INVESTMENT MANAGER SURVEY REPORT FOURTH SECOND QUARTER

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1 INVESTMENT MANAGER SURVEY REPORT FOURTH SECOND QUARTER INVESTMENT MANAGERS VIEW U.S. EQUITY VALUATIONS AS STRETCHED; SEE EQUITIES IN EMERGING MARKETS AND EUROPE AS ATTRACTIVE July 2017 Christopher Vella, CFA Chief Investment Officer Northern Trust Multi-Manager Investments Mark Meisel Senior Vice President Northern Trust Multi-Manager Investments Investment managers believe that U.S. economic growth will remain stable, but compared to last quarter, fewer managers expect U.S. gross domestic product (GDP) growth will improve. Managers continue to view U.S. corporate earnings as healthy, with approximately 88% of managers expecting earnings to either increase or remain the same. Their view of U.S equity valuations continues to worsen: only 36% of managers believe they are undervalued or fairly valued, the lowest percentage since the survey began. They view both emerging market and European equity valuations favorably. Most managers (63%) view the historically low levels of the Chicago Board Options Exchange Volatility Index (VIX) as suggesting too much complacency in the markets, which may lead to a sell-off. Key Findings: Second Quarter 2017 Survey Less Optimistic View on U.S. Economic Growth Fewer managers expect U.S. economic growth to accelerate this quarter: 29% versus 44% last quarter 38%, up from last quarter, of managers expect job growth to decelerate but remain positive 88% of managers expect corporate earnings to increase or remain the same 49% of managers expect housing prices to increase, while 47% expect prices to remain stable Managers Reassess U.S. Equity Valuations 65% of managers believe U.S. equities are overvalued, the highest percentage since the survey began Possible Risks to U.S. Equity Market Rally Geopolitical incident U.S. economic slowdown U.S. policy conflicts with partners (Paris Accord, NATO) U.S. POLICY ANNOUNCEMENTS, TERRORIST ATTACKS AND ENERGY PRICES The Trump administration made a number of policy announcements and announced that it decided to withdraw from the Paris climate agreement in the last quarter. President Trump met with NATO leaders in Brussels, and some of the reporting on the meeting suggested that Trump did not allay fears regarding the U.S. commitment to NATO. Most managers (55%) do not believe that these policy disagreements will affect the financial markets over the short term, but a sizeable minority (43%) believe there is a moderate to strong chance they will hurt the financial markets. northerntrust.com Investment Manager Survey Report Second Quarter of 10

2 The global markets have also had to assess the effect an increasing number of terrorist attacks will have on economic activity. Despite the terrible impact on those communities affected, a string of recent terrorist attacks in the West has had little effect on the markets. We asked managers if they thought these attacks had raised the risk of a market sell-off: about 3 in 10 managers do not believe the attacks have increased market risk; 55% believe there has been a small increase in downside risk; 12% believe there has been a moderate increase. Separately, lower energy prices have been a headwind for markets. We asked investment managers where they expected energy prices to be one to two years out. Fifty-six percent expect energy prices to increase, while 35% expect prices to remain stable. Just under 1 of manager expect oil prices to decline. Investment Managers and the Cost of Regulatory Requirements After the 2008 financial crisis, regulatory oversight and requirements increased throughout financial services. About half (49%) of managers describe the cost to their firm of addressing these requirements as modest but an evident portion of the firms incremental costs over the past few years. Approximately 24% described the incremental cost as moderate, while 7% believe it has been high. Slightly more than of investment managers describe the incremental costs to their firms as small. Focusing just on 2017, about 49% of managers believe regulatory requirement costs are plateauing, 47% describe them as still increasing and 4% believe they are coming down. U.S. ECONOMIC AND EARNINGS OUTLOOK The outlook for U.S. economic growth is slightly less optimistic than last quarter in the view of investment managers. Approximately 6 in 10 managers expect U.S. GDP growth to remain the same over the next six months, an increase from last quarter. However the percent of managers that expect GDP to accelerate fell from 44% last quarter to 29%. TRUMP ADMINSTRATION POLICY CHANGES AND EFFECT ON EQUITY MARKETS 5% 3% Potential positive effect on the market No effect on the market 37% 55% Moderate probability of a negative effect on the market Strong chance of negative effect on the market EFFECT OF INCREASE IN TERRORIST ATTACKS ON RISK OF EQUITY MARKET SELL-OFF 3% 12% No increase in risk of a market sell-off Small increase in risk of a market sell-off Moderate increase in the risk of a market sell-off Large increase in the risk of a market sell-off 55% INCREMENTAL COST TO FIRM DUE TO REGULATORY REQUIREMENTS OVER THE PAST FEW YEARS 7% 21% 24% Very little incremental cost Modest incremental cost Moderate incremental cost High incremental cost 49% northerntrust.com Investment Manager Survey Report Second Quarter of 10

