Merrill Lynch Report Addresses Potential Conflicts of Interest

Merrill Lynch 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. Customers of Merrill Lynch in the US can receive independent, third-party research on companies covered in this report, at no cost
to them, if such research is available. Customers can access this independent research at http://www.ml.com/independentresearch or can call 1-800-637-
7455 to request a copy of this research.
Refer to important disclosures on page 22 to 23. Analyst Certification on page 21. Price Objective Basis & Risk on page 21 10671171
Asset Management
Defensive, but not immune
Historical view – defensive, but only up to a point
Asset managers have been relatively defensive within financials this year, but we
would not assume this will last forever. That’s because their business model is
well designed to withstand short, sharp shocks to the economy like the 1994
Mexican peso devaluation and the LTCM crisis, in our opinion, but they tend to
sag during more serious economic declines.
Asset managers tend to under-perform in long downdrafts
Given recent economic data pointing to a potential slowing – and weakness in the
shares in recent days -- we examined the group’s behavior in 1990, 1995, 1998,
and 2001. In 2 of 4 slowdowns, they under-performed the S&P, particularly in
1990 recession. Multiple compression was responsible for much of the
under-performance, as their forward P/E fell by an average of 2x, or 11%. Net
flows (which often drive multiples) declined as well. During the declines, fixed
income managers fared the best. Afterward, most managers bounced back
quickly with equity markets, however.
Should a long downturn occur, we see potential downside given the group is
trading at a 27% premium vs. S&P 500, greater than usual. In addition, managers
are more equity-focused: Their assets under management average 70% equity
vs. 40% in 1990 and 63% in 2001. On the positive side, asset managers have
become much more global, both in terms of distribution and what they invest in,
which might buffer a U.S. slowdown.
Should there be a major economic slowdown, past patterns would suggest a 10-
25% decline in the group, mostly due to multiple compression. We are not
anticipating this, though, so for now maintain our positive but selective outlook.
We have Buy ratings on 4 of 14 asset managers in our universe: Growth
managers Calamos and Waddell & Reed (benefiting from the growth vs. value
rotation, and their key funds continue to out-perform); AllianceBernstein, trading at
a 23% discount, with a 7%+ projected yield; and AMG, an acquirer which has
survived past downturns well by acquiring. Although we like T. Rowe Price and
Janus, we think they are fairly valued.
Industry Overview
Equity | Americas | Asset Management
12 November 2007
Cynthia Mayer +1 212 449 5130
Research Analyst
MLPF&S
cynthia_mayer@ml.com
Guy Moszkowski, CFA +1 212 449 7800
Research Analyst
MLPF&S
guy_moszkowski@ml.com
Kevin Cheng +1 212 449 1167
Research Analyst
MLPF&S
kevin_cheng@ml.com
Chart 1: Asset Manager Index, 1988-present
0
2000
4000
6000
8000
10000
12000
14000
16000
12/'87 12/'89 12/'91 12/'93 12/'95 12/'97 12/'99 12/'01 12/'03 12/'05
0
200
400
600
800
1000
1200
1400
1600
1800
Recession bars ML AM Index (LHS) S&P 500 (RHS)
Source: Factset, Merrill Lynch

Asset Management
12 November 2007
2
Defensive, but only up to a point
Asset managers have been a relatively good place to hide in financials so far this
year. They are up about 13% while banks and brokers are down 22%. We think
this reflects their lower sensitivity to yield curves, credit risk, and relatively little
direct exposure to sub-prime issues.
In addition, asset managers tend to out-perform in up markets and under-perform
in down markets. Their r-squared vs. the S&P 500 since 1996 is .38, and so far
this year they are out-performing, as expected in an up year (Chart 2 below).
Chart 2: Annual performance of asset manager group and S&P 500 since 2000
23%
18%
21%
13%
37%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2000 2001 2002 2003 2004 2005 2006 YTD
Asset Managers S&P 500
Source: Merrill Lynch
Longer downturns a threat
But longer economic slowdowns are another matter, because the average assets
gradually sag, lower employment may mean lower 401(k) contributions, and in
consumer-led recessions, retail investors tend to slow sales or even redeem.
Given recent economic data pointing to a potential slowing, we examined the
group’s behavior in 1990, 1995, 1998, and 2001. We concluded that asset
managers tend to under-perform in market declines connected to economic
slowdowns, but not as badly as some other financials including brokers.
The classic asset manager model –
earning fees on average assets -– is ideal
for riding through short, sharp shocks…
..but longer economic slowdowns are
another matter, because the average
assets gradually sag, and sales slow,
which can hurt multiples.

