asset allocation strategy - · pdf filetracie mcmillion, cfa, head of global asset allocation....

Global Economic Summary

2

Market Summaries

3

Capital Market Assumptions

9

Market Forecasts

8

Investment Themes

7

Strategic and Tactical Asset Allocation

10

Sector Strategies

20

Currency Hedging Guidance

24

Asset Allocation Strategy.

September 18, 2017Asset Allocation Strategy.

Darrell Cronk, CFA, President, Wells Fargo Investment Institute and CIO, Wealth and Investment Management.

Global Asset Allocation Team:Tracie McMillion, CFA, Head of Global Asset Allocation.Chris Haverland, CFA, Global Asset Allocation Strategist,Luis Alvarado Investment Strategy AnalystKen Johnson, CFA, Investment Strategy Analyst,Michael Taylor, CFA, Investment Strategy AnalystVeronica Willis Investment Strategy AnalystBobby Zheng, CFA Investment Strategy Analyst

Asset Class Strategists:Paul Christopher, CFA, Head Global Market Strategist.Brian Rehling, CFA, Co-Head of Global Fixed Income Strategy.George Rusnak, CFA, Co-Head of Global Fixed Income Strategy.Peter Wilson, International Fixed Income Strategist.Stuart Freeman, CFA, Co-Head of Global Equity Strategy.Sean Lynch, CFA, Co-Head of Global Equity Strategy.Scott Wren, Senior Global Equity Strategist.Sameer Samana, CFA, Global Quantitative Strategist.Peter Donisanu, Investment Strategy AnalystCraig Holke, Investment Strategy AnalystJohn LaForge Head of Real Asset StrategyAustin Pickle, CFA Investment Strategy AnalystAdam Taback, Head of Global Alternative Investments.Jim Sweetman, Global Alternative Investments Strategist.Justin Lenarcic, Global Alternative Investments Strategist

2018 forecasts. See page 8.

Modest Growth and Asset Price Returns for 2018. The synchronized global recovery that took hold this year should continue, although restrained by headwinds from high debt, slow labor market recovery, and political uncertainty. We expect moderate inflation in developed economies but easing inflation in emerging economies. Late in the U.S. economic cycle, it becomes increasingly important for investors to assess whether an asset’s expected return adequately compensates for its expected risk. This may be an appropriate time to ensure that your portfolio matches your current risk profile and financial needs.

As we look ahead to 2018, we anticipate slow-but-steady U.S. economic growth and somewhat stronger economic expansion overseas. Our 2018 forecast is for the U.S. economy to grow at a rate of 2.4 percent and for the global economy to expand at a 3.6 percent pace. Growth in the U.S. next year should be driven by gradual gains in consumer spending and housing. Meanwhile, flat business and government spending could offset growth, as tax reform remains uncertain. In developed and emerging economies, steady commodity prices, stronger international trade, and rising confidence should drive growth. Yet, slow job growth and high debt levels could limit overseas improvement. Somewhat stronger and broader global growth should support higher U.S. earnings and equity gains in 2018. Our initial year-end 2018 S&P 500 Index target price range is 2450–2550. For mid-cap stocks, we foresee revenue and earnings growth of 5.5 percent and 8.8 percent, respectively. We continue to recommend an underweight position for small caps; they tend to underperform late in a cycle as investors focus on lower-risk shares with greater liquidity. Improving earnings have supported international developed equity markets this year, and we expect that trend to continue. Our earnings target of $127 for the MSCI EAFE Index represents a five percent increase over 2017’s target. Our 2018 year-end target range of 1980–2080 for the MSCI EAFE Index also should be supported by low interest rates, credit growth, and improvements in consumption globally. We project slightly

higher earnings growth in emerging markets than in developed economies. Our 2018 earnings target for the MSCI Emerging Markets Index of $84 per share represents 10.5 percent growth over our 2017 target. Our year-end 2018 target range for the MSCI Emerging Markets Index is 1090–1170. In fixed income, continued U.S. monetary tightening should further flatten the Treasury yield curve. We expect the Federal Reserve (Fed) to tighten monetary policy slowly and deliberately in 2018. We project two fed funds rate increases next year in addition to an expected rate increase later this year. Additionally, we look for the Fed to slowly reduce its balance sheet throughout 2018. In real assets, we see $40–$50 per barrel West Texas Intermediate crude oil. We suspect that gold prices will come under pressure, sinking below $1,300 per ounce, to our $1,150–$1,250 year-end 2018 target. Finally, we see compelling opportunities for alternative investment strategies next year. Historically, modest economic growth, rising interest rates, and inflation approaching target levels, have been supportive of active management in alternative investments. The added influence of monetary-policy divergence, coupled with late-cycle dynamics, could generate a robust environment for this asset group in 2018.

This may be an appropriate time to ensure that your portfolio matches your current risk profile and financial needs.

Table of Contents

Asset Allocation Strategy ReportSeptember 18, 2017

2

Global Economic Summary.

Present Situation Component Reached Its Highest Level Since 2001

2001

Index Level

Consumer ConfidencePresent Situation Component

2015 201720162012 2014201320092008200720062005200420032002 201120100

50

100

150

200

Source: Bloomberg, 9/8/17

United States.The second look at second-quarter U.S. gross domestic product (GDP) beat expectations with a 3.0 percent annualized quarter-over-quarter (QoQ) expansion rate. Personal consumption rose, to a 3.3 percent annualized QoQ growth rate. August’s nonfarm payrolls came in below expectations, with 156,000 net jobs added (versus expectations of 180,000). The unemployment rate ticked up to 4.4 percent, although the labor-force participation rate held flat at 62.9 percent. Wage growth slowed to 0.1 percent month-over-month and held steady at 2.5 percent year-over-year. Headline inflation was modest in July, with the Consumer Price Index (CPI) up 0.1 percent for the month and increasing by 1.7 percent year-over-year. Excluding the more volatile food and energy components, the CPI also rose 0.1 percent for the month and 1.7 percent year-over-year. August’s Institute for Supply Management (ISM) manufacturing and services surveys both improved. The manufacturing survey reading was the highest since 2011, at 58.8, while the services survey rebounded to 55.3 following July’s large decline (a reading above 50 indicates expansion). In August, consumer confidence beat expectations, at 122.9. The present situation component reached the highest level since 2001, and future expectations continued to recover. Housing-market data worsened in July. Housing starts and building permits declined by -4.8 and -4.1 percent, respectively. Existing home sales decreased by -1.3 percent, to a seasonally-adjusted 5.44-million-unit annual pace. New home sales fell by -9.4 percent, to a seasonally-adjusted annual rate of 571,000 units.

Europe.European economic growth has remained robust as political concerns have dissipated. A final look at second-quarter Eurozone GDP showed a 2.3 percent year-over-year growth rate; the currency bloc’s fastest economic growth in more than five years. Eurozone business and consumer sentiment remains near multi-year highs. The Eurozone Markit Manufacturing Purchasing Managers’ Index (PMI) advanced to 57.4, while consumer confidence pulled back modestly in July from June’s 10-year high. During the second quarter, the U.K.’s economy expanded by 1.7 percent on a year-over-year basis, according to a preliminary GDP report published in August. This figure was softer than the 2.0 percent first-quarter reading. Household spending and business investment have been mixed as sentiment has remained subdued. The U.K. manufacturing PMI rose to 56.9 in August from 55.1 in July, yet remains below April’s multi-year high. Consumer confidence has reached a 12-month low, given ongoing uncertainties surrounding Brexit negotiations.

Japan’s Economy Grew at Its Longest Positive Stretch In More Than a Decade

6/2007

Annualized GDP Growth (QoQ)

6/2008 6/2009 6/2010 6/2011 6/2012 6/20146/2013 6/2016 6/20176/2015-20%

-15%

-10%

-5%

0%

5%

10%

Source: Bloomberg, 9/8/17

Asia.Recent data releases continue to show expansion in Asia’s two largest economies (Japan and China). This has been quite pronounced in Japan, where GDP growth remained positive for the past six consecutive quarters—its longest stretch in more than a decade. Recent Japanese industrial-production releases show a persistently-strong advance in activity this year. Business sentiment remains robust, with the latest Tankan business survey climbing to its highest level in three years. China’s economy grew by 6.9 percent year-over-year in the second quarter, in line with the first-quarter expansion. We expect Chinese economic growth to slow modestly this year, as policymakers work to curb excesses in certain parts of the country’s credit markets. Yet, we believe that China’s economy is benefiting from a rebound in global economic growth and international trade.

