US Equity Strategy Equity Research Americas/United States 2017 Russell Reconstitution Changes of Note For Active Managers

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1 US Equity Strategy Equity Research Americas/United States 2017 Russell Reconstitution s of Note For Active Managers March 16, 2017 RESEARCH ANALYSTS Lori Calvasina Chief US Equity Strategist / Managing Director lori.calvasina@credit-suisse.com Sara Mahaffy, CFA US Equity Strategist / Vice President sara.mahaffy@credit-suisse.com Joseph Eddy US Equity Strategy Team/ Associate Analyst joseph.eddy@credit-suisse.com 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. March 16, 2017

2 Takeaways For Active Managers Key Dates: The 2017 Russell Reconstitution is scheduled to occur on June 23 rd. The first official lists will be announced on June 9. This year Rank date (the day whose close prices and market caps determine the changes that will be made) will be on May 12 th earlier than prior years. CS ections Based on March 6th Close Prices: The forecasts highlighted in this report were produced by the CS Index Analytics team (Colin Goldin & Meera Krishnan) using March 6th close prices. The data in this report should be treated as an early look at the changes that may happen in this year s Reconstitution as revisions to this forecast are ongoing. Here, we highlight conclusions that relevant to long-only active managers (fundamental stock pickers) who are not trying to trade the event in the short term, but use one of the Russell indices as their fund s performance benchmark (something that matters most in our experience to small and SMID fund managers and growth and value focused managers). For the latest update on the Index Analytics team s complete stock level forecasts, including weight shifts by specific benchmark, or questions on specific stocks/ methodology, ptglobal.index@credit-suisse.com. Upper End Of Small Cap Is Set To Creep Higher Yet Again: With banding applied, the new upper limit of small cap is forecasted to be at $4.4 billion market cap, a new high and up from $3.9 billion in the 2016 Russell Reconstitution (using May 27, 2016 prices). The upper end of SMID is forecasted to be at $10.6 billion and the upper end of mid cap is projected to be at $29.3 billion. Major Sectors With Big Shifts: Below we highlight the most important sector changes happening to the various benchmarks, as of the 3/6/17 forecast. We also highlight the industries that our forecast indicates may be driving the shift. Long-only managers are always keen to know whether style shifts, and moves into/out of 2000 core, are indicative of future returns. The history across sectors has been fairly inconsistent, but we have looked at instances where the same kind of shift impacted specific sectors in the past, and, when possible, highlight takeaways we think are relevant now. Consumer Discretionary: Consumer Discretionary is expected to go up in value and down in growth within all size segments. Industry drivers vary by size segment. History suggests that going up in value could be a positive for the sector s relative performance trends. Dating back to 2005, the sector has experienced a shift into value twice (2008, 2011). Both times, it outperformed after the recon on an all cap basis. In 2008 the leadership was short lived, in 2011 the style shift occurred near the beginning of a multi year uptrend. Consumer Staples: Staples is forecasted to go up in value and down in growth in mid and large cap. In large, the shift is being driven by Food & Staples Retail. In mid cap, the change is being driven by Food Products. Since 2005 a shift into value has only happened once for this sector, in The sector outperformed strongly immediately after the event, then lagged sharply. Health Care: Health Care is expected to go up in value and down in growth in all size segments. Industry drivers vary by size segment. A shift into value has occurred for this sector twice since 2005 (in 2010 and 2013), with completely different performance trends in each instance. Industrials: Industrials is expected to go up in growth and down in value in all size segments. Industry drivers vary by size segment. A shift into growth has happened four times since 2005, with very different performance patterns each time. Around the last two occurrences (2008, 2010), a brief outperformance trade was seen in the sector immediately post Recon, but longer term trends differed. Energy: Energy is expected to increase in growth and decrease in value in mid and large cap, driven by Oil, Gas & Consumable Fuels. Relative performance trends have been inconsistent the four times Energy has gone up in growth since 2005, but the last two times it happened (2011, 2014) the sector lagged after the recon longer term. Note that in small cap, the anticipated shifts this year differ. Small cap Energy is expected to increase in the core and value indices, driven by names being demoted from the R1 to the R2 and new adds to the R2. Tech: Tech is forecasted to go up in growth, and down in value in mid and large, with the change being largely driven by Semis. The last two times this occurred (2012, 2016) the sector initially outperformed post Recon, but in 2012 that outperformance trade was short lived. Within small cap, Tech is also anticipated to go down in weight in the R2, along with the R2G and R2V, as a few Semis are being promoted to the R1 index a shift with inconsistent performance trends at the sector level, though it is worth noting that the specific names that are promoted don t usually outperform following the event. Financials: Investors have been asking whether the growth indices will see an up weight in Financials (or Banks) this year so far our forecast indicates that Financials may go up in growth and down in value within small/smid cap, but we do not see a meaningful increase in mid/large cap growth in the current forecast. Financials is also expected to go down weight in the R2 core as a number of Banks are expected to be promoted from the R2 to R1. Key stocks screens found on pages Promotions tend to outperform ahead of the recon, but this trade stalls after the event. Generally demotions lag leading up to the recon and see choppy performance in the 6 month period after the event, with some short lived outperformance immediately following it. New R2 adds generally outperform before the recon but lag afterwards. R2 deletes lag in the 6 months before and after the recon, and outperform initially following the event. 2

3 Upper Limit of Small Cap at $4.4 Bn Market Cap When banding is applied, the upper limit of small cap (R2000) is forecasted to be $4.4 billion market cap (using March 6 th pricing), the upper limit of SMID (R2500) is forecasted to be $10.6 billion market cap and the upper limit of mid cap (RMid) is forecasted to be $29.3 bn. In the R2000 index, PDCE is projected to be the top market cap stock. In the Russell 2500 index it s SNPS and in the Russell Mid Cap index it s STI. Key Market Cap Stats (2017) * Banding applied Max Min Wtd Avg Avg Median R2000 4, ,980 1, R2000 Growth 4, ,121 1, R2000 Value 4, , R , ,351 1,985 1,137 R2500 Growth 10, ,575 2,111 1,267 R2500 Value 10, ,145 1, RMid 29,323 2,401 13,387 9,280 7,076 RMid Growth 28,848 2,432 13,468 9,540 7,431 RMid Value 29,323 2,401 13,320 9,149 6,754 R ,053 2, ,842 25,531 9,117 R1000 Growth 731,053 2, ,853 28,458 9,667 R1000 Value 578,596 2, ,020 24,714 8,884 R , ,955 9,233 1,636 R3000 Growth 731, ,934 10,433 1,801 R3000 Value 578, ,149 8,937 1,414 RTop ,053 23, ,466 92,135 56,103 RTop200 Growth 731,053 25, ,653 95,447 56,313 RTop200 Value 578,596 23, ,225 92,841 56,411 Source: CS Index Analytics Team, forecasts as of March 6 th,

4 Small & Mid Market Cap Cutoffs vs. History The Russell 2000 s and Russell Mid Cap s max market cap cutoffs are projected to hit new highs. Russell 2000 Max Market Cap Post Recon With Banding Applied, Prior Years Based on May Month End Prices 5,000 Russell Mid Cap Max Market Cap Post Recon With Banding Applied, Prior Years Based On May Month End Prices 30,000 4,500 4,000 25,000 3,500 3,000 2,500 2,000 1,500 1, ,000 15,000 10,000 5,000 - Source: CS Index Analytics Team, forecasts as of March 6 th,

5 Forecasted GICS Sector Weight Shifts The only major weight shifts forecasted for the core indices are in the 2000 core, where Energy is increasing in weight and Financials and Tech are decreasing in weight. Health Care and Consumer Discretionary are expected to go up in value and down in growth across most size segments. Consumer Staples is increasing in value/decreasing in growth in mid and large cap. Industrials is forecasted to go up in growth and down in value across most size indices. Energy and Tech are also forecasted to go up in weight in mid/large cap growth and down in weight in mid/large cap value. ected GICS Sector Weights By Index R2 R2V R2G R25 R25V R25G RMid RMidV RMidG R1 R1V R1G Consumer Discretionary 12.4% 10.6% 14.1% 13.1% 10.8% 15.6% 14.6% 11.6% 18.2% 12.3% 6.8% 17.9% Consumer Staples 2.9% 2.8% 3.0% 3.2% 3.1% 3.4% 4.8% 4.6% 5.2% 8.7% 9.3% 8.1% Energy 4.5% 7.0% 1.9% 4.8% 7.5% 2.0% 6.2% 8.1% 3.9% 6.4% 10.7% 2.1% Financials 18.9% 31.1% 6.7% 16.8% 25.3% 7.7% 13.9% 20.4% 6.0% 15.0% 26.4% 3.5% Health Care 13.5% 5.6% 21.6% 11.2% 6.1% 16.7% 9.8% 5.8% 14.7% 13.4% 12.3% 14.6% Industrials 14.9% 11.4% 18.4% 15.5% 11.9% 19.3% 13.3% 11.3% 15.8% 10.4% 8.8% 12.0% Information Technology 16.1% 8.7% 23.5% 15.2% 8.6% 22.3% 14.8% 6.2% 25.0% 21.2% 8.7% 33.8% Materials 4.8% 4.5% 5.2% 6.1% 5.1% 7.2% 5.6% 5.2% 6.1% 3.3% 2.7% 3.8% Real Estate 7.7% 11.5% 3.8% 9.8% 14.7% 4.5% 10.4% 15.1% 4.8% 3.8% 4.8% 2.8% Telecom Services 0.7% 0.5% 0.9% 0.6% 0.5% 0.7% 0.6% 1.0% 0.2% 2.3% 3.3% 1.3% Utilities 3.6% 6.3% 0.9% 3.7% 6.4% 0.7% 5.9% 10.7% 0.2% 3.1% 6.2% 0.1% ected GICS Sector Weight Shifts By Index R2 R2V R2G R25 R25V R25G RMid RMidV RMidG R1 R1V R1G Consumer Discretionary 0.4% 1.2% -0.6% 0.7% 2.1% -1.1% -0.3% 3.2% -4.7% -0.2% 2.4% -2.8% Consumer Staples 0.1% 0.1% 0.0% 0.0% 0.4% -0.5% -0.1% 1.3% -1.9% 0.0% 1.0% -1.1% Energy 1.0% 1.6% 0.6% 0.4% 0.1% 0.9% 0.3% -1.5% 2.6% 0.0% -1.5% 1.6% Financials -0.8% -1.7% 0.9% -0.7% -2.2% 1.3% 0.3% 0.3% 0.5% -0.1% -0.8% 0.6% Health Care 0.5% 0.9% -0.4% -0.1% 1.6% -2.4% 0.7% 1.7% -0.7% -0.1% 1.5% -1.6% Industrials 0.4% -1.5% 2.2% -0.2% -1.1% 0.6% -0.5% -1.6% 0.8% -0.1% -1.3% 1.1% Information Technology -1.2% -1.8% -1.1% 0.2% -0.7% 1.0% -0.3% -3.1% 2.8% 0.2% -1.0% 1.5% Materials -0.3% -0.4% -0.2% -0.1% -0.6% 0.4% 0.0% -0.9% 1.0% 0.1% -0.2% 0.3% Real Estate -0.1% 1.6% -1.7% -0.1% 0.6% -0.7% 0.4% 1.2% -0.4% 0.1% 0.2% 0.0% Telecom Services 0.0% -0.1% 0.2% 0.0% -0.1% 0.1% -0.1% -0.2% 0.0% 0.0% -0.3% 0.3% Utilities 0.0% 0.1% 0.1% 0.0% -0.3% 0.3% -0.2% -0.3% 0.2% 0.0% 0.0% 0.0% Source: CS Index Analytics Team, forecasts as of March 6 th ; sector weight shifts greater than +/- 75 bps are highlighted in the second table 5

