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The following information and opinions are provided courtesy of Wells Fargo Bank N.A.Please see important disclosures at the end of the presentation.
Market Transformations and Risks
H. Cameron Hinds, CFARegional Chief Investment OfficerMinnesota Planned Giving CouncilJanuary 27, 2015
Focus 2015
The following information and opinions are provided courtesy of Wells Fargo Bank, N.A
2014 Look Back
Asset Class PerformanceGlobal REITs, Managed Futures and Domestic Equities led in 2014.
Asset Class Total Returns (YTD)
Past performance is no guarantee of future results.Source: FactSet, Bloomberg Finance, LLP, total return as of 12/31/14
Percent
S&P 500 Performance After Mid-Term ElectionsStock Performance After Mid-Term Elections
S&P 500 Price Return, 12 Mo. Period following Mid-Term Elections
Source: Strategas, 2014 Policy & Election Outlook; September 2014
2015 Outlook
Global GDP OutlookGlobal GDP likely to climb, boosted by improving growth in developed countries.
Modest GDP Growth Expected
Source: Wells Fargo Wealth Management, 10/10/14; IMF actual figures for 2013, Wells Fargo Wealth estimated figures for 2014 and 2015.
Global Manufacturing ProductionA rebalancing global economy helps manufacturing in developed countries
Source: Bloomberg, HSBC Markit, 12/30/14
54.553.9 53.8
52.552.0
51.6 51.4 51.250.6
50.249.6 49.4
48.948.4
47.5
46
48
50
52
54
56
58
60Manufacturing Expanding in Many Developed Markets
Contracting
Expand
ing
Developed MarketsEmerging Markets
U.S. Economy Creating JobsSteady job gains have become a market expectation.
Total Nonfarm Employees Reach New High
Source: FactSet, 12/31/14; the shaded bar represents recession period
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014128
130
132
134
136
138
140
142
Millions
Dec‐14 : 140.35
Oil Weakens, U.S Dollar StrengthensLower oil prices act like a tax savings for consumers which help boost consumption.
Breaking Brent
Source: Bloomberg, 1/9/2015.
78
80
82
84
86
88
90
92
94
$40
$50
$60
$70
$80
$90
$100
$110
$120
Jan‐13 Apr‐13 Jul‐13 Oct‐13 Jan‐14 Apr‐14 Jul‐14 Oct‐14 Jan‐15
U.S. D
ollar Ind
ex
USD
per Barrel
Brent Crude Oil U.S Dollar Index (DXY)
The U.S Dollar Index has gained 15.2% since June of 2014
Brent Crude Oil has lost 56 % since June of
2014
Source: U.S. Energy Information Administration, NASA 11/14
U.S. is now the world’s largest oil and gas producer.
Falling Oil Prices – Is it Supply…….
Falling Oil Prices – Or is it Demand?
Source: Bloomberg
Source: Wells Fargo, 12/2014.*Note: The Index survey was dormant in 2010 as enhancements were studied and new retirement questions were added to the survey.
Index Level
9095
68
44
2215
‐55‐64
‐1 ‐3
9
42
33
‐45
‐9
4024
16‐8
31
43
33 25
37
29
4648
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Overall Retirees Non‐Retirees
2007 2008 2009 2011 2012 2013 2014
Investor Confidence – Building Optimism
Economic Outlook
2015 Forecast 2015E 2014A 2013A 2012A 2011AGlobal GDP Growth 3.7% 3.3%E 3.0% 3.4% 3.9%U.S. GDP Growth 3.0% 2.3%E 2.2% 2.8% 1.8%U.S. CPI 1.4% 1.6% 1.5% 2.1% 3.1%Unemployment Rate 5.4% 5.6% 6.7% 7.8% 8.5%10‐Year U.S. Treasury 2.25‐2.75% 2.17% 3.04% 1.76% 1.88%
Economic Forecasts
2014E: U.S GDP Growth is Bloomberg Consensus Estimate, Global GDP Growth is WFII Estimate2015E: Wells Fargo Investment Institute Estimates A: Actual as of 12/31 of each year. Sources: Bloomberg Finance LLP, Wells Fargo Investment Institute, 1/16/15
Today’s Interest Rate DilemmaTreasury rates are near historic lows. We believe there are better opportunities elsewhere
Source: FactSet, as of 1/14/15
'54 '56 '58 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '140.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
34‐year bond bull market run, yields are at historic lows. For how long?
Interest Rate ExpecationsThe market is skeptical that rates will be normalized as quickly as the Fed believes.
