Global Asset Managers

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1 Americas/United States Equity Research Asset Managers Research Analysts Craig Siegenthaler, CFA Tom Mills James Cordukes, CFA james.cordukes@credit-suisse.com Ari Ghosh ari.ghosh@credit-suisse.com Jordan Friedlander jordan.friedlander@credit-suisse.com Global Asset Managers SECTOR REVIEW Expect a Challenging 2017 for US/UK Retail, but Positive on Alts/Institutional Channel We recommend a market-weight allocation to the US asset management industry in 2017, but expect a wide dispersion between the winners and losers (similar to '14 & '16). Our top three US longs include BX, AMG, and BLK, while we are the most cautious on WDR and BEN. Additionally, we favor the alternative managers to the traditionals, due to a more favorable setup (low valuations / low earnings + improving realizations). The Seven Key Themes of 2017: (1) Active to Passive, (2) Regulations (3) Fee Pressure, (4) Rising Rates, (5) Taxes, (6) Modernization of US Brokerage Industry, (7) M&A (industry consolidation). We explore each theme inside of this report with our updated thoughts. European Asset Managers: Tom Mills is cautious on the UK/EU stocks due to a similar mix of themes that are impacting the US asset managers (regulations MiFID II, UK FCA AM Market Study, fee pressure), while Brexit also provides an additional level of uncertainty. Azimut, Schroders, and Man Group are his top longs, as he looks to minimize his exposure to UK retail (for similar reasons to why we look to avoid US retail). Australian Asset Managers + HGG-JNS MOE: James Cordukes expects the strong Australian industry net flows to slow (5-8% range to 1-2%) due to demographics (compulsory superannuation/retirement system). MFG is James's top long as he expects the firm to generate strong flows in the Australian retail channel and in its global institutional business. We both are still favorable on the HGG-JNS MOE (JNS rated Neutral, HGG rated Outperform), driven by the high level of expense synergies ($110M USD on combined $700M EBITDA base). Three Key Products to Focus on in 2017: (1) BLK's ishares Core Series large pools of money-in-motion in the US retail channel will flow to BLK (land grab), led by its ishares Core Series. (2) TROW's Target Date Funds the pricing war has spread into the TDF segment, and now more focus is on fees due to the DOL rule. We think a greater emphasis on price, versus performance (TROW's TDF performance is strong), could slow TROW's TDF flows (which was TROW's main net flow driver over last five years). (3) APAM's Global Equity weaker performance and higher mgmt fee rate creates a difficult setup in front of the large decisions being made at the US brokers. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Our 2017 Outlook for the Asset Manager Stocks Recommend a market-weight allocation to the asset manager stocks, but expect a wide dispersion between the winners and losers in '17. We believe investors should be highly selective and overweight the names that either benefit from the modernization of the US brokerage industry (Outperform on ETF managers - BLK & WETF) or have low exposure to the US retail channel (Outperform on AMG & LM). We estimate the US retail channel will be the most challenged segment in 2017 due to the large decisions and money-in-motion taking place at the US brokers, which were accelerated by the DOL's Fiduciary Standard Rule (April 2017 implementation deadline). Alternatively, we think investors should avoid the names that have the most exposure to US retail, including the highest contribution from A, B, and C MF share classes, largest commission-based platform business, and weaker trailing performance. We continue to think WDR (Underperform) and BEN (Underperform) will see the largest DOL rule impact to their 2017 flows/profits. Figure 1: Annual Total Returns (including Dividend) 20% 10% 0% -10% -20% -30% Traditional AM Alternative AM MSCI World S&P 1500 Financials Source: Credit Suisse Asset Manager Research, Thomson, 2016 through 12/27/16 Figure 2: Traditional Asset Manager Stock Returns Traditional Stocks - Top Performance 1. JNS (+33%) WETF (+4%) EV (+34%) 2. AB (+30%) AB (0%) BLK (+16%) 3. LM (+24%) BLK (-2%) CNS (+16%) Median +7% -20% -1% Traditional Stocks - Bottom Performance 1. WDR (-21%) WDR (-39%) WDR (-24%) 2. MN (-18%) MN (-33%) WETF (-23%) 3. APAM (-17%) BEN (-32%) LM (-19%) Figure 3: Alternative Asset Manager Stock Returns Alternative Stocks - Top Performance 1. BX (+13%) BX (-3%) ARES (+46%) 2. KKR (+4%) OAK (-4%) APO (+34%) 3. FIG (0%) ARES (-19%) CG (+8%) Median -6% -27% +6% Alternative Stocks - Bottom Performance 1. CG (-18%) OZM (-39%) OZM (-51%) 2. APO (-16%) CG (-31%) OAK (-16%) 3. OZM (-9%) FIG (-29%) BX (1%) Source: Credit Suisse Asset Manager Research, Thomson, 2016 through 12/27/16 Source: Credit Suisse Asset Manager Research, Thomson, 2016 through 12/27/16 Global Asset Managers 2