Key Economic Statistics.Global Growth Rates 3Q17 2Q17 1Q17

U.S. Real Economic Growth (GDP)1 2.6%a 3.0% 1.2%Eurozone Real Economic Growth2 2.1%a 2.3% 2.0%Japanese Real Economic Growth1 1.0%a 2.5% 1.2%Chinese Real Economic Growth2 6.7%a 6.9% 6.9%

Key U.S. Economic Data 8/17 7/17 8/16Unemployment Rate 4.4% 4.3% 4.9%Leading Economic Index (LEI) 0.1%a 0.3% -0.1%Durable Goods Orders 1.5%a -6.8% 0.6%ISM Manufacturing 58.8 56.3 49.4ISM Service 55.3 53.9 51.7Retail Sales 0.1%a 0.6% -0.1%Consumer Confidence 122.9 120.0 101.8New Home Sales (millions) 0.600a 0.571 0.567Existing Home Sales (millions) 5.49a 5.44 5.34U.S. Dollar Index 92.67 92.86 95.53

U.S. Inflation 8/17 7/17 YoYConsumer Price Index (CPI) 0.4% 0.1% 1.9% Core CPI 0.2% 0.1% 1.7%Producer Price Index (PPI) 0.2% -0.1% 2.4% Core PPI 0.1% -0.1% 2.0%Price Consumption Expenditures (PCE) N/A 0.1% 1.4%b

Core PCE N/A 0.1% 1.4%b

1 Annualized Q/Q % change; 2 Year-over-year % change a Bloomberg survey estimate. b YoY references 7/17 Data source: Bloomberg, FactSet; 9/18/17 See end of report for important definitions and disclosures.

Table of Contents


3

Market Summary.

Fixed Income.

Fixed Income Index Total Returns—As of 8/31/17

MTD QTD YTD 1 Year 3 Year 5 Year

U.S. Taxable Inv Grade Fixed Income 0.9% 1.3% 3.6% 0.5% 2.6% 2.2%

U.S. Short Term Taxable 0.2% 0.5% 1.2% 0.9% 1.1% 1.0%

U.S. Intermediate Term Taxable 0.7% 1.2% 3.1% 0.7% 2.4% 2.1%

U.S. Long Term Taxable 2.2% 2.5% 8.5% -1.3% 4.8% 3.7%

U.S. Treasury Bills 0.1% 0.2% 0.5% 0.6% 0.3% 0.2%

U.S. Municipal Bonds 0.8% 1.6% 5.2% 0.9% 3.4% 3.2%

High Yield Taxable Fixed Income 0.0% 1.1% 6.1% 8.6% 4.8% 6.5%

DM Ex.-U.S. Fixed Income (Unhedged) 1.2% 3.9% 9.7% -1.5% -0.4% -0.5%

DM Ex.-U.S. Fixed Income (Hedged) 1.0% 1.3% 1.4% -0.8% 3.9% 4.3%

EM Fixed Income (U.S. Dollar) 1.7% 2.4% 8.7% 4.5% 5.2% 4.6%

EM Fixed Income (Local Currency)1 1.5% 4.6% 15.6% 11.7% -1.6% -0.2%

Inv Grade indicates Investment Grade; DM indicates Developed Market; EM indicates Emerging Market. Past performance is no guarantee of future results.Returns over one year are annualized.1 Returns are converted to dollars for U.S. investors.Sources: Bloomberg Barclays, J.P. Morgan See end of report for important definitions and disclosures.

Once again, all major fixed income classes gained in August and year to date (YTD)—as muted inflation and synchronized global growth continued to drive returns. Developed and emerging markets led YTD returns, along with U.S. preferred stock (+9.1 percent). On a YTD basis, longer-term taxable issues (+8.5 percent), high-yield (HY) and investment-grade (IG) corporate debt (+6.1 and 5.4 percent, respectively) outperformed, while municipal bonds (+5.2 percent) delivered healthy returns.

Market Observations. U.S. Fixed Income: August was another strong month for fixed income due to stable U.S. data and heightening geopolitical concerns. Fed officials discussed a shift in focus for upcoming meetings from rising rates toward reduction of the Fed’s balance sheet. We believe that the Fed will begin reducing its balance sheet this fall. Although market volatility may rise slightly, we believe that the path will be smooth and disruption-free overall. In fact, we would view any significant spread widening as a buying opportunity for longer-term investors. The yield curve dramatically flattened in August as the 2 to 10 year Treasury spread declined from 95 to 79 basis points (100 basis points equal 1 percent). Yield-curve flattening has been ongoing in 2017, and we expect this to continue at a reduced pace through year-end. This trend is a contributing factor to our overweight position on the intermediate part of the yield curve. HY corporates have performed well YTD, but this was the only bond class with a flat return in August. We continue to believe that the risk to HY outweighs the possible reward. We remain underweight.IG corporates returned 0.8 percent last month, led by the Financial sector, which we favor today. Municipals matched this return, driving their YTD gain above 5 percent. We believe that high-grade municipals present opportunities in intermediate issues and higher-rated essential revenue credits. Yet, municipal ratios versus Treasury counterparts are rich when compared to historical levels. Although we have been constructive on IG municipals, we are growing concerned that they may face increased volatility as supply is expected to rise in the near term. Developed Markets (DM): The U.S. Dollar Index (DXY) slowed its decline in August, decreasing only marginally—so hedged (+1.0 percent) and unhedged (+1.2 percent) DM returns were similar. YTD, unhedged DM bonds (+9.7 percent) substantially outperformed hedged bonds (+1.4 percent). In August, the U.S. dollar outperformed the Australian and New Zealand dollars, and the British pound suffered as Brexit negotiations stalled. Consequently, these markets delivered negative returns to dollar-based investors. The euro gained slightly against the dollar, driven by continued central-bank bond purchase tapering expectations for 2018. These expectations also meant that core Eurozone markets such as Germany, Belgium, and the Netherlands, along with euro-linked Sweden, performed best and outperformed peripheral markets (Italy, Spain, and Portugal).Emerging Markets (EM): EM bonds gained again in August, although dollar-denominated sovereigns (+1.7 percent) marginally outperformed local-currency bonds (+1.5 percent). This relative performance is not typical. YTD, local-currency and dollar-denominated bonds returned 15.6 percent and 6.7 percent, respectively. The absence of regional trading shocks allowed

investors to gain fully from EM debt carry (higher coupons and yields). Reflecting this, most sovereign markets performed well in broad-based strength. Top performers in both sectors were mixed, regionally, including Russia, Turkey, Indonesia, South Africa, and Colombia. Mexico and Brazil were the exceptions in local-currency markets, as their currencies paused from recent strong appreciation, cutting dollar-based returns.

Wells Fargo Investment Institute Perspective. We believe that fixed income can offer excellent diversification potential in times of geopolitical uncertainty. Yet, with many valuations elevated now, there are some challenges in locating compelling value. We recommend that investors maintain exposure at targets while remaining broadly and globally diversified. We believe that caution is warranted in longer-dated and credit-sensitive debt. We favor intermediate maturities and IG issues. We maintain our DM-debt underweight, as yields remain below Treasury yields and relative value versus Treasury securities has not significantly improved. We expect the dollar to recover somewhat against the euro by year-end 2017, but wide swings are possible both this year and next. Given the high level of currency uncertainty, and the fact that we are already underweight this asset class, we do not recommend hedging DM bond holdings. We are evenweight dollar-denominated EM debt. EMs would be especially vulnerable to any global-market shocks, so we maintain our preference for dollar-denominated debt over local-currency-denominated bonds. Our strategic benchmark is dollar denominated; we would require a higher degree of conviction to add local-currency risk at this stage. We therefore maintain a 100 percent dollar-denominated EM debt strategy.

For more information, please request our Investment Strategy report.

Table of Contents


4

Market Summary.

Equities.