Fed Officials Believe Interest Rates Will Rise
Source: Federal Reserve Board, 1/13/15
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2015 2016 2017 Longer Run
Yield %
Year‐end fed funds rate in the futures market
Year‐end fed funds rate projected by the Fed
2007 2008 2009 2010 2011 2012 2013 20140.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Interest Rate (%)
0.53
1.611.862.17
Global 10‐Year Government Yields
USGermanyItalySpain
Global Interest Rates
Historically low U.S. rates look very compelling to foreign investors.
Past performance is no guarantee of future results. Source: FactSet, as of 12/31/14
Eurozone RatesThe European Central Bank reduced rates in an attempt to contain a slowdown in its economy.
ECB acts by reducing rates
Source: Bloomberg Financial, LLP, Quarterly Consensus Estimates, 12/31/14
‐0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percent
ECB Deposit Rate ECB Policy Rate
Global YieldsEuropean rates continue to fall as economic struggles persist and disinflationary forces take hold.
Source: FactSet, as of 1/5/15
‐150
‐100
‐50
0
50
100
150
200
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Basis P
oints
10‐year U.S. Yield less 10‐year German Yield
Bull Markets: Historical PerspectiveAt 206 percent, this bull market has exceeded the average bull‐market return, and it is currently at the average bull‐market length.
Past performance is no guarantee of future results. S&P 500 is an unmanaged index and is unavailable for direct investment. Source: Bloomberg Finance LLP, S&P 500 Index Price Return as of 12/31/14
Bull Market Return
Equity Volatility - LowVolatility has trended below its longer‐term average since 2012
Past performance is no guarantee of future results. See Index Definitions on slides 46‐49.Source: Bloomberg Finance, LLP, 1/13/15
'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140
10
20
30
40
50
60
70
80
Volatility
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
Index Level
Low volatility can persist for longer periods of time
CBOE Market Volatility Index, 09‐JAN‐15 : 17.55 S&P 500 ‐ Price Index, 09‐JAN‐15 : 2044.81Recession Periods ‐ United States
Investor Complacency
Source: Factset, 12/31/14
'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '140
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Ratio
ComplacencyNov‐14 : 1.21
S&P 500 ‐ Forward Price to Earnings Ratio / CBOE Market Volatility Index ‐ Index Price Level Recession Periods ‐ United States
U.S. Fed Policy: QE3 is Officially Complete
Source: Federal Reserve Board, 9/30/14
Date of First Raise ‐6 Mos. ‐3 Mos. +3 Mos. +6 Mos. +12 Mos.
03/31/1983 27.0% 8.8% 9.9% 8.6% 4.1%
01/05/1987 0.2% 7.9% 19.1% 21.2% 2.6%
03/30/1988 ‐19.8% 4.1% 6.0% 5.4% 13.3%
01/04/1994 4.7% 2.7% ‐3.9% ‐2.4% 1.9%
06/30/1999 11.7% 6.7% ‐6.6% 7.0% 6.0%
06/30/2004 2.6% 1.3% ‐2.3% 6.2% 4.4%
Average 4.4% 5.2% 3.7% 7.7% 5.4%
Effects of Fed TighteningEquity markets often respond positively to Fed tightening.
Source: Bloomberg Finance, LLP, 05/31/13
S&P 500 Performance Before and After Fed Tightening
Global Equity ValuationsGlobal equity price earnings (P/E) ratios remain fair relative to historical averages.
Global Forward Valuations
Past performance is no guarantee of future results. P/E ratios represent current price relative to earnings expected over the next 12 months. Source: FactSet, as of 12/31/14
5
10
15
20
25
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
S&P500:16.2xMSCIEAFE(DevelopedMarkets):14.0xMSCIEmergingMarkets:10.6x
Average=14.5x
Average=15.5x
Average=10.5x
Equity Market Forecasts
2015E 2014A* 2013A 2012A 2011AS&P 500 2,150‐2,250 2,068 1,848 1,426 1,258
S&P 500 EPS $128.0 $120.0E $110.5 $103 $96Russell Midcap 1,685‐1,785 1,663 1,492 1,125 976Russell 2000 1,160‐1,240 1,173 1,164 849 741MSCI EAFE 1,950‐2,050 1,840 1,916 1,604 1,413MSCI Emerging Markets 1,050‐1,130 1,005 1,003 1,056 916
Equity Market Estimates
A: actual / E: estimateActual index level as of 12/31 of each year. A*: as 11/30/2014. An index is not managed and unavailable for direct investment.Source: Bloomberg Finance, LLP, Wells Fargo Wealth Management, 11/30/14
Earnings gains are expected to continue into 2015.
Key Points—Economy and Markets
We believe growth could accelerate to 3.0 percent in the U.S. and 3.7 percent globally in 2015.
Improving employment and consumer/business confidence is likely contributing to U.S. economic growth.