Asset Management
12 November 2007
3
In 2 of 4 slowdowns, they under-performed the S&P, particularly in 1990
recession. Asset managers out-performed in 1995-6 however, suggesting
resiliency during short shocks in rising markets; they also out-performed as the
tech bubble burst in 2000-2002, though in real terms they declined 20%.
Table 1: Asset manager performance during economic slowdowns (ML indices as measured
from S&P 500 peak to trough)
ML AM ML Broker
Time Frame Index S&P 500 Index
May '90 - Oct '90 (including
recession) -24.4% -15.8% -28.9%
Jul '95 - Jul '96 26.9 14.6 6.8
Jul '98 - Oct '98 -11.4 -4.3 -35.7
Dec '00 - Dec '02 (including
recession) -20.3 -33.4 -40.4
Source: Factset and Merrill Lynch
Table 2: Multiple compression for group during equity market weakness coinciding with
economic slowdowns (ML indices measured at nearest quarter-end)
Forward four quarter P/E
Date Starting Ending Change % decline
1Q90 - 3Q90 13.8x 9.5x 4.3x -31%
2Q95 - 2Q96 13.7 13.7 0.0 0%
2Q98 - 3Q98 19.3 14.8 4.5 -23%
4Q00 - 4Q02 17.9 16.4 1.5 -8%
Average 16.2 13.6 2.6 -16%
2Q07 - present 19.7x 18.1x 1.6 -8.1%
Multiple compression was responsible for much of the under-performance during
their declining periods, as their forward P/E fell by an average of 2x, or 11%.
Net flows -- which often drive multiples --declined as well.
Strong balance sheets probably helped, but weren’t a complete defense against
the declines either. T. Rowe Price and Franklin began 1Q90 with $5 and $7 per
share in net cash and investments respectively. This was equivalent to 19% and
10% of their market capitalization, similar to current levels of 10% and 12%. The
cash came in handy -- T. Rowe Price used some of its cash to make whole an
investment, and Franklin had increased charge-offs in its banking business – but
it did not stop their share prices from declining. In the 4 sections ahead, we look
in detail at the group’s performance in 1990, 1995, 1998, and 2001.
Multiple compression was responsible for
much of the under-performance, as their
forward P/E fell by an average of 2x, or 11%.

Asset Management
12 November 2007
4
1990 – a time to avoid asset managers
Asset managers under-performed the broader market at the start of the 1990
recession. For those who believe current economic conditions most resemble
1990 (including ML strategist Richard Bernstein) this is obviously a bad sign.
There are similarities: In 1990, growth was slowing, and credit and housing were
issues. The June 1990 Federal Reserve Beige book sounded similar warnings,
noting for instance that “[retail] sales have been slow in recent months, and are
expected to remain so in the short term…Lenders are reported to have tightened
standards especially for real estate loans, but there is still little information that
suggests credit restraint is spreading into other markets.”
Asset managers directionally followed the market up, then down
The asset managers rose strongly ahead of the July 1990 recession, but as the
Fed cut rates and the 8-month recession began, they fell hard (Chart 3).
Chart 3: Asset manager index vs. S&P 500 1989-1991 (actual recession was 7/90 – 3/91)
80
130
180
230
280
330
380
430
480
12/30/88 6/30/89 12/30/89 6/30/90 12/30/90 6/30/91 12/30/91
200
250
300
350
400
450
First Fed rate cut
(6/6/89)
Fed rate cuts
1989 - 1991
Second series of
Fed rate cuts (7/13/90)
Source: Federal Reserve Board, Merrill Lynch Economics
As equity markets declined, equity fund flows also declined, and the industry had
equity fund outflows briefly in 3Q90. Equity fund inflows recovered in 1991, but
bond funds remained more popular (Chart 4).

Asset Management
12 November 2007
5
Chart 4: Mutual fund net flows for equity and bond funds (industry-wide, $MM); equity fund
flows were weak during market declines, including the first half of the recession
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
Q1'89
Q2'89
Q3'89
Q4'89
Q1'90
Q2'90
Q3'90
Q4'90
Q1'91
Q2'91
Q3'91
Q4'91
Equity
Bond
Source: Strategic Insight Simfund
As the S&P 500 declined, asset managers declined more
The asset managers under-performed, even though their businesses continued to
grow. There were only a handful of small, relatively fast-growing public asset
managers at the time. When the S&P 500 declined about 16% from peak in May
to trough in October 1990, the group collectively declined an average of 27%.
Even fixed income managers under-performed (Table 3).
Table 3: Performance of asset managers in 1990 (operating changes from 1989 to 1990; share price declines from broad market peak to trough)
% change 1989 - 1990 Stock price AUM % equity AUM % equity
Assets under management Revenues EPS May 90 - Oct 90 at Dec '89 at Dec '90
Alliance Capital 5.7% 18.5% 33.3% -14.1% 64% 66%
Franklin* 8.9 13.6 14.0 -30.2 14 12
T. Rowe Price*** 8.7 6.6 -7.2 -42.5 59 61
Legg Mason* 20.0 14.2 88.6 -23.4 34 43
Eaton Vance** 2.8 46.2 23.0 -23.5 29 25
Average 9.2 19.8 30.3 -26.7 40 41
S&P 500 -15.8
Source: Company Reports and Merrill Lynch
*Note: BEN - data reflects FY 9/'89 to 9/'90; LM - FY 3/'90 to 3/'91
** EV - FY 10/'89 to 10/'90; revenues include mutual fund acquired from Bank of New England; EPS ex-unrealized losses on gold-mining partnership.
*** TROW EPS adjusted for MRT losses.

