Asset Management. Rating Perimeter Milan, Dublin, Boston. First Rating: aa (April 2004) New Rating*: AM2 (May 2004) Rating upgraded: AM2+ (May 2005)

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1 Rating Perimeter Milan, Dublin, Boston First Rating: aa (April 2004) New Rating*: AM2 (May 2004) Rating upgraded: AM2+ (May 2005) * Following the rating scale s change in May 2004 Aymeric Poizot, CFA aymeric.poizot@fitchratings.com Charlotte Quiniou, CFA charlotte.quiniou@fitchratings.com Business Structure Independence & Controls Communication Investment Risk Management Rating Criteria Fitch Ratings, the international rating agency, has upgraded the Asset Manager rating of Pioneer Investments ( Pioneer ) Milan, Dublin and Boston operations to AM2+ from AM2. This rating does not include alternative investments. The rating upgrade reflects Pioneer s various achievements. Its technological platform has been enhanced, notably with the implementation of a common portfolio monitoring tool across Europe, a global analytical portal giving access to all research and portfolio data and the Fix protocol in Europe for equity trades. Corporate governance has also been reinforced with the appointment of an independent Chairman to the Board of the holding company, a Board on which independent directors play a major role. Of equal importance are the changes in senior management, with the CEO assuming responsibility for asset management and private banking, the former global CIO taking the role of deputy CEO and the former head of research global CIO. These changes serve to illustrate the strategic importance of the asset management ( AM ) business to its shareholder, Unicredito Italiano ( UniCredito, rated AA-/F1+, outlook positive), and the capacity of Pioneer to maintain management continuity. The rating also takes into account the evolution of Pioneer s strategy, which now emphasises global institutional development alongside third-party and captive-distribution networks. Several initiatives have already been instigated, such as the appointment of senior sales staff and the launch of several projects in, among others, reporting or risk budgeting. Fitch will monitor these developments closely. The rating continues to reflect Pioneer s operational strength, risk culture and the quality of its investment processes as well as its capacity for innovation. Staff turnover remained low in 2004, fund performances were good and profitability strong. Net sales reached EUR3.6billion in 2004, essentially driven by Europe (Continental and Eastern) and the US. However, EUR0.4bn mutual fund outflows in Italy were fuelled by increasing risk aversion and transfers to cash and insurance policies. Compared to the rest of the Italian AM industry, Pioneer fared relatively well, increasing its market share. Fitch will monitor how it develops its business outside Italy and in turn reduces its dependence on its domestic market, which still represents roughly 75% of assets under management ( AUM ). Pioneer managed asset portfolios totalling EUR126bn (excluding alternative) as of end-2004 and employed a staff of c.1,500. It emerged from the merger in 2000 of UniCredito s AM companies and Boston-based Pioneer Inc. Pioneer, now run as a global business, has been integrated in terms of investment functions and closely supervises all its entities in aspects like IT, risk management and compliance. Bottom-up, active money management prevails at Pioneer, supported by strong quantitative and qualitative internal research. Equities and bonds are managed through all three operational sites listed above; all other investment centres (Singapore, Warsaw and Prague) are outside the scope of this rating and report. Strong shareholder Emphasis on corporate governance Sound equity and fixed-income investment processes, supported by strong quantitative and fundamental research Extensive risk management platform in Europe Dependence on the Italian retail market Relatively limited, but growing, institutional client base Capacity to address institutional clients needs (reporting, client relationship management, etc) Less developed investment control in the US /

2 Pioneer Global Asset Management ( PGAM ) is the sub-holding company for the asset management activities of UniCredito, Italy s second largest bank 1, its Long-term AA- (Outlook Positive) rating underlining its financial strength. In 1998, UniCredito set up an Irish subsidiary, Europlus, that focused solely on asset management and in 2000, Boston-based asset manager Pioneer Inc. was acquired for USD1.2bn. Three years of reorganisation followed, culminating in the creation of a single AM holding company, PGAM, bringing all the AM subsidiaries of UniCredito under the Pioneer brand. Pioneer encompasses six investment centres: Milan, Dublin, Boston, Singapore, Warsaw and Prague. The latter three and the alternative investment activities 2 fall out of the scope of the AM2+ rating and this report. While Pioneer accounted for only 11% of UniCredito s 2004 consolidated operating profit it was central to operating growth. It also constitutes a strategic area of development, recently illustrated by the appointment of Pioneer s CEO to the bank s executive committee, where he now heads