We believe the Fed will remain supportive of the U.S. economy and is likely to keep interest rates near zero until the summer of 2015.
Intermediate rates are likely to move higher the second half of 2015. Global stocks are trading at fair valuations by recent historical standards – and remain attractive relative to bonds.
Geopolitical tensions could continue to contribute to negative headlines and global market volatility.
Oil prices have fallen by some 50 percent plus from its mid‐year peak. If these lower prices persist into 2015, it could produce positive economic impact and negative psychological impact.
In our view:
Source: Wells Fargo Wealth Management, 12/14
Emerging from a “Low-Everything” Environment
Theme 1
Fed Policy Rate
10‐Year Treasury Yield
10‐Year Bund Yield
U.S. Inflation (CPI YoY )
0‐0.25%
2.1%
0.6%
1.7%
Change is in the Air
All‐Time High Today
20.0%
15.84%
9.13%
19.7%
Source: FactSet, Bloomberg Finance LLP, IMF; 12/18/2014,
Investors have grown accustomed to a “low everything” environment. A new economic and market environment could be emerging in the U.S.
Global Inflation 3.9%
TED Spread (Volatility) 20.5
VIX Volatility Index 16.8
S&P 500 Volume (Billion) 9.3
463.6
46.9
80.9
42.3%
USD Exchange Rate (DXY) 82.78164.72
U.S. GDP Growth (YoY SA) 2.7%13.4%
2015
U.S. GDP – Better Than It May Appear
Source: Bloomberg Finance, LLP, 12/23/14.
The U.S. economy has recently grown at a faster pace, rising from an average 2 percent growth rate to a 3 percent growth rate – a rate we expect to continue.
2005 PeakImports
When Perceived “Safe” Investments Aren’t SafeAs the U.S. economy strengthens, the Fed will likely raise interest rates in 2015. Well‐diversified bond portfolios may fare better than single‐maturity bonds.
Source: BondEdge, Wells Fargo Wealth Management 12/22/14. Simulation analysis from 12/22/2013 to 12/22/2014. Simulation analysis take into account only price changes caused by parallel yield curve shifts and makes no assumptions about changes in spreads of investment grade or high yield securities. See disclosures for definition of the Diversified Bond Portfolio.
‐6.4%
‐2.7%
‐7%
‐6%
‐5%
‐4%
‐3%
‐2%
‐1%
0%
+100bp
Total Return
When the 10‐Yr Treasury Yield Rises 1.0 %
10yr U.S. Treasury Diversified Portfolio (Hypothetical)
A Shift in Fed Policy May Spark Greater Volatility
Source: Morningstar Encorr, 11/30/2014. Monthly Series. U.S. dollar = DXY Index; Global Bonds = Barclays Multiverse Index ; Hedge Funds = HRFI Weighted Composite Index; Global Stocks = MSCI ACWI Index ; Commodities = Bloomberg Commodity Index. See disclosures for full definitions.
High
Low
CommoditiesGlobal StocksU.S Dollar
Current= 11/30/201412‐Month Rolling Standard Deviation Data begins 01/31/1999
Global Bonds Hedge Funds
10.0
8.0
6.0
4.0
2.0
0.0
10.0
8.0
6.0
4.0
2.0
0.0
10.0 10.0 10.0
8.0 8.0 8.0
6.0 6.0 6.0
4.0 4.0 4.0
2.0 2.0 2.0
0.0 0.0 0.0
Current Median
Volatility has been lower than average across all asset groups and the U.S. dollar. As the Fed shifts its policy from easing to tightening, volatility may rise.
Standard deviation is a statistical measurement that sheds light on historical volatility
Emerging From a “Low Everything” Environment
Expect a positive environment for equities. Bond investors should continue to exercise caution.
• Invest broadly and globally diversify bonds
• Actively manage bonds
• Be mindful of the potential impact of interest rate increases on CRT’s/CPT’s
• Underweight U.S. investment‐grade and developed‐market bonds
• Consider capitalizing on periods of higher volatility
Sustaining the Global Recovery
Theme 2
Who Steps Up When the Fed Steps Down?
Source: Bloomberg Finance, LLP, , Wells Fargo Wealth Management as of 12/10/2014
The U.S. Fed has ended QE and may soon raise rates. Japan and the Eurozone are still easing and may double the amount of bonds purchased globally in 2015.
Japanese and Eurozone Central Banks’ Purchases Could be Sizable
The Under-Achieving Recovery…So Far
Source: Bloomberg Finance, LLP, NBER, as of 11/30/2014
This cycle has been shorter and less robust than average. We believe U.S. growth could continue for several more years boosting global growth.