Asset Management
12 November 2007
6
Share decline mostly due to multiple contraction…
Most of the decline was due to multiple contraction, as the group average fell
from 13.8x forward four quarter estimates to 9.5x in the space of two quarters
(Chart 5, see highlighted bars). Asset manager multiples often follow net flows,
and equity fund flows turned negative in 3Q90 and 4Q90 for most managers.
Chart 5: Forward P/e of asset managers on absolute basis (1Q90 –
3Q90 highlighted)
Asset Manager Composite Forward P/E
18.1x
16.1x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average:
13.8x
9.5x
Source: FactSet, First Call and Merrill Lynch
Chart 6: Relative forward P/e of asset managers vs. the S&P 500 (1Q90
– 3Q90 highlighted)
Forward Multiple of Asset Managers vs. S&P 500, 1990-Present
127%88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average =
94%
66%

Asset Management
12 November 2007
7
Over full 1990-91 recession, asset managers actually did well
Interestingly, while asset managers under-performed during the beginning of the
1990 recession, they out-performed over the full recession (Chart 7).
Chart 7: Asset manager price performance during actual recession 7/90 – 3/91
60
70
80
90
100
110
120
130
140
150
Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91
asset managers S&P 500 brokers
S&P 500 +4%
asset mgrs +24%
brokers +42%
(July 1, 1990 = 100)
Lessons learned
- The onset of recessions don’t seem to be good times to own asset managers,
judging by 1990. A single rate cut didn’t seem to help them or the market.
- Asset managers do out-perform in up markets, however, even those which
occur mid-recession. When a series of rate cuts revived the market in 1990, asset
managers snapped back too, eventually out-performing.
Asset managers under-performed at the
beginning of the 1990 recession, but out-
performed over the full recession.

Asset Management
12 November 2007
8
1995-1996 – asset managers led the market up
Asset managers were rattled by economic setbacks in 1995-1996, but only
briefly. In this case, the problems were short-lived, and the companies’ net flows
were not particularly affected. The broader market was rising, and the asset
manager stocks ultimately out-performed the equity market.
The Fed cut rates in July 1995 were precipitated by a few specific events:
- a temporary monetary squeeze in December 1994 (marked by the
Orange County bankruptcy);
- the December 1994 devaluation of the Mexican peso;
- sluggish economic conditions: Retail sales were weak, unemployment
claims were rising, and real wages were flat.
Asset manager shares were weak immediately following both Fed rate cuts, but
eventually went up with the market. In the roughly 13 months which followed the
first Fed rate cut, the S&P 500 rose 15% and the asset managers rose 27%. (Chart
9 and Table 4). Equity fund flows barely registered any change during the period,
though bond fund flows were pressured (especially munis) throughout (Chart 8).
Chart 9: Asset manager index vs. the S&P 500, 1995 – 1996 (with Fed easings marked)
560
660
760
860
960
1060
1160
1260
1/3/1995 5/3/1995 9/3/1995 1/3/1996 5/3/1996 9/3/1996
400
450
500
550
600
650
700
750
ML AM Index (LHS) S&P 500 (RHS)
First Fed cut (7/6/95)
Fed rate cuts
1995 - 1996
Source: Federal Reserve Board, Merrill Lynch
Chart 8: Equity and bond fund flows 1995-96
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
Q1'95 Q2'95 Q3'95 Q4'95 Q1'96 Q2'96 Q3'96 Q4'96
Equity
Bond
Source: Strategic Insight Simfund and Merrill Lynch

Asset Management
12 November 2007
9
Multiple started low, so didn’t contract
Unlike 1990, there was no multiple contraction in 1995-6. The group’s average
started at a low 13.7x forward four quarters and stayed there (Chart 10), though
their relative P/E did lose ground (Chart 11).
Lessons learned:
- the asset manager model is designed well to withstand short, sharp
shocks. Because they bill on average assets under management, there
is a delay before the impact to earnings is felt, during which time the
economy and equity markets may recover, supporting multiples again.
- A low multiple is the best defense against multiple contraction
Table 4: Asset manager index returns vs. S&P 500 and brokers in 1995-6
ML AM ML Broker
Jul '95 - Jul '96 26.9% 14.6% 6.8%
Chart 10: Asset managers forward four quarter P/E, 2Q95 and 2Q96
highlighted
18.1x
16.1x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average:
13.7x 13.7x
Chart 11: Asset managers forward four quarter P/E vs. S&P 500, 2Q95
and 2Q96 highlighted
127%88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average =
88% 79%