Equity Index Total Returns—As of 8/31/17


U.S. Large Cap Equities 0.3% 2.4% 11.9% 16.2% 9.5% 14.3%

U.S. Large Cap (Growth) 1.8% 4.5% 19.2% 20.8% 11.7% 15.4%

U.S. Large Cap (Value) -1.2% 0.1% 4.8% 11.6% 6.7% 13.2%

U.S. Mid Cap Equities -0.8% 0.7% 8.7% 12.4% 7.3% 14.1%

U.S. Mid Cap (Growth) 0.7% 2.4% 14.1% 14.5% 7.9% 14.0%

U.S. Mid Cap (Value) -1.9% -0.6% 4.6% 10.8% 6.8% 14.2%

U.S. Small Cap Equities -1.3% -0.5% 4.4% 14.9% 7.7% 13.2%

U.S. Small Cap (Growth) -0.1% 0.7% 10.8% 16.4% 8.2% 13.7%

U.S. Small Cap (Value) -2.5% -1.8% -1.3% 13.5% 7.1% 12.5%

DM Equities Ex-U.S. (USD) 0.0% 2.9% 17.5% 18.2% 3.3% 9.0%

DM Equities Ex-U.S. (Local)1 0.0% 0.7% 8.6% 16.8% 7.5% 12.5%

EM Equities (USD) 2.3% 8.4% 28.6% 25.0% 2.8% 5.7%

EM Equities (Local) 1 2.1% 7.2% 23.3% 22.2% 7.2% 9.1%

FM Equities (USD) 3.7% 5.9% 22.7% 26.6% -1.4% 9.6%

FM Equities (Local) 1 4.7% 6.3% 21.8% 27.2% 3.4% 13.0%

DM indicates Developed Market; EM indicates Emerging Market; FM indicates Frontier Market; USD indicates U.S. dollar. Past performance is no guarantee of future results. Returns over one year are annualized. 1 Returns are in local currencies as experienced by local investors. U.S. investors would experience gains or losses on currency conversion.

Sources: Standard & Poor’s, Russell Indexes, MSCI Barra See end of report for important definitions and disclosures.

In August, all of the major equity classes delivered YTD gains, with international developed, emerging, and frontier market equities significantly outperforming U.S. classes. U.S. large-cap equity returns exceeded those of mid caps and small caps YTD. Further, Growth outperformed Value across all domestic capitalizations in August and YTD. U.S. large-cap, emerging-market and frontier-market equities delivered positive August returns, while mid caps and small caps lost ground.

The U.S. economy keeps expanding at a modest pace; we expect earnings growth to improve in the second half of this year (over 2016). In August, the S&P 500 Index continued to set record highs. We do not expect the index to rise much higher than recent trading levels this year and believe it is likely to ease back into our current year-end target range by year-end 2017. We are not, however, calling for an end to the current cycle.

Market Observations. U.S. Equities: August saw a spike in volatility stemming from geopolitical concerns. Yet, the S&P 500 Index delivered a small gain, which brought its YTD return to 11.9 percent. Information Technology had the highest monthly return for S&P 500 Index sectors (+3.5 percent), followed by Utilities (+3.3 percent). The largest performance detractors were Energy (-5.2 percent) and Telecom Services (-3.0 percent).

Mid-cap and small-cap equities fared worse than large caps in August and YTD. For mid caps, Information Technology outperformed in August (+3.1 percent), while Energy fell short (-7.7 percent). For small caps, Health Care ended the month with a solid return (+5.0 percent), while Energy plunged (-10.5 percent).

International Equities: As noted, international equities outperformed domestic classes YTD, with substantial double-digit returns. Although dollar-denominated developed market (DM) equities returned more than 17 percent YTD, they slightly underperformed the S&P 500 Index in August, while emerging-market (EM) equities outperformed this index.

From a country perspective, Italy (+1.8 percent in U.S.-dollar terms) led DM returns, as positive economic data fueled growth prospects. Spain had the weakest monthly performance after the Barcelona terrorist attack rattled markets (-1.2 percent in U.S.-dollar terms).

Dollar-denominated emerging-market (EM) equities delivered a YTD return exceeding 28 percent, aided by solid monthly gains. Russia (+8.1 percent U.S.-dollar terms) outperformed amid solid corporate performance. Israel was hit hard (-14.4 percent in U.S.-dollar terms) as generic drug maker, Teva Pharmaceutical Industries Ltd., lost its title as Israel’s biggest firm after the announcement that it would exit markets.

Wells Fargo Investment Institute Perspective. We recently established our 2018 forecasts for equities and other asset classes. We are expecting somewhat stronger economic growth in the remainder of 2017 and next year. We anticipate that this expansion will support 7.0 percent earnings growth for the S&P 500 Index next year, and we have set a $138 S&P 500 Index earnings target for 2018. Our initial year-end 2018 S&P 500 Index target range is 2450–2550 (versus 2300–2400 in 2017). For the Russell Midcap Index, our year-end 2018 target range is 1910–2010. We foresee

earnings growth of 8.8 percent next year and 2018 earnings of $99. Our year-end 2018 target range for the Russell 2000 Index (small caps) is 1350–1450. With a 48x trailing multiple, the index trades well over its long-term average 36x price/earnings valuation.

Improved earnings have fueled DM equity gains in 2017, and we expect this to continue next year. Our 2018 earnings target of $127 for the MSCI EAFE Index is five percent higher than our 2017 target. Our year-end 2018 target range for the MSCI EAFE Index is 1980–2080, while for the MSCI Emerging Markets Index, it is 1090–1170. Our 2018 EM earnings target of $84 per share represents 10.5 percent growth over our 2017 target.

We expect that some Trump-administration proposals eventually will work their way into the U.S. economy after congressional debate and consideration. Yet, we doubt that this year’s economic statistics will see much impact from them, and next year’s may only see modest effects. We believe this is more of a 2018, 2019, or 2020 story—as it takes time to refine, debate, and (possibly) pass legislation with enough magnitude to move the needle on the world’s largest economy. In coming months, we hope to get more clarity on which (if any) of the administration’s fiscal, tax, and regulatory proposals might be passed into law, and if they will help to extend the current U.S. economic expansion.


Table of Contents


5

Market Summary.

Real Assets.


Outside of master limited partnerships’ (MLPs) dreadful performance, the major real assets indices had a ho-hum August. A weaker dollar and lower interest rates served as support. Individual commodity performance varied widely. China, geopolitical tensions, and hurricanes took center stage in driving returns.

REITs and MLPs.Market Observations. Real Estate Investment Trusts (REITs): Interest rates declined in August, with the 10-year Treasury yield falling by 13 basis points. Recently, this magnitude of interest-rate decrease would correspond with a nice bounce in REIT returns, but that failed to materialize in August. Instead, REITs largely tracked equity markets. International REITs continued their outperformance, benefiting from improved investor confidence and growth expectations. Continued economic growth and improving lending activity are expected to support REIT fundamentals. If interest rates rise too far, too fast, the group may underperform. On the other hand, if interest rates stabilize, or even gradually increase, we believe that both domestic and international REITs will be positioned to outperform other asset classes. We remain overweight public real estate (which encompasses both domestic and international REITs). Master Limited Partnerships (MLPs): MLPs declined by nearly five percent in August. This drop was driven by the continued grind lower in oil prices. Tepid growth expectations in today’s lower oil-price environment, and several distribution-cut announcements, certainly have not helped. MLP performance typically benefits from stable and rising oil prices. We believe that any oil-price weakness can offer a good opportunity to invest in partnerships with high-quality assets and strong balance sheets. It is helpful to keep our $40–$50 year-end West Texas Intermediate (WTI) crude-oil price target in mind when deciding when to add exposure to MLPs. Downside risks include the possibility of collapsing oil prices and higher interest rates.

Wells Fargo Investment Institute Perspective. REITs and MLPs typically provide income opportunities for investors, but the main drivers for these two sectors differ. For REITs, we believe that the fundamentals remain generally supportive, and we continue to hold a tactical overweight position on public real estate. For MLPs, investors’ search for yield and improving fundamentals serve as positives for the sector. We recommend that investors consider high-quality, midstream MLPs that are large and liquid.

Real Assets Index Total Returns, REITs and MLPs—As of 8/31/17


Public Real Estate 0.2% 2.1% 7.6% 0.8% 4.6% 8.0%

Domestic REITs 0.6% 1.9% 6.9% 1.9% 8.4% 9.9%

International REITs 0.9% 3.9% 14.3% 5.8% 2.4% 7.0%

Master Limited Partnerships -4.9% -3.7% -6.3% -2.6% -13.6% -0.3%

Past performance is no guarantee of future results. Returns over one year are annualized.Sources: FTSE, Alerian See end of report for important definitions and disclosures.

Commodities.Market Observations.Gains in metals and certain energy commodities supported broad commodity indices in August. Agriculture and oil were the largest performance detractors. We expect the broad commodity indices to stabilize, but believe that the performance divergence of individual commodities will widen. This would be typical for this stage in a commodity bear super-cycle.

Metals: Precious metal prices have continued to trek higher on dollar weakness and increased demand for perceived safe havens as geopolitical concerns have grown. Yet, the dollar could strengthen into year-end. Further, in the longer term, monetary-policy divergence is likely to increase. Both of these trends could put downward pressure on gold and other precious-metal prices. Base-metal prices also rose last month, due to better-than-expected data from China. A potentially stronger dollar, weaker Chinese growth, and fading optimism over the prospect of increased U.S. infrastructure spending could be headwinds for base metals.