6 CD Increasing In Value, Decreasing In Growth Media is largely driving the forecasted style shift in large cap. In mid cap, Media and Household Durables are driving the anticipated up weight in value, down weight in growth. Within SMID, Specialty Retail and Textiles Apparel & Luxury Goods are expected to increase in value. Forecasted GICS Consumer Discretionary Weight Shifts: Russell 2000 Indices Forecasted GICS Consumer Discretionary Weight Shifts: Russell 2500 Indices R2 R2 R2 R2V R2V R2V R2G R2G R2G R25 R25 R25 R25V R25V R25V R25G R25G R25G Consumer Discretionary 12.0% 12.4% 0.4% 9.5% 10.6% 1.2% 14.7% 14.1% -0.6% Consumer Discretionary 12.4% 13.1% 0.7% 8.7% 10.8% 2.1% 16.7% 15.6% -1.1% Auto Components 1.2% 1.3% 0.0% 0.8% 0.9% 0.1% 1.7% 1.7% 0.0% Auto Components 1.2% 1.4% 0.1% 0.9% 1.0% 0.1% 1.6% 1.7% 0.1% Automobiles 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% Automobiles 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.3% 0.3% 0.0% Distributors 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.2% 0.0% Distributors 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.3% 0.3% 0.0% Div'd Consumer Svcs 0.9% 0.9% 0.0% 0.7% 0.6% -0.1% 1.2% 1.3% 0.1% Div'd Consumer Svcs 0.8% 0.8% 0.0% 0.6% 0.4% -0.2% 1.1% 1.3% 0.2% Hotels, Restaurants & Leisure 3.0% 3.2% 0.2% 1.5% 1.7% 0.2% 4.5% 4.7% 0.1% Hotels, Restaurants & Leisure 2.6% 2.6% 0.0% 1.2% 1.2% 0.0% 4.1% 4.1% 0.0% Household Durables 1.2% 1.2% 0.0% 1.3% 1.5% 0.2% 1.2% 1.0% -0.2% Household Durables 1.8% 1.5% -0.3% 1.4% 1.2% -0.2% 2.2% 1.7% -0.5% Internet & Direct Mkt Retail 0.5% 0.6% 0.1% 0.1% 0.2% 0.1% 0.9% 1.0% 0.1% Internet & Direct Mkt Retail 0.4% 0.5% 0.1% 0.3% 0.4% 0.1% 0.5% 0.6% 0.1% Leisure Products 0.3% 0.3% 0.1% 0.1% 0.3% 0.2% 0.4% 0.3% -0.1% Leisure Products 0.4% 0.4% 0.0% 0.1% 0.2% 0.0% 0.7% 0.6% -0.1% Media 1.6% 1.4% -0.2% 2.0% 1.6% -0.3% 1.3% 1.2% 0.0% Media 1.8% 1.8% 0.0% 1.6% 2.0% 0.3% 1.9% 1.6% -0.3% Multiline Retail 0.2% 0.4% 0.2% 0.1% 0.4% 0.3% 0.3% 0.4% 0.1% Multiline Retail 0.2% 0.3% 0.2% 0.2% 0.5% 0.3% 0.2% 0.2% 0.0% Specialty Retail 2.2% 2.2% 0.0% 2.3% 2.8% 0.5% 2.1% 1.6% -0.5% Specialty Retail 2.3% 2.5% 0.2% 2.1% 2.8% 0.7% 2.5% 2.1% -0.4% Textiles, Apparel & Lux Good 0.7% 0.7% 0.0% 0.6% 0.7% 0.1% 0.8% 0.7% -0.1% Textiles, Apparel & Lux Good 0.7% 1.1% 0.4% 0.3% 1.1% 0.9% 1.2% 1.0% -0.2% Forecasted GICS Consumer Discretionary Weight Shifts: Russell Mid Cap Indices Forecasted GICS Consumer Discretionary Weight Shifts: Russell 1000 Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG R1 R1 R1 R1V R1V R1V R1G R1G R1G Consumer Discretionary 14.9% 14.6% -0.3% 8.4% 11.6% 3.2% 22.9% 18.2% -4.7% Consumer Discretionary 12.5% 12.3% -0.2% 4.4% 6.8% 2.4% 20.6% 17.9% -2.8% Auto Components 1.0% 0.9% -0.1% 0.7% 0.7% -0.1% 1.3% 1.3% 0.0% Auto Components 0.3% 0.3% 0.0% 0.2% 0.2% 0.0% 0.3% 0.3% 0.0% Automobiles 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.6% 0.5% 0.0% Automobiles 0.7% 0.6% 0.0% 0.9% 0.9% 0.0% 0.4% 0.4% 0.0% Distributors 0.4% 0.4% 0.0% 0.0% 0.3% 0.3% 0.9% 0.6% -0.4% Distributors 0.1% 0.1% 0.0% 0.0% 0.1% 0.1% 0.2% 0.1% -0.1% Div'd Consumer Svcs 0.3% 0.3% 0.0% 0.2% 0.1% -0.1% 0.4% 0.5% 0.1% Div'd Consumer Svcs 0.1% 0.1% 0.0% 0.1% 0.0% 0.0% 0.1% 0.1% 0.0% Hotels, Restaurants & Leisure 2.6% 2.5% 0.0% 1.6% 2.0% 0.5% 3.8% 3.2% -0.7% Hotels, Restaurants & Leisure 1.9% 1.9% 0.0% 0.7% 1.2% 0.5% 3.1% 2.5% -0.6% Household Durables 1.8% 1.8% -0.1% 1.2% 2.2% 1.0% 2.6% 1.2% -1.3% Household Durables 0.5% 0.5% 0.0% 0.4% 0.7% 0.3% 0.7% 0.3% -0.3% Internet & Direct Mkt Retail 0.5% 0.5% 0.0% 0.2% 0.4% 0.2% 0.9% 0.6% -0.3% Internet & Direct Mkt Retail 2.2% 2.2% 0.0% 0.1% 0.1% 0.1% 4.4% 4.4% 0.0% Leisure Products 0.5% 0.4% 0.0% 0.1% 0.2% 0.1% 1.0% 0.8% -0.2% Leisure Products 0.1% 0.1% 0.0% 0.0% 0.1% 0.0% 0.3% 0.2% 0.0% Media 2.1% 2.1% 0.1% 1.4% 2.3% 1.0% 3.0% 1.9% -1.1% Media 3.2% 3.1% 0.0% 0.9% 2.1% 1.3% 5.5% 4.1% -1.3% Multiline Retail 1.0% 0.9% -0.1% 0.5% 0.5% 0.0% 1.5% 1.3% -0.2% Multiline Retail 0.4% 0.4% 0.0% 0.4% 0.4% 0.0% 0.4% 0.4% -0.1% Specialty Retail 3.5% 3.4% -0.1% 1.9% 2.0% 0.1% 5.5% 5.0% -0.6% Specialty Retail 2.3% 2.3% -0.1% 0.6% 0.6% 0.1% 4.1% 3.9% -0.2% Textiles, Apparel & Lux Good 0.9% 1.1% 0.2% 0.6% 0.9% 0.3% 1.4% 1.4% 0.0% Textiles, Apparel & Lux Good 0.7% 0.7% 0.0% 0.2% 0.3% 0.1% 1.2% 1.0% -0.1% Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted 6

7 Last Two Times CD Went Up In Value It Led After Recon Since 2005, there have been two recons where Consumer Discretionary has gone up in value and down in growth both times the sector outperformed following the recon on an all cap basis. In 2008, the style shift was seen in small and large cap (within mid cap, Consumer Discretionary went up in growth and value). The sector underperformed leading up to the recon, but strongly outperformed shortly after the event. This was a short-lived trade. In 2011, the style shift was seen across the Russell 2000, Russell Mid Cap and Russell 1000 indices. Relative performance trends were choppy immediately following the recon, but the sector outperformed on a longer term basis. All Cap Consumer Discretionary Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Up in value Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 7