Asset Management
12 November 2007
10
1998 – trouble for international managers
The 1998 period was another one in which asset manager stocks were briefly
rattled by shocks, but recovered. However this time they did not recover to the
same extent as the broader market, perhaps because the Russian default had
direct bearing on the popularity of emerging markets and other international
funds. Franklin Resources, with its large Templeton unit, remained below its stock
price highs for almost 6 years before recovering (Chart 12).
Chart 13: Asset manager index and the S&P 500 during 1997 – 1998
560
1060
1560
2060
2560
3060
3560
12/31/1996 4/30/1997 8/31/1997 12/31/1997 4/30/1998 8/31/1998 12/31/1998
600
700
800
900
1000
1100
1200
1300
ML AM Index (LHS) S&P 500 (RHS)
Fed rate cuts
1997 - 1998
Initially, asset manager stocks followed the market down (Chart 13). But while the
broader market recovered, asset managers and brokers did not fully recover in line.
Net flows to equity and bond funds also did not recover in 4Q98, or even 1999
(Chart 14). Overall, the asset managers under-performed the S&P 500 (Table 5).
Table 5: 1998 returns of the ML asset management index, S&P 500, and ML broker index
ML AM ML Broker
Jul '98 - Oct '98 -11.4% -4.3% -35.7%
Chart 12: BEN stock price — A long recovery
20
25
30
35
40
45
50
55
60
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
BEN
Source: Bloomberg, Merrill Lynch
Chart 14: Equity and bond fund flows ($MM)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Q1'97 Q2'97 Q3'97 Q4'97 Q1'98 Q2'98 Q3'98 Q4'98
Equity
Bond

Asset Management
12 November 2007
11
Rapid multiple contraction
The group’s average multiple contracted rapidly, reflecting the impact of sudden
news, falling from 19.3x to 14.8x in one quarter (Chart 15). This was also
arguably the beginning of the end to the tech bubble, and asset managers
remained at a discount to the tech-heavy S&P 500 for several years (Chart 16).
Lessons learned
- When an asset class falls out of favor, asset manager specialists in that
area may be challenged for years
- Asset managers don’t always out-perform in an up market, for instance if
net flows are weak
Chart 15: Asset managers forward four quarter P/E, 2Q98 and 3Q98
highlighted
18.1x
16.1x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average:
19.3x
14.8x
Chart 16: Asset managers forward four quarter P/E vs. S&P 500, 2Q98
and 3Q98 highlighted
127%88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average =
78%
65%

Asset Management
12 November 2007
12
The 2001-2002 bear market
The 2001-2002 bear market was the most prolonged test of asset managers, and
they all declined with the exception of Nuveen. However, they out-performed the
S&P 500, which had the disadvantage of being weighed down by tech.
Chart 17: Asset manager index and the S&P 500 during 2000 – 2002
3500
4000
4500
5000
5500
6000
6500
7000
7500
12/29/00 3/29/01 6/29/01 9/29/01 12/29/01 3/29/02 6/29/02 9/29/02 12/29/02
700
800
900
1000
1100
1200
1300
1400
Fed rate cuts
2000 - 2002

Asset Management
12 November 2007
13
Contrary to popular belief, there were not large equity outflows during the bear
market, but rather a decline in sales which led to softer flows and 2 quarters of
outflows (Chart 18). Bond funds grew in popularity and picked up some of the
slack, especially government and short-term bond funds in those quarters with
equity outflows.
Chart 18: Equity and bond fund flows 2000 through 2002 ($MM)
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Equity
Bond

Asset Management
12 November 2007
14
Fixed income managers held up better
Fixed income managers out-performed equity managers. Nuveen’s assets even
rose 29% during this period, mostly through the sale of muni closed-end funds.
Other fixed income managers lost assets, but at a much slower rate.
Affiliated Managers Group (AMG) and Legg Mason, the two managers with
acquisition / revenue-sharing models (and therefore less operating leverage) also
seemed to do better than average. AMG survived relatively well thanks to several
acquisitions. In all it acquired assets worth 20% of its starting AUM. This kept its
EPS relatively flat during the period (-1%), and limited its share price downside
(-8%). However, AMG declined in 2003 when acquisitions paused for a year.
Table 6: Asset Manager bear market performance (2000 – 2002)
% change '02/'00
AUM Revenues EPS Stock price AUM % equity AUM % equity
(Dec'00 - Dec'02) (Dec'00 - Dec'02) at Dec '00 at Dec '02
Equity focus
AB -14.8% -25.0% -29.4% -38.8% 60% 55%
AMG -8.6 3.5 -1.2 -8.3 74 84
BEN 7.4 4.2 -30.6 -10.6 66 47
JNS -46.3 -52.4 -85.9 -66.9 94 83
TROW -15.7 -24.1 -26.9 -35.5 74 67
WDR -23.4 -15.7 -33.3 -47.7 88 76
WPL -24.8 -32.5 -44.6 -31.1 100 100
Equity manager average -18.0 -20.3 -36.0 -34.1 79.4% 73.1%
Fixed income focus
BLK 33.9 21.1 51.1 -6.2 13 7
FII 54.7 9.2 37.0 -12.9 15 10
LM 58.3 8.5 9.2 -10.9 33 38
EV 23.4 21.4 8.0 -12.4 45 42
JNC 28.6 7.8 23.0 32.3 38 29
Fixed income manager average 39.8 13.6 25.7 -2.0 29% 25%
Group Average 6.1 -6.2 -10.3 -20.7 58% 53%
S&P 500 -33.4
Source: Company Reports, Factset and Merrill Lynch