3 This trend also was evident in managers outlook for job growth in the United States, with 38% of managers expecting job growth to decelerate up from last quarter. Fifty-two percent expect job growth to remain stable over the next six months versus 61% last quarter. Housing price expectations were little changed as compared to last quarter. Slightly more managers, 49% versus 46% last quarter, expect housing process to increase over the next six months. Fewer managers expect housing prices will remain stable (47% versus 53% last quarter), and slightly more managers (4% versus 2% last quarter) expect housing prices will decrease over the next six months. Regarding U.S. corporate earnings, of managers expect earnings growth to increase up from 46% last quarter. Another 38% expect earnings to remain the same, down from 46% last quarter. We saw a slight uptick in the number of managers that expect profit growth to decrease (12% up from 7% last quarter). Fewer managers ( versus 95% last quarter) expect U.S. corporate revenues to remain the same or increase. Within this: 49% of managers expect accelerating revenue growth (up from 46% last quarter), while the number of managers expecting revenue growth to remain the same decreased. We also saw a slight increase in the managers expecting revenue growth to decrease (1 versus 4% last quarter). INFLATION AND INTEREST RATES Although two thirds of managers expect interest rates to increase over the next three months, this is down from 79% last quarter. The number of managers that believe interest rates will remain the same is increasing: 27% this quarter, up from 17%. More managers expect inflation to remain the same ( versus last quarter). Fewer managers expect inflation will increase over the next six months (42% versus 63%). The lower expected increases in interest rates and inflation parallel the lower economic growth expectations. U.S. GDP GROWTH EXPECTATIONS NEXT 6 MONTHS Accelerating 29% 11% 2Q2017 U.S. JOB GROWTH EXPECTATIONS NEXT 6 MONTHS 8% 52% 38% 1% 1% 2Q Q 2017 Accelerating Remaining stable Remaining the same 44% 6% 1Q2017 7% 61% Decelerating but remaining positive Turning negative Decelerating INFLATIONS RATE EXPECTATIONS NEXT 6 MONTHS % 8% 2Q % 7% 1Q2017 Accelerating Remaining the same Decelerating northerntrust.com Investment Manager Survey Report Second Quarter of 10

