FINANCIAL SECTOR UPDATE A Buy on BEN and Sell on BLK

Spring 2014

The Financials Team is reinitiating its Buy recommendation on BEN and Sell recommendation on BLK. We feel that many of BLKs catalysts have been realized, with upside viewpoints and street guidance as overly optimistic given BLKs current market position back -dropped against their past abnormal growth, which we believe will start to slow in 2HFY14. We place a Likely/High Price Target on BLK at $320.24/$338.15.

The Issue at Hand We originally initiated our defer position on rotating BLK out of the portfolio for BEN on the risk of continued concerns over EM volatility and the effect that rising interest rates would have on BENs AUM, relative to street and consensus guidance for 2QFY14 Ending AUM. To clarify, our decision was based off of potential short term downside AUM risk relative to high Analyst quarterly ending AUM guidance, estimated at over $890 billion. Given BENs AUM position and the current events of EM volatility, exacerbated by the civil conflict in Ukraine, that was taking place at the time of our pitch (January 17 th), we believed that it would be wise to defer, until the near term future became more transparent. This is as we wanted to avoid getting in front of potentially decreasing AUM or equity valuation, and missing earnings expectations or having them revised downward during our potential holding of BEN. Recommendation Thesis After closely monitoring the situation, we believe that now would pose the best time to rotate into BEN on the thesis of: BENs AUM has exceeded expectations and has experienced positive net inflows into Fixed-Income, pursuant with our Initiating Coverage thesis; uncertainty around the short term global macro-environment and EM volatility has subsided; and BLKs realized growth catalysts and lower HPR expected return relative to BEN.

Analysis (refer also to the below chart: Assets Under Management) Since our pitch on January 17th, uncertainty regarding EM volatility ha s quelled, with BENs monthly AUM mark-to-market results exceeding expectations, increasing to $882.2 billion by 2.91% for February month end, from Januarys month end decrease of 2.49%, on Fixed -Income outflows. Such outflows were a result of the EM volatility and rising rates that were taking place at the time of our pitch, as well as since December 31st, when BEN first became undervalued relative to its peers. Given the strong inflows into Fixed-Income as well as equity accounts, combined with the improved macro-economic environment from our original pitch, we no longer view BEN as a risk of missing analyst estimates.

William C. Dunkleburg

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FINANCIAL SECTOR UPDATE

Spring 2014

Rotation out of BLK We recommend a rotation out of BLK and into BEN for the following reasons: BLKs realized growth catalysts; and lower HPR expected return relative to BEN. (higher FI better) We believe that BLK has satisfied their growth catalysts, especially in respect to its ishares platform, and is now largely valued on capital market appreciation and economic growth. Therefore, we recommend a rotation into BEN, which has a much broader geographic diversification and larger Fixed-Income platform, which is its management specialty and claim to fame in the Asset Management Universe. This will allow BEN to capitalize greater than BLK on the increased inflows into their FI platforms in the rising domestic and global interest rate environment. In fact, since 2010, BEN has attracted FI inflows and appreciation at a much greater rate than BLK; where BENs 4-year FI growth CAGER was 12.31% versus BLKs of 2.86% (Please refer to below charts). Additionally, due to FI/Equity disparities that affect AUM appreciation, the 4-year CAGR was adjusted to reflect BENs performance to BLK (red) and BLKs performance to BEN (light blue). With the adjustment factor BEN is approximately 2x more efficient at growing their FI investments than BLK. On the equity side, after adjustments, BLK is still more efficient than BEN with equity appreciation, which is expected as equity is BLKs specialty. However the disparity is not quite as large, with BLK outperforming BEN by about .25x.

William C. Dunkleburg

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FINANCIAL SECTOR UPDATE

Spring 2014

Recommendation Given out macro-economic outlook, we expect BEN to outperform BLK for the several reasons: continued rising domestic and global interest rates, and slowing equity markets and equity market appreciation. These two facets will allow BEN to outperform BLK as BEN, who is a specialty FI manager, and greater weighted in FI, will capitalize on increased inflows on rising rates and a smaller capital loss on face value than BLK. Additionally, equity markets are not expected to abnormally outperform as they have in 2012, lowering performance for BLK greater than for BEN, who is weighted less in equities. Therefore, relative to BLK, BEN will perform greater overall, due to better performance on FI AUM growth, which is expected to increase in 2H2014 relative to equities, and would also outperform on equities in a market downturn or correction, due to their higher FI weighting and lower equity weighting. Given our current economic outlook of rising rates and smaller equity market growth, we expect BEN to outperform BLK.

William C. Dunkleburg

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