8 CD Stakes vs. Benchmark w/ Recon Shifts Using January 2017 median fund allocations as a guide, the forecasted up weight in the value indices would narrow mid and large value OW s to Consumer Discretionary. For small cap value, neutral positions would turn to underweights. For growth funds, the anticipated down weight would shrink fund underweight positions. For mid and large cap growth funds, underweights would turn to overweights. Consumer Discretionary: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Growth 14.3% 15.0% 14.1% -0.7% 0.2% slight UW turns to neutral Russell 2000 Value 10.1% 9.8% 10.6% 0.3% -0.6% Neutral turns to UW Russell Mid Cap Growth 18.9% 23.2% 18.2% -4.3% 0.8% Flips UW's to OW's Russell Mid Cap Value 11.8% 8.5% 11.6% 3.3% 0.2% Narrows Fund OW's Russell 1000 Growth 20.1% 21.0% 17.9% -1.0% 2.2% Flips UW's to OW's Russell 1000 Value 7.4% 4.6% 6.8% 2.8% 0.6% Narrows Fund OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 8

9 Staples Increasing in Value in Mid/Large Cap The shift is being driven by Food & Staples Retail in large cap and Food Products in mid cap. Forecasted GICS Consumer Staples Weight Shifts: Russell 2000 Indices R2 R2 R2 R2V R2V R2V R2G Curre Chang Curre Chang Curre R2G R2G Chang Forecasted GICS Consumer Staples Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V R25V R25V R25G Consumer Staples 2.8% 2.9% 0.1% 2.7% 2.8% 0.1% 3.0% 3.0% 0.0% Consumer Staples 3.3% 3.2% 0.0% 2.7% 3.1% 0.4% 3.9% 3.4% -0.5% Beverages 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% 0.4% 0.4% 0.0% Beverages 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.2% 0.0% Food & Staples Retail 0.5% 0.6% 0.0% 0.7% 0.8% 0.1% 0.3% 0.4% 0.0% Food & Staples Retail 0.6% 0.6% 0.0% 0.3% 0.7% 0.4% 0.8% 0.5% -0.3% Food Products 1.3% 1.4% 0.0% 1.2% 1.4% 0.1% 1.4% 1.3% -0.1% Food Products 1.6% 1.8% 0.2% 1.3% 1.9% 0.6% 2.0% 1.8% -0.3% Household Products 0.3% 0.3% 0.0% 0.1% 0.1% -0.1% 0.5% 0.5% 0.1% Household Products 0.3% 0.3% 0.0% 0.2% 0.0% -0.1% 0.4% 0.6% 0.1% Personal Products 0.3% 0.3% 0.0% 0.3% 0.3% 0.0% 0.2% 0.3% 0.0% Personal Products 0.6% 0.4% -0.2% 0.8% 0.4% -0.4% 0.4% 0.3% 0.0% Tobacco 0.2% 0.2% 0.0% 0.3% 0.3% 0.0% 0.1% 0.1% 0.0% Tobacco 0.1% 0.1% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% Forecasted GICS Consumer Staples Weight Shifts: Russell Mid Cap Indices RMid RMid RMid RMidV RMidV RMidV RMid RMid Curre Chang Curre Chang G G RMid G Forecasted GICS Consumer Staples Weight Shifts: Russell 1000 Indices R1 R1 R1 R1V R1V R1V R1G Consumer Staples 5.0% 4.8% -0.1% 3.3% 4.6% 1.3% 7.1% 5.2% -1.9% Consumer Staples 8.8% 8.7% 0.0% 8.3% 9.3% 1.0% 9.2% 8.1% -1.1% Beverages 0.7% 0.7% 0.0% 0.5% 0.5% 0.0% 1.0% 0.9% 0.0% Beverages 1.8% 1.8% 0.0% 0.7% 0.5% -0.2% 3.0% 3.1% 0.1% Food & Staples Retail 0.4% 0.4% 0.0% 0.2% 0.4% 0.2% 0.5% 0.3% -0.2% Food & Staples Retail 1.8% 1.8% 0.0% 1.5% 2.3% 0.8% 2.1% 1.3% -0.8% Food Products 3.0% 2.9% -0.1% 2.0% 3.2% 1.2% 4.3% 2.6% -1.7% Food Products 1.7% 1.6% 0.0% 1.8% 2.3% 0.4% 1.5% 1.0% -0.5% Household Products 0.6% 0.6% 0.0% 0.1% 0.0% -0.1% 1.1% 1.2% 0.0% Household Products 1.7% 1.7% 0.0% 2.6% 2.7% 0.1% 0.7% 0.6% -0.1% Personal Products 0.3% 0.3% 0.0% 0.4% 0.4% 0.0% 0.2% 0.2% 0.0% Personal Products 0.2% 0.2% 0.0% 0.1% 0.1% 0.0% 0.2% 0.2% 0.0% Tobacco 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Tobacco 1.6% 1.6% 0.0% 1.5% 1.4% -0.1% 1.7% 1.8% 0.1% R25G R1G R25G R1G Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted 9

10 Choppy Returns Last Time Staples Went Up In Value Since 2005, Consumer Staples has only gone up in value/down in growth in one recon When this occurred, performance was choppy right around the event, but the sector outperformed initially after. All Cap Consumer Staples Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Up in value Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 10

11 Cons. Staples Stakes vs. Benchmark w/recon Shifts Mid cap value funds likely to turn underweight post Recon, while large cap value fund underweights likely to deepen. No major changes expected for small cap growth and value funds. Consumer Staples ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Growth 2.3% 3.0% 3.0% -0.7% -0.7% No change, still UW Russell 2000 Value 2.7% 2.8% 2.8% 0.0% -0.1% No change, still neutral Russell Mid Cap Growth 4.2% 7.1% 5.2% -2.9% -1.0% Narrows fund UW's Russell Mid Cap Value 3.6% 3.2% 4.6% 0.3% -1.0% Flips neutral to UW's Russell 1000 Growth 7.2% 9.3% 8.1% -2.1% -0.9% Narrows fund UW's Russell 1000 Value 7.2% 8.1% 9.3% -1.0% -2.2% Increases fund UW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 11

12 Health Care Going Up In Value, Down In Growth Within large cap, the forecasted style shift is being largely driven by Providers & Services. The industry drivers differ by size segment. Forecasted GICS Health Care Weight Shifts: Russell 2000 Indices R2 R2 R2V R2 R2V R2V R2G R2G R2G Forecasted GICS Health Care Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V Health Care 13.0% 13.5% 0.5% 4.7% 5.6% 0.9% 22.0% 21.6% -0.4% 11.3% 11.2% -0.1% 4.5% 6.1% 1.6% 19.0% 16.7% -2.4% Biotechnology 4.9% 5.0% 0.0% 1.8% 1.9% 0.1% 8.3% 8.1% -0.3% Biotechnology 3.3% 3.7% 0.3% 1.0% 1.4% 0.4% 6.0% 6.1% 0.1% Equipment & Supplies 3.2% 3.2% 0.0% 1.4% 1.2% -0.2% 5.2% 5.2% -0.1% Equipment & Supplies 3.4% 3.0% -0.4% 1.1% 1.3% 0.1% 6.0% 4.9% -1.1% Providers & Services 2.0% 2.1% 0.1% 1.2% 1.2% 0.1% 2.8% 3.0% 0.1% Providers & Services 1.9% 1.9% 0.0% 1.1% 1.7% 0.6% 2.8% 2.1% -0.7% Health Care Technology 0.5% 0.7% 0.2% 0.1% 0.4% 0.4% 0.9% 1.0% 0.0% Health Care Technology 0.5% 0.5% 0.0% 0.1% 0.2% 0.0% 0.9% 0.9% -0.1% Life Sci Tools & Svcs 0.6% 0.7% 0.1% 0.1% 0.1% 0.0% 1.2% 1.3% 0.1% Life Sci Tools & Svcs 1.3% 1.0% -0.2% 0.9% 0.8% -0.1% 1.6% 1.2% -0.4% Pharmaceuticals 1.8% 1.9% 0.1% 0.2% 0.7% 0.5% 3.4% 3.1% -0.4% Pharmaceuticals 0.9% 1.0% 0.2% 0.2% 0.7% 0.5% 1.7% 1.4% -0.2% R25V R25V R25G R25G R25G Forecasted GICS Health Care Weight Shifts: Russell Mid Cap Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG Forecasted GICS Health Care Weight Shifts: Russell 1000 Indices R1 R1 R1V R1 Health Care 9.2% 9.8% 0.7% 4.1% 5.8% 1.7% 15.4% 14.7% -0.7% 13.5% 13.4% -0.1% 10.8% 12.3% 1.5% 16.2% 14.6% -1.6% Biotechnology 1.3% 1.9% 0.5% 0.2% 0.4% 0.2% 2.8% 3.6% 0.9% Biotechnology 2.9% 2.9% 0.0% 0.0% 0.3% 0.2% 5.8% 5.6% -0.2% Equipment & Supplies 3.0% 3.1% 0.0% 1.0% 1.5% 0.4% 5.5% 5.0% -0.5% Equipment & Supplies 2.5% 2.5% 0.0% 2.5% 2.8% 0.3% 2.6% 2.3% -0.3% Providers & Services 2.1% 2.0% -0.1% 1.5% 1.8% 0.4% 2.8% 2.1% -0.7% Providers & Services 2.5% 2.5% 0.0% 1.4% 2.0% 0.6% 3.7% 3.0% -0.7% Health Care Technology 0.4% 0.4% -0.1% 0.1% 0.0% -0.1% 0.9% 0.8% -0.1% Health Care Technology 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.2% 0.2% 0.0% Life Sci Tools & Svcs 1.6% 1.6% -0.1% 0.9% 1.1% 0.2% 2.6% 2.2% -0.3% Life Sci Tools & Svcs 0.7% 0.7% 0.0% 0.6% 0.5% 0.0% 0.9% 0.9% 0.0% Pharmaceuticals 0.7% 1.0% 0.3% 0.5% 1.0% 0.5% 0.9% 0.9% 0.0% Pharmaceuticals 4.6% 4.6% 0.0% 6.3% 6.7% 0.4% 2.9% 2.5% -0.5% R1V R1V R1G R1G R1G Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted 12