4 PORTFOLIO POSITIONING Eighty-two percent of investment managers report that their portfolio s cash levels are in line with historic norms, and 16% have cash levels above their normal levels. On average, over the survey s history, approximately 13% of managers have had higher-than-normal cash levels. The majority of the managers we surveyed aren t changing their portfolio concentrations: 71%have not altered their portfolios concentration level over the last three months. Approximately of managers increased their portfolios concentration, up from 9% last quarter. Most managers (62%) have not changed their portfolios risk aversion over the past three months; 33% are more risk averse, and only 4% of managers were less risk averse a drop from 14% last quarter. Most investment managers, 69%, are maintaining their commodities exposure at the same level. Fewer managers (7% versus 15% last quarter) are increasing their exposure to commodities; 24% are decreasing their exposure, up from 13%. VOLATILITY Eighty-two percent of investment managers expect market volatility, as represented by the Chicago Board Options Exchange Volatility Index (VIX), to increase over the next six months. This is the highest percentage since the survey began. Only 17% of managers, down from 23% last quarter, expect the VIX to remain the same. The VIX has been at historically low levels, and other measures, such as G-10 currencies and U.S. treasury rates, also have low implied volatility. Approximately 23% of managers believe these historically low volatility levels reflect fundamentals, such as improved growth and low inflation, that are reducing market concerns. However, 63% of managers see this as a warning of too much complacency in the markets, which may lead to a market sell-off. CHANGE IN RISK AVERSION OVER PAST 3 MONTHS % 4% 34% 2Q Q Q Q 2016 No change in risk aversion 55% 14% 31% Less risk aversion 48% 21% 31% PORTFOLIO COMMODITIES EXPOSURE COMPARED TO 3 MONTHS AGO % 7% 69% Decreased 13% 15% 72% 6% 36% 58% Increased 66% 6% 28% More risk aversion 2Q Q Q Q % 23% 68% Same WHAT DO YOU BELIEVE THE HISTORICALLY LOW LEVELS OF THE VIX INDEX SUGGEST? 14% GLOBAL EQUITY MARKET RISKS Geopolitical risks became the top-ranked global equity market risk for managers. A U.S. economic slowdown rose from the seventh- to the second-ranked risk in the view of investment managers. U.S. corporate earnings ranked third and trade policy dropped to fourth from first last quarter. 63% 23% Reflects improved fundamentals, such as growth, earnings, etc. Warning sign suggesting too much complacency in the markets Reflects technical issues with new products in the markets like ETPs northerntrust.com Investment Manager Survey Report Second Quarter of 10

5 INVESTMENT MANAGERS RANKINGS OF TOP RISKS TO EQUITIES RISKS SECOND QUARTER 2017 RANK FIRST QUARTER 2017 RANK CHANGE FROM LAST QUARTER GEOPOLITICAL RISK U.S. ECONOMIC SLOWDOWN U.S. CORPORATE EARNINGS TRADE POLICY EMERGING MARKET ECONOMIC GROWTH CHANGE IN U.S. MONETARY POLICY RISE IN INTEREST RATES OIL/COMMODITY PRICES EUROPEAN DEBT CRISIS NEGATIVE INTEREST RATES = Source: Northern Trust Investment Manager Survey, 2nd quarter 2017 GLOBAL EQUITY MARKET VALUATIONS Nearly half of managers (47%) view U.S. equities as overvalued by up to 1, and another 17% believe U.S. equities are overvalued by more than 1. These are the highest levels since the survey began. Only 36% of managers view U.S. equities as appropriately value or undervalued. This is the lowest percentage since the survey began. Managers views of equity valuations in Japan are in line with last quarter. Approximately 29% view Japanese equities as undervalued, down from 37% last quarter. Although more managers (51%) believe they are fairly valued, up from 39% last quarter. An increasing number of managers (62% this quarter versus 54% last quarter) view European equities as undervalued. Only 14% believe they are overvalued a drop from last quarter. Emerging market equities are also attractive from a valuations perspective: 88% of investment managers view them as undervalued or appropriately valued. Fiftyfour percent of managers view emerging market equities as undervalued, compared to 48% last quarter. We saw a decrease (32% versus 39% last quarter) in the number of managers that view them as appropriately valued. And 12% of managers say emerging market equities are overvalued, down from 13% last quarter. The percent of managers that expect equities from the Asia Pacific region (MSCI AC Asia Pacific Index) to GLOBAL EQUITY MARKET VALUATIONS % 51% 25% 11% 38% 62% 54% 55% 29% 37% 11% 48% 2Q Q Q Q Q Q Q Q 2017 U.S. Equities Japanese Equities European Equities EM Equities Overvalued 51% 18% 45% 24% Appropriately valued 14% 26% 12% 32% Undervalued outperform global equities increased to 42% from 35% last quarter. Forty-six percent of investment managers expect Asia Pacific equities to perform in line with global equities. Approximately 12% of investment managers believe they will underperform global equities over the next six months. FIXED-INCOME SECTORS Within fixed-income markets, managers view emerging market debt, investment grade and U.S. high yield as most attractive. Least attractive is euro high yield, followed by global sovereign debt. 13% 39% northerntrust.com Investment Manager Survey Report Second Quarter of 10