Current U.S. Growth Less than Half the Historical Average
Small Business Sentiment
Small Business Employment
U.S. Corp Profits (After Tax)
Small Business CAPEX Plans
96.1 Points
49.49 MM
$1,477.8 Billion
25.0 Points
Businesses - Cautiously Optimistic
Pre‐Recession High Today
96.2 Points
47.36 MM
$885.6 Billion
38.0 Points
Source: FactSet, Bloomberg Finance LLP, 12/12/2014
Business sentiment is back to pre‐recession highs and corporate profits are at all‐time highs. We expect increased capital spending and jobs growth to follow.
Crisis-Events - Good Investment Opportunities?Crisis events may trigger emotional responses that can damage longer‐term investment returns. A framework can help investors evaluate crisis events.
Source: Wells Fargo Wealth Management, 11/30/2014
Sustaining the Global Recovery
The ongoing global recovery should benefit global equities, especially in the U.S. where growth is improving.
• The Eurozone and Japanese markets may benefit from increasing economic support from their central banks. Overweight U.S. Large Cap and other developed‐market stocks.
• Favor more cyclical sectors such as technology, consumer discretionary, industrials.
• Still‐high debt levels in the U.S. mean tax rates may continue to rise, invest in a way that is most tax‐efficient for your circumstances
• Be aware that geopolitical events can create attractive entry points
• Consider hedging to help defend against weakening developed‐market currencies
Technology: The Wonders and the Woes
Theme 3
What’s a Radio, Mom?
Years Until 25 Percent of the U.S. Population Adopted Technology
Source: National Intelligence Council, Global Trends 2030: Alternative Worlds
Technology continues to be an important investment theme. Eager consumer adoption means the potential for new businesses in this sector is tremendous.
What’s a Zettabyte, Son?
90% of world’s data created in the past 2 years
1 trillion “things” will be connected to the internet over the next 10 years
2.5 million gigabytes of data are created each day
Many of us are dependent on “devices” to help manage our busy lives. This rising connectivity means vast amounts of data are being created and stored online.
Sources: @Gizmodo @PipCzar @sobata416 @ReutersGMF
Map of every device in the world connected to the internet.
Emerging Growth Potential Still Significant
Virtual RobberyWith so much personal and confidential information online, security is a significant and growing concern for businesses and consumers.
Source: Data from Information is Beautiful, Identity Theft Resource Center, “Data Breach Reports”, 2013 and 2014.
Technology – The Wonders and the Woes
Consider companies that use technology to enhance profitability and those with best‐in‐class security.
• Seek companies that benefit from technology‐related efficiencies
• Look for companies that have strong omni‐channel operations
• Consider companies that employ and provide best‐in‐class information security
• Utilize technological advances when sharing information with potential givers/clients
• Data theft will continue to be a significant issue
Investing with a Purpose
Theme 4
The Millennial generation believes the main purpose of business is to:
Create Wealth Generate Profit
Drive Innovation
Enable Progress
Exchange Goods & Services
Improve Society
Primary Purpose of Business
The Millennial generation believes the main purpose of business is to:
Create Wealth Generate Profit
Drive Innovation
Enable Progress
Exchange Goods & Services
Improve Society
Primary Purpose of Business
In a 2012 Deloitte survey of 5,000 Millennials residing in 18 countries, a greater percentage of respondents answered that the primary purpose of business is to “improve society” than answered “to generate a profit.” Source: Deloitte.com, 2012
Looking Beyond Profits
Source: US SIF Foundation (2012): Report on Sustainable and Responsible Investing Trends in the United States. n=129
64%
67%
67%
72%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Returns
Risk
Social Benefit
Mission
Top Motivators for ESG Investors
Returns are not the top motivator for investors who wish to further their mission or generate a social benefit with their assets.
What Have You Done for Me Lately?
Source: Bloomberg, Hedge Fund Research; 12/12/2014
Acquisitions
Stock Buybacks
Dividends
Activist and “Suggestivist” investors encourage businesses to use cash holdings in shareholder‐friendly ways (acquisitions, stock buybacks, and dividends).
6.9% 6.6% 6.4% 5.8% 5.7% 7.8% 8.7% 8.9% 9.9% 10.3% 11.4% 11.6%11.8
19.5
29.2
47.654.8
32.336.2
46.850.9
65.5
93.1
112.1
0%
2%
4%
6%
8%
10%
12%
14%
$0
$20
$40
$60
$80
$100
$120
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD2014
Billions
S&P 500 Companies ‐ Cash as Percent of Total Assets Total Activist Assets
As Corporations Accumulate Cash,Activist Investors React
Investing with a Purpose
Millennials, philanthropic institutions, sovereign wealth funds, pensions and even activist investors are investing for change.