3 Favor the Alts to the Traditionals, but bullish on AMG, BLK, and WETF (BX & KKR Top Alt Longs): With both EPS and valuation multiples "low" across most of the alts, we think there is a high probability that the alternative asset manager stocks will have a positive Within the alts, BX is still our top long (strong FE AuM growth + improving realization thesis), and we also rate KKR Outperform (attractive valuation + cash EPS growth prospects). We are the most cautious on OZM given its soft intermediate-term performance and negative flow trends. Within the traditionals, we are very bullish on AMG as we disagree with how the market is valuing the stock given its high EPS growth potential from a mix of flows, deals, and market returns. We think AMG's affiliate/product quality, overall fund performance, and net flow potential from its 40 affiliates is significantly higher than the peer group average, and AMG has the most attractive capital allocation opportunities via its M&A pipeline. However, AMG's 4Q16 flows are shaping-up to decline from $6B (3Q16) to zero to $1B (4Q16E). On BLK, we think they will put up strong net flows over the next 12 months, and we think the stock's premium valuation multiple may even expand further in 2017 given stronger revenue growth, and incremental margin opportunities. US Alternative Asset Manager Update: We believe the future changes to US tax policy (corporate reduction, individual reduction, tax repatriation) and US regulatory efforts from the 2017 Republican Congress and President Elect Trump could be very positive for US economic activity and foreign investment. The key benefit to the alts will be through higher returns, which will translate into stronger ENI p-fees and eventually realizations (cash earnings). On a ST basis, we are already seeing strong 4Q16 returns from the public portfolios (APO +15%, BX RE +17%), and expect solid investing quarters for CG and APO, but expect a massive investment quarter for BX in 1Q17 (estimate $15B of deal value). And while BX may report low fund raising and realization activity in 4Q16, we expect a solid fund raising year in 2017 (despite lack of flagship fund raises) and also for the firm to generate strong realizations in 1H17 ($0.40 already locked-in). BX remains our top long among the alts, as our long-term thesis is supported from BX's ability to innovate products successfully and consistently raise large amounts of capital (driving stronger than peer FE AuM growth). Global Asset Managers 3

4 Global Asset Managers 4 Figure 4: Our Cash Earnings Valuation Framework Ticker Valuation Method #1 Valuation Method #2 Traditional Asset Managers: Target Price Price to Cash Earnings EV to NOPAT Company Name Current Price Capital Adjustment Target Price Upside to TP Total Return (incl div) CY2018 Cash Earnings 5Yr Average Cash Earnings Multiple AMG Affiliated Managers Group Inc $144 $201 39% 39% $ x 11.2x WETF WisdomTree Investments Inc $11 $0.5 $15 33% 36% $ x 28.0x LM Legg Mason Inc $30 $7.0 $39 31% 34% $ x 8.9x BLK BlackRock Inc $379 $466 23% 25% $ x 17.6x IVZ Invesco Ltd $30 $36 20% 23% $ x 12.0x CNS Cohen & Steers Inc $34 $3.1 $40 18% 23% $ x 14.5x AB AllianceBernstein Holding LP $24 $25 7% 14% $ x 10.7x OMAM OM Asset Management PLC $15 $16 10% 13% $ x 10.1x FII Federated Investors Inc $28 $28 1% 8% $ x 10.1x VRTS Virtus Investment Partners Inc $119 $0.0 $127 7% 8% $ x 10.2x JNS Janus Capital Group Inc $13 $13-1% 2% $ x 11.0x MN Manning & Napier Inc $8 $1.3 $7-12% -4% $ x 9.3x WDR Waddell & Reed Financial Inc $19 $4.0 $15-20% -11% $ x 5.2x TROW T. Rowe Price Group Inc $76 $3.0 $65-14% -11% $ x 10.5x BEN Franklin Resources Inc $39 $7.0 $33-17% -15% $ x 7.6x APAM Artisan Partners Asset Management Inc $30 $22-26% -17% $ x 9.2x EV Eaton Vance Corp $42 $33-21% -18% $ x 12.3x Median 4% 8% 11.0x 10.6x Ticker EV/NOPAT Valuation Method #1 Valuation Method #2 Alternative Asset Managers: Target Price Price to Cash Earnings EV to NOPAT Company Name Current Price Target Price Upside to TP Total Return (incl div) CY2018 Cash Earnings 5Yr Average Cash Earnings Multiple BX Blackstone Group $27 $37 38% 43% $2.51 $ x 11.5x OAK Oaktree Capital $37 $51 36% 42% $4.31 $ x 12.0x APO Apollo Global Mgmt $19 $25 32% 39% $2.27 $ x 8.0x CG Carlyle Group LP $15 $19 26% 38% $1.97 $ x 9.0x FIG Fortress Investment Group $5 $6 21% 31% $0.67 $ x 4.5x KKR KKR & Co LP $15 $18 17% 21% $1.87 $ x 7.9x MDLY Medley Management Inc. $10 $9-12% -4% $0.66 $ x 16.6x OZM Och Ziff Capital $3 $3-23% -22% $0.35 $ x 7.5x FSAM Fifth Street Asset Management Inc $7 $5-29% -22% $0.62 $ x 7.2x Median 21% 31% 10.0x 8.0x Source: Credit Suisse Asset Manager Research, capital adjustment for excess cash included in TP, AMG includes 40c accretion from deals, JNS includes 10% earnings accretion from MOE, price as of EV/NOPAT 3 January 2017