Energy: While crude-oil prices declined in August, gasoline and natural gas led the energy sector higher. Gasoline prices rose by 25 percent last month, on concerns over supply disruptions from Hurricane Harvey. (Hurricane Harvey temporarily shut down an estimated 20–25 percent of U.S. refinery capacity). Oil prices did not experience the same upward movement—as the global oil market remains oversupplied and demand, especially from refiners, has been weak. Elevated global supplies could continue to suppress prices.

Agriculture: Despite dollar weakness, agricultural commodities have continued to lag other commodities as favorable weather conditions in the Midwest have improved U.S. crop conditions, and supplies remain elevated. Improving foreign demand remains a positive for grains, but demand has not improved as quickly as supply has grown. Domestic demand for meats has been low, and supplies have been ample. Consequently, prices fell last month. Potential dollar strength could hurt this sector further unless there is an uptick in demand.

Wells Fargo Investment Institute Perspective. Despite common supportive factors like dollar weakness, we have seen a divergence in commodity prices for most of 2017. We anticipate that this divergence will continue. Yet, we believe that commodities, as a whole, could suffer headwinds from relatively low inflation, sluggish economic growth, and potential dollar strength. Overall, commodities appear to be in a range-bound period and could underperform this year. We currently hold a tactical underweight.

Real Assets Index Total Returns, Commodities—As of 8/31/17


Commodities (BCOM) 0.4% 2.7% -2.7% 3.0% -12.3% -10.1%

Past performance is no guarantee of future results. Returns over one year are annualized.Source: Bloomberg See end of report for important definitions and disclosures.

Table of Contents


6

Market Summary.

Alternative Investments*.

Early estimates from Hedge Fund Research, Inc. (HFR) indicate positive returns in August, despite significant geopolitical concerns that led to sporadic bouts of increased volatility. Equity Hedge managers posted their 10th consecutive month of positive returns, benefiting from both long and short positions. Event Driven strategies continue to benefit from a robust deal environment, with Distressed and Special Situations strategies outperforming Merger Arbitrage and Activist approaches. Macro strategies capitalized on opportunities with currency and commodity sectors, although certain strategies had difficulty trading in the fixed income class. Finally, Relative Value strategies were slightly positive, led by Structured Credit strategies that were less affected by macro events.

Strategy Results Relative Value: The credit environment in August was challenging for Relative Value managers as spreads widened and issuance declined due to seasonality. While earnings were generally in line with, or above, expectations, geopolitical risks led to increased volatility. Structured Credit managers benefited from positive technical support—as demand for yield drove an institutional investor base. Macro: Performance for Macro strategies was positive in August, with Discretionary managers underperforming Systematic. Although fixed-income trading was challenging for trend followers, losses were somewhat offset by gains in commodities, equities, and currencies.Event Driven: Managers assert that merger and acquisition activity is being delayed by U.S. tax reform uncertainties. Many contend that further clarity on this issue, along with continued European deal activity growth, can provide opportunities in the remainder of 2017 and in 2018. Equity Hedge: Performance was positive again last month, as managers generally benefited from “momentum-oriented” securities within the Information Technology, Health Care, and Utilities sectors. While geopolitical risks escalated toward the end of August, gross and net exposure levels remained relatively unchanged.

Market Observations. Even though the S&P 500 Index was roughly flat in August, there were two days when the index declined by more than one percent, which is a departure from the norm this year. Importantly, though volatility jumped on both of these occasions, Long/Short Equity hedge funds were generally successful in managing exposures and, in many cases, benefited as their short positions appreciated. As a result, long and short alpha (excess return over a benchmark) for August reached levels not seen in years, further bolstering our belief that the environment is improving for active management. Furthermore, Relative Value managers were modestly positive last month, as portfolio hedges—especially short high-yield credit—offset losses elsewhere.

Wells Fargo Investment Institute Perspective. Relative Value: We are tactically overweight Relative Value, as we believe that certain Structured Credit sectors currently offer more attractive yields and total-return potential than corporate credit. An increase in fixed-income volatility and credit dispersion is expected to benefit Arbitrage and Long/Short Credit strategies. Macro: We remain evenweight Macro strategies, which can provide useful diversification benefits in a rising-rate

environment. We prefer the Macro Discretionary strategy, which typically is more nimble and less susceptible to volatility spikes and trend reversals than other strategies. Event Driven: We are evenweight Event Driven strategies. Default rates may be bottoming (and may begin to increase), especially if retail-sector weakness accelerates and interest rates continue to rise. Deal activity, notably in Europe (and other developed economies), remains supportive of Merger Arbitrage and Special Situation strategies. Equity Hedge: We continue to view Equity Hedge a high-conviction strategy and favor managers with low-to-moderate equity exposure. Though volatility has been muted, equity correlations are at multi-year lows, benefiting security selection. Further, we expect that fiscal policy should influence fundamentals, providing opportunities between and within sectors. Private Capital: We remain highly constructive on prospective Private Capital opportunities and recommend that qualified, financially-sophisticated investors continue to diversify their Private Capital investments by vintage year. Our evenweight position is more representative of our tepid outlook on the Large Buyout strategy than it is reflective of limited opportunities in Private Capital—particularly opportunities within Private Debt as well as niche and specialty private-capital strategies. Private Real Estate: We remain evenweight Private Real Estate. Despite the recent reduction in core commercial property values, we believe that many core markets are fully priced or overpriced for new capital investment. We see potential opportunities in certain global strategies.

For more information, please request our Global Alternatives Outlook or our Investment Strategy report.

Alternative Investments Index Total Returns—As of 8/31/17


Global Hedge Funds 0.8% 1.9% 5.5% 7.4% 3.0% 4.9%

Relative Value 0.3% 1.0% 3.7% 6.5% 3.2% 5.2%

Arbitrage 0.5% 1.0% 4.7% 5.2% 3.0% 3.3%

Long/Short Credit 0.3% 1.2% 4.0% 7.5% 3.3% 4.9%

Struct Credit/Asset-Backed 0.9% 1.4% 6.1% 9.2% 4.9% 7.5%

Macro 1.0% 1.7% 0.9% -0.1% 1.4% 1.0%

Systematic 1.4% 2.4% -0.2% -3.4% 1.3% 0.4%

Discretionary 0.1% -0.1% 0.7% 1.8% -0.2% 0.6%

Event Driven 0.0% 0.9% 4.9% 9.6% 2.8% 5.9%

Activist -2.1% -1.6% 2.8% 8.0% 5.2% 10.2%

Distressed Credit 0.6% 1.3% 4.5% 11.7% 1.4% 5.6%

Merger Arbitrage 0.1% 0.4% 3.8% 5.8% 3.4% 3.7%

Equity Hedge 1.0% 2.4% 8.5% 11.0% 3.6% 6.5%

Directional Equity 1.3% 2.5% 7.4% 9.5% 3.7% 6.5%

Equity Market Neutral 0.8% 1.6% 2.4% 4.0% 3.3% 3.9%

Past performance is no guarantee of future results. Returns over one year are annualized.Source: Hedge Fund Research, Inc. See end of report for important definitions and disclosures.

* Alternative investments are not suitable for all investors. They are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. Please see end of report for important definitions and disclosures.

Table of Contents


7

Investment Themes and Actions for 2017,

Theme, Trends, Strategic (Long-Term Investments), Tactical (Short-Term Opportunities),

The Divided Recovery.

The divided recovery has led to unequal benefits for market participants.

Wage and real-income stagnation may be fueling protectionism and geopolitical unrest.

Technology and innovation may be contributing to job/worker mismatch.

If the expected new policies support faster growth and inflation, we believe that equities and real assets should benefit.

On the contrary, if growth slows or if politics remain unpredictable, bond positions could help stabilize portfolios.

The potential economic outcomes are broad; we believe that investors should maintain a diversified portfolio.

We favor Public Real Estate and high-quality issues within U.S. Intermediate Term Fixed Income.

Due to lower relative yields, consider an underweight position in Developed Market ex-U.S. Fixed Income.

We are evenweight Emerging Market Equities due to improved earnings growth potential.

The Agile Investor.

We expect several asset classes to trade within a range of values.

Tactical decisions may enhance asset performance in this environment.

Active managers may find opportunities to add return in the coming years.

We suggest a strategic asset allocation that includes fixed income, equities, real assets, and alternative investments based on long-term investment goals and risk tolerance.

We recommend rebalancing portfolios regularly to account for shifts in sentiment and asset values.

We expect opportunities in sectors such as Industrials and Health Care may benefit from the next phase of globalization, expanding populations, and new technologies.

We recommend selecting a mix of active and passive strategies that are appropriate for current market trends.

Investing Across Generations.