Asset Management
12 November 2007
15
In relative terms, group out-performed S&P 500, but it wasn’t hard
Relative to the S&P 500, asset managers actually out-performed during the bear
market. One of the oddities of asset manager history is that the group hit its
relative valuation trough (48%) during the tech bubble, when many assume it
should have done well. We attribute this to the fact that the group had lost traction
to index funds in the 1990s, investors were buying a limited number of funds
heavily, and that toward the end of the bull market, the S&P 500 was distorted by
its heavy tech weighting.
As a result, the group entered 2001 trading at a 28% discount to the S&P 500.
After the S&P 500 declined 33% in the next two years, asset managers ended the
bear market on a relative par (Chart 20 below).
Lessons learned:
- Fixed income managers survive equity downturns better, but may also
decline.
- A tech-heavy index is easier to beat in a downturn. However, now the
S&P 500 is more weighted toward financials, so asset managers are
less likely to out-perform, because they would have to in a sense out-
perform themselves.
Chart 19: Asset manager forward P/E on absolute basis in bear
market, 4Q00 and 4Q02 multiples highlighted
18.1x
16.1x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average:
17.9x
16.4x
Source: First Call, FactSet and Merrill Lynch
Chart 20: Asset manager forward P/E vs. S&P 500 in bear market,
4Q00 and 4Q02 highlighted
127%88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average =
72%
96%

Asset Management
12 November 2007
16
Current situation – out-performing
Asset managers are out-performing the S&P 500 this year, as is to be expected in
an overall up market. They are up 14%, ahead of the S&P 500 (+4%) (Chart 21).
They are trouncing other financials, particularly banks (-22%).
Chart 21: Asset manager index and the S&P 500 – 2007 YTD
90
95
100
105
110
115
120
125
12/29 1/29 2/28 3/29 4/29 5/29 6/29 7/29 8/29 9/29 10/29
S&P 500 ML AM Index
+4.0%
+14.2%
Fed rate cut
Fed-inspired rally helped out-performance, and is typical
Some of the out-performance followed the Fed’s 50bps rate cut. This has been
their pattern in the past as well (Tables 8 and 9).
Table 7: Sector average relative price performance following the last four Fed easing cycles
(initiating in 1990, 1995, 1998, 2000, as measured from previous month)
Relative Price Performance Following Cut
3-mths 6-mths 12-mths 18-mths 24-mths
Consumer Discretionary 1.5% 3.7% -0.6% 0.3% 0.5%
Consumer Staples 1.6 -0.7 4.0 5.8 7.7
Energy 0.1 -0.4 3.9 1.2 2.6
Financials -0.5 -0.5 -8.0 -1.5 5.1
Health Care 0.3 2.1 6.2 4.1 12.2
Industrials -0.1 2.4 1.3 -1.3 0.8
Information Technology -1.3 -1.9 3.2 16.5 7.8
Materials 1.0 -2.6 -1.2 -1.0 -4.7
Telecommunication Services 4.8 4.7 0.3 -12.9 -19.8
Utilities -0.7 -6.5 -11.5 -19.5 -18.7
Asset Manager performance 2.7 8.1 26.0 53.7 84.0
S&P 500 (absolute performance) 2.7 7.5 6.9 16.1 21.3
Source: Merrill Lynch Sector Strategy