5 Expect an acceleration and a peak in several key themes in 2017, setting-up a better net flow backdrop in 2018: We estimate December flows deteriorated for traditional actives and hedge funds, but Jan/Feb could provide a ST "head fake" for investors due to the large seasonal inflows into mutual funds inside of 401k accounts from year-end bonuses. However, we expect Mar/April flows to be the weakest of the year, and may include the largest monthly rotations ever (MF to ETF, active to passive), and we conservatively expect 2017 to include the largest calendar year flows in the US ever (MF to ETF, active to passive), but we are hopeful that the rotations will improve in 2018 (DOL Rule frontend loaded the key secular trends into 2017). However, given the improving return profiles of equities vs. bonds in 2H16, we are slightly more positive on equity flows (and unconstrained bond and bank loans) versus fixed income and other duration constrained products in the retail channel. Key 2017 themes that we address in this note include regulations, active to passive, fee pressure, rising rates, modernization of US brokerage industry, and taxes. Figure 5: Net Flows by Active/Passive ($,B) Figure 6: Net Flows by Asset Class ($,B) E 2017E E 2017E ETFs Passive Equity MF Active Equity MF Bond Equity Money Market Source: Credit Suisse Asset Manager Research, Simfund Source: Credit Suisse Asset Manager Research, Simfund, include MF & ETFs, and active and passive strategies Money Market Fund Update: We think higher ST rates in 2017 will improve the attractiveness of the MMF versus bank demand deposits. Additionally, we expect this could lead to positive net flows, however, key for flows will be how easily the asset managers can find and win the non-operational deposits from the banks, and also how hard US banks fight back in trying to keep their core deposits as rates rise. Bank loan/deposit ratios are depressed versus pre-crisis levels, but they also may not return to normal given new liquidity regulations (LCR). Global Asset Managers 5

6 Figure 7: US Money Market AuM 4,000 3,500 3,000 2,500 2,000 1,500 1, Money Market AuM ($,B) 2-Month LIBOR (%) Source: : Credit Suisse Asset Manager Research, Simfund, 2-Month LIBOR based on average daily values; 2016TD as of 12/21/16 Global Asset Managers 6

7 Four Key Products to Focus on in 2017 Figure 8: Net Flows ($,B) Q4'15 Q1'16 Q2'16 Q3'16 BLK Core Series TROW TDFs BEN Global Bond Source: Credit Suisse Asset Manager Research, Simfund, BEN Global Bond flows represent total net new flows BlackRock's ishares Core part of its "land grab" effort in US retail: In early October, BLK cut fees across its core series ETFs (and several key bond funds), which we think created the most attractive product offering in the industry, and is part of BLK's overall strategy that we labeled its US retail "land grab." You can find ishare's core ETF offering here, which provides investors access to all of the main product segments (US large cap, US core fixed income, emerging markets equity, US real estate ) with total expense ratios in the 3 to 14 basis point range. We expect BLK to generate very large inflows in its core series in 4Q16 to 4Q17, and while flows into the core series will be fee rate dilutive, we note that BLK's fee rate is already very low at 20bps, and large inflows will still translate into new revenues at high incremental margins. Additionally, we think BLK's "land grab" also includes large wins in its fixed income business (strong performance/low cost) and its solutions platform (Aladdin), but will also create a cross-sell opportunity for its active equity funds and multi-asset capabilities. Franklin Templeton's Global Bond Fund 2017 will be the real test. While the US mutual fund sleeve is $42B, we estimate the total AuM under Michael Hasenstab is $120B (globally) or the majority of its taxable global bond bucket (which also includes the Total Return Fund). The Global Bond Fund's performance rebounded in the back half of 2016, and is now outpacing the peer group by ~290bps. However, on a 3Y basis, the fund is 175bps (annualized) below the BarCap Aggregate but has outperformed its peer group by 90bps (ann.). This fund also has a high mix of both atrisk share classes (A/C = 42%, Adv = 51%, retirement = 7%) in the US, which could cause sales levels to decline in 2017 as brokers shift more money into cheaper/newer share classes (I, R5/6s) and away from commission-based platforms (where As and Cs are sold). While we have a lot of respect for this team and their strong long-term track record, we see this very large fund stuck between several secular headwinds (including higher rates and less quantitative easing) given its NT performance and how the product was initially sold (commission-based, higher cost share classes). T. Rowe Price's Target Date Funds: There are several TDF managers which have launched passive products with fees under 25bps (including Vanguard at 15bps, BlackRock at 20bps, Fidelity at 10bps), while Schwab reset the bar even lower when they cut to 8bps in August We think this places greater competitive pressures on Global Asset Managers 7