Many feel the U.S. is facing a retirement crisis, exacerbated by perpetually low interest rates.

Over the next few decades, Baby Boomers and Millennials will be trading places in the workforce.

The largest generational transfer of wealth (close to $30 trillion) is expected to occur over the next several decades.

Younger workers should take advantage of time and start saving for retirement, no matter how small the initial contributions.

Eligible individuals also may want to consider investing in a tax-deferred Health Savings Account, which is tax-exempt as long as the money is used for covering qualified medical expenses.

We believe equity holdings are vital for most retirement accounts. Investors may consider owning a mix of dividend-paying, value-tilted stocks for income as well as growth stocks for capital appreciation and an offset to inflation.

Workers nearing retirement age may be able to take advantage of “catch-up” contributions. The IRS provision allows workers age 50 or older to make additional tax-deferred contributions.

Policies of Change.

The new U.S. administration appears to favor tax cuts and rolling back regulations, which could be positive for U.S. growth.

Central-bank stimulus programs appear less effective since economic growth slowed in 2015.

The new U.S. administration’s policies may be more restrictive to global trade.

We expect an increased risk for recession beyond 2017 as debt levels and inflation continue to rise and geopolitical stresses build.

Although fixed income is an important component of many portfolios, volatility in this sector may increase due to higher inflation and speculation about future monetary policy.

Overweight Consumer Discretionary, Financials, Industrials, Health Care.

In 2017, we expect that the more defensive sectors likely will receive less attention from investors.

Increased price dispersion in equity markets could potentially create an attractive environment for alternative investments.

Table of Contents


8

Wells Fargo Investment Institute Forecasts.

GDP Growth: Data continue to reflect broad advancement in the global economy. We believe that the U.S. economy is in the latter stages of recovery and do not expect a recession this year or next. Economic conditions in China have stabilized, yet we believe that regulators’ efforts to curb excess lending will weigh on its growth rate. The outlook for Europe continues to improve as trade, employment, and investment activity gain pace. Japan also is experiencing a robust economic expansion, which has largely gone unnoticed.

Inflation: We expect inflationary pressures to stabilize— as inflation remains benign in most developed economies. U.S. inflation should rise this year as labor-market conditions tighten, while policies could limit international trade. Overseas, however, lower-for-longer commodity prices and excess factory capacity should constrain inflation. EMs should see relatively low levels of inflation rates, except in high-debt, low-growth locales like South America and Russia.

Unemployment Rate: The strong labor market is slowly raising wages and producing job openings broadly across the U.S. economy. This trend has been reflected in the U.S. unemployment rate recently falling to multi-year lows. Similar developments are underway in Europe and Japan.

Interest Rates: We expect that the Fed will proceed with rate hikes gradually. Interest-rate volatility may rise given the uncertainties around potential fiscal proposals and their likely effect.

U.S. Stocks: We are expecting stronger economic growth from mid-2017 through 2018, and we anticipate that this growth will support 7.0 percent earnings growth for the S&P 500 Index in 2018. Our initial year-end 2018 S&P 500 Index target range is 2450–2550 (versus 2300–2400 in 2017), alongside $138 in per-share earnings next year. For the Russell Midcap Index, our year-end 2018 target range is 1910–2010 (with a midpoint of 1960 versus 1870 this year). We foresee earnings growth of 8.8 percent next year and 2018 earnings of $99. Our year-end 2018 target range for the Russell 2000 Index (small caps) is 1350–1450. With a 48x trailing multiple, the index trades well over its long-term average 36x price/earnings (P/E) valuation.

Foreign Stocks: Improved earnings have fueled international developed-market (DM) equity gains in 2017, and we expect this to continue in 2018. Most of this year’s DM equity appreciation has come from earnings improvement, rather than higher valuations. We expect this to continue in 2018. Our 2018 earnings target of $127 for the MSCI EAFE Index represents a five percent increase over our 2017 forecast. Our 2018 year-end target range for the MSCI EAFE Index is 1980–2080. Our year-end 2018 target range for the MSCI Emerging Markets Index is 1090–1170, and our 2018 earnings target of $84 per share represents 10.5 percent growth over our 2017 EM equity earnings target. Our projected P/E multiple based on our 2018 EM targets and earnings is 13.5x—slightly above the historical average of 12.3x.

Commodities: We expect that the commodity bear super-cycle will keep oil and gold prices range–bound; though volatility could rise as interest-rate, dollar, and geopolitical uncertainties persist. We anticipate that WTI crude-oil prices will end both 2017 and 2018 between $40 and $50 a barrel as oil producers struggle with oversupply. Our year-end 2018 target range for gold is $1,150–$1,250 per ounce, the same as in 2017. We believe that gold’s 2017 rally will fade in 2018.

Currencies: For year-end 2017, we expect a partial recovery of the U.S. dollar’s decline versus the euro, and relative stability against the yen. For 2018, we anticipate that the euro may resume its rise, but that the yen will continue to weaken against the dollar. Rising U.S. interest rates and residual European political risks in 2018 (such as an Italian election) may only partially offset euro-positive factors, which include recovering European economic growth and reduced monetary stimulus. By contrast, full-throttle Japanese monetary stimulus (continued negative policy rates and a zero-percent 10-year sovereign yield target) implies yen depreciation. In the current environment of heightened geopolitical risk and U.S. policy uncertainty, we expect volatility, and currency pairs may trade in wide ranges over the year. We have a neutral to moderately positive outlook for EM currencies against the dollar in 2018. Yet, risk remains that a faster pace of U.S. rate increases, or Trump-administration trade developments, may tilt the outlook toward a stronger dollar. (Please see page 24 for more details.)

2018 Year- End Targets

2017 Year-End Targets 2016 (A)

Global EconomyDomestic GDP Growth 2.4% 2.3% 1.5%Domestic Inflation 2.2% 2.0% 2.1%Domestic Unemployment Rate 4.2% 4.5% 4.7%Global GDP Growth 3.6% 3.3% 3.2%Developed-Market GDP Growth 2.1% 1.7% 1.7%Developed-Market Inflation 1.9% 1.7% 1.3%Emerging-Market GDP Growth 4.7% 4.4% 4.3%Emerging-Market Inflation 4.3% 5.2% 5.7%Eurozone GDP Growth 2.0% 1.6% 1.8%Eurozone Inflation 1.6% 1.2% 1.1%Dollar/Euro Exchange Rate $1.16-$1.24 $1.08-$1.16 $1.05Yen/Dollar Exchange Rate ¥110-¥120 ¥105-¥115 ¥117

Global EquitiesS&P 500 Index 2450-2550 2300-2400 2239S&P 500 Operating Earnings Per Share $138 $129 $117 Russell Midcap® Index 1910-2010 1820-1920 1784Russell 2000 Index 1350-1450 1270-1370 1357 MSCI EAFE Index 1980-2080 1890-1990 1684MSCI Emerging Markets (EM) Index 1090-1170 1010-1090 862

Global Fixed Income10-Year U.S. Treasury Yield 2.50-3.00% 2.25-2.75% 2.44%30-Year U.S. Treasury Yield 3.00-3.50% 3.00-3.50% 3.07%Fed Funds Rate 1.75-2.00% 1.25-1.50% 0.75%

Global Real AssetsWest Texas Intermediate Crude Price ($ per barrel)

$40-$50 $40-$50 $54

Brent Crude Price ($ per barrel) $45-55 $45-55 $57Gold Price ($ per troy ounce) $1,150-

$1,250$1,150-$1,250

$1,152

Wells Fargo Investment Institute forecasts. See end of report for important definitions and disclosures. Sources: Wells Fargo Investment Institute, Bloomberg, S&P Capital IQ. As of 9/18/17. Projections are not guaranteed and are subject to change.

Table of Contents


9

Capital Market Assumptions.Fixed Income, Equities, Real Assets and Alternative Investments.

Annual update; as of July 2017.

Capital market and asset class assumptions are estimates of how asset classes may respond during various market environments. For example, downside risk is based on our assumptions about average returns and the variability of returns. It represents the minimum return that would be statistically likely in 95 percent of annual returns. In other words, in 19 out of 20 years, performance would likely be better than this figure and in the twentieth year it would likely be worse. There is no guarantee that any particular 20-year period would follow this pattern. Hypothetical returns represent our estimate of likely average returns over the next several market cycles. They do not represent the returns that an investor should expect in any particular year. Geometric return is the compounded annual growth rate of an investment (asset class or portfolio) over a specified period of time longer than one year. Standard deviation is a measure of volatility. It reflects the degree of variability surrounding the outcome of an investment decision; the higher the standard deviation, the greater the risk. Yield on a bond assumes constant maturity. Dividend yield on an equity or real-asset investment represents the projected dividend as a percentage of the purchase price. The assumptions are not designed to predict actual performance, and there are no assurances that any estimates used will be achieved. The information given has been provided as a guide to help with investment planning and does not represent the maximum loss a portfolio could experience.