Asset Management
12 November 2007
17
Table 8: Asset Manager index performance following the last four Fed easing cycles
(initiating in 1989 (& 1990), 1995, 1998, 2000, as measured from previous day)
Rate cut dates: 1-month later 3-months later 6-months later 1-year later
Jul-89 -0.2% 15.7% 20.1% 30.4%
Jul-90 -7.6 -27.7 -10.5 35.8
Jul-95 7.4 14.1 15.4 35.2
Sep-98 4.7 19.3 20.4 27.0
Jan-01 11.0 -9.5 7.7 9.3
Average return: 3.1 2.4 10.6 27.5
Source: Federal Reserve Board and Merrill Lynch
Summer decline – asset managers declined much more than S&P 500
Also to be expected, the asset managers under-performed during the decline in
the S&P over the summer (Table 7, left). The group declined nearly 17% in under
a month, close to twice the decline of the S&P 500. Those declining the most
were mostly smaller sized managers whose AUM is weighted toward equity, as
well as the REIT manager, Cohen & Steers. Given confusion over sub-prime,
commercial paper, and widening spreads, money market manager Federated
also declined. Least affected was T. Rowe Price, which has strong performance,
a growing brand, and a sticky 401(k) business.
Table 9: Asset Manager: Q3 peak to trough and
YTD performance
Change from YTD % AUM
Ticker peak to trough* (%) performance equity
WPL -26.7 -64.8 100%
CLMS -25.9 24.7 68%
CNS -23.1 -19.0 90%
WDR -21.5 23.4 87%
FII -20.0 13.8 17%
AMG -18.5 16.4 95%
GBL -17.5 41.8 97%
JNS -17.0 67.7 88%
BLK -16.9 25.7 38%
BEN -16.4 8.0 69%
EV -16.3 38.9 65%
IVZ -15.4 12.7 55%
LM -14.7 -22.3 34%
AB -13.6 -4.7 76%
TROW -11.1 38.5 81%
BPFH -8.2 -4.3 76%
AM ML Index -16.8 14.2
SPX Index -9.4 4.0
*July 19 and Aug 15 was Q3 peak and trough respectively
for the S&P 500
Source: Bloomberg and Merrill Lynch

Asset Management
12 November 2007
18
Valuation remains at premium, but not at an all-time high
Currently, asset managers are trading at 18.1x forward four quarter estimates, a
27% premium vs. the S&P 500. While valuations remain at a premium, they still
remain only 2x above to their long-term average of 16.1x. Assuming a healthy
market, the group could continue to grow faster than the broader market, and
possibly even expand their multiples as they grow globally.
Chart 22: Asset manager forward P/E – current
18.1x
16.1x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average:
Chart 23: Asset manager forward P/E vs. S&P 500 – current
127%88%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
Average =

Asset Management
12 November 2007
19
What is potential downside, if past repeats?
But what if we enter a long slowdown? We think the asset managers will hold up
relatively well as long as there is no drawn out consumer recession. But a long
slowdown could cause multiple compression.
If we apply past patterns to the current situation, we can imagine a few scenarios,
which together imply a potential 11% - 25% decline:
Scenario 1: Reversion to mean implies 9% downside
A return to their long-term average of 16.1x forward four quarter estimates would
imply about 11% downside, assuming no change to estimates.
Scenario 2: Replay of 1990, managers have beta of 2 = 25% downside
Another hypothetical is that in a recession the S&P 500 declines 15%, similar to
1990, and the asset managers suffer multiple compression in same proportion as
1990 – equivalent to a 30% decline. (Then, they went from 13.8x to 9.5x – which
would translate into a current drop from 18.1x to 12.7x). With some offset for
earnings growth, this might be equivalent to a 25% decline.
Scenario 3: Contraction similar to average of last 4 episodes
If asset managers were to contract at a rate similar to the 4 slowings we
examined, their multiples would fall about 2x, representing 11% downside.
Table 10: Multiple compression for group during equity market weakness coinciding with
economic slowdowns (ML indices measured at nearest quarter-end)
Forward four quarter P/E
Date Starting Ending Change % decline
1Q90 - 3Q90 13.8x 9.5x 4.3x -31%
2Q95 - 2Q96 13.7 13.7 0.0 0%
2Q98 - 3Q98 19.3 14.8 4.5 -23%
4Q00 - 4Q02 17.9 16.4 1.5 -8%
Average 16.2 13.6 2.6 -16%
2Q07 - present 19.7x 18.1x 1.6 -8.1%
A repeat of past patterns would suggest a 10-
25% decline in the group, mostly due to
multiple compression

Asset Management
12 November 2007
20
We remain selective, with 4 Buys and 1 Sell
Because we are not yet convinced of a long slowdown, we maintain our
cautiously positive outlook, but we are selective: We have Buy ratings on 4 of 14
asset managers in our universe: Growth managers Calamos and Waddell & Reed
(because we think the growth vs. value rotation will continue, and their funds
continue to out-perform); AllianceBernstein, which is trading at a 23% discount,
with a 7% projected yield; and AMG, an acquirer which has in the past survived
downturns well by acquiring.
Although we like T. Rowe Price and Janus, we think they are fairly valued. We
have a Sell rating on Eaton Vance because, although we think highly of
management, some of its product specialties (closed-end funds, bank loan funds,
high yield, and value equity) may not attract strong flows in this environment,
suggesting it should not trade at its current 22% premium.
Table 11: Coverage Universe
Price
Company Ticker Rating 11/9/2007
INVESCO IVZ C-2-7 $27.05
AllianceBernstein AB B-1-7 74.55
BlackRock BLK RSTR** 191.20
Franklin Resources BEN B-2-7 117.23
Legg Mason LM B-2-7 72.49
T. Rowe Price TROW B-2-7 58.60
Affiliated Managers Group AMG B-1-9 120.57
Calamos CLMS C-1-7 32.25
Eaton Vance EV B-3-7 44.78
Federated Investors FII B-2-7 39.97
Janus Capital Group JNS B-2-7 35.00
Nuveen Investments JNC 6 64.8
Boston Private Holdings BPFH C-2-7 27.10
Cohen & Steers CNS C-2-7 32.25
GAMCO GBL C-2-7 54.71
Waddell & Reed WDR B-1-7 32.65
W.P. Stewart WPL C-2-9 5.27
*RESTRICTED. SOLICITATION OF COMMISSION ORDERS IS PROHIBITED.
Source: Company Reports and Merrill Lynch