8 TROW's TDF business, with its MFs priced in the bps range (depends on share class), and its SMA option likely in the mid-30s. But while TROW's overall fees are obviously not as competitive as the low-cost passive options, its relative performance is still excellent. Its 2030 TDF ranks in the top tenth percentile of peers across three, five, and ten years. The question for TROW's TDF business is will DC plan sponsors continue to focus on after fee performance as the most critical factor, or will the incoming DOL lawsuits cause some to err with the cheaper options. Artisan Partner s Global Equity Strategy: APAM s $28B Global Equity strategy which accounts for ~30% of company AuM has been experiencing net flow headwinds and has seen ~10% (ann.) organic decay in Central to this strategy is the Artisan International fund (ARTIX), which accounts for 90%+ of segment assets and is closed to new investor money. While the fund has generated positive returns on a 5 and 10 year basis, and has outpaced the broader benchmark (and also the peer fund group by ~30bps), its near-term performance continues to deteriorate. On a 3-year basis, the fund trails both benchmark (MSCI AC ex-us) and the peer group by ~300bps. Additionally 2016 is shaping up to be a very difficult performance year, with the fund down 10% YTD and trailing benchmark and peers by 1200/700bps, respectively. We believe that 2017 will be an especially difficult year for active equity managers that operate in the US retail space (see our section on our 6 th theme of 2017 = Modernization of US Brokerage Industry). Accordingly, we think that the managers who are positioned the best are those with 4/5 star rated funds, with 1 st quartile performance that charge 2 nd or even 3 rd quartile fees. By contrast, ARTIX is a 3 star rated fund (w ~$15B of retail AuM), with performance headwinds, and at 92bps of management fee, has a total expense ratio that is above peer group median. Figure 9: Expensive Share Class and Performance by Manager Ticker Manager Name AuM (3Q16) "Expensive Share Class" as % of Total % of MF AuM Rated 4/5 Stars WDR Waddell and Reed Financial 87 43% 14% BEN Franklin Resources % 13% CLMS Calamos Investments 20 30% 25% VRTS Virtus Investment Partners 46 20% 69% FII Federated Investments % 52% IVZ INVESCO Ltd % 37% EV Eaton Vance 340 8% 51% LM Legg Mason 742 7% 30% AB AllianceBernstein 492 4% 70% JNS Janus Capital 196 4% 42% BLK BlackRock 5,029 2% 51% MN Manning & Napier 35 2% 13% AMG Affiliated Managers Group 660 0% 56% APAM Artisan Partners 98 0% 35% TROW T. Rowe Price 804 0% 75% WETF WisdomTree Asset Management 39 0% N/A Source: Credit Suisse Asset Manager Research, Simfund, Rolling 3Y as of 10/31/16, Expensive = (A+B+C) share classes, AuM in $B Global Asset Managers 8