both asset management and private banking. Unicredito s explicit strategy is to transform its asset manager arm into a global player capable of attracting noncaptive money and thus contributing to the group s bottom line. Pioneer reported net sales of EUR3.6bn in 2004 on opening AUM of EUR122bn as of December Growth was modest but positive, continuing a trend since Excluding Italy, growth was reported across the markets covered, with EUR0.8bn in the US, EUR1.2bn in Western Europe (ex-italy), EUR0.7bn in Eastern Europe and EUR0.5bn in Asia. In Italy, Pioneer is the third largest mutual fund provider and among the top institutional investment managers. While the performance therein (74% of AUM) was downbeat in term of net sales, following investors growing risk aversion and a general switch to cash instruments and insurance policies, Pioneer has fared better than its competitors. It increased its market share of mutual funds (13.8%) and is well positioned against competitors for third-party networks and institutional clients (pension funds, foundations and corporates). Pioneer continues to leverage off its international expertise and product 1 Total assets in Alternative strategies (hedge funds and funds of hedge funds) are managed by Pioneer Alternative Investments, which is out of the scope of the present rating. innovation (alternative investments, pension funds, asset-liability management and capital protected funds). In the US, it acquired several funds from Safeco, Oakridge and Papp, and gained a foothold in the rapidly-growing segregated account sector through its 49% participation in Oakridge, which manages assets totalling USD1.5bn. The Safeco funds (USD3.6bn) have been merged with Pioneer s and the Papp and Oakridge funds have simply been added to the commercial offerings. Pioneer managed EUR126bn of assets as of end Dublin remains by far its primary investment centre, accounting for 53%, followed by Boston (24%) and Milan (18%), the remaining 5% being split between Singapore, Warsaw and Prague.. Pioneer has expertise in all asset classes: European, international and emerging market bonds, including high-yield and corporate (58% of end-2004 AUM), European, US, Asian and emerging market equities (26%), European-biased and global balanced products (10%) and money-market funds (6%). In 2004 it expanded its US expertise with the acquisition of the Oakridge funds and the launch of global high-yield. Quant European equity funds, European income, European value, concentrated US and concentrated global equity products are due to be launched in 2005 to complete the range with more focused investment strategies. Pioneer continues to exploit its broad distribution network to maximum effect, with representative offices all over the US, Europe, Latin America and the Pacific basin. PGAM employs 57 staff, the majority of whom fulfil coordination functions in areas such as audit, risk management, corporate governance, compliance, strategic research, finance and IT to facilitate the application of a consistent strategy across the AM activities. Pioneer employs a workforce of c.1,500 in the entities covered by the present rating. Its corporate philosophy is to become an integrated global asset manager rather than a network of independent asset managers. In 2004 integration improved significantly with the appointments of a local CIO in Boston and a head of international sales. Most IT projects (see below) are also moving towards this ideal. A global portal to access all research and portfolio data produced across the investment centres was also launched in Transatlantic communication appears to have been strengthened, placing the group well on the road to global integration. Pioneer continues to put the emphasis on corporate governance and in 2004 appointed an independent Chairman to the Board. Six out of twelve Directors, including the Chairman, are not affiliated to UniCredo, PGAM's shareholder. Thus their role, played as independent, is determinant. All Board documents are signed off by 2

3 the Global Corporate Governance function, and an Audit Committee sits at PGAM level that comprises the independent directors and non-executive directors. PGAM has reported healthy operating profit over the last years, which shows no sign of reversing. In the nine months to end-september 2004, operating income totalled EUR261million, up 27% year-onyear, the increase stemming from growth in AUM coupled with a better asset mix and cost containment. Profitability of Boston s operations has consistently improved since 2002 and the return to break-even, thanks to cost rationalisation, and US operating margin has now moved virtually in line with the rest of the group. Overall, profitability appears robust thanks to diversification of the client base, generally fixed fees and a balanced product mix. The only concern remains an over reliance on the Italian retail market.! As of end-december 2004, the retail segment represented 72% of AUM, private and high net worth individuals 14% and group assets 3%. The remaining 11% related to institutional and third parties, the bulk originating from Italy. The majority of AUM (80%) are still managed through mutual funds, split into five groups; the remainder are