• Interest in impact investing is growing and the number of ESG investment‐vehicles is increasing rapidly
• Consider funds that include activist strategies
• Be prepared to have ESG conversations on planned giving investments and have ESG investment strategies available
• In the private capital space, we favor private debt opportunities
2015 Investment Themes
Emerging from a “Low‐Everything” Environment
Technology – The Wonders and the Woes
1
2
3
4 Investing with a Purpose
Sustaining the Global Recovery
Asset classesTactical adjustments
*Some complementary strategies may be available for pre‐qualified investors only. Suggestions as of 12/14
Underweight
U.S Investment‐Grade Bonds Developed‐Market Bonds
Overweight
U.S. Large Cap Equities Developed‐Market
International Equities Event Driven and Equity
Hedge ‐ Hedge Funds*
Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. The information and opinions in this report were prepared by the investment management division within Wells Fargo Private Bank. Information and opinions
have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Bank’s opinion as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
This material is for general information only, is not suitable for all investors and is not soliciting any action from any particular investor. Information and opinions presented have been obtained or derived from sources we believe reliable, but we cannot guarantee their accuracy or completeness. Opinions represent WFB’s judgment as of the date of the report and are subject to change without notice. WFC affiliates may issue reports or have opinions, which are inconsistent with, and reach different conclusions from, this report.
This report is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned. Wells Fargo & Company and/or its affiliates may trade for their own accounts, be on the opposite side of customer orders, or have a long or short position in the securities mentioned herein.
The investments discussed or recommended in this report are not insured by the Federal Deposit Insurance Corporation (FDIC) and may be unsuitable for some investors depending on their specific investment objectives and financial position.
Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments also may fluctuate. There is always the potential for loss as well as gain.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Investing in foreign securities presents certain risks that may not be present in domestic securities and may not be suitable for all investors. These risks are
heightened in emerging markets. Real estate investment carries a certain degree of risk and may not be suitable for all investors. Some real assets may be available to pre‐qualified investors only. Some alternative investments and complementary strategies may be available to prequalified investors only. Hedge strategies and private investments may
be speculative and involve a high degree of risk. Hedge strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. There is no secondary market for the investor’s interest in a hedge fund or private equity investment and none is expected to develop. There may be restrictions on transferring interests in a hedge fund or private equity investment.
Fixed income securities are subject to availability and market fluctuation. These securities may be worth less than the original cost upon redemption. Certain high‐yield/high‐risk bonds carry particular market risks and may experience greater volatility in market value than investment grade corporate bonds. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in some instances, the alternative minimum tax. Investments in fixed‐income securities are subject to interest rate and credit risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price.
TIPS have special tax consequences, generating phantom income on the "inflation compensation" component of the principal. A holder of TIPS may be required to report this income annually although no income related to "inflation compensation" is received until maturity.
The Market Volatility Index (VIX) is an index designed to track market volatility as an independent entity. The index calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism.
There are special risks associated with investing in preferred securities. Preferred securities generally offer no voting rights with respect to the issuer. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer’s capital structure, subjecting them to a greater risk of non‐payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security. Preferred dividends are not guaranteed and are subject to deferral or elimination.
Disclosures
Disclosures (continued) The prices of small‐ and mid‐company stocks are generally more volatile than large company stocks. They often involve higher risks because smaller
companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
An investment in Master Limited Partnership (MLP) units involves certain risks which differ from an investment in the securities of a corporation. Holders of MLP units have limited control and voting rights on matters affecting the partnership. In addition, there is certain tax risks associated with an investment in MLP units and conflicts of interest exist between common unit holders and the general partner, including those arising from incentive distribution payments. The risks associated with an MLP are outlined in the prospectus. You should carefully consider these risk factors before investing.
Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investments in currencies involve certain risks, including credit risk, interest rate fluctuations, fluctuations in currency exchange rates, derivative investment risk and the effect of political and economic conditions. The use of currency transactions to seek to achieve gains in the portfolio could result in significant losses to the portfolio which exceeds the amount invested in the currency instruments.
An index is unmanaged and not available for direct investment. Equity Representative Indices. Indices represented include MSCI Emerging Markets Index (Emerging Markets Equity), MSCI EAFE Developed Market Index
(Developed Markets Equity), MSCI Frontier Markets Index (Frontier Markets Equity), Russell 1000 Growth Index (Large Cap Equity‐Growth), S&P 500 (U.S. Large Cap Equity), Russell 1000 Value Index (Large Cap Value), Russell Midcap Index (U.S. Mid Cap Equity), and Russell 2000 Index (U.S. Small Cap Equity).
Emerging Markets Equity. MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
Developed Markets Equity. MSCI EAFE Developed Market Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada. It is unmanaged and unavailable for investment.