9 Seven Key US Themes for Active to Passive: Expect '17 to be a very challenging year for US actives, but forecast improvement in '18: While the active to passive shift has been slowly building for the last twenty years, we believe 2017 will include the highest rotation activity (ever), and expect the rotation to slow in This is driven by the large amount of money-in-motion in the US retail channel, triggered by the modernization of the business models of the largest US brokers, and was jump-started by the DOL's Fiduciary Standard Rule. We think the shift from active to passive is driven by three factors: (1) relative performance of the strategies, (2) greater focus on fees from regulators, brokers, investors (partly due to low return backdrop), (3) new technology as passive can exist efficiently in a fully transparent ETF vehicle while many actives cannot yet (Precidian's nontransparent ETF model could gain approval in 2017 with new SEC leadership). Note: The ETF vehicle has four advantages to a MF: (1) cost, (2) tax efficiency (only in US), (3) transparency, (4) liquidity. Over the next ten years (but maybe sooner), we expect each asset class segment to approach a secular equilibrium range between active-passive, which is established when the majority of active managers can consistently outperform and justify their higher fees. Additionally, we see opportunities to grow organically for both passive managers (cap-weighted and smart-beta) and highly active managers (private equity, high active share/concentrated portfolios, activist), but view lower active share strategies as the most at risk segment as the institutional bar-belling trend gravitates heavily into retail in By December 2017, we believe US retail investors will receive a more "institutional" experience from their brokers, which includes lower fees, higher passive allocations, more customization, and hopefully higher returns after fees/taxes. Figure 10: US MF AuM/Flows Active vs. Passive & MF vs. ETF YTD Q2016TD 3Q2016 2Q /16 10/16 9/16 AuM ($, B) Active ETF Passive ETF 2,443 2,112 1,988 1,686 1,338 1,057 1, ,806 2,394 2,235 2,443 2,363 2,394 ETF 2,472 2,135 2,005 1,700 1,349 1,062 1, ,863 2,422 2,261 2,472 2,391 2,422 LT Mutual Fund - Active 9,828 9,596 10,013 9,517 8,131 7,077 7,210 6,274 19,646 10,015 9,723 9,828 9,818 10,015 LT Mutual Fund - Passive 2,430 2,078 1,922 1,618 1,224 1, ,788 2,396 2,257 2,430 2,358 2,396 LT Mutual Funds 12,258 11,674 11,934 11,135 9,355 8,084 8,156 7,033 24,434 12,411 11,980 12,258 12,176 12,411 Net Flows ($, B) Active ETF Passive ETF ETF LT Mutual Fund - Active LT Mutual Fund - Passive LT Mutual Funds Organic Growth (%) Active ETF 21% 40% 15% 44% 93% 79% 174% 314% 5% 3% 5% 2% 3% 1% Passive ETF 10% 11% 14% 13% 17% 11% 14% 22% 3% 4% 2% 2% 1% 1% ETF 10% 12% 14% 13% 18% 11% 14% 22% 3% 4% 2% 2% 1% 1% LT Mutual Fund - Active -2% -2% 0% 2% 2% 0% 3% 6% -1% -1% -1% -1% 0% 0% LT Mutual Fund - Passive 9% 9% 9% 8% 8% 6% 9% 9% 2% 2% 2% 1% 1% 1% LT Mutual Funds 0% -1% 2% 3% 3% 1% 4% 7% 0% 0% 0% 0% 0% 0% Source: Credit Suisse Asset Manager Research, Simfund, annual and QTD not annualized, subject to rounding 2. Regulations: Trump win was a clear positive for the asset managers (especially for the traditionals): We expect the future composition of the SEC chair/commissioners and the next Secretary of Labor (DOL) to be significantly more friendly to industry. And while the future pipeline of new regulations will likely be fairly dry, we also think there is only a low probability that the newer regulations from the Obama administration are fully repealed (including DOL Rule, SEC LRM, SEC MMFs/2a7 see our November regulatory note for additional details). However, we Global Asset Managers 9

10 think there is a greater chance that the new leadership could focus on the one or two more negative items within the rules, and look to upgrade the initiatives by making them more workable for industry. With the DOL rule, we think they could focus on reducing the ability of tort lawyers to sue brokers/asset managers for large sums of money (shift to arbitration), and also on improving the best interest contract exemption. While this would be good news for industry, we think the timing will end up being too late ("train has left the station"). Specifically, the largest US brokers are generally comfortable with their new Fiduciary Standard (de-risked) business models, and we estimate there are already large amounts of money-in-motion in the US retail channel, which may find its way into cheap, passive, and ETF products. On a positive note, we think new leadership at the SEC provides a higher probability that Precidian could get approval on its nontransparent ETF model, or the industry could gain approval for its variable management fee structure MF both would help industry fight back against passives/etfs. We are very focused on who will be nominated as the next Secretary of Labor and Chair of the SEC, and how the empty SEC commissioner seats will be filled (we are expecting candidates with conservative/anti-regulatory backgrounds). 3. Fee Pressure: 2017 will be challenging in US retail: Between visible (1) mgmt fee cuts or less visible (2) expense cap reductions or (3) fee waivers, we see fee pressure accelerating in the US retail channel in We think the brokers are driving most of the pressure on the US retail channel, as the US institutional channel has already exhibited lower fees in traditional products for a long time. We see the highest risk in segments that are the most crowded, and have exhibited the weakest performance versus passive (like US large cap equities). However, we note that even niche segments like real estate is not immune, as is illustrated in the flow results between four star rated funds vs. Vanguard's VNQ (passive REIT ETF). Currently, brokers are trying to extract the lowest pricing possible from their asset manager partners, which will benefit their overall cost ratios for their clients, but the effort is also driven by the fear of incoming lawsuits after the DOL Rule is planned to be implemented in April 2017 (new Secretary of Labor could delay the implementation). Figure 11: Annual Net Expense Ratio Trends for US Equity Mutual Funds E Source: : Credit Suisse Asset Manager Research, Morningstar Global Asset Managers 10