Capital Market Assumptions

Asset ClassHypothetical

Arithmetic ReturnHypothetical

Geometric ReturnHypothetical Standard

Deviation or RiskYield or

Dividend Yield Downside Risk

Inflation 2.5% 2.5%

Cash Alternatives 2.5% 2.5% 1.0% 2.5% 0.8%

Fixe

d In

com

e U.S. Short Term Taxable Fixed Income 2.6% 2.6% 1.8% 2.6% -0.2%U.S. Intermediate Term Taxable Fixed Income 3.2% 3.1% 4.5% 3.1% -4.0%U.S. Long Term Taxable Fixed Income 3.8% 3.2% 10.5% 3.2% -12.6%Short Term Tax Exempt Fixed Income 2.1% 2.1% 1.8% 2.1% -0.8%Intermediate Term Tax Exempt Fixed Income 2.6% 2.5% 4.5% 2.5% -4.7%Long Term Tax Exempt Fixed Income 3.0% 2.6% 9.0% 2.6% -11.1%Developed Market ex.-U.S. Fixed Income 3.2% 2.8% 9.0% 2.8% -10.9%High Yield Taxable Fixed Income 6.8% 6.1% 12.0% 6.1% -11.7%High Yield Tax Exempt Fixed Income 5.4% 4.8% 12.0% 4.8% -13.1%Emerging Market Fixed Income 6.8% 6.2% 12.0% 6.2% -11.7%Inflation-Linked Fixed Income 3.3% 3.1% 6.0% 3.1% -6.3%Preferred Stock 5.1% 4.5% 12.0% 4.5% -13.4%

Equi

ties U.S. Large Cap Equities 8.9% 7.7% 16.5% 2.3% -15.9%

U.S. Mid Cap Equities 9.8% 8.3% 18.3% 1.8% -17.5%U.S. Small Cap Equities 10.3% 8.5% 20.0% 1.3% -19.2%Developed Market ex. U.S. Equities 8.9% 7.5% 17.5% 3.0% -17.4%Developed Market ex. U.S. Small Cap Equities 9.8% 8.0% 20.0% 2.0% -19.8%Emerging Market Equities 11.5% 9.0% 24.0% 2.3% -23.2%Frontier Market Equities 11.1% 8.2% 26.0% 3.5% -26.0%

Real

Ass

ets Public Real Estate 8.7% 7.2% 18.0% 4.3% -18.2%

Private Real Estate* 8.7% 7.7% 15.0% 6.0% -14.1%Infrastructure 8.7% 7.5% 16.0% 4.0% -15.5%Master Limited Partnerships 8.9% 7.6% 17.0% 6.0% -16.6%Timberland 7.5% 6.8% 12.3% 5.0% -11.4%Commodities 5.5% 4.4% 15.0% 0.0% -17.3%

Alte

rnat

ive

Inve

stm

ents

* Hedge Funds–Relative Value 5.3% 5.1% 5.8% 0.0% -3.9%Hedge Funds–Macro 5.1% 4.9% 6.3% 0.0% -4.9%Hedge Funds–Event Driven 5.6% 5.4% 7.0% 0.0% -5.5%Hedge Funds–Equity Hedge 5.8% 5.5% 8.8% 0.0% -7.9%Private Equity 13.0% 10.9% 22.0% 0.0% -19.3%Private Debt 9.3% 8.1% 16.0% 6.8% -14.9%


Table of Contents


10

Strategic and Tactical Asset Allocation

Client Goals: INCOME. GROWTH & INCOME. GROWTH.

Risk Tolerance: Conservative. Moderate. Aggressive. Conservative. Moderate. Aggressive. Conservative. Moderate. Aggressive.

Efficient FrontierAn efficient frontier represents the theoretical set of diversified portfolios that maximizes return given a specific level of risk.

Chart is conceptual and is not meant to reflect any actual returns or represent any specific asset classifications.

Source: Wells Fargo Investment Institute, July 2017

Aggressive GrowthGROWTH PORTFOLIOS

GROWTH & INCOME PORTFOLIOSAggressive Growth & Income

Moderate Growth & Income

Conservative Growth & Income

Aggressive Income

Moderate Income

Conservative Income

Moderate GrowthConservative Growth

INCOME PORTFOLIOS

Hypo

thet

ical R

etur

n

Hypothetical Risk

Income.Income portfolios emphasize current income with minimal consideration for capital appreciation and usually have less exposure to more volatile growth assets but can still experience losses.

Conservative Income investors generally assume lower risk, but may still experience losses or have lower expected income returns.

Moderate Income investors are willing to accept a modest level of risk that may result in increased losses in exchange for the potential to receive modest income returns.

Aggressive Income investors seek a higher level of returns and are willing to accept a higher level of risk that may result in greater losses.

Growth & Income. Growth & Income portfolios emphasize a blend of current income and capital appreciation and usually have some exposure to more volatile growth assets.

Conservative Growth & Income investors generally assume a lower amount of risk, but may still experience losses or have lower expected returns.

Moderate Growth & Income investors are willing to accept a modest level of risk that may result in increased losses in exchange for the potential to receive modest returns.

Aggressive Growth & Income investors seek a higher level of returns and are willing to accept a higher level of risk that may result in greater losses.

Growth. Growth portfolios emphasize capital appreciation with minimal consideration for current income and usually have significant exposure to more volatile growth assets.

Conservative Growth investors generally assume a lower amount of risk, but may still experience increased losses or have lower expected growth returns.

Moderate Growth investors are willing to accept a modest level of risk that may result in significant losses in exchange for the potential to receive higher returns.

Aggressive Growth investors seek a higher level of returns and are willing to accept a higher level of risk that may result in more significant losses.

Investment Objectives Definitions.

Table of Contents


11

Strategic and Tactical Asset Allocation,

Three Asset Groups: Fixed Income, Equities, Real Assets.

Strategic allocations as of 7/18/17; tactical allocations as of 7/18/17

CONSERVATIVE MODERATE AGGRESSIVE

Strategic Tactical Difference Strategic Tactical Difference Strategic Tactical Difference

INCO

ME CASH ALTERNATIVES 3.0% 3.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%

TOTAL FIXED INCOME 87.0% 87.0% 0.0% 72.0% 72.0% 0.0% 64.0% 64.0% 0.0%U.S. Taxable Investment Grade Fixed Income 73.0% 78.0% 5.0% 56.0% 61.0% 5.0% 43.0% 48.0% 5.0% U.S. Short Term Taxable 28.0% 28.0% 0.0% 19.0% 19.0% 0.0% 8.0% 8.0% 0.0% U.S. Intermediate Term Taxable 40.0% 45.0% 5.0% 30.0% 35.0% 5.0% 25.0% 30.0% 5.0% U.S. Long Term Taxable 5.0% 5.0% 0.0% 7.0% 7.0% 0.0% 10.0% 10.0% 0.0%High Yield Taxable Fixed Income 5.0% 3.0% -2.0% 6.0% 4.0% -2.0% 8.0% 6.0% -2.0%Developed Market Ex-U.S. Fixed Income 6.0% 3.0% -3.0% 5.0% 2.0% -3.0% 5.0% 2.0% -3.0%Emerging Market Fixed Income 3.0% 3.0% 0.0% 5.0% 5.0% 0.0% 8.0% 8.0% 0.0%TOTAL EQUITIES 6.0% 6.0% 0.0% 20.0% 18.0% -2.0% 28.0% 26.0% -2.0%U.S. Large Cap Equities 2.0% 2.0% 0.0% 12.0% 12.0% 0.0% 15.0% 15.0% 0.0%U.S. Mid Cap Equities 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 4.0% 4.0% 0.0%U.S. Small Cap Equities 0.0% 0.0% 0.0% 2.0% 0.0% -2.0% 4.0% 2.0% -2.0%Developed Market Ex-U.S. Equities 2.0% 2.0% 0.0% 4.0% 4.0% 0.0% 5.0% 5.0% 0.0%Emerging Market Equities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%TOTAL REAL ASSETS 4.0% 4.0% 0.0% 5.0% 7.0% 2.0% 5.0% 7.0% 2.0%Public Real Estate 4.0% 4.0% 0.0% 5.0% 7.0% 2.0% 5.0% 7.0% 2.0%Commodities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GROW