Asset Management
12 November 2007
21
Price Objective Basis & Risk
AllianceBernstein (AB)
Our $97 price objective is based on a relative P/E and a DCF valuation, and
assumes it should trade in line with the group’s long-term averages. Because
Alliance is a Master Limited Partnership, total potential return includes a 6%
estimated dividend yield based on earnings. The risks to our price objective are
market depreciation, similar to other asset managers, and an unpredictable yield
since it is based on earnings rather than fixed. Although we do not believe
AllianceBernstein is likely to lose its MLP status, recent legislation proposed by
the Senate addressing this issue vis a vis other companies also introduces some
risk. Because MLPs have unique tax characteristics, investors should consult with
their advisors.
Affiliated Mgrs. (AMG)
Our P.O. of $140 is based on a combination of relative P/E and DCF valuations.
We give 70% weight to our relative P/E valuation ($128), which assumes that
AMG should trade at a 10% discount on a relative P/E basis vs. peers to reflect
use of cash EPS, leverage, and lower transparency as a holding company. We
give a 30% weight to our DCF valuation of $164. Risks are market depreciation,
as ~95% of AUM is in equity products, greater leverage and associated costs,
and acquisition risk.
Calamos (CLMS)
Our $35 price objective is based on a combination of relative P/E, our DCF, and
our “core+cash” valuation. We assume Calamos should trade at a 10% discount
to peers given outflows and the large influence of the Calamos Growth fund.
Risks are underperformance of the Growth fund, equity market depreciation, and
margin pressure due to continued investment in infrastructure, staff and products
at a time of outflows.
Waddell & Reed (WDR)
Our $34 price objective is based on a combination of relative P/E and a DCF
valuation, which we use as a proxy for acquisition value. Our relative P/E target
assumes that Waddell shares should trade in line vs. the group’s long-term average
relative P/E, based on above-average organic growth offset by below-average
operating margins. Risks to our price objective are market depreciation and
investment under-performance, as for all asset managers, and an industry shift
away from proprietary sales networks such as Waddell’s Advisors channel. In
addition Waddell has concentration risk, as the Ivy Global Natural Resources fund
comprises about 13% of AUM, and its other funds contain energy positions as well.
Analyst Certification
I, Cynthia Mayer, hereby certify that the views expressed in this research report
accurately reflect my personal views about the subject securities and issuers.
I also certify that no part of my compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or view expressed in this
research report.

Asset Management
12 November 2007
22
Important Disclosures
Investment Rating Distribution: Financial Services Group (as of 01 Oct 2007)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 108 38.85% Buy 45 44.55%
Neutral 156 56.12% Neutral 67 45.27%
Sell 14 5.04% Sell 4 28.57%
Investment Rating Distribution: Global Group (as of 01 Oct 2007)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1701 47.03% Buy 437 29.15%
Neutral 1611 44.54% Neutral 425 29.11%
Sell 305 8.43% Sell 58 21.09%
* Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK
RATINGS, indicators of potential price fluctuation, are: A - Low, B - Medium, and C - High. INVESTMENT RATINGS, indicators of expected total return
(price appreciation plus yield) within the 12-month period from the date of the initial rating, are: 1 - Buy (10% or more for Low and Medium Volatility Risk
Securities - 20% or more for High Volatility Risk securities); 2 - Neutral (0-10% for Low and Medium Volatility Risk securities - 0-20% for High Volatility
Risk securities); 3 - Sell (negative return); and 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend
considered to be secure); 8 - same/lower (dividend not considered to be secure); and 9 - pays no cash dividend.
Price charts for the equity securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or call 1-888-ML-CHART to
have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the securities recommended in the report: AllianceBernstein, AMG., Calamos, Eaton Vance, Janus
Capital, T. Rowe Price, Waddell & Reed.
MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Eaton Vance, Janus Capital.
The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, AMG.,
Calamos, Eaton Vance, Janus Capital, Waddell & Reed.
MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months:
AllianceBernstein, AMG., Calamos, Eaton Vance, Janus Capital, T. Rowe Price, Waddell & Reed.
The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: AllianceBernstein, AMG.,
Calamos, Eaton Vance, Janus Capital, T. Rowe Price, Waddell & Reed.
MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: AllianceBernstein, AMG.,
Calamos, Eaton Vance, Janus Capital, Waddell & Reed.
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company within the next three months:
AllianceBernstein, AMG., Calamos, Eaton Vance, Janus Capital, Waddell & Reed.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day
of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 10th day of a month reflect the ownership position at
the end of the second month preceding the date of the report: AllianceBernstein, AMG., Waddell & Reed.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: AllianceBernstein, AMG.,
Calamos, Eaton Vance, Janus Capital, T. Rowe Price, Waddell & Reed.
The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates:
AllianceBernstein, AMG., Calamos, Eaton Vance, Janus Capital, T. Rowe Price, Waddell & Reed.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill
Lynch, including profits derived from investment banking revenues.