held in segregated accounts, essentially for Italian institutionals and high net worth individuals. Institutional investors only became a primary focus for Pioneer in its third party business in While the emphasis is also on global private banking platforms and financial institutions, Pioneer now intends to position itself as a major player in the institutional investor segment to achieve its 50% non-captive business target. Pioneer has set aside the resources to respond to RFPs (requests for proposals), notably a centralised database that has been the subject of a complete clean up. Around 150 RFPs were handled in Dublin in 2004 and 18 in Milan (of which 16 were won). Pioneer is still building its relationships with consultants but the appointment of a dedicated senior manager should facilitate progress. Pioneer s portfolio monitoring, order management, matching/settlement and valuation (when not outsourced) systems appear to stand up to scrutiny and adapted to the nature of the activities and volumes across all three sites covered in this report. Managers in Boston continue to monitor their portfolios on a bespoke and comprehensive system (Portfolio Management Analysis) while, in Dublin and Milan, portfolio monitoring was improved in 2004 with the implementation of a common querying tool (Business Objects). Nevertheless, this tool only provides views of portfolios without much added value such as a P&L or risk analysis, interface with research, etc. All portfolio analytics and research are accessible to managers via IPortal. The Charles River Development ( CRD ) solution is used for order management, which also incorporates pre-trade compliance checks. Segregated accounts managed from Milan are being transferred from the AR Enterprise solution 3 to the Dublin front-office database and will thus follow the same operational processes (CRD for pre-trade compliance and Business Objects for monitoring). Order generation (cash allocation, programme trades, etc) is run on PMA in Boston and an in-house system, TMI Navigator, in Dublin, both connected to CRD. Execution is highly automated in Boston through the Fix protocol, which was also installed in 2004 in Dublin and is being tested by a couple of brokers before full implementation. Broker matching is fully electronic in Turin (middle-office for all non-us funds), Milan (middle-office for Italian segregated accounts) and Boston, which outsources broker matching to its custodian for US-domiciled funds. This activity will soon be transferred from Milan to Turin to benefit from economies of scale. The existence of numerous different systems, many developed in-house, raised the question of the scalability, cost efficiency and integration capacity of the IT platform. In response, Pioneer recently launched a three-year project to implement a global investment platform. Fitch will monitor this IT development, which will constitute a significant step toward global integration. UniCredito acts as custodian for all the Italiandomiciled funds and retail segregated accounts, which is delegated to third parties for the other mutual fund groups. Institutional segregated accounts in Boston and Milan are held by various external custodians. Communication between all external custodians is highly automated using dedicated interfaces, electronic file exchanges or SWIFT messaging. In Italy, communication with custodians is about to be transferred from Milan to Turin, the latter being highly automated via SWIFT. Valuations of Italian- and US-domiciled funds are run internally in Turin and Boston, and outsourced for Luxembourg and Irish funds. The acquisition of Oakridge in the US brought Pioneer the operational capability to administrate segregated wrap accounts. Service Level Agreements have been signed with all custodians/fund administrators bar UniCredito (currently being drawn up). 3 AR Enterprise is an Italian company providing investment solutions for high-net worth individuals. 3

4 Numerous staff are employed in key areas such as investments (140), sales (220) and client relationships, all of whom have extensive AM experience. Average staff turnover has remained extremely low except in the Dublin bond team, which lost its head of credit research, its currency manager and a couple of junior personnel in Across its various locations and in all functions, Pioneer hired 50 senior staff, reflecting a strong will to invest in human capital. Investment continuity is ensured with a workforce commensurate with requirements and back-up from the portfolio managers. Broker/counterparty selection and monitoring is guided by clear procedures that have been harmonised under a global policy. Selection requires a formal and documented review (rating, structure, regulation, etc) by risk management and the local Trading Management Committee. The order management system restricts portfolio managers to dealing solely with approved brokers. The Trading Management Committee also checks volume data against projections. To date, only Dublin and Milan have set formal commission targets. Internal valuations are subject to fair pricing and adequate procedures and resources are in place to avoid errors and manipulations. A dedicated pricing unit is responsible for