TH &

INCO


TOTAL FIXED INCOME 51.0% 51.0% 0.0% 41.0% 41.0% 0.0% 33.0% 32.0% -1.0%U.S. Taxable Investment Grade Fixed Income 37.0% 42.0% 5.0% 27.0% 33.0% 6.0% 17.0% 23.0% 6.0% U.S. Short Term Taxable 7.0% 7.0% 0.0% 4.0% 4.0% 0.0% 2.0% 2.0% 0.0% U.S. Intermediate Term Taxable 20.0% 25.0% 5.0% 16.0% 22.0% 6.0% 11.0% 17.0% 6.0% U.S. Long Term Taxable 10.0% 10.0% 0.0% 7.0% 7.0% 0.0% 4.0% 4.0% 0.0%High Yield Taxable Fixed Income 6.0% 4.0% -2.0% 6.0% 3.0% -3.0% 7.0% 3.0% -4.0%Developed Market Ex-U.S. Fixed Income 3.0% 0.0% -3.0% 3.0% 0.0% -3.0% 3.0% 0.0% -3.0%Emerging Market Fixed Income 5.0% 5.0% 0.0% 5.0% 5.0% 0.0% 6.0% 6.0% 0.0%TOTAL EQUITIES 39.0% 37.0% -2.0% 49.0% 47.0% -2.0% 57.0% 55.0% -2.0%U.S. Large Cap Equities 17.0% 17.0% 0.0% 21.0% 21.0% 0.0% 25.0% 25.0% 0.0%U.S. Mid Cap Equities 7.0% 7.0% 0.0% 9.0% 9.0% 0.0% 11.0% 11.0% 0.0%U.S. Small Cap Equities 6.0% 4.0% -2.0% 8.0% 6.0% -2.0% 8.0% 6.0% -2.0%Developed Market Ex-U.S. Equities 5.0% 5.0% 0.0% 6.0% 6.0% 0.0% 7.0% 7.0% 0.0%Emerging Market Equities 4.0% 4.0% 0.0% 5.0% 5.0% 0.0% 6.0% 6.0% 0.0%TOTAL REAL ASSETS 7.0% 8.0% 1.0% 7.0% 9.0% 2.0% 7.0% 10.0% 3.0%Public Real Estate 5.0% 8.0% 3.0% 5.0% 9.0% 4.0% 5.0% 10.0% 5.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 2.0% 0.0% -2.0%

See next page for Growth data and Portfolio Allocations across the Efficient Frontier, Strategic and Tactical.

Evenweight includes a +/- 100 basis point band around strategic allocation

Table of Contents


12

Strategic and Tactical Asset AllocationThree Asset Groups: Fixed Income, Equities, Real Assets (continued),.




GROW

TH

CASH ALTERNATIVES 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 2.0% 2.0% 0.0%TOTAL FIXED INCOME 23.0% 24.0% 1.0% 16.0% 16.0% 0.0% 7.0% 9.0% 2.0%U.S. Taxable Investment Grade Fixed Income 14.0% 19.0% 5.0% 8.0% 13.0% 5.0% 3.0% 7.0% 4.0% U.S. Short Term Taxable 4.0% 4.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0% U.S. Intermediate Term Taxable 6.0% 11.0% 5.0% 3.0% 8.0% 5.0% 0.0% 4.0% 4.0% U.S. Long Term Taxable 4.0% 4.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%High Yield Taxable Fixed Income 4.0% 2.0% -2.0% 3.0% 0.0% -3.0% 2.0% 0.0% -2.0%Developed Market Ex-U.S. Fixed Income 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 0.0% 0.0% 0.0%Emerging Market Fixed Income 3.0% 3.0% 0.0% 3.0% 3.0% 0.0% 2.0% 2.0% 0.0%TOTAL EQUITIES 68.0% 65.0% -3.0% 75.0% 72.0% -3.0% 84.0% 79.0% -5.0%U.S. Large Cap Equities 29.0% 29.0% 0.0% 29.0% 29.0% 0.0% 27.0% 26.0% -1.0%U.S. Mid Cap Equities 12.0% 12.0% 0.0% 13.0% 13.0% 0.0% 15.0% 15.0% 0.0%U.S. Small Cap Equities 10.0% 7.0% -3.0% 13.0% 10.0% -3.0% 14.0% 10.0% -4.0%Developed Market Ex-U.S. Equities 9.0% 9.0% 0.0% 10.0% 10.0% 0.0% 14.0% 14.0% 0.0%Emerging Market Equities 8.0% 8.0% 0.0% 10.0% 10.0% 0.0% 14.0% 14.0% 0.0%TOTAL REAL ASSETS 7.0% 9.0% 2.0% 7.0% 10.0% 3.0% 7.0% 10.0% 3.0%Public Real Estate 5.0% 9.0% 4.0% 5.0% 10.0% 5.0% 5.0% 10.0% 5.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 2.0% 0.0% -2.0%

These allocations span the set of investments available to investors, utilizing broad diversification to help manage portfolio risk. Special issues such as liquidity, cash flow, and taxability would be taken into consideration in the choice of investment vehicles for each asset class. Depending on their tax bracket and on market conditions, investors may elect taxable or municipal bonds to implement their fixed-income allocation.

Portfolio Allocations across the Efficient Frontier –Strategic

0%

20%

40%

60%

80%

100%

AggressiveModerateConservativeAggressiveModerateConservativeAggressiveModerateConservative

INCOME GROWTH & INCOME GROWTH

U.S. Equities

Foreign Equities

Real Assets

Other Fixed Income

U.S. Taxable Investment Grade Fixed Income

Cash Alternatives

Portf

olio A

lloca

tions

Portfolio Allocations across the Efficient Frontier –Tactical

0%

20%

40%

60%

80%

100%



U.S. Equities

Foreign Equities

Real Assets

Other Fixed Income


Cash Alternatives

Portf

olio A

lloca

tions


Table of Contents


13

Strategic and Tactical Asset AllocationFour Asset Groups: Fixed Income, Equities, Real Assets, Alternative Investments (without Private Capital).Strategic allocations as of 7/18/17; tactical allocations as of 7/18/17

CONSERVATIVE MODERATE AGGRESSIVEStrategic Tactical Difference Strategic Tactical Difference Strategic Tactical Difference

INCO


TOTAL FIXED INCOME 77.0% 74.0% -3.0% 64.0% 59.0% -5.0% 56.0% 53.0% -3.0%U.S. Taxable Investment Grade Fixed Income 61.0% 64.0% 3.0% 46.0% 47.0% 1.0% 35.0% 37.0% 2.0% U.S. Short Term Taxable 21.0% 21.0% 0.0% 14.0% 14.0% 0.0% 4.0% 4.0% 0.0% U.S. Intermediate Term Taxable 35.0% 38.0% 3.0% 25.0% 26.0% 1.0% 21.0% 23.0% 2.0% U.S. Long Term Taxable 5.0% 5.0% 0.0% 7.0% 7.0% 0.0% 10.0% 10.0% 0.0%High Yield Taxable Fixed Income 5.0% 3.0% -2.0% 7.0% 5.0% -2.0% 8.0% 6.0% -2.0%Developed Market Ex-U.S. Fixed Income 8.0% 4.0% -4.0% 6.0% 2.0% -4.0% 5.0% 2.0% -3.0%Emerging Market Fixed Income 3.0% 3.0% 0.0% 5.0% 5.0% 0.0% 8.0% 8.0% 0.0%TOTAL EQUITIES 6.0% 6.0% 0.0% 16.0% 16.0% 0.0% 24.0% 22.0% -2.0%U.S. Large Cap Equities 2.0% 2.0% 0.0% 10.0% 10.0% 0.0% 11.0% 11.0% 0.0%U.S. Mid Cap Equities 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 6.0% 6.0% 0.0%U.S. Small Cap Equities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.0% 1.0% -2.0%Developed Market Ex-U.S. Equities 2.0% 2.0% 0.0% 4.0% 4.0% 0.0% 4.0% 4.0% 0.0%Emerging Market Equities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%TOTAL REAL ASSETS 2.0% 2.0% 0.0% 5.0% 7.0% 2.0% 5.0% 7.0% 2.0%Public Real Estate 2.0% 2.0% 0.0% 5.0% 7.0% 2.0% 5.0% 7.0% 2.0%Commodities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%TOTAL ALTERNATIVE INVESTMENTS* 12.0% 15.0% 3.0% 12.0% 15.0% 3.0% 12.0% 15.0% 3.0%Hedge Fund–Relative Value 6.0% 9.0% 3.0% 4.0% 7.0% 3.0% 4.0% 7.0% 3.0%Hedge Fund–Macro 3.0% 3.0% 0.0% 5.0% 5.0% 0.0% 5.0% 5.0% 0.0%Hedge Fund–Event Driven 3.0% 3.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%Hedge Fund–Equity Hedge 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GROW