11 Figure 12: US Large Cap Equity Flows for 2016 ($,B) Figure 13: US Small Cap Equity Flows for 2016 ($,B) Active Passive -15 Active Passive Source: Credit Suisse Asset Manager Research, Simfund, as of 10/31/16, Passive includes ETFs and Index Mutual Funds, US retail flows Source: Credit Suisse Asset Manager Research, Simfund, as of 10/31/16, Passive includes ETFs and Index Mutual Funds, US retail flows Figure 14: Global Equity Flows for 2016 ($,B) Figure 15: US Taxable Bond Flows for 2016 ($,B) Active Passive 40 Active Passive Source: Credit Suisse Asset Manager Research, Simfund, as of 10/31/16, Passive includes ETFs and Index Mutual Funds, US retail flows Source: Credit Suisse Asset Manager Research, Simfund, as of 10/31/16, Passive includes ETFs and Index Mutual Funds, US retail flows 4. Rising Rates Good for Retail Equities, Institutional Bond, Money Market Funds, but Mixed for Retail Bond and Alts: While we expect US retail to generally chase the trailing performance of the last six months (buy US equities / sell bonds), we think higher rates will provide more incentive for institutional investors (like US DB plans) to consider fixed income options like liability driven investing which are now offering much cheaper options to immunize their portfolios. Also, large institutional investors may be underweight bonds/overweight equities after the recent performance reversal in 4Q16. However, we do believe the December rate hike (and future rate hikes in 2017) is putting the money market fund business back into an advantageous position versus lower yielding bank deposits, and we think we may now be at the end of the eight year bear market for MMFs. This drove us to upgrade FII in November 2016 (to Neutral), as we think its MMF business will see a large improvement in organic growth as ST rates increase (it's also a positive for the business that fee waivers will disappear in 2017 too). Global Asset Managers 11

12 Figure 16: Equity and Bond US Retail Flows since the May 2013 Taper Tantrum Taper Tantrum Jan'13 Jun'13 Nov'13 Apr'14 Sep'14 Feb'15 Jul'15 Dec'15 May'16 Oct'16 Equity Bond 10Yr (RHS) Source: Credit Suisse Asset Manager Research, Simfund, Federal Reserve, flows in $B, Treasury yield in % 5. Tax Rate Changes: The fact that the US will now have both a Republican president and tilted congress significantly increases the probability of comprehensive corporate tax reform. This means three things for the asset managers: (1) high corporate tax rates are going lower (est. 35% to 25%) - benefiting the names that have high tax rates (WETF is ~40%), but impacting the firms with large tax shields (like LM). As a decline in the corporate tax rate could reduce the PV of the tax shield (it will take more time to harvest the DTA/NOL with a lower tax rate). (2) Individual carried interest tax rates may be resetting higher from the capital gains rate to the ordinary income rate for the holders of the stocks. However, while the alternative firms' corporate tax rates may benefit modestly from a lower US corporate tax rate, we note that they don't pay a lot of corporate taxes given how their businesses are structured (expenses are loaded against fee related earnings). The change in carried interest could encourage some alts to consider re-classing from a PTP structure to a C-Corp, while we think BX could be among the least likely to convert as there is no certainty that a C-Corp Alt would trade at a premium to a PTP alt (but we think the C-Corp stock should due to the larger potential investor base). (3) Tax repatriation holiday for firms to return foreign earnings to the US. This would benefit BEN (a lot), and less so for IVZ given its Bermuda tax domicile, but the net result of all of these changes could affect how the firms individually think about repatriating foreign earnings in the future. We also see the deductibility of interest expense (on debt) as a risk for firms with a lot of debt (including PE firms that use a lot of debt), while investing that is not included in GAAP expenses may receive a benefit but we note that there is still a lot of uncertainty on the tax front. 6. Modernization of US Brokerage Industry: We believe the "train has left the station" with respect to both the retail mgmt fee cuts, and the large future shifts to passive/etf, as we don't think a repeal of the DOL rule would significantly stop either the rotation in flows that we expect in 2017 or pricing cuts (and we don't expect the DOL rule to be repealed). While the best interest contract exemption will prevent commission-based businesses in A-class shares (upfront commissions) or with large taxable gains from moving into fee-based business quickly (also true for IRA rollovers from 401ks), we expect most new sales in 2017 to be directed into fee-based platforms, and we do expect a pick-up in redemption in commission-based accounts Global Asset Managers 12