identifying anomalies by comparing different price sources and prices and for determining fair prices on illiquid or unquoted securities. Valuation services have been legally transferred to Unicredito, without any operating impact. " Pioneer has significant autonomy in areas of operations, hiring staff and selecting most service providers (investment tools, custodians, fund administrators and investment research) or financial intermediaries. Only FX, futures and orders on Italian segregated accounts are executed with the UniCredito Group, and the custodian and fund administration function for the Italian funds is retained within the Group. While UniCredito s banking networks still account for the bulk of AUM, Pioneer s own distribution capacities and the level of net sales processed through third parties over the last few years have demonstrated its ability to develop its business autonomously. The composition of PGAM s Board and the recent evolution towards an independent director majority also illustrates its independence. Pioneer has developed a very strong risk control culture, supported by sufficient staff at both a global and local level. Risk Management, which supervises operational risks and internal limits set by the Board 4, was brought together as one function with the Organisation and Change Management function and now employs 30 staff worldwide. Through CRD, Compliance officers ensure that regulatory and contractual limits are not breached and that conflicts of interest are eliminated (between clients, between a client and employees, between clients and the Group). In that regard, a comprehensive Global Compliance Policy was released in 2004 that is now being rolled out locally. Alongside Risk Management and Compliance, each investment centre has an audit team that reports to PGAM. These three functions are run locally but coordinated globally at the PGAM level. In Milan and Dublin an Investment Control function has also been put in place to help local CIOs supervise investment activities (see Risk Management). To maximise operational risk monitoring, Pioneer s Global Risk Management team has developed a database that provides in-depth operational risk analysis across the various entities and allows sign-offs of controls and hierarchal reporting. In 2004, functionalities for reporting to management were enhanced and a module for documenting investment limit breaches developed. The risk mapping has been broadened in Europe with the inclusion of new business units and locations. Senior management is provided with regular top risk, events and key risk indicator reports. Operational risk management, which was less developed in Boston, is being reinforced with greater procedure formalisation and process mapping. Own account trading is restricted by the various regulations to which Pioneer is subject, notably the SEC (Securities and Exchange Commission). In Boston and Dublin, staff with access to marketsensitive information ( access persons ) are subject to adequate control on their personal accounts. Controls on personal transactions in Milan, however, are still limited due to confidentiality clauses under the local regulation. Investments in securities issued or syndicated by the group or related to Group clients are monitored closely by Compliance and Investment Control. While proxy voting is required by law in Boston and exercised electronically via ISS, it has, thus far, been limited in Europe to strategic investments. The scope is though being extended in Europe thanks to ISS. 4 Under Italian law, the board of an Sgr (Italian money management firm) remains responsible for all asset allocation decisions, even if management thereof is delegated. 4

5 An interface between the Luxembourg custodian and ISS as well as coordination by Investment Control have been put in place and a global voting policy has already been formalised by Global Compliance. On Italian funds, the legality of electronic proxy is still pending and thus, for the immediate future, Pioneer will continue voting only on strategic investments. Pioneer employs more than 400 sales, marketing and client relationship staff. International teams in the various representative offices (e.g. ex-italian and ex- US on-shore) are supported by marketing and CRM teams in Dublin. Different CRM systems coexist in Boston and Europe, but their functionalities remain poor (no account management, reporting facilities, etc). In order to respond to RFPs and other enquiries, Pioneer set up a centralised database in Dublin documenting processes and procedures, which was totally overhauled in Furthermore, in Dublin and Boston, Investment Communications departments (staffed by former portfolio managers, macroeconomists, etc) support the sales teams, add to the RFP database and give presentations on behalf of managers (investment comments, process presentations, client requests, etc). Extensive quantitative resources are available, mainly from Dublin, to adapt proposals to a client s needs and to offer advice (asset-liability management, structuring, etc). Several projects are underway to strengthen consultant relationships, RFPs, investor reporting and client relationship management, and the sales organisation was recently