13 Going Up in Value Has Had Mixed Implications For HC Since 2005 there have been two recons where Health Care has gone up in value and down in growth performance implications have been mixed, but the last time this happened the sector outperformed following the recon on an all cap basis. In 2010 Health Care went up in value and down in growth across small, mid and large cap. On an all cap basis, the sector outperformed leading up to the recon, but underperformed after the event. In 2013 Health Care went up in value, down in growth in mid and large cap. The sector outperformed before and after the recon. All Cap Health Care Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Up in value Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 13

14 Health Care Stakes vs. Benchmark w/ Recon Shifts Using January 2017 median fund allocations as a guide, the forecasted up weight in the value indices would shrink value fund OW s to Health Care; for small and large cap value, OW s would turn to UW s. For large cap growth funds, the forecasted down weight would flip fund underweights to overweights. For mid cap growth funds, the anticipated down weight would increase fund overweights that have been in place. Health Care: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Growth 20.1% 21.5% 21.6% -1.4% -1.5% No change, still UW Russell 2000 Value 5.2% 4.4% 5.6% 0.8% -0.3% Flips OW to neutral Russell Mid Cap Growth 15.7% 15.1% 14.7% 0.6% 1.0% Increases fund OW's Russell Mid Cap Value 6.5% 4.1% 5.8% 2.5% 0.8% Narrows Fund OW's Russell 1000 Growth 15.4% 15.9% 14.6% -0.5% 0.8% Flips slight UW's to OW's Russell 1000 Value 10.9% 10.4% 12.3% 0.5% -1.4% Flips slight OW's to UW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 14

15 Industrials Increasing in Growth/Decreasing in Value In large cap, this is being driven by Road & Rail. No specific industry is driving the shift in small, SMID and mid cap. Forecasted GICS Industrials Weight Shifts: Russell 2000 Indices R2 R2 R2 R2V R2V R2V R2G Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted R2G R2G Forecasted GICS Industrials Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V R25V R25V R25G R25G R25G Industrials 14.5% 14.9% 0.4% 12.9% 11.4% -1.5% 16.2% 18.4% 2.2% Industrials 15.7% 15.5% -0.2% 13.0% 11.9% -1.1% 18.7% 19.3% 0.6% Aerospace & Defense 1.6% 1.4% -0.2% 2.3% 1.8% -0.5% 0.8% 0.9% 0.1% Aerospace & Defense 1.8% 1.7% -0.1% 1.5% 1.4% -0.1% 2.0% 2.1% 0.0% Air Freight & Logistics 0.6% 0.3% -0.3% 0.8% 0.2% -0.5% 0.4% 0.4% 0.0% Air Freight & Logistics 0.3% 0.3% 0.0% 0.3% 0.2% -0.2% 0.2% 0.4% 0.2% Airlines 0.3% 0.4% 0.0% 0.2% 0.2% 0.0% 0.5% 0.5% 0.0% Airlines 0.7% 0.5% -0.3% 0.7% 0.6% -0.1% 0.7% 0.3% -0.4% Building Products 1.2% 1.3% 0.1% 0.2% 0.3% 0.1% 2.2% 2.3% 0.0% Building Products 1.5% 1.5% 0.0% 0.7% 0.6% -0.1% 2.5% 2.5% 0.0% Comm Svcs & Supp 2.4% 2.6% 0.2% 1.5% 1.6% 0.0% 3.3% 3.7% 0.4% Comm Svcs & Supp 1.7% 1.8% 0.1% 0.8% 1.1% 0.3% 2.6% 2.6% 0.0% Construction & Engineering 1.0% 1.1% 0.1% 0.7% 0.5% -0.2% 1.3% 1.8% 0.5% Construction & Engineering 1.1% 1.1% 0.0% 1.3% 1.2% -0.1% 0.8% 0.9% 0.1% Electrical Equipment 0.7% 0.7% 0.0% 0.6% 0.4% -0.2% 0.7% 1.0% 0.3% Electrical Equipment 0.5% 0.7% 0.2% 0.5% 0.4% -0.1% 0.6% 1.0% 0.4% Industrial Conglomerates 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% Industrial Conglomerates 0.2% 0.2% 0.0% 0.2% 0.3% 0.1% 0.1% 0.1% -0.1% Machinery 3.4% 3.6% 0.1% 3.4% 3.0% -0.4% 3.5% 4.1% 0.6% Machinery 4.4% 4.4% 0.0% 3.7% 3.3% -0.4% 5.2% 5.6% 0.4% Marine 0.1% 0.1% 0.0% 0.1% 0.2% 0.1% 0.1% 0.1% 0.0% Marine 0.1% 0.2% 0.0% 0.2% 0.3% 0.0% 0.0% 0.0% 0.0% Professional Services 1.4% 1.4% 0.0% 1.0% 1.3% 0.3% 1.8% 1.6% -0.3% Professional Services 1.1% 1.1% 0.0% 0.8% 0.9% 0.1% 1.3% 1.3% -0.1% Road & Rail 0.5% 0.6% 0.1% 0.5% 0.5% 0.0% 0.5% 0.7% 0.2% Road & Rail 0.8% 0.8% 0.0% 0.8% 0.7% -0.1% 0.8% 0.9% 0.1% Trading Companies & Dist 1.2% 1.3% 0.1% 1.4% 1.4% 0.0% 0.9% 1.1% 0.3% Trading Companies & Dist 1.4% 1.2% -0.2% 1.1% 0.8% -0.3% 1.7% 1.7% -0.1% Transportation Infrastructure 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Transportation Infrastructure 0.1% 0.1% 0.0% 0.3% 0.3% 0.0% 0.0% 0.0% 0.0% Forecasted GICS Industrials Weight Shifts: Russell 2000 Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG Forecasted GICS Industrials Weight Shifts: Russell 2500 Indices R1 R1 R1 R1V R1V R1V R1G R1G R1G Industrials 13.8% 13.3% -0.5% 12.9% 11.3% -1.6% 15.0% 15.8% 0.8% Industrials 10.5% 10.4% -0.1% 10.1% 8.8% -1.3% 10.9% 12.0% 1.1% Aerospace & Defense 1.7% 1.6% 0.0% 1.3% 1.3% 0.0% 2.1% 2.0% -0.1% Aerospace & Defense 2.2% 2.2% 0.0% 1.6% 1.5% -0.1% 2.8% 2.8% 0.0% Air Freight & Logistics 0.3% 0.4% 0.1% 0.1% 0.1% 0.0% 0.6% 0.8% 0.1% Air Freight & Logistics 0.6% 0.6% 0.0% 0.0% 0.0% 0.0% 1.2% 1.3% 0.0% Airlines 1.1% 1.0% -0.1% 1.7% 1.2% -0.6% 0.3% 0.8% 0.4% Airlines 0.6% 0.6% -0.1% 0.6% 0.7% 0.1% 0.7% 0.5% -0.2% Building Products 1.4% 0.8% -0.6% 1.3% 0.4% -0.9% 1.5% 1.3% -0.3% Building Products 0.4% 0.4% 0.0% 0.4% 0.5% 0.0% 0.4% 0.3% 0.0% Comm Svcs & Supp 0.9% 0.8% -0.1% 0.5% 0.7% 0.1% 1.3% 0.9% -0.4% Comm Svcs & Supp 0.4% 0.4% 0.0% 0.2% 0.2% 0.0% 0.6% 0.5% -0.1% Construction & Engineering 0.5% 0.5% -0.1% 0.8% 0.8% 0.0% 0.1% 0.1% -0.1% Construction & Engineering 0.1% 0.1% 0.0% 0.3% 0.3% 0.0% 0.0% 0.0% 0.0% Electrical Equipment 0.8% 0.9% 0.1% 0.6% 0.5% -0.1% 1.1% 1.3% 0.2% Electrical Equipment 0.5% 0.6% 0.0% 0.7% 0.7% 0.0% 0.3% 0.4% 0.1% Industrial Conglomerates 0.4% 0.4% 0.0% 0.4% 0.2% -0.2% 0.4% 0.7% 0.2% Industrial Conglomerates 2.2% 2.2% -0.1% 2.1% 1.9% -0.1% 2.4% 2.4% 0.0% Machinery 3.9% 4.0% 0.2% 4.6% 4.3% -0.3% 3.0% 3.8% 0.8% Machinery 1.7% 1.7% 0.0% 2.3% 1.8% -0.4% 1.2% 1.6% 0.4% Marine 0.1% 0.1% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% Marine 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Professional Services 1.0% 1.2% 0.2% 0.3% 1.0% 0.6% 1.7% 1.4% -0.3% Professional Services 0.3% 0.3% 0.1% 0.1% 0.3% 0.2% 0.4% 0.4% -0.1% Road & Rail 0.7% 0.6% -0.1% 0.6% 0.5% -0.1% 0.7% 0.7% 0.0% Road & Rail 1.0% 0.9% 0.0% 1.6% 0.7% -0.9% 0.3% 1.1% 0.8% Trading Companies & Dist 1.0% 1.0% 0.0% 0.3% 0.1% -0.2% 1.9% 2.1% 0.1% Trading Companies & Dist 0.3% 0.3% 0.0% 0.1% 0.0% -0.1% 0.5% 0.5% 0.1% Transportation Infrastructure 0.1% 0.1% 0.0% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% Transportation Infrastructure 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% 15

16 Going Up in Growth Has Mixed Implications For Industrials Since 2005 there have been four recons where Industrials has gone up in growth and down in value performance implications have been mixed, but after the last two recons a brief outperformance trade was seen immediately following the event. In 2005 and 2006, Industrials underperformed leading up to the recon. After the recon, underperformance persisted before a period of more stable relative returns. In 2008 and 2010, the Recon was followed by a short-lived outperformance trade. In 2008 underperformance returned quickly to the sector, but in 2010, the second continued the outperformance period that began at the Financial Crisis lows. All Cap Industrials Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Up in growth Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 16

