Regardless of how good our products are or how many awards we achieve, we can only sell as much as our distributors are willing to sell.

A formidable 4,800-strong sales force

No distributor has been more vital to our success over the past 40-plus years than Nikko Cordial Securities. With a vast broker network numbering over 4,800 salespeople, Nikko Cordial focuses on serving the needs of Japanese high-net-worth customers. The company has 113 offices in Japan, a retail customer base of close to 2 million individuals and maintains about 5,000 institutional customers. In the year ended March 31, 2006, ¥460 billion of net asset inflows came in through Nikko Cordial channels, accounting for about 28% of the total net flow.

For over the past six years, Nikko Cordial has been instrumental in the success of our alternative investment trusts, L-Plus Series, one of the largest single-manager hedge funds in Japan. Owing to the ongoing support of Nikko Cordial’s institutional sales force of 270, this product has gained wide acceptance among institutional investors and carries ¥186 billion in AUM.¹

As Nikko AM continues its rise to the top of the industry, we are extremely proud of, and grateful for, the continued support and dedication of Nikko Cordial Securities.

Simply put, this is the opportunity of a lifetime for us.

Japanese banks, collectively holding over ¥520 trillion in total deposits, were first allowed to sell mutual funds to their network of deposit customers starting in 1998.² Since then, the industry has seen inflows from publicly offered investment trusts from this vast distribution channel amounting to ¥24 trillion in AUM,³ a sizable amount in itself, but one that still only represents a mere 1.5% of Japan’s total household financial assets. Even by what we believe conservative assumptions, there may be upward of ¥20 trillion moving from traditional savings to mutual funds by 2010.⁴

Banks have become a powerhouse in mutual fund distribution. The strategic importance of maximizing our piece of this pie cannot be overstated. To this end, Nikko Asset Management has gotten off to a strong start. Our targeted marketing efforts and flexible product development techniques have allowed us to consistently expand our presence in the bank channel. More than 110 banks in all 47 prefectures of Japan are distributing our products.⁵ In the year ended March 2006, banks accounted for 51.6% of net asset inflows. Nikko AM’s market share is now 7.1%, up from 3.3% last year.

There’s much more.

The Japanese post office network is the emerging giant of mutual fund distribution in Japan. It boasts the single largest pool of savings deposits in the world, amounting to ¥196 trillion.⁶ In October 2005, this channel was opened to the sale of mutual funds; as of the end of July 2006, AUM had reached ¥264 billion.⁷ The number of post offices selling investment trusts will be increased from 575 to 1,155 by the end of fiscal 2006, with a target AUM of over ¥640 billion⁸ as reported by the Japanese media. This surely points to the huge potential of Japan Post in the sales of investment trusts.

In June 2006, we launched two funds exclusively distributed at the post office: the Nikko Five Continents Bond Fund (Monthly Dividend Payment Type) and the Nikko Five Continents Equity Fund, which respectively invest in the bonds and equities of economically advanced and emerging countries worldwide, excluding Japan. Both funds are based on passive investment expertise that we have developed over 20 years. Our index funds consistently lead the industry in the measure of tracking error, the most commonly used tool for comparing index funds. The two new funds featured specialized marketing materials to help post office customers understand our products even without additional explanations.