reshuffled with the promotion of the former head of international sales and distribution (ex-italy and US) as Global Head of Sales, covering the US and Italy as well. A Consultant Relationship Manager has also been hired in Europe, and a Global Head of Institutional Sales is expected to be appointed in Pioneer produces basic mutual fund fact sheets, fed with data produced by the Portfolio Analytics Teams such as performance, benchmarks, peer groups, ex post metrics (tracking-error, volatility, R², etc) and asset allocation. Data is consolidated by the marketing teams using the Morningstar solution or Excel. Fact sheet transparency was improved in 2004 to include market benchmarks. Institutional reporting still falls someway short of industry standards for presentation and content. To that end, a project was recently initiated to re-engineer the investor reporting offering (institutional fact sheets and institutional mandates). Performance attribution, the responsibility of quant teams, is run on various platforms: an internal system for equities in Dublin and Milan, Factset for equities in Boston, and Wilshire for fixed income across all sites. Since 2004 equity attribution has been produced at holding company level in Europe, a marked improvement. As Boston s equity positions are now being duplicated on Dublin s database, equity performance attribution will soon be produced by Dublin s application. Additionally, Pioneer has selected a new system for fixed-income performance attribution, while performance attribution for segregated accounts is still only run on demand and with limited detail (for instance, only giving asset class attribution for balanced mandates). Pioneer intends making Dublin the portfolio analytics hub. Fitch would welcome a dedicated reporting department, which would improve automation and avoid the need for portfolio managers to fulfil the function, as is currently the case in Milan. Pioneer is fully GIPS compliant. All investment processes at Pioneer are formalised, disciplined and transparent. Generally speaking, all benefit from substantial resources, and all decisions documented. Equity and credit management is mostly bottom-up, backed by very solid proprietary fundamental and quantitative research, which is now supervised by the Head of Global Research. Pioneer believes in and thus actively promotes synergies between both approaches, which tend to be independent in most organisations. The equity research team comprises 42 sector analysts, some of whom have more than 20 years of experience, illustrating Pioneer s desire to have career analysts. Critical mass appears to have been reached; the only area Pioneer intends to invest now is emerging markets (five to six analysts ultimately). The emphasis is still on a thorough understanding of companies and disciplined financial modelling (primarily Discounted Cash Flow), documented into reports, templates for which were harmonised in The most notable improvement has been the recent implementation of an intranet portal ( IPortal ) to store and circulate all pieces of research and reports. Equity analysts still manage US and European research funds and, until recently, global sector funds before being wound down (except for telecoms and high tech). Recommendations are based on Stock Action Lists and discussed with portfolio managers in a weekly stock-picking meeting. Quantitative screening results are also reviewed every month with fundamental analysts to explore new ideas. This screening has 5

6 become central to the US small-cap investment process due to the size of the universe, and a pure European quantitative equity product has just been launched, illustrating the level of maturity achieved by the quant equity process. Fixed-income strategies in Europe are partly topdown, based on various macroeconomic and quantitative inputs, and partly bottom-up, with security selections supported by a credit analysis department in Dublin. In the US, asset allocation and security selections are the main sources of alpha and are supported by a team of four analysts. Several quantitative models were developed in 2004 to help identify relative value ideas on the high yield universe in Boston and investment grade investments in Dublin. Balanced funds and mandates managed from Europe follow asset allocation decisions taken by a Global Asset Allocation Committee that meets monthly, the structure of which was significantly improved in 2004 in terms of organisation and documentation. Security selection relies on the same input as other processes but still leaves managers with substantial leeway. The Dublin quantitative department also manages multi-manager, asset allocation and absolute return products (for EUR29bn), essentially for private banking clients, using proprietary models for external fund selection, portfolio construction, tactical asset allocation and portfolio insurance. Significant efforts have been made in recent years to integrate the investment functions, the last phase of which being the implementation of IPortal, and communications between Europe and the US are the subject of regular updates. Nevertheless, there is still room for improvement, notably as regards global fixed-income and equity processes managed