17 Industrials Stakes vs. Benchmark w/recon Shifts Using January 2017 median fund allocations as a guide, the forecasted up weight in the value indices would flip UW s to OW s for mid and large cap value funds. For small value funds, it would increase the size of fund OW s already in place. For growth funds, the forecasted down weight would increase small and large cap growth fund s UW s. For mid cap value, it would narrow OW s. Industrials: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Growth 16.1% 16.6% 18.4% -0.5% -2.3% Increases fund UW's Russell 2000 Value 15.2% 13.0% 11.4% 2.2% 3.7% Increases fund OW's Russell Mid Cap Growth 16.3% 14.9% 15.8% 1.4% 0.5% Narrows fund OW's Russell Mid Cap Value 12.3% 12.8% 11.3% -0.5% 1.0% Flips UW's to OW's Russell 1000 Growth 8.9% 10.8% 12.0% -1.9% -3.1% Increases fund UW's Russell 1000 Value 9.9% 10.2% 8.8% -0.3% 1.1% Flips UW's to OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 17

18 Energy Getting Growthier In Mid & Large After this year s Russell Reconstitution, Energy is expected to remain a bigger weight in value, but the gap with growth is expected to narrow. The anticipated style shift within mid and large is mainly being driven by Oil Gas & Consumable Fuels. In small cap, Energy is increasing in weight in core and value (and growth, but to a lesser extent). The up weight in the 2000 core and value is largely being driven by names being demoted from the Russell 1000 to Russell 2000 and new additions to the Russell 2000 index. Forecasted GICS Energy Weight Shifts: Russell 2000 Indices R2 R2 R2 R2V R2V R2V Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted R2G R2G R2G Energy 3.5% 4.5% 1.0% 5.5% 7.0% 1.6% 1.3% 1.9% 0.6% Energy Equipment & Services 1.1% 1.7% 0.5% 1.8% 2.8% 1.1% 0.5% 0.5% 0.1% Oil, Gas & Consumable Fuels 2.3% 2.8% 0.4% 3.7% 4.2% 0.5% 0.8% 1.3% 0.5% Forecasted GICS Energy Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V R25V R25V R25G R25G R25G Energy 4.4% 4.8% 0.4% 7.4% 7.5% 0.1% 1.0% 2.0% 0.9% Energy Equipment & Services 1.3% 1.4% 0.1% 2.3% 2.4% 0.1% 0.2% 0.3% 0.1% Oil, Gas & Consumable Fuels 3.1% 3.4% 0.4% 5.0% 5.1% 0.0% 0.8% 1.7% 0.8% Forecasted GICS Energy Weight Shifts: Russell Mid Cap Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG Energy 5.9% 6.2% 0.3% 9.6% 8.1% -1.5% 1.3% 3.9% 2.6% Energy Equipment & Services 1.3% 1.1% -0.2% 2.3% 2.0% -0.3% 0.0% 0.1% 0.1% Oil, Gas & Consumable Fuels 4.6% 5.1% 0.4% 7.3% 6.1% -1.2% 1.3% 3.8% 2.5% Forecasted GICS Energy Weight Shifts: Russell 1000 Indices R1 R1 R1 R1V R1V R1V R1G R1G R1G Energy 6.4% 6.4% 0.0% 12.2% 10.7% -1.5% 0.5% 2.1% 1.6% Energy Equipment & Services 1.1% 1.0% 0.0% 2.1% 1.6% -0.5% 0.0% 0.5% 0.5% Oil, Gas & Consumable Fuels 5.3% 5.4% 0.1% 10.1% 9.1% -1.0% 0.5% 1.7% 1.2% 18

19 Going Up in Growth Has Mixed Implications For Energy Since 2005 there have been four recons where Energy has gone up in growth and down in value the last two times it happened the sector underperformed following the recon on an all cap basis. In 2011 and 2014 Energy generally went up in growth and down in value across small, mid and large cap. In 2011, relative performance was choppy around the recon, but the sector lagged following the event longer term. In 2014, the recon basically marked the peak in relative performance that year - the sector outperformed leading up to the event, but underperformed sharply in the months following. Energy also went up in growth/down in value in 2005 and In these years Energy performance was choppy immediately following the event, but went on to outperform afterwards on an all cap basis. All Cap Energy Relative Performance Around Recon Style Shifts Rel to R3000 Index, Total Returns Up in growth Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 19

20 Mixed Trends For Sectors Going Up In The 2000 Core The chart below highlights the relative performance trends around recon (6 months before/after) for sectors that saw a meaningful up weight in the Russell 2000 core index (greater than 75 basis points) since Energy has not seen a meaningful up weight in the 2000 core since Across sectors, relative performance trends have been mixed before/after the recon, but on average, they tend to underperform slightly ahead of the recon, and outperform slightly afterwards. Rel Perf Of Small Cap Sectors Seeing A Large Up Weight in The 2000 Core Before/After Recon vs. R2000 Index, Total Returns Tech (2005) CD (2006) Fin incl REITs (2006) Fin incl REITs (2008) Industrials (2008) Tech (2012) Fin incl REITs (2014) CD (2015) Recon Date Median Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 20

21 Energy Stakes vs. Benchmark w/recon Shifts After this year s Russell Reconstitution, most mid and large cap growth funds seem likely to shift from being slightly overweight Energy to slightly underweight Energy. This could generate a need to buy the sector on the part of mid and large cap growth funds if the sector starts outperforming again. But on the flipside, the Recon changes are likely to cause mid cap value funds to turn less underweight, and to take large cap value funds from an underweight to an overweight resulting in less of a need to buy the sector if performance picks up, and more of a need to sell the sector if underperformance persists. For small cap managers, the forecasted up weight would turn small cap core funds underweight, increase underweights in small cap value funds and narrow overweights seen in small cap growth funds. Within large cap, there is more AUM benchmarked to value than growth, according to data from Morningstar. In mid cap, AUM levels are pretty similar. Energy: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Core 3.8% 3.7% 4.5% 0.1% -0.7% Neutral turns to UW Russell 2000 Growth 2.6% 1.4% 1.9% 1.2% 0.7% OW's narrow slightly Russell 2000 Value 5.4% 5.8% 7.0% -0.5% -1.6% Increases Fund UW's Russell Mid Cap Growth 1.9% 1.3% 3.9% 0.6% -2.0% Flips slight OW's to UW's Russell Mid Cap Value 8.0% 10.0% 8.1% -2.0% -0.1% Narrows Fund UW's Russell 1000 Growth 1.5% 0.6% 2.1% 0.9% -0.6% Flips OW's to UW's Russell 1000 Value 12.2% 13.0% 10.7% -0.9% 1.4% Flips UW's to OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 21

22 Tech Getting Growthier, Largely Driven By Semis Tech is forecasted to go up weight in growth and down weight in value in SMID, mid and large cap. This change is being largely driven by Semis. In mid cap Software is also expected to increase in growth and decrease in value, though to a lesser degree. In small cap, Tech is forecasted to go down in weight across core, value and growth. This is being driven by a few large Semis being promoted from the Russell 2000 index to the Russell 1000 Index. Forecasted GICS Technology Weight Shifts: Russell 2000 Indices R2 R2 R2V R2 R2V R2V R2G R2G R2G Forecasted GICS Technology Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V Technology 17.3% 16.1% -1.2% 10.4% 8.7% -1.8% 24.6% 23.5% -1.1% Technology 14.9% 15.2% 0.2% 9.3% 8.6% -0.7% 21.3% 22.3% 1.0% Comm Equipment 2.0% 2.1% 0.1% 1.7% 1.5% -0.2% 2.3% 2.7% 0.4% Comm Equipment 1.4% 1.5% 0.1% 1.2% 1.2% 0.0% 1.6% 1.8% 0.2% Electronic Equip, Inst 3.0% 2.9% -0.1% 3.4% 3.1% -0.2% 2.6% 2.6% 0.0% Electronic Equip, Inst 3.0% 3.0% 0.0% 3.0% 2.8% -0.2% 3.0% 3.2% 0.3% Internet Software & Svcs 2.2% 2.2% 0.0% 0.4% 0.4% 0.0% 4.2% 3.9% -0.2% Internet Software & Svcs 1.6% 1.7% 0.1% 0.4% 0.2% -0.1% 3.0% 3.2% 0.2% IT Services 1.9% 2.0% 0.0% 1.0% 1.4% 0.4% 2.9% 2.5% -0.4% IT Services 2.5% 2.6% 0.1% 0.7% 1.5% 0.8% 4.6% 3.8% -0.7% Semis & Semi Equip 3.9% 2.9% -0.9% 2.6% 1.2% -1.3% 5.2% 4.7% -0.6% Semis & Semi Equip 2.4% 2.3% -0.1% 2.3% 1.6% -0.7% 2.5% 2.9% 0.4% Software 3.8% 3.5% -0.3% 1.2% 0.9% -0.3% 6.6% 6.2% -0.4% Software 3.7% 3.7% 0.1% 1.6% 1.2% -0.5% 6.0% 6.6% 0.5% Tech HW & Storage 0.6% 0.6% 0.0% 0.3% 0.2% -0.1% 0.8% 0.9% 0.1% Tech HW & Storage 0.4% 0.4% 0.0% 0.1% 0.1% 0.0% 0.7% 0.7% 0.0% R25V R25V R25G R25G R25G Forecasted GICS Technology Weight Shifts: Russell Mid Cap Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG Forecasted GICS Technology Weight Shifts: Russell 1000 Indices R1 R1 R1V R1 Technology 15.1% 14.8% -0.3% 9.3% 6.2% -3.1% 22.3% 25.0% 2.8% Technology 21.0% 21.2% 0.2% 9.7% 8.7% -1.0% 32.4% 33.8% 1.5% Comm Equipment 1.2% 1.2% 0.0% 1.3% 1.3% 0.0% 1.1% 1.1% 0.0% Comm Equipment 1.1% 1.1% 0.0% 1.9% 1.9% 0.0% 0.3% 0.3% 0.0% Electronic Equip, Inst 1.4% 1.5% 0.0% 1.0% 0.9% -0.1% 1.9% 2.1% 0.1% Electronic Equip, Inst 0.5% 0.5% 0.0% 0.5% 0.5% 0.0% 0.5% 0.6% 0.1% Internet Software & Svcs 0.8% 0.9% 0.0% 0.2% 0.3% 0.1% 1.7% 1.5% -0.1% Internet Software & Svcs 4.1% 4.2% 0.1% 0.4% 1.1% 0.7% 7.8% 7.3% -0.5% IT Services 3.7% 3.6% -0.1% 1.1% 1.1% 0.0% 6.9% 6.7% -0.2% IT Services 3.9% 3.8% 0.0% 0.8% 0.7% -0.1% 7.0% 7.0% 0.0% Semis & Semi Equip 3.9% 3.3% -0.5% 3.1% 1.0% -2.1% 4.8% 6.1% 1.3% Semis & Semi Equip 3.1% 3.4% 0.3% 3.0% 2.4% -0.6% 3.2% 4.4% 1.2% Software 3.3% 3.6% 0.3% 1.5% 0.9% -0.6% 5.6% 6.9% 1.3% Software 4.5% 4.5% 0.1% 1.6% 1.4% -0.3% 7.3% 7.7% 0.4% Tech HW & Storage 0.7% 0.7% 0.0% 1.2% 0.7% -0.5% 0.2% 0.7% 0.5% Tech HW & Storage 3.9% 3.7% -0.2% 1.5% 0.8% -0.7% 6.2% 6.6% 0.4% R1V R1V R1G R1G R1G Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted 22