Frontier Markets Equity (U.S. Dollar/Local). MSCI Frontier Markets Index is a free‐float‐adjusted market‐capitalization index that is designed to measure equity performance of the world’s least‐developed capital markets.
Large Cap Equity (Growth). Russell 1000 Growth Index measures the performance of the large‐cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price‐to‐book ratios and higher forecasted growth values.
Large Cap Equity. S&P 500 Index is a capitalization‐weighted index calculated on a total return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies.
Large Cap Equity (Value). Russell 1000 Value Index measures the performance of the large‐cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price‐to‐book ratios and lower expected growth values.
Mid Cap Equity. Russell Midcap Index measures the performance of the mid‐cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27 percent of the total market capitalization of the Russell 1000 companies.
Small Cap Equity. Russell 2000 Index measures the performance of the small‐cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 8 percent of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
Disclosures (continued) Fixed Income Representative Indices. Indices represented include: Barclays MBS Index, Barclays TIPS Index, Barclays Treasury Index, Barclays Investment
Grade Corporate Index, Barclays High Yield Index, JPMorgan Global Bond (ex‐US) Index, JPMorgan Emerging Markets Index. U.S. MBS. Barclays Capital U.S. Mortgage Backed Securities Index includes mortgage‐backed pass‐through securities of Ginnie Mae (GNMA), Fannie Mae
(FNMA), and Freddie Mac (FHLMC). The MBS Index is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates.
U.S. TIPS. Barclays Capital U.S. TIPS Index consists of Inflation‐Protection securities issued by the U.S. Treasury. U.S. Treasury. Barclays Capital U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. U.S. Corporate. Barclays Capital U.S. Corporate Bond Index includes publicly issued U.S. corporate and Yankee debentures and secured notes that meet
specified maturity, liquidity, and quality requirements. U.S. High Yield. Barclays Capital High Yield Index covers the universe of fixed rate, non‐investment grade debt. Foreign Bond (Unhedged). JPMorgan GBI Global ex‐US FX NY Index (Unhedged) in USD is an unmanaged index market representative of the total return
performance in U.S. dollars on an unhedged basis of major non‐U.S. bond markets. Emerging Markets Debt (U.S. Dollar). JP Morgan Emerging Markets Bond Index (EMBI Global) currently covers 27 emerging market countries. Included in the
EMBI Global are U.S.‐dollar‐denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi‐sovereign entities.
Real Assets Representative Indices. International REITs are represented by the S&P Developed ex‐U.S. Property Index. Global REITs are represented by the FTSE/EPRA NAREIT Developed Index. Domestic REITs are represented by FTSE NAREIT U.S. All Equity REITs Index.
International REITs. S&P Developed ex‐US Property Index measures the performance of several hundred publicly traded property companies from 21 countries outside the U.S.
Global REITs. FTSE/EPRA NAREIT Developed Index is designed to track the performance of listed real estate companies and REITs worldwide. Domestic REITs. FTSE NAREIT US All Equity REITs Index is designed to track the performance of REITs representing equity interests in (as opposed to
mortgages on) properties. Commodities (S&P GSCI). S&P Goldman Sachs Commodity Index is a trade‐weighted index of commodity sector returns representing unleveraged, long‐only
investment in commodity futures that is broadly diversified across the spectrum of commodities. The index includes futures contracts on 24 physical commodities, of which Energy represents nearly 70 percent.
Commodities (Bloomberg). Bloomberg Commodity Index represents futures contracts on 22 physical commodities. No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33 percent of the index as of the annual reweightings of the components. No single commodity may constitute less than 2 percent of the index.
Disclosures (continued) Complementary Strategies Representative Indices. Hedge Fund Research, Inc. (HFR) maintains two sets of indices to report hedge‐fund performance. This
presentation uses the HFRX series, which covers a select subset of the manager universe. Macro, Equity Market Neutral, Relative Value Arbitrage, Merger Arbitrage, Distressed Securities, Global Hedge Funds, Managed Futures, Equity Hedge, Event Driven, and Convertible Arbitrage.
Macro. HFRI Macro Index includes a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. A variety of techniques are employed: discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods. Macro strategies’ primary investment thesis is predicated on predicted or future movements in the underlying instruments, and the impact movements in underlying macroeconomic variables may have on security prices.