6 WHICH ASSET CLASSES AND SECTORS ARE MANAGERS BULLISH ON? Managers are most bullish on emerging market equities, followed by non-u.s. developed equities. This is in line with last quarter s ranking. U.S. small cap ranked third this quarter, from fourth last quarter. Private equity jumped to fourth from eighth last quarter. Managers were the most bearish on U.S. fixed income (Barclays Capital U.S. Aggregate Bond Index), followed by hedge funds and commodities. Within emerging and frontier equity markets investment managers believe India, China and Brazil have the best investment opportunities over the next two to three years and the frontier markets, Russia and South Africa the least. Managers were most bullish on the information technology sector again this quarter. Healthcare ranked second, followed by financials. The sectors managers are most bearish about are utilities, consumer staples and energy. We also surveyed managers on their views regarding valuations within U.S. sectors this quarter. Thirty-nine percent of managers viewed financials as undervalued, followed by 32% for both energy and healthcare. Only 6% of managers viewed consumer staples as undervalued and 15% said the same for information technology. BULL/BEAR INDICATOR (ASSET CLASS) MSCI Emerging Markets MSCI EAFE U.S. Small Cap Equity Private Equity Private Real Estate Emerging Market Debt (Local Currency) Emerging Market Debt (Hard Currency) U.S. Large Cap Equity Hedge Funds Government TIPS Commodities U.S. Treasury (Cash) Non-U.S. Bonds Barclays Capital Agg Bond Index 4 8 Source: Northern Trust Investment Manager Survey, 2nd quarter 2017 BULL/BEAR INDICATOR (SECTORS) Information Technology Health Care Financials Industrials Consumer Discretionary Energy Telecommunication Services Materials Real Estate Consumer Staples Utilities Very Bullish Bullish Neutral Bearish Very Bearish Very Bullish Bullish Neutral Bearish Very Bearish 4 8 Source: Northern Trust Investment Manager Survey, 2nd quarter % of managers rate emerging market equities as bullish (45%) or very bullish (11%). of managers are bullish on non-u.s. developed equities and approximately 6% very bullish. U.S. bonds have bearish ratings of 54%. Information technology has a bullish rating of 47% and very bullish of 6%, followed by healthcare at 39% bullish and 11% very bullish. 57% of managers are bearish on utilities, followed by consumer staples at 46%. northerntrust.com Investment Manager Survey Report Second Quarter of 10