23 Going Up in Growth Initially Positive For Bigger Cap Tech Style shifts for Tech are rarely consistent across size segments; below, we ve isolated large cap since that is where the shift into growth is expected to be seen this year. When Tech has gone up in growth/down in value within large cap (2012, 2016), the sector has underperformed leading up to the recon. The sector outperformed in the immediate aftermath in both instances. In 2012, that outperformance was short-lived, however. In 2016, it lasted up until the Presidential election, then lagged. Large Cap Tech Relative Performance Around Recon Style Shifts Rel to R1000 Index, Total Returns Up in growth Source: CS US Equity Strategy, Russell, S&P Capital IQ/ClariFi 23

24 Tech Stakes vs. Benchmark w/ Recon Shifts Using January 2017 median fund allocations as a guide, the forecasted up weight in Tech in the mid and large cap growth indices would narrow fund OW s that have been in place. For mid cap growth, OW s would turn to slight UW positions. For value and small cap growth, the forecasted down weight in Tech would increase the size of fund overweights that have been in place across size segments. For small cap core, neutral positions would turn to overweight positions. Technology: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Core 17.1% 17.3% 16.1% -0.2% 1.0% Neutral turns to OW Russell 2000 Growth 25.3% 24.6% 23.5% 0.7% 1.8% Increases fund OW's Russell 2000 Value 12.9% 10.5% 8.7% 2.4% 4.2% Increases fund OW's Russell Mid Cap Growth 24.1% 22.4% 25.0% 1.7% -1.0% Flips fund OW's to UW's Russell Mid Cap Value 11.5% 9.1% 6.2% 2.4% 5.2% Increases fund OW's Russell 1000 Growth 34.5% 32.0% 33.8% 2.6% 0.7% Narrows fund OW's Russell 1000 Value 11.5% 9.6% 8.7% 1.9% 2.7% Increases fund OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 24

25 Semis Stakes vs. Benchmark w/ Recon Shifts Using January 2017 median fund allocations as a guide, the forecasted up weight in Semis in mid cap growth would increase fund UW s that have been in place. In large cap growth, it would flip OW s to slight UW s. Similar to what we re seeing for the broader Tech sector, in value the forecasted down weight in Semis would increase the size of fund overweights in small cap value and large cap value. In mid cap value, slight underweights would turn to meaningful overweights and in small cap core, neutral position would turn to overweight positions. Semis: ected s to Fund OW/UW Positions From Recon Forecasts Index Median Fund Allocation Index Weight Weight (Recon Forecast) OW/UW OW/UW With Recon Forecast Russell 2000 Core 4.0% 4.0% 2.9% 0.0% 1.1% Neutral turns to OW Russell 2000 Growth 5.0% 5.3% 4.7% -0.3% 0.4% Flips slight UW's to slight OW's Russell 2000 Value 3.1% 2.7% 1.2% 0.4% 1.9% Increases fund OW's Russell Mid Cap Growth 4.3% 5.0% 6.1% -0.7% -1.7% Increases fund UW's Russell Mid Cap Value 2.5% 3.0% 1.0% -0.4% 1.5% Flips slight UW's to OW's Russell 1000 Growth 3.6% 3.2% 4.4% 0.4% -0.7% Flips slight OW's to UW's Russell 1000 Value 3.5% 3.0% 2.4% 0.5% 1.1% Increases fund OW's Fund allocations and current index weights are based on Jan 31st pricing, recon forecast is based on March 6th pricing Source: CS US Equity Strategy, CS Index Analytics team, Morningstar, Russell, S&P Capital IQ/ClariFi 25

26 Financials Watching For An Increase in Growth Investors have been asking whether the growth indices will see an up weight in Banks or Financials this year. According to the CS Index Analytics team current forecast, Financials may see a slight up weight in growth in SMID and small cap. We re not seeing a meaningful up weight in mid and large cap growth yet. We d also note that Financials/Banks are expected to go down weight in the R2000 core and value indices, as a number of Banks are expected to graduate from small cap to large cap. Forecasted GICS Financials Weight Shifts: Russell 2000 Indices R2 R2 R2V R2 R2V R2V R2G R2G R2G Forecasted GICS Financials Weight Shifts: Russell 2500 Indices R25 R25 R25 R25V Financials 19.8% 18.9% -0.8% 32.8% 31.1% -1.7% 5.8% 6.7% 0.9% Financials 17.6% 16.8% -0.7% 27.5% 25.3% -2.2% 6.3% 7.7% 1.3% Banks 11.8% 11.0% -0.9% 20.7% 19.1% -1.5% 2.3% 2.7% 0.4% Banks 7.9% 7.7% -0.2% 13.2% 12.5% -0.7% 1.8% 2.5% 0.7% Capital Markets 1.5% 1.6% 0.1% 1.4% 1.4% 0.0% 1.6% 1.8% 0.2% Capital Markets 2.5% 2.3% -0.2% 2.0% 1.4% -0.6% 3.1% 3.3% 0.3% Consumer Finance 0.5% 0.5% 0.0% 0.7% 0.8% 0.0% 0.2% 0.3% 0.0% Consumer Finance 0.6% 0.6% 0.0% 0.9% 0.9% 0.0% 0.2% 0.2% 0.0% Div'd Fin Services 0.1% 0.1% 0.0% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% Div'd Fin Services 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% Insurance 2.4% 2.5% 0.0% 3.8% 3.8% 0.0% 1.0% 1.1% 0.1% Insurance 4.5% 4.1% -0.4% 7.7% 6.8% -0.9% 0.9% 1.3% 0.3% Mortgage REITs 1.1% 0.8% -0.2% 2.1% 1.7% -0.4% 0.0% 0.0% 0.0% Mortgage REITs 1.0% 1.0% 0.0% 1.9% 1.9% 0.0% 0.0% 0.0% 0.0% Thrifts & Mortgage Fin 2.4% 2.4% 0.1% 4.0% 4.2% 0.2% 0.6% 0.7% 0.1% Thrifts & Mortgage Fin 1.1% 1.1% 0.0% 1.8% 1.8% 0.0% 0.3% 0.3% 0.0% Forecasted GICS Financials Weight Shifts: Russell Mid Cap Indices RMid RMid RMid RMidV RMidV RMidV RMidG RMidG RMidG Forecasted GICS Financials Weight Shifts: Russell 1000 Indices R1 R1 R1V R1 Financials 13.6% 13.9% 0.3% 20.2% 20.4% 0.3% 5.5% 6.0% 0.5% Financials 15.1% 15.0% -0.1% 27.2% 26.4% -0.8% 2.9% 3.5% 0.6% Banks 4.4% 4.6% 0.3% 6.9% 7.3% 0.4% 1.2% 1.4% 0.1% Banks 6.6% 6.6% 0.0% 12.8% 12.8% 0.0% 0.3% 0.4% 0.0% Capital Markets 3.0% 2.9% -0.1% 2.6% 2.4% -0.2% 3.5% 3.6% 0.0% Capital Markets 3.0% 2.9% -0.1% 4.2% 3.9% -0.4% 1.7% 1.9% 0.2% Consumer Finance 0.8% 0.8% 0.0% 1.5% 1.3% -0.1% 0.1% 0.1% 0.1% Consumer Finance 0.8% 0.8% 0.0% 1.6% 1.5% -0.1% 0.1% 0.2% 0.1% Div'd Fin Services 0.3% 0.2% 0.0% 0.5% 0.4% -0.1% 0.0% 0.1% 0.1% Div'd Fin Services 1.5% 1.5% 0.0% 3.0% 3.0% 0.0% 0.0% 0.0% 0.0% Insurance 4.5% 4.6% 0.1% 7.6% 7.7% 0.1% 0.7% 0.8% 0.1% Insurance 3.0% 3.0% 0.0% 5.2% 4.9% -0.3% 0.8% 1.1% 0.3% Mortgage REITs 0.5% 0.6% 0.1% 0.9% 1.1% 0.1% 0.0% 0.0% 0.0% Mortgage REITs 0.1% 0.2% 0.0% 0.3% 0.3% 0.0% 0.0% 0.0% 0.0% Thrifts & Mortgage Fin 0.1% 0.1% 0.0% 0.2% 0.2% 0.0% 0.0% 0.0% 0.0% Thrifts & Mortgage Fin 0.0% 0.0% 0.0% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0% R25V R1V R25V R1V R25G R1G R25G R1G R25G R1G Source: CS Index Analytics Team, forecasts as of March 6 th ; sector and industry weight shifts greater than +/- 75 bps are highlighted 26