Equity Market Neutral. HFRI Equity Market Neutral Index strategies employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale. These can include both Factor‐based and Statistical Arbitrage/Trading strategies. Factor‐based investment strategies include strategies in which the investment thesis is predicated on the systematic analysis of common relationships between securities. In many but not all cases, portfolios are constructed to be neutral to one or multiple variables, such as broader equity markets in dollar or beta terms, and leverage is frequently employed to enhance the return profile of the positions identified. Statistical Arbitrage/Trading strategies consist of strategies in which the investment thesis is predicated on exploiting pricing anomalies which may occur as a function of expected mean reversion inherent in security prices; high frequency techniques may be employed and trading strategies may also be employed on the basis on technical analysis or opportunistically to exploit new information believed to have not been fully, completely or accurately discounted into current security prices. Equity Market Neutral Strategies typically maintain characteristic net equity market exposure no greater than 10 percent long or short.
Relative Value Arbitrage. HFRI Relative Value Arbitrage Index maintains positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. A variety of fundamental and quantitative techniques are employed to establish an investment theses, and security types range broadly across equity, fixed income, derivative or other security types.
Merger Arbitrage. HFRI Merger Arbitrage Index strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction. Merger Arbitrage involves primarily announced transactions, typically with limited or no exposure to situations which pre‐, post‐date or situations in which no formal announcement is expected to occur. Opportunities are frequently presented in cross border, collared and international transactions which incorporate multiple geographic regulatory institutions, with typically involve minimal exposure to corporate credits. Merger Arbitrage strategies typically have over 75 percent of positions in announced transactions over a given market cycle.
Distressed Securities. HFRI Distressed Securities Index strategies employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings. Fundamental credit processes employed are focused on valuation and asset coverage of securities of distressed firms; in most cases portfolio exposures are concentrated in instruments which are publicly traded, in some cases actively and in others under reduced liquidity but in general for which a reasonable public market exists.
Disclosures (continued) Global Hedge Funds. HFRI Fund Weighted Composite Index A global, equal‐weighted index of over 2,000 single‐manager funds that report to HFR
Database. Constituent funds report monthly net‐of‐all‐fees performance in U.S. Dollars and have a minimum of $50 Million under management or a 12‐month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.
Equity Hedge. HFRI Equity Hedge Index strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. Typical exposure is at least 50 percent, and may in some cases be substantially entirely invested in equities, both long and short.
Event Driven. HFRI Event Driven Index maintains positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.
Convertible Arbitrage. HFRI Convertible Arbitrage Index includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a convertible fixed income instrument. Strategies employ an investment process designed to isolate attractive opportunities between the price of a convertible security and the price of a non‐convertible security, typically of the same issuer. Convertible arbitrage positions maintain characteristic sensitivities to credit quality the issuer, implied and realized volatility of the underlying instruments, levels of interest rates and the valuation of the issuer’s equity, among other more general market and idiosyncratic sensitivities.
The BBA LIBOR rate is a consensus derived from those submitted by major banks in London at 11:00 am London time. It is an average derived from sixteen quotations provided by banks determined by the British Bankers’ Association. The four highest and four lowest are then eliminated and an average of the remaining eight is calculated to arrive at the fix at 11:00 am. The fix is rounded to five decimal places. Eurodollar LIBOR is calculated on am ACT/360 basis and settlement is for two days hence. Prior to January 1995, the BBA did not "fix" LIBOR.
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DisclosuresWells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.The information and opinions in this report were prepared by the investment management division within Wells Fargo Private Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Bank’s opinion as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or in the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. This material is for general information only, is not suitable for all investors, and is not soliciting any action from any particular investor. Information and opinions presented have been obtained or derived from sources we believe reliable, but we cannot guarantee their accuracy or completeness. Opinions represent WFB’s judgment as of the date of the report and are subject to change without notice. WFC affiliates may issue reports or have opinions, which are inconsistent with, and reach different conclusions from, this report.This report is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned. Wells Fargo & Company and/or its affiliates may trade for their own accounts, be on the opposite side of customer orders, or have a long or short position in the securities mentioned herein.The investments discussed or recommended in this report are not insured by the Federal Deposit Insurance Corporation (FDIC) and may be unsuitable for some investors depending on their specific investment objectives and financial position.Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments also may fluctuate. There is always the potential for loss as well as gain.Equity investments are subject to market risk which means that the value of its investments will fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.Exchange rate risk between the U.S. dollar and foreign currencies may cause the value of investments to decline.Technology and internet‐related stocks, especially of smaller, less‐seasoned companies, tend to be more volatile than the overall market.Investments in fixed‐income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.Private debt strategies seek to actively improve the capital structure of a company often through debt restructuring and deleveraging measures. In private debt investments, an investor acts as a lender to private companies and loans have specific contractual interest rate terms and repayment schedules. Such investments are subject to potential default, limited liquidity and the creditworthiness of the private company. Real Estate investments have special risks, including possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. Complementary strategies may be available to pre‐qualified investors only. Hedge strategies and private investments may be speculative and involve a high degree of risk. Hedge strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment.