Asset Management
12 November 2007
23
Other Important Disclosures
UK readers: MLPF&S or an affiliate is a liquidity provider for the securities discussed in this report.
MLPF&S or one of its affiliates has a significant financial interest in the fixed income instruments of the issuer. If this report was issued on or after the 10th day of
a month, it reflects a significant financial interest on the last day of the previous month. Reports issued before the 10th day of a month reflect a significant financial
interest at the end of the second month preceding the date of the report: Eaton Vance, Janus Capital.
Information relating to Non-U.S. affiliates of Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S):
MLPF&S distributes research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch (France): Merrill Lynch Capital Markets
(France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd, Frankfurt Branch; Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd;
Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLPF&S (UK): Merrill Lynch, Pierce, Fenner & Smith Limited; Merrill Lynch (Australia): Merrill Lynch
Equities (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte Ltd; Merrill
Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Bolsa; Merrill Lynch (Argentina): Merrill Lynch
Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co, Ltd; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch); Merrill
Lynch (Taiwan): Merrill Lynch Global (Taiwan) Limited; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch
Indonesia; Merrill Lynch (KL) Sdn. Bhd.: Merrill Lynch (Malaysia); Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited,
Moscow; Merrill Lynch (Turkey): Merrill Lynch Yatirim Bankasi A.S.; Merrill Lynch (Dubai): Merrill Lynch International Bank Ltd, Dubai Branch.
This research report has been prepared and issued by MLPF&S and/or one or more of its non-U.S. affiliates. MLPF&S is the distributor of this research report in
the U.S. and accepts full responsibility for research reports of its non-U.S. affiliates distributed in the U.S. Any U.S. person receiving this research report and wishing
to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates.
This research report has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is authorized and
regulated by the Financial Services Authority; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd, a registered securities dealer
under the Securities and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited, which is regulated by the Hong Kong SFC; is
issued and distributed in Taiwan by Merrill Lynch Global (Taiwan) Ltd or Merrill Lynch, Pierce, Fenner & Smith Limited (Taiwan Branch); is issued and distributed in
Malaysia by Merrill Lynch (KL) Sdn. Bhd., a licensed investment adviser regulated by the Malaysian Securities Commission; is issued and distributed in India by DSP
Merrill Lynch Limited; and is issued and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd
(Company Registration No.’s F 06872E and 198602883D respectively). Merrill Lynch International Bank Limited (Merchant Bank) and Merrill Lynch (Singapore) Pte
Ltd. are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited, (ABN 65 006 276 795), AFS License 235132, provides this
report in Australia. No approval is required for publication or distribution of this report in Brazil.
Merrill Lynch (Frankfurt) distributes this report in Germany. Merrill Lynch (Frankfurt) is regulated by BaFin.
Copyright, User Agreement and other general information related to this report:
Copyright 2007 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. This research report is prepared for the use of Merrill Lynch clients and
may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Merrill Lynch. Merrill Lynch
research reports are distributed simultaneously to internal and client websites eligible to receive such research prior to any public dissemination by Merrill Lynch of
the research report or information or opinion contained therein. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report
constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including
any investment recommendations, estimates or price targets) prior to Merrill Lynch's public disclosure of such information. The information herein (other than
disclosure information relating to Merrill Lynch and its affiliates) was obtained from various sources and we do not guarantee its accuracy. Merrill Lynch makes no
representations or warranties whatsoever as to the data and information provided in any third party referenced website and shall have no liability or responsibility
arising out of or in connection with any such referenced website.
This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer,
to buy or sell any securities or other investment or any options, futures or derivatives related to such securities or investments. It is not intended to provide personal
investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may
receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies
discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income
from such securities or other investments, if any, may fluctuate and that price or value of such securities and investments may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance is not necessarily a guide to future performance. Any information relating to the tax status of financial
instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on
their particular circumstances from an independent tax professional.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition,
investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.
Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related
investments.
Merrill Lynch Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf.
Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.

Merrill Lynch Report Addresses Potential Conflicts of Interest

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Merrill Lynch Report Addresses Potential Conflicts of Interest

Similar to Merrill Lynch Report Addresses Potential Conflicts of Interest (20)

More from Kevin Cheng, CFA

More from Kevin Cheng, CFA (12)

Recently uploaded

Recently uploaded (20)

Merrill Lynch Report Addresses Potential Conflicts of Interest