7 COMMENTARY FROM OUR MANAGERS We asked managers this quarter to share their views on the following questions: Productivity increases have been historically low in most developed economies over the past decade. What do you believe this reflects and has it affected the factors you look at in an investment? Rising income inequality, aging populations and less savings are key factors that have contributed to the slowdown in productivity growth in developed economies. However, it s important to note that it takes several years for technological advances to have a meaningful impact on productivity growth. Advances in artificial intelligence could be a key growth driver over the next decade. The slowdown in productivity growth has not had a significant impact on the fundamental factors we look for. We continue to believe high quality companies with improving business momentum trading at attractive valuations will outperform the market over the long-run. Bobby Mullen, portfolio specialist, Trivalent Investments Measurement issues associated with a rising share of service-oriented activities and digital goods do offer some explanation for the slowdown in developed economies measured labor productivity dating to the financial crisis. While newer technologies offer the promise of improvement, demographic shifts in labor markets look to provide a headwind. Since changes in aggregate output-per-labor-hour tend to be an economy-wide factor, the fluctuations have only marginal impact on TWIN s investment process which emphasizes the relative fortunes of individual companies. TWIN s equity investment strategies remain fully invested in the market regardless of the productivity environment. Geoffrey Gerber, president & chief investment officer, TWIN Capital Management, Inc. Our belief is that the productivity gains are simply a reflection of business fixed investment, which continues to decline as a percent of GDP. Corporations are generating record operating profits, but for the most part are returning capital to shareholders through buybacks and dividends rather than reinvesting. John Schaeffer, co-portfolio manager, Hahn Capital Management LLC We also asked managers what other significant risks concern their investment teams and how these are affecting their portfolios. The following comments represent a selection of their responses: As bottom-up investors, we are focused on owning high quality growth companies run by talented and ethical management teams. As long-term investors and not traders, we do not make dramatic changes to the portfolio based on macro fears. That said, we are concerned about U.S. equity valuations. Valuations don t cause corrections but those high valuation stocks get punished when a correction comes. We are trimming positions where the valuation is excessive and our return expectations have diminished. The rise in the market has also made it difficult to find new ideas for the portfolio at attractive prices. As global tensions increase, we are also concerned about major geopolitical risks that could cause a short-term correction in the market. Mike Morrill, chief operating officer, DF Dent and Company, Inc. Elevated valuations and investor complacency are concerning. As a result, we have made more stock-weight adjustments due to price and we have expanded our list of candidates for inclusion into the fund. Brian Beitner, portfolio manager, Chautauqua Capital a Division of Baird northerntrust.com Investment Manager Survey Report Second Quarter of 10

8 Among the various risks we have been tracking are competitive and technological shifts in the retail landscape and, separately, the shifting probabilities of pro-growth policies from the Republican Congress and administration. With respect to retail, we continue to evaluate how secular trends toward online shopping will impact a range of industries and companies. As for pro-growth policies, we believe the U.S. stock market s initial reaction to last year s election overestimated the potential magnitude and timing of likely pro-growth policy changes. However, despite recent political headwinds, we do anticipate the enactment of some pro-growth policies should extend the duration of the moderate economic growth environment we expect, and, as a result, we made some adjustments in portfolios to modestly increase their economic sensitivity and better position them for sources of earnings growth. However, we continue to avoid the more economically cyclical sectors that initially outperformed in the market s reaction to the election. So far in 2017, there has been a material shift in sector leadership from that of late 2016, which seems to reflect a growing acknowledgement of uncertainty around the timing and likely extent of pro-growth policy changes. Fritz Porter, CFA, partner, portfolio manager, WestEnd Advisors northerntrust.com Investment Manager Survey Report Second Quarter of 10

9 ABOUT THE SURVEY For this survey, Northern Trust polled a select group of respondents, including fixed-income and equity managers across value and growth styles, with a bias toward fundamental, bottom-up stock-picking strategies. Invitations to complete the survey were only sent to investment managers that currently manage assets for Northern Trust and our clients. As a result, the survey responses should reflect the beliefs of only the managers in which Northern Trust s multi-manager investments group maintains a high conviction. The survey is conducted quarterly so that Northern Trust and participating managers can examine trends in attitudes and allocations. Percentages in report and graphs may not add to due to rounding. All data analyzed in this report are derived from the Northern Trust Investment Manager Survey. ABOUT NORTHERN TRUST MULTI-MANAGER SOLUTIONS Northern Trust is a leading provider of multi-manager investment solutions, with $62.5 billion under management and $53.2 billion under advisement for institutional and personal clients. Having investments with more than 200 external managers worldwide, Northern Trust s multi-manager solutions range from retail mutual funds and alternative asset classes to emerging manager programs and total investment program management for institutions and affluent individuals and families. northerntrust.com Investment Manager Survey Report Second Quarter of 10

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