DisclosuresThe Market Volatility Index (VIX) is an index designed to track market volatility as an independent entity. The index is calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism.An Index is unmanaged and not available for direct investment.S&P 500 Index is a market capitalization‐weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market. The Index is unmanaged and not available for direct investment. MSCI EAFE® Index (Europe, Australasia, Far East) is an unmanaged group of securities widely regarded by investors to be representations of the stock markets of Europe, Australasia and the Far East. The MSCI Emerging Markets Index is a free float‐adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Composition of Diversified Bond Portfolio on slide 11:The Diversified Bond Portfolio consists of 3% 90 Day Tbill, 10% Barclays 1‐3 Yr Credit, 44% Barclays 5‐10 Yr Credit, 6% BofA ML U.S High Yield Master, 12% BofA ML 1‐10 Yr Municipal, 3% BofA ML US Preferred Stock , 5% JPM EMBI+, 17% BofA ML Global Govt Bond ex US.90‐day Tbill: The index is an unmanaged index representing monthly return equivalents of yield averages of the last 3 month Treasury Bill issues.Barclays 1‐3 Yr Credit: This index includes all medium and larger issues of U.S. government, investment‐grade corporate, and investment‐grade international dollar‐denominated bonds that have maturities of between 1 and 3 years and are publicly issuedBarclays 5‐10 Yr Credit: This index includes all medium and larger issues of U.S. government, investment‐grade corporate, and investment‐grade international dollar‐denominated bonds that have maturities between 5 and 10 years and are publicly issued.BofA ML U.S High Yield Master: tracks the performance e of below investment grade, but not in default, US dollar‐ denominated corporate bonds publicly issued in the US domestic market, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.BofA ML US Preferred Stock :The BofA Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. JPM EMBI+: The J.P. Morgan Emerging Markets Bond Index Plus (EMBI+) tracks total returns for traded external debt instruments in the emerging markets. Included in the index are U.S. dollar‐and other external‐currency‐denominated Brady bonds, loans, Eurobonds, and local markets instruments. Thus, the EMBI+ expands upon our EMBI, which covers only Brady bonds, extending the market benchmark to most strategic investment opportunities readily available in the emerging marketsBofA ML Global Govt Bond ex US: The index tracks the performance of public debt of investment‐grade sovereign issuers, issued and denominated in their own domestic market and currency . It is a market value‐weighted measure of these bonds. This index excludes the US domestic market.
Definitions for slide 13US Dollar Index, DXY = The U.S. Dollar Index(USDX) indicates the general int'l value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks. It is a weighted geometric mean of the dollar's value relative to other select currencies: Euro (EUR), 57.6% weight, Japanese yen (JPY) 13.6% weight, Pound sterling (GBP), 11.9% weight, Canadian dollar (CAD), 9.1% weight, Swedish krona (SEK), 4.2% weight, Swiss franc (CHF) 3.6% weight.Global Bonds: The Barclays Multiverse Bond Index provides a broad‐based measure of the global fixed‐income bond market. The index represents the union of the Global Aggregate Index and the Global High‐Yield Index and captures investment grade and high yield securities in all eligible currencies. Standalone indices such as the Euro Floating‐Rate ABS Index and the Chinese Aggregate Index are excluded. The Multiverse Index family includes a wide range of standard and customized sub‐indices by sector, quality, maturity, and country. The Multiverse Index was created on January 1, 2001, with index history backfilled to January 1, 1999.
Disclosures (cont.)Hedge Funds: HFRI Fund Weighted Composite Index. A global, equal‐weighted index of over 2,000 single‐manager funds that report to HFR Database. Constituent funds report monthly net‐of‐all‐fees performance in U.S. Dollars and have a minimum of $50 Million under management or a 12‐month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds.Global Stocks: The MSCI ACWI Index is a free float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed market country indexes included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates.Commodities: Bloomberg Commodity Index represents futures contracts on 19 physical commodities. No related group of commodities (e.g., energy, precious metals, livestock and grains) may constitute more than 33 percent of the index as of the annual reweightings of the components. No single commodity may constitute less than 2 percent of the index. Wells Fargo Advisors s the trade name used by two separate registered broker‐dealers and non‐bank affiliates of Wells Fargo & Company: Wells Fargo Advisors, LLC, and Wells Fargo Advisors Financial Network, LLC (Members SIPC).
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Market Transformations and Risks
H. Cameron Hinds, CFARegional Chief Investment OfficerMinnesota Planned Giving CouncilJanuary 27, 2015
Focus 2015
The following information and opinions are provided courtesy of Wells Fargo Bank, N.A