from Dublin. #!! Equity and corporate credit analysts/managers manage actual portfolios, based on which, added value generated can be gauged. Global sector funds will be replaced by virtual portfolios to assess quality of analytical recommendations. Managers also employ performance attribution to assess decision-making (although this is not entirely appropriate for fixed-income products). In addition, various analytical models (RiskManager, Yieldbook and in-house PCA 5 in Dublin, Barra in Boston) perform regular risk attribution and contribute to the understanding of performance drivers. An analysis tool, was developed in 2004 in Dublin that allows analysis of equity portfolios against benchmarks in various dimensions (valuation, return on capital, 5 PCA: Principal Component Analysis size, etc), which will be made available through IPortal before being deployed in Boston. Performances over the last three years against benchmarks and peers remain very good in the US and European equity departments, and in US fixedincome, despite a poor year in US high-yield in European fixed-income had a fairly good 2004 against peers, partially offsetting previous mixed results. Balanced processes still show a mixed picture, and emerging and global equities remain disappointing. US large-cap growth recovered in 2004 after the change in portfolio management following several years of poor results. $ All self-imposed internal limits (i.e. not regulatory) relate to exposures by asset class, single issuers or currency, deviations from benchmarks and trackingerror, and trade size. Ex ante tracking-error has been monitored since 2004 and other indicators are being explored to address credit risk (e.g. average rating), liquidity risk (bid-ask spreads for example) and market risk (e.g. relative Value-at-Risk ( VaR )). Capital protected funds are also subject to VaR limits, computed internally and by their guarantor (UniCredito). Numerous risk indicators are available, such as ex ante tracking-error and a breakdown thereof, key rate duration for credit and bond portfolios, and all ex post metrics (beta, R², alpha) using in-house or external software. Regular reports are produced by quant teams in every centre. A major risk budgeting project is currently underway that is designed to reconcile performance and risk attribution to measure information ratios at each step of the investment process to optimise active risk allocation. While Pioneer has not used derivatives or option-like instruments extensively to date, Fitch sees some room for improvement in the risk monitoring, as illustrated by the recent poor performance in the US high-yield product 6. There is also an expectation that Pioneer will make greater use of such instruments (see below). Consistency of portfolio management is monitored in Europe by the Investment Control department, which computes analysis of the overlap between portfolios, quant and fundamental recommendations and compares exposures. Consistency checks have been extended to balanced portfolios (e.g. comparison of equity components of balanced portfolios and equity portfolios) but will only be introduced across US portfolios and those with some exposure to the US once they have been consolidated into the European database. 6 Heavily invested in busted convertibles, the fund partly suffered from decline in implicit volatility throughout last year. 6

7 % Three trading desks - one each in Milan, Dublin and Boston - centralise execution of all transactions bar fixed-income, staffed by three traders in Milan, five in Dublin and six in Boston. Pioneer has access to electronic trading platforms on bonds (including credit) and uses Electronic Communication Networks extensively for equities in Boston. The Fix protocol has been fully integrated into CRD in Boston (being introduced in Dublin), which also facilitates execution. Best execution monitoring of equity trades is systematic and will be enhanced through the implementation of a dedicated system (Plexus, currently being tested) in all three sites. Fixed income is not subject to the same level of monitoring $ Internally-developed systems have been audited by an external consultant. Models as well as changes in any operating process are subject to very strict validation and implementation procedures under the Risk Management and Organisation department supervision. All key applications and interfaces are tested by the local and global IT departments (240 staff). The implementation of Business Objects as standard querying and reporting tool in Europe has reduced the reliance to office solutions and the incidence of personal spreadsheets. All entities involved in portfolio management have thorough and state-of-the-art business continuity plans that are regularly tested. Controls on trades are run regularly in Europe by Investment Control though not independent of portfolio management. This encompasses among others, cross-trades, portfolio turnover and intra-day trading. In Boston, controls could be tightened and performed more systematically by a dedicated department. Cash and security positions in various systems (the accounting system in Boston, Milan and Turin and the position-keeping database in Dublin) are automatically reconciled