27 ected R2 to R1 Promotions: Several in Banks 6 Banks and 3 Semis are forecasted to be promoted from the Russell 2000 to the Russell 1000 index. Several names that are popular in small cap long only funds are expected to be promoted, including OZRK, MSCC and MASI which all made our 3Q16 Small Cap Darlings list (25 most popular names in actively managed small cap long only funds). Forecasted Russell 2000 to Russell 1000 Promotions Ranked by Market Cap # Small Cap Funds Ticker Name GICS Sector GICS Industry Price Market Cap R1 Net Wgt Chg R2 Net Wgt Chg AMD Advanced Micro Devices Inc Technology Semis & Semi Equipment ,267 R2 to R % % TSRO TESARO Inc Health Care Biotechnology ,556 R2 to R % % FWONA Liberty Media Corp-Liberty Formula One Cons. Discretionary Media ,820 R2 to R % % NA NA NA FWONK Liberty Media Corp-Liberty Formula One Cons. Discretionary Media ,820 R2 to R % % NA NA NA OZRK Bank of the Ozarks Inc Financials Banks ,734 R2 to R % % EXEL Exelixis Inc Health Care Biotechnology ,611 R2 to R % % RSPP RSP Permian Inc Energy Oil, Gas & Consumable Fuels ,437 R2 to R % % CC Chemours Co/The Materials Chemicals ,161 R2 to R % % MSCC Microsemi Corp Technology Semis & Semi Equipment ,052 R2 to R % % TTWO Take-Two Interactive Software Inc Technology Software ,956 R2 to R % % XPO XPO Logistics Inc Industrials Air Freight & Logistics ,775 R2 to R % % WINS Wins Finance Holdings Inc Financials Capital Markets ,672 R2 to R % % HPP Hudson Pacific Properties Inc Real Estate Equity REITs ,493 R2 to R % % OLN Olin Corp Materials Chemicals ,292 R2 to R % % NRZ New Residential Investment Corp Financials Mortgage REITs ,225 R2 to R % % PB Prosperity Bancshares Inc Financials Banks ,200 R2 to R % % LOGM LogMeIn Inc Technology Internet Software & Svcs ,178 R2 to R % % WBS Webster Financial Corp Financials Banks ,138 R2 to R % % MASI Masimo Corp Health Care HC Equipment & Supplies ,718 R2 to R % % SNX SYNNEX Corp Technology Electronic Equip, Inst ,712 R2 to R % % TDY Teledyne Technologies Inc Industrials Aerospace & Defense ,645 R2 to R % % PVTB PrivateBancorp Inc Financials Banks ,636 R2 to R % % SEB Seaboard Corp Consumer Staples Food Products 3, ,601 R2 to R % % CAVM Cavium Inc Technology Semis & Semi Equipment ,558 R2 to R % % ISBC Investors Bancorp Inc Financials Banks ,549 R2 to R % % DFT DuPont Fabros Technology Inc Real Estate Equity REITs ,544 R2 to R % % COR CoreSite Realty Corp Real Estate Equity REITs ,522 R2 to R % % COHR Coherent Inc Technology Electronic Equip, Inst ,506 R2 to R % % AZPN Aspen Technology Inc Technology Software ,496 R2 to R % % UNVR Univar Inc Industrials Trading Companies & Dist ,486 R2 to R % % TCBI Texas Capital Bancshares Inc Financials Banks ,472 R2 to R % % Source: CS Index Analytics Team, CS US Equity Strategy, forecasts as of March 6 th, 2017; ownership based on the holdings of 466 small cap funds, 209 mid cap funds, 593 large cap funds # Mid Cap Funds # Large Cap Funds 27

28 ected R1 to R2 Demotions Five are in Energy (mostly Equipment & Services); none are well owned by long only funds. Forecasted Russell 1000 to Russell 2000 Demotions Ranked by Market Cap Source: CS Index Analytics Team, CS US Equity Strategy, forecasts as of March 6 th, 2017; ownership based on the holdings of 466 small cap funds, 209 mid cap funds, 593 large cap funds # Small Cap Funds Market R1 Net Wgt R2 Net Wgt Ticker Name GICS Sector GICS Industry Price Cap Chg Chg KOS Kosmos Energy Ltd Energy Oil, Gas & Consumable Fuels ,345 R1 to R % 0.061% UFS Domtar Corp Materials Paper & Forest Products ,341 R1 to R % 0.125% JUNO Juno Therapeutics Inc Health Care Biotechnology ,284 R1 to R % 0.092% PAY VeriFone Systems Inc Information Technology Electronic Equipment, Instrume ,282 R1 to R % 0.122% GRPN Groupon Inc Consumer Discretionary Internet & Direct Marketing Re ,271 R1 to R % 0.090% DO Diamond Offshore Drilling Energy Energy Equipment & Services ,239 R1 to R % 0.056% RDC Rowan Cos Plc Energy Energy Equipment & Services ,187 R1 to R % 0.115% CCO Clear Channel Outdoor Holdings Consumer Discretionary Media ,174 R1 to R % 0.011% CCP Care Capital Properties Inc Real Estate Equity Real Estate Investment ,162 R1 to R % 0.115% MDRX Allscripts Healthcare Solutions Inc Health Care Health Care Technology ,154 R1 to R % 0.114% DRQ Dril-Quip Inc Energy Energy Equipment & Services ,140 R1 to R % 0.114% AGIO Agios Pharmaceuticals Inc Health Care Biotechnology ,109 R1 to R % 0.096% APAM Artisan Partners Asset Management Financials Capital Markets ,101 R1 to R % 0.070% THC Tenet Healthcare Corp Health Care Health Care Providers & Servic ,077 R1 to R % 0.089% KBR KBR Inc Industrials Construction & Engineering ,066 R1 to R % 0.109% EAT Brinker International Inc Consumer Discretionary Hotels, Restaurants & Leisure ,039 R1 to R % 0.109% CVA Covanta Holding Corp Industrials Commercial Services & Supplies ,982 R1 to R % 0.096% FEYE FireEye Inc Information Technology Software ,926 R1 to R % 0.092% JCP JC Penney Co Inc Consumer Discretionary Multiline Retail ,837 R1 to R % 0.094% QCP Quality Care Properties Inc Real Estate Equity Real Estate Investment ,792 R1 to R % 0.096% NA NA NA HTZ Hertz Global Holdings Inc Industrials Road & Rail ,757 R1 to R % 0.080% INOV Inovalon Holdings Inc Health Care Health Care Technology ,739 R1 to R % 0.040% DDS Dillard's Inc Consumer Discretionary Multiline Retail ,717 R1 to R % 0.047% NE Noble Corp plc Energy Energy Equipment & Services ,581 R1 to R % 0.084% FIT Fitbit Inc Information Technology Electronic Equipment, Instrume ,357 R1 to R % 0.052% HRI Herc Holdings Inc Industrials Trading Companies & Distributo ,330 R1 to R % 0.060% VREX Varex Imaging Corp Health Care Health Care Equipment & Suppli ,229 R1 to R % 0.066% NA NA NA VSTO Vista Outdoor Inc Consumer Discretionary Leisure Products ,168 R1 to R % 0.062% SPWR SunPower Corp Information Technology Semiconductors & Semiconductor ,077 R1 to R % 0.024% RRD RR Donnelley & Sons Co Industrials Commercial Services & Supplies ,076 R1 to R % 0.056% LKSD LSC Communications Inc Industrials Commercial Services & Supplies R1 to R % 0.036% NA NA NA ASIX AdvanSix Inc Materials Chemicals R1 to R % 0.043% NA NA NA CHUBA CommerceHub Inc Information Technology Internet Software & Services R1 to R % 0.012% CHUBK CommerceHub Inc Information Technology Internet Software & Services R1 to R % 0.025% DFIN Donnelley Financial Solutions Inc Financials Capital Markets R1 to R % 0.029% NA NA NA # Mid Cap Funds # Large Cap Funds 28

29 Perf of Promotions & Demotions Around Recon Date Promotions generally stall after the reconstitution. Generally, demotions lag leading up to the recon. Performance trends are choppy following, but they do tend to outperform near term. Absolute Perf: Promotions Relative Perf: Promotions Cumulative Average Return of R2 to R1 Promotions Around Recon Date: All Sectors , Absolute Total Returns Absolute Perf: Demotions On average, promotions rise 0.90 in the 6 months before the 0.85 recon and experience choppy trends after Cumulative Average Rel Return of R2 to R1 Promotions Around Recon Date: All Sectors Rel to R2000 Idx On average, promotions outperform before the event, but lag after. Rel to S&P 500 Idx Relative Perf: Demotions Cumulative Average Return of R1 to R2 Demotions Around Recon Date: All Sectors , Absolute Total Returns Choppy absolute performance trends. Cumulative Average Rel Return of R1 to R2 Demotions Around Recon Date: All Sectors Rel to R2000 Idx Underperforms before the event, choppy trends after the recon. Rel to S&P 500 Idx Source: CS US Equity Strategy Team, S&P Capital IQ/ClariFi, Russell; performance study only includes stocks with pricing 6 months before/after event (excludes IPOs and M&A takeouts around the recon); based on performance of actual promotions/demotions (not forecasts) 29

30 Promotions Sold By Small Cap Funds Around Recon On average, promotions are sold by small cap long only funds, but bought by mid/large cap funds in the quarters before and after the recon. Less of an ownership change is seen for demotions on average. Promotions: Chg in Small Cap Fund Ownership Promotions: Chg in Mid/Large Fund Ownership Average in Small Cap Fund Ownership Before/After the Recon (# Funds): Promotions - (2) (4) (6) (8) Average in Mid/Large Cap Fund Ownership Before/After the Recon (# Funds): Promotions (10) Quarter Before Recon Quarter After Recon Demotions: Chg in Small Cap Fund Ownership Average in Small Cap Fund Ownership Before/After the Recon (# Funds): Demotions (1) (2) (3) (4) (5) Quarter Before Recon Quarter After Recon Demotions: Chg in Mid/Large Fund Ownership Source: CS US Equity Strategy Team, S&P Capital IQ/ClariFi, Russell, evestment, Morningstar; ownership data captures actively managed long only funds (institutional & retail), does not include passive funds, ETF s, hedge funds or quant funds. - Quarter Before Recon Quarter After Recon Average in Mid/Large Cap Fund Ownership Before/After the Recon (# Funds): Demotions (1) (2) (3) (4) (5) Quarter Before Recon Quarter After Recon