13 (and A and C share classes) as brokers prepare for the April implementation of the DOL rule, and then maintain compliance of the fiduciary standard throughout We also expect brokers to shrink the number of asset manager manufacturers that they offer on their platforms, while increasing the passive and ETF options. Additionally, we expect a leveling of distribution shelf fees at each broker, and are interested to see if Vanguard will finally start paying shelf fees like the rest of the industry. Data Points: JPM (November), Merrill Lynch (October), and Raymond James (August) announced that they would no longer offer commission-based retirements accounts, while WFC (December) and MS (October) said they would. LPL also announced in August that they would offer a new platform where the asset managers would help pay for more of the cost of distribution. 7. M&A: We expect a continued high level of M&A activity both in the US and Western Europe, as owners of the firms reach retirement, and managers react to the key challenges (distribution, regulations). And as the managers/founders still own a large percentage of equity in many of the smaller/private firms, we think the partners will look to maximize their net worth and seek a succession-planning type solution. We see AMG as the main consolidator of the higher quality/growth franchises, while other firms may look to merge businesses with a focus on low valuations and value extraction/cost cutting (similar to Crestview Partner's recent acquisitions of Victory, RS, and Munder). However, we don't expect to see a significant number of large MOEs and mergers between large public firms, but expect to see a continued inflow of smaller deals for the larger firms (bolt-ons, tuck-ins, lift-outs ). There still seems to be a high level of interest from several larger Asian firms, so we will see if anyone new will join Dai-ichi (JNS) into the US in Europe Outlook and Regulatory/M&A Update from Tom Mills Cautious Outlook on the UK/EU asset manager stocks: We enter 2017 with a degree of trepidation about the outlook for the European asset managers. The sector faces a profound set of challenges regulatory pressure on fees, product performance and distribution, an increasing incursion from low cost providers, and uncertainty around organic growth trends. Managers in the UK, meanwhile, face the additional headwinds of Brexit uncertainty and the risk of regulatory capital inflation. All of this seems incompatible with a sector average PE multiple slightly above the 10 year mean (15x). Azimut, Schroders, Man Group = Top Longs: Within our coverage universe, we think the UK retail exposed managers look more vulnerable, as do the EM-exposed players in light of the post US election reflation trade. Our relative preference is for non-uk exposure (we particularly like Azimut) or names that offer diversification by product, channel and geography (we favour Schroders). Whilst fundamentally we like Alt managers particularly Man Group we acknowledge that performance fee expectations may be too high in the short term. Azimut is Tom's favorite long in details: Our most preferred name in Europe into 2017 is Azimut. We expect Italian financials could deteriorate further still as we go through the constitutional referendum in Italy of 4 December 2016 if, as is expected, there is a no vote. Whilst it is almost inevitable that Azimut will get wrapped up in that in the very short term, we think it will represent a great buying opportunity for a stock that offers an >10% organic growth rate in AUM for c.10.5x 2017E EPS with an ordinary dividend yield of >7%. Moreover, we expect a share buyback of up to 7% of stock outstanding to begin soon (not in consensus numbers) and believe the company is well-placed to participate in consolidation in the Italian AM industry. Global Asset Managers 13

14 MiFID II: MiFID II will now come into force on 3 January 2018 (delayed from original Jan-17). To our mind, it is unlikely to be a piece of regulation that significantly impairs the European asset management industry, as was once feared, but it is still likely to result in higher costs and lower fee margins for continental European players in particular (given the RDR has already pushed through some of these changes in the UK). Higher costs because of the administrative and compliance burden which are unlikely to be able to passed on to customers for competitive reasons and lower fee margins because of greater disclosure and transparency requirements on fund charges and distribution costs. Arguably though, the greater risks of MiFID II are nonprescribed and driven by industry competitiveness issues, i.e. the risk that not internalising research costs becoming a competitive disadvantage or that fear of misselling on the part of distributors leads to shifting client demand away from traditional providers of asset management product and towards low cost providers. UK FCA AM Market Study: The UK FCA Asset Management Market Study interim report identified four key findings limited price competition for actively managed funds (not justified by returns); strong price competition for passively managed funds; lack of clarity on fund objectives; and high industry profitability with significant price clustering and proposed three remedies duty on AMs to act in investors best interests; the introduction of an all-in fee; and greater clarity on fund objectives. Our view is that on the one hand, these proposals are nowhere near as draconian as the DoL rule and the risk of fee caps has been mitigated. However, on the other, we still think fee transparency is toxic for an industry where hidden costs can be % of disclosed fees and profitability is perceived to be too high by the regulator. Active=>Passive: Lower levels of financial sophistication, personal savings rates and direct investing have meant European AMs have been relatively more insulated from the incursion of passive / low cost products so far (c.13% of total AUM is passive versus double that in the US). However, MiFID II will help catalyse a switch, as will greater marketing spend / visibility by product providers. The UK FCA has also now demonstrated regulators willingness to spell out the detrimental impact on retirement outcomes from buying poor performing, expensive products. We expect regulators and policymakers will only become increasingly more vocal on this theme. In a European sector where there is a massive underrepresentation of low cost capability, we think players with more defensible alternatives (Man Group, Partners Group) and solutions (Schroders) product shelves are likely to fare better. Further consolidation (as per Henderson / Janus) seems inevitable to us. Australia Market Outlook and Thoughts on Henderson-Janus MOE from James Cordukes Expect Australian industry flows to slow; MFG is top long: Following two decades of exceptionally strong fund flows (5-8%) underpinned by the compulsory superannuation (retirement) system, we expect fund flows to moderate (1-2%) in the coming years due to the maturity and size of the system and as superannuants began to shift into the drawdown phase (as opposed to the accumulation phase). We expect the organic growth prospects to be strongest for those with a large offshore presence (eg MFG, HGG, BTT) or more exposed to underweight asset classes such as global equities which should benefit from higher fund flows (eg MFG, PTM albeit acknowledging PTM is near a point of saturation and is experiencing outflows due to weak fund performance). Our most preferred exposure is MFG given we expect it to continue to attract flows in the domestic retail market well above peers (innovative new products and recent distribution wins) and that the global institutional business continues to source new mandates (investment in distribution). Concerns over fund performance have had little impact on flows which highlights the value of the MFG Global Asset Managers 14