daily with custodians at all sites. #& Broker commissions and service quality are regularly reviewed by local Trading Management Committees, with volumes processed formally monitored. Pioneer has not yet build global relationships with international brokers and counterparties, which ultimately could be beneficial to the entire group. Regulatory ratio compliance is checked by the different Compliance departments using CRD, and corporate actions are systematically received in parallel from a data provider other than the custodian. Formal monthly meetings are held with key custodians (including Unicredito) to discuss projects and issues. Where external administrators (Luxembourg funds) are calculating NAVs, the figures are verified daily by the Investment Operations department, which runs its own valuation based on its own prices and positions. Discrepancy tolerance was cut in 2004 to improve accuracy. Where computed internally (Turin and Boston), numerous checks are in place, e.g. comparisons with previous NAVs and benchmarks, performance of each investment, etc. Valuation of small Italian individual accounts (almost 200,000) is being transferred to Turin for rationalisation purposes; only institutional accounts and large private banking mandates will remain in Milan. ' ( All contractual and regulatory restrictions continue to be monitored both ex ante and ex post using AR Enterprise or CRD. Fixed income trades are executed directly in the market by portfolio managers and are only subject to a posteriori controls in Boston while, in Dublin, proposals are monitored a priori being entered into CRD before agreeing the trade with the broker. A posteriori controls are run at least daily by the Compliance departments, and for Italian mutual funds, regulatory limits are also coded into the accounting system. $ $ Currency exposure is only actively managed for international bonds. However, the departure of the FX Manager led Pioneer to consider a fully-fledged currency overlay. Passive FX transactions (spot and forward) are initiated by the custodian or the portfolio managers themselves. Residual cash is invested daily in repos by the Treasury desks and monitored with bespoke systems. To date, Pioneer has rarely used derivatives other than futures. Trading of listed options has however been permitted in Europe since 2004 and such options are properly handled by front and middle office systems with prices and sensitivity measures (the greeks) downloaded from Bloomberg. Open positions on futures and soon on options with the underlying exposure are checked regularly by Investment Control. Pioneer is currently considering investing in OTC derivatives (options and swaps, including credit derivatives), which would require tighter controls and a global policy to clarify strategies to be employed (such as option underwriting, volatility bets, etc). 7

8 Exposures to single issuers, countries or sectors are monitored across portfolios by Investment Control in Europe. In Dublin, a fortnightly report highlighting the largest aggregate exposures in equities and, more recently, bonds across all its portfolios bar those out of the US is also produced by the department. Again, the addition of US positions to the Dublin database will give a broader view of Pioneer s exposures to single names. In terms of liquidity, there is still no transversal control (of average liquidation periods, exposures by liquidity buckets, etc), but the introduction of new risk indicators is being considered, as already mentioned. Fitch welcomes the consolidation of the portfolio holdings into one database, which will allow truly global monitoring of market, credit and liquidity risks and will neutralise the absence of an Investment Control function in Boston. 8

9 ASSETS BREAKDOWN Assets under Management (excl. alternative assets): EUR126bn as of Dec 2004 (vs. EUR122bn as of Dec 2003) Dec 2004 Dec 2003 Breakdown of Assets Under Management by Type of Client Breakdown of Assets Under Management by Asset Class (%) 80 (%) Retail Private Banking Institutional Investors Third Parties Proprietary Funds Fixed Income Money Market Equity Balanced and Flexible Funds Real Estate Funds Breakdown of Assets Under Management by Location of Investment* Breakdown of Assets Under Management by Investment Vehicle (%) (%) Domestic Europe US Pacific Global Emerging 10 0 Mutual Funds (direct sales) Segregated accounts (Private & Retail clients) Institutional segregated accounts Proprietary Funds *: Mutual funds only Copyright 2005 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY Telephone: , (212) Fax: (212) Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. All of the information contained herein is based on information obtained from issuers, other obligors, underwriters, and other sources which Fitch believes to be reliable. Fitch does not audit or verify the truth or accuracy of any such information. As a result, the information in this report is provided as is without any representation or warranty of any kind. A Fitch rating is an opinion as to the creditworthiness of a security. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed, suspended, or withdrawn at anytime for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. 9