31 Top ected Russell 2000 Adds By Market Cap 12 of the top 25 projected Russell 2000 Adds by market cap are in Energy, mainly in Oil, Gas & Consumable Fuels industry. Top 25 Forecasted Russell 2000 Adds Ranked By Market Cap Ticker Name GICS Sector GICS Industry Price Market Cap R2 Net Wgt Chg JELD JELD-WEN Holding Inc Industrials Building Products ,168 R2 Add 0.040% TELL Tellurian Inc Energy Oil, Gas & Consumable Fuels ,080 R2 Add 0.096% JAG Jagged Peak Energy Inc Energy Oil, Gas & Consumable Fuels ,849 R2 Add 0.023% LAUR Laureate Education Inc Consumer Discretionary Diversified Consumer Services ,166 R2 Add 0.024% TWNK Hostess Brands Inc Consumer Staples Food Products ,992 R2 Add 0.054% ARCH Arch Coal Inc Energy Oil, Gas & Consumable Fuels ,841 R2 Add 0.084% REVG REV Group Inc Industrials Machinery ,773 R2 Add 0.019% FRAC Keane Group Inc Energy Energy Equipment & Services ,761 R2 Add 0.028% WRD WildHorse Resource Development Energy Oil, Gas & Consumable Fuels ,114 R2 Add 0.020% EXXI Energy XXI Gulf Coast Inc Energy Oil, Gas & Consumable Fuels ,023 R2 Add 0.040% BAS Basic Energy Services Inc Energy Energy Equipment & Services R2 Add 0.051% HLNE Hamilton Lane Inc Financials Capital Markets R2 Add 0.012% REN Resolute Energy Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.039% AKAO Achaogen Inc Health Care Pharmaceuticals R2 Add 0.041% NXEO Nexeo Solutions Inc Industrials Trading Companies & Distributo R2 Add 0.013% JNCE Jounce Therapeutics Inc Health Care Pharmaceuticals R2 Add 0.009% PVAC Penn Virginia Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.039% HK Halcon Resources Corp Energy Oil, Gas & Consumable Fuels R2 Add 0.037% FBM Foundation Building Materials Inc Industrials Trading Companies & Distributo R2 Add 0.011% SD SandRidge Energy Inc Energy Oil, Gas & Consumable Fuels R2 Add 0.021% CLPR Clipper Realty Inc Real Estate Equity Real Estate Investment R2 Add 0.004% KEG Key Energy Services Inc Energy Energy Equipment & Services R2 Add 0.015% KEM Kemet Corp Information Technology Electronic Equipment, Instrume R2 Add 0.027% METC Ramaco Resources Inc Materials Metals & Mining R2 Add 0.004% MPO Midstates Petroleum Co Inc Energy Oil, Gas & Consumable Fuels R2 Add 0.019% Source: CS Index Analytics Team, forecasts as of March 6 th,

32 Top ected Russell 2000 Deletes By Market Cap Our index analytics team notes that IMAX and ABY are forecasted deletions due to domicile rules. Top 25 Forecasted Russell 2000 Deletes Ranked By Market Cap Ticker Name GICS Sector GICS Industry Price Market Cap R2 Net Wgt Chg IMAX IMAX Corp Consumer Discretionary Media ,142 R2 Del % ABY Atlantica Yield plc Utilities Independent Power and Renewabl ,078 R2 Del % CIE Cobalt International Energy Inc Energy Oil, Gas & Consumable Fuels R2 Del % XCO EXCO Resources Inc Energy Oil, Gas & Consumable Fuels R2 Del % PFSW PFSweb Inc Information Technology IT Services R2 Del % AGFS AgroFresh Solutions Inc Materials Chemicals R2 Del % DXLG Destination XL Group Inc Consumer Discretionary Specialty Retail R2 Del % HNNA Hennessy Advisors Inc Financials Capital Markets R2 Del % INFI Infinity Pharmaceuticals Inc Health Care Biotechnology R2 Del % DRRX Durect Corp Health Care Pharmaceuticals R2 Del % GAIA Gaia Inc Consumer Discretionary Internet & Direct Marketing Re R2 Del % ALJJ ALJ Regional Holdings Inc Information Technology IT Services R2 Del % NVIV InVivo Therapeutics Holdings Corp Health Care Health Care Equipment & Suppli R2 Del % AOI Alliance One International Inc Consumer Staples Tobacco R2 Del % MRTX Mirati Therapeutics Inc Health Care Biotechnology R2 Del % GNE Genie Energy Ltd Utilities Electric Utilities R2 Del % OPHT Ophthotech Corp Health Care Biotechnology R2 Del % ROIAK Radio One Inc Consumer Discretionary Media R2 Del % NEOS Neos Therapeutics Inc Health Care Pharmaceuticals R2 Del % DLA Delta Apparel Inc Consumer Discretionary Textiles, Apparel & Luxury Goo R2 Del % FBRC FBR & Co Financials Capital Markets R2 Del % IMDZ Immune Design Corp Health Care Biotechnology R2 Del % VHC VirnetX Holding Corp Information Technology Software R2 Del % ATHX Athersys Inc Health Care Biotechnology R2 Del % EGLT Egalet Corp Health Care Pharmaceuticals R2 Del % Source: CS Index Analytics Team, forecasts as of March 6 th,

33 Perf of R2 Adds & Deletes Around Recon Date New adds to the R2000 generally outperform the broader index before the recon, but tend to lag in the six months following the event. On average names deleted from the R2000 index underperform before the recon and in the 6 month period afterwards. Absolute Perf: R2000 Adds Cumulative Average Return of R2000 Adds Around Recon Date: All Sectors , absolute total returns Relative Perf: R2000 Adds Cumulative Average Relative Return of R2000 Adds Around Recon Date: All Sectors , relative total returns vs. R2000 Index New R2 adds tend to lag following the event Absolute Perf: R2000 Deletes Cumulative Average Return of R2000 Deletes Around Recon Date: All Sectors , absolute total returns Relative Perf: R2000 Deletes Cumulative Average Relative Return of R2000 Deletes Around Recon Date: All Sectors , relative total returns vs. R2000 Index Brief period of outperformance following the event is short lived Source: CS US Equity Strategy Team, S&P Capital IQ/ClariFi, Russell; performance study only includes stocks with pricing 6 months before/after event (excludes IPOs and M&A takeouts around the recon); based on performance of actual adds/deletes (not forecasts) 33

34 Who Has More Money Growth or Value? When considering style shifts, we are often asked whether more dollars are benchmarked to growth or value. Overall, in terms of actively managed funds, more dollars are tied to value within both the 1000 and 2000 index families than growth. AUM in Growth & Value By Benchmark ($ mn's) Based on Morningstar Open End Fund & ETF Universe, Passive Includes Index Funds & ETF's 600, , , , , ,000 - Russell 2000 Growth Russell 2000 Value Russell 2500 Growth Russell 2500 Value Russell Mid Cap Growth Russell Mid Cap Value Russell 1000 Growth Russell 1000 Value Active AUM Passive AUM Source: CS US Equity Strategy, Morningstar, based on latest available AUM data (pulled on March 7 th ) 34

35 Basic Methodology: Core Indices Market Cap Breakpoints Banding Requirement Russell takes the biggest 4,000 companies in the US equity market that are eligible for inclusion in its US indices and ranks them by their total market cap. They then determine market cap breakpoints for the various indices as follows: = Russell 3000 (all caps) = Russell Top 200 (mega caps) = Russell Mid Cap (sometimes referred to as the Russell 800) = R1000 (large caps) = R2000 (small caps) = Russell 2500 (SMID caps) ,000 = Russell Micro Cap (the top 1000 stocks in micro overlap with the bottom of the Russell 2000) To minimize index turnover, Russell then applies a banding requirement To move into a new index, the company must be more than +/- 2.5% (in percentile terms) away from the market cap breakpoint. Essentially Russell introduced a buffer zone between small and mid with the implementation of this rule. This change has the effect of reducing turnover, but has also come to mean that the biggest R2000 stocks with be larger in market cap than the smaller Russell mid cap or R1000 stock. Basic Methodology: Style Indices 3 Factors for Style Selection Substitution Rules Banding In 2011 Russell retired its 2 factor model and moved to a new 3 factor model. Book-to-price continued to be utilized, but the index replaced the IBES long-term growth rate estimate with a 2 year IBES EPS growth estimate, as well as a 5 year historical revenue per share growth rate. The forward EPS growth rate estimate is fairly straightforward, essentially dividing an FY2 EPS estimate by the latest annual actual EPS. The revenue growth factor is somewhat more complicated. Our overly simplified explanation is that the formula provided by Russell calls for calculating an average of annual revenue growth rates over the past 5 years. Russell employs a series of substitution rules when a 2 year forward EPS growth estimate is not available due to lack of analyst coverage, when trailing 5 year revenue growth is not available due to lack of company history, or when either data point was not meaningful (something often triggered by negative numbers). The substitution rules are complex, but involve substituting an industry average when the company level data point is not available or not meaningful. For the EPS forecast, when two or fewer analysts' estimates are available, the industry average is included as part of the calculation but the company level data is also still used in part. Russell also implemented a style factor band to help minimize style turnover. The implementation of the banding rule is also fairly complicated. But the gist is that if the company s CVS score (determined by using price/book, trailing 5 year revenue growth, and 2 year forward EPS growth estimate as outlined above) changed by less than a certain amount, the prior year s CVS score is used. Russell believes that this provision helps minimize growth/value turnover. In 2011, the banding limit was +/ but in 2012 Russell changed it to +/