15 franchise and their strong relationships with clients and so we view the current modest P/E premium to peers as attractive (noting it s below its historical premium spread to peers). Our Australian asset manager order of preference is MFG, HGG, BTT, PPT, PTM. Expect modest fee pressure in the Australian retail channel: While fee pressure in the institutional market has been excessive in recent years (with Australian institutional margins some of the lowest in the world), we expect modest fee pressure to continue in the retail market which is mostly the result of inflows into contemporary lower margin products and outflows of very high margin legacy products rather than acute fee pressure/cuts. Consumption of passive investment products is below that of the US, at 15-20% of total FuM (with much higher rates in the institutional market), and passive flows do not appear to be excessively above active flows (and were in fact in greater outflow than active funds in FY16). Growth of ETFs is very strong (up around five-fold in the last five years) but penetration remains low with the total Australian market representing only ~A$25bn (~1% of system FuM). Australians still have a preference for active asset management with the ETF alternative, Listed Investment Companies (or LICs which are essentially actively managed listed closed end funds) continuing to grow and attract new raisings and have ~A$30bn under management. HGG continues to remain topical: We remain supportive of the HGG / JNS merger noting its strategic merits (complementary product set and distribution footprint, scale which is increasingly seen as a as source of competitive advantage, demand for global relationships) and significant financial merits (costs synergies). While the deal is not as accretive for HGG shareholders as when first announced (~10% on our estimates assuming full cost synergies and partial revenue synergies vs initial estimates of ~20%) due to HGG upgrades and JNS downgrades, we note that there is significant valuation appeal (~10x FY19E merged earnings which assumes bottom of market JNS earnings). The medium term investment case for HGG remains compelling but we caution investors that operating conditions will be challenging over the next 6-12 months (eg Brexit / Trump could stifle flows and impact market moves, uncertainty over DOL rules, risk of FuM attrition) which could weigh on the share price with positive catalyst (eg costs synergies realised) unlikely to emerge until 2H17E / 1H18E. Global Asset Managers 15

16 Companies Mentioned (Price as of 29-Dec-2016) Affiliated Managers Group (AMG.N, $143.93) AllianceBernstein (AB.N, $23.7) Apollo Global Management LLC (APO.N, $19.31) Artisan Partners (APAM.N, $29.6) Azimut (AZMT.MI, 15.9) BT Investment Management Limited (BTT.AX, A$10.63) BlackRock (BLK.N, $379.0) Blackstone Group (BX.N, $27.15) Calamos Investments (CLMS.OQ, $8.59) Cohen & Steers (CNS.N, $33.56) Eaton Vance (EV.N, $41.86) Federated Investors (FII.N, $28.0) Fifth Street Asset Management (FSAM.OQ, $7.0) Fortress Investment Group (FIG.N, $4.82) Franklin Resources (BEN.N, $39.41) Henderson Group PLC (HGG.AX, A$4.05) Invesco (IVZ.N, $30.1) Janus Capital Group (JNS.N, $13.41) KKR and Co LP (KKR.N, $15.47) Legg Mason (LM.N, $29.79) Magellan Financial Group (MFG.AX, A$23.74) Man Group (EMG.L, 118.7p) Manning and Napier (MN.N, $7.7) Medley Management Inc. (MDLY.N, $9.8) Oaktree Capital Group, LLC (OAK.N, $37.35) Och-Ziff Capital Management (OZM.N, $3.26) Old Mutual Asset Management (OMAM.N, $14.56) Perpetual Limited (PPT.AX, A$48.8) Schroders (SDR.L, p) T. Rowe Price Group (TROW.OQ, $75.54) The Carlyle Group L.P. (CG.OQ, $15.1) Virtus Investment Partners (VRTS.OQ, $118.8) Waddell & Reed Financial (WDR.N, $19.4) WisdomTree Investments (WETF.OQ, $11.28) Disclosure Appendix Analyst Certification Craig Siegenthaler, CFA, Tom Mills, James Cordukes, CFA and Ari Ghosh each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. 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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Global Asset Managers 16

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This research report is authored by: Credit Suisse Securities (USA) LLC...Craig Siegenthaler, CFA ; Ari Ghosh ; Jordan Friedlander Credit Suisse International...Tom Mills Credit Suisse Equities (Australia) Limited...James Cordukes, CFA To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 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