial assets
invested in mutual funds rose from 7% to 16.7%. As of May 2005, approximately 47.5% of U.S.
households owned mutual funds.

o Trends in International Investments

As of June 2005, assets of international and global equity and bond funds were $786 billion,
up 30.6% from $601 billion in June 2004. These funds represented 12.4% of total long-term fund
assets in June 2005. There was an $88.8 billion net inflow to these funds in the 12-month period
ending June 2005, up from the previous year’s $59.4 billion inflow.

3. Regulatory and Self-Regulatory Developments

There have been a number of regulatory and self-regulatory developments since the IIFA met
last October. The most important reforms are described below.

Redemption Fees and Transparency Contracts. A rule adopted in March, 2005 will
require every mutual fund board to determine whether redemption fees are necessary or appropriate
to recoup the costs of short-term trading or prevent dilution in the funds that they oversee. The rule
also requires funds to enter into written transparency contracts with financial intermediaries that give
funds the right to obtain investor-level trading information and the right to enforce anti-market timing
policies against the intermediary’s customers. The compliance deadline for the rule is October 16,
2006.

New Fund Governance Rules. In July 2004, the SEC adopted amendments to rules under
the Investment Company Act of 1940 to enhance the independence and effectiveness of fund boards.
The amendments generally require funds to have boards comprised of at least 75% independent
directors, including an independent chairman. The amendments also specify other governance
practices, such as an annual self-assessment by the board, and impose new recordkeeping
requirements relating to a board’s approval of advisory contracts. Funds must comply with these
changes by January 16, 2006.

The two main rules – the 75% independence standard and the requirement for an
independent chair – have been challenged in court by the U.S. Chamber of Commerce. The January
2006 compliance date has been stayed for these two rules pending resolution of the court
proceedings.

The Registration of Hedge Fund Advisers. In December, the SEC adopted a new rule
that will require advisers to certain private investment pools (hedge funds) to register with the SEC
under the Advisers Act by February 1, 2006. The new rule requires advisers with 15 or more clients in
the U.S. to register with the SEC. Clients include all investors in funds that are advised by the adviser,
meaning that the adviser must “look through” any such funds to determine the number of clients that
it has in the U.S.

The rule places the same counting requirements on offshore advisers to hedge funds as
offshore advisers providing advice directly to U.S. clients. The rule, however, contains special
provisions for offshore advisers to offshore funds that have U.S. investors designed to limit the
extraterritorial application of the Advisers Act. In particular, any company that has its principal office
and place of business outside the U.S., makes a public offering of its securities in a country outside the

IIFA Oct.2005 WASHINGTON
U.S., and is regulated as a public investment company under the laws of the country other than the
U.S. is excepted from the definition of “private fund.”

Regulation NMS. In July, the SEC adopted Regulation NMS, providing a major overhaul of
its market structure rules. Regulation NMS contains four interrelated rules that are designed to
modernize and strengthen the regulatory structure of the U.S. equity markets – the “Order Protection
Rule,” the “Access Rule,” the “Sub-Penny Rule,” and the “Market Data Rules.”

o The Order Protection Rule establishes a uniform trade-through rule for all market centers
that, subject to certain exceptions, requires trading centers to establish, maintain, and
enforce written policies and procedures reasonably designed to prevent “trade-
throughs,” i.e., the execution of an order at a price that is inferior to a price displayed
in another market.
o

o The Access Rule sets forth new standards governing access to quotations in NMS
stocks.

o The Sub-Penny Rule prohibits market participants from displaying, ranking, or accepting
quotations in NMS stocks that are priced in an increment of less than $0.01, unless the
price of the quotation is less than $1.00.
o

o The Market Data Rules are designed to promote the wide availability of market data and
to allocate revenues to SROs that produce the most useful data for investors.

Ban on Directed Brokerage. In February, amendments to the NASD Conduct Rules took
effect that prohibit broker-dealers from receiving mutual fund brokerage commissions as
compensation for the sale of fund shares (“directed brokerage”).

“Point of Sale” and Confirmation Statements. In January 2004, the SEC proposed a new
rule that would require a new disclosure document to be given to investors at the “point of sale” and
significant revisions to the rule describing the information that must be contained on a confirmation
statement. The intended purpose of the new document is to provide investors with disclosure of any
payments a broker receives from a fund or its management company that might influence the broker’s
recommendation. In March, the SEC requested additional comment on point of sale and
confirmation disclosure. The SEC has not yet acted on this proposal.

NASD Mutual Fund Task Force. Last year, the NASD formed a “Mutual Fund Task
Force” to provide guidance to the SEC on issues relating to soft dollars, mutual fund portfolio
transaction costs, and distribution arrangements. Since we last met, the Task Force has issued two
reports to the SEC. The first report, published in November, focused on portfolio transaction costs,
including soft dollar issues. The second report, published in April, focused on distribution issues,
including point of sale disclosure and Rule 12b-1 issues. Overall, the Task Force concluded that the
most important change the Commission should consider relating to distribution is to make the costs
and potential conflicts associated with the distribution of mutual funds more visible to the retail
investor.

4. Corporate Governance - Major Developments

There were no major developments in corporate governance since the IIFA met last October.

IIFA Oct.2005 WASHINGTON
5. Product Development - Major Changes

Several firms are developing or have introduced retirement income programs designed to help
older investors in retirement. These programs offer a combination of products and services geared
towards income generation during retirement.

6. Other Major Issues and Developments

New SEC Chairman; New Division Director for Investment Management Expected.
The Honorable Christopher Cox was sworn in as the 28th Chairman of the SEC in August. In a
submission later that month, the ICI highlighted important initiatives for the Commission’s
consideration, including the need to undertake a top-to-bottom review of the mutual fund disclosure
regime with the goal of improving the effectiveness of required disclosure. As part of that review, we
urged the SEC to carefully study how to take full advantage of the Internet as a means of providing
mutual fund disclosure. The ICI also highlighted the need to improve the SEC’s inspection process,
including by issuing interpretive guidance relating to requests for e-mail communications in the course
of routine inspections.

In March, Paul Roye retired as Director of the SEC’s Division of Investment Management.
The SEC has yet to name a replacement.

IIFA Oct.2005 WASHINGTON