TH A

ND IN

COM

E CASH ALTERNATIVES 3.0% 4.0% 1.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%TOTAL FIXED INCOME 41.0% 40.0% -1.0% 31.0% 29.5% -1.5% 23.0% 21.5% -1.5%U.S. Taxable Investment Grade Fixed Income 29.0% 33.0% 4.0% 17.0% 21.5% 4.5% 9.0% 13.5% 4.5% U.S. Short Term Taxable 4.0% 4.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. Intermediate Term Taxable 16.0% 20.0% 4.0% 11.0% 15.5% 4.5% 4.0% 8.5% 4.5% U.S. Long Term Taxable 9.0% 9.0% 0.0% 6.0% 6.0% 0.0% 5.0% 5.0% 0.0%High Yield Taxable Fixed Income 5.0% 3.0% -2.0% 6.0% 3.0% -3.0% 6.0% 2.0% -4.0%Developed Market Ex-U.S. Fixed Income 3.0% 0.0% -3.0% 3.0% 0.0% -3.0% 2.0% 0.0% -2.0%Emerging Market Fixed Income 4.0% 4.0% 0.0% 5.0% 5.0% 0.0% 6.0% 6.0% 0.0%TOTAL EQUITIES 35.0% 31.0% -4.0% 44.0% 40.0% -4.0% 52.0% 47.0% -5.0%U.S. Large Cap Equities 13.0% 13.0% 0.0% 20.0% 20.0% 0.0% 22.0% 22.0% 0.0%U.S. Mid Cap Equities 7.0% 7.0% 0.0% 8.0% 8.0% 0.0% 9.0% 9.0% 0.0%U.S. Small Cap Equities 6.0% 2.0% -4.0% 6.0% 2.0% -4.0% 8.0% 3.0% -5.0%Developed Market Ex-U.S. Equities 5.0% 5.0% 0.0% 5.0% 5.0% 0.0% 7.0% 7.0% 0.0%Emerging Market Equities 4.0% 4.0% 0.0% 5.0% 5.0% 0.0% 6.0% 6.0% 0.0%TOTAL REAL ASSETS 7.0% 8.0% 1.0% 7.0% 9.0% 2.0% 7.0% 10.0% 3.0%Public Real Estate 5.0% 8.0% 3.0% 5.0% 9.0% 4.0% 5.0% 10.0% 5.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 2.0% 0.0% -2.0%TOTAL ALTERNATIVE INVESTMENTS* 14.0% 17.0% 3.0% 15.0% 18.5% 3.5% 15.0% 18.5% 3.5%Hedge Fund–Relative Value 3.0% 3.5% 0.5% 3.0% 3.5% 0.5% 3.0% 3.5% 0.5%Hedge Fund–Macro 6.0% 6.0% 0.0% 6.0% 6.0% 0.0% 6.0% 6.0% 0.0%Hedge Fund–Event Driven 3.0% 3.0% 0.0% 4.0% 4.0% 0.0% 4.0% 4.0% 0.0%Hedge Fund–Equity Hedge 2.0% 4.5% 2.5% 2.0% 5.0% 3.0% 2.0% 5.0% 3.0%




Table of Contents


14


CONSERVATIVE MODERATE AGGRESSIVEStrategic Tactical Difference Strategic Tactical Difference Strategic Tactical Difference

GROW

TH

CASH ALTERNATIVES 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 2.0% 2.0% 0.0%TOTAL FIXED INCOME 17.0% 18.0% 1.0% 8.0% 9.0% 1.0% 6.0% 5.0% -1.0%U.S. Taxable Investment Grade Fixed Income 7.0% 11.0% 4.0% 2.0% 6.0% 4.0% 0.0% 2.0% 2.0% U.S. Short Term Taxable 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. Intermediate Term Taxable 4.0% 8.0% 4.0% 0.0% 4.0% 4.0% 0.0% 2.0% 2.0% U.S. Long Term Taxable 3.0% 3.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0%High Yield Taxable Fixed Income 5.0% 2.0% -3.0% 3.0% 0.0% -3.0% 3.0% 0.0% -3.0%Developed Market Ex-U.S. Fixed Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Emerging Market Fixed Income 5.0% 5.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%TOTAL EQUITIES 62.0% 56.0% -6.0% 71.0% 65.0% -6.0% 82.0% 76.0% -6.0%U.S. Large Cap Equities 24.0% 24.0% 0.0% 25.0% 25.0% 0.0% 25.0% 25.0% 0.0%U.S. Mid Cap Equities 11.0% 11.0% 0.0% 13.0% 13.0% 0.0% 16.0% 16.0% 0.0%U.S. Small Cap Equities 10.0% 4.0% -6.0% 12.0% 6.0% -6.0% 15.0% 9.0% -6.0%Developed Market Ex-U.S. Equities 9.0% 9.0% 0.0% 11.0% 11.0% 0.0% 13.0% 13.0% 0.0%Emerging Market Equities 8.0% 8.0% 0.0% 10.0% 10.0% 0.0% 13.0% 13.0% 0.0%TOTAL REAL ASSETS 7.0% 9.0% 2.0% 7.0% 9.0% 2.0% 5.0% 9.0% 4.0%Public Real Estate 5.0% 9.0% 4.0% 5.0% 9.0% 4.0% 5.0% 9.0% 4.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 0.0% 0.0% 0.0%TOTAL ALTERNATIVE INVESTMENTS* 12.0% 15.0% 3.0% 12.0% 15.0% 3.0% 5.0% 8.0% 3.0%Hedge Fund–Relative Value 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0%Hedge Fund–Macro 6.0% 6.0% 0.0% 6.0% 6.0% 0.0% 3.0% 3.0% 0.0%Hedge Fund–Event Driven 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0%Hedge Fund–Equity Hedge 2.0% 5.0% 3.0% 2.0% 5.0% 3.0% 2.0% 5.0% 3.0%

These allocations span the set of investments available to investors, utilizing broad diversification to help manage portfolio risk. Special issues such as liquidity, cash flow, and taxability would be taken into consideration in the choice of investment vehicles for each asset class. Depending on their tax bracket and on market conditions, investors may elect taxable or municipal bonds to implement their fixed income allocation. The tactical asset allocation overweights and underweights are designed to provide guidance on shorter-term (6–18 months) weightings in the portfolio.


0%

20%

40%

60%

80%

100%



U.S. Equities

Foreign Equities

Real Assets

Other Fixed Income


Cash Alternatives

Alternative Investments

Portf

olio A

lloca

tions


0%

20%

40%

60%

80%

100%



U.S. Equities

Foreign Equities

Real Assets

Other Fixed Income


Cash Alternatives


Portf

olio A

lloca

tions

Strategic and Tactical Asset AllocationFour Asset Groups: Fixed Income, Equities, Real Assets, Alternative Investments (without Private Capital) (continued).



Table of Contents


15

Strategic and Tactical Asset AllocationFour Asset Groups: Fixed Income, Equities, Real Assets, Alternative Investments.




INCO


TOTAL FIXED INCOME 75.0% 71.0% -4.0% 60.0% 54.0% -6.0% 51.0% 46.0% -5.0%U.S. Taxable Investment Grade Fixed Income 58.0% 60.0% 2.0% 42.0% 42.0% 0.0% 30.0% 30.0% 0.0% U.S. Short Term Taxable 20.0% 20.0% 0.0% 12.0% 12.0% 0.0% 2.0% 2.0% 0.0% U.S. Intermediate Term Taxable 33.0% 35.0% 2.0% 23.0% 23.0% 0.0% 19.0% 19.0% 0.0% U.S. Long Term Taxable 5.0% 5.0% 0.0% 7.0% 7.0% 0.0% 9.0% 9.0% 0.0%High Yield Taxable Fixed Income 6.0% 4.0% -2.0% 7.0% 5.0% -2.0% 8.0% 6.0% -2.0%Developed Market Ex-U.S. Fixed Income 8.0% 4.0% -4.0% 6.0% 2.0% -4.0% 5.0% 2.0% -3.0%Emerging Market Fixed Income 3.0% 3.0% 0.0% 5.0% 5.0% 0.0% 8.0% 8.0% 0.0%TOTAL EQUITIES 6.0% 6.0% 0.0% 18.0% 18.0% 0.0% 25.0% 23.0% -2.0%U.S. Large Cap Equities 2.0% 2.0% 0.0% 10.0% 10.0% 0.0% 11.0% 11.0% 0.0%U.S. Mid Cap Equities 2.0% 2.0% 0.0% 4.0% 4.0% 0.0% 6.0% 6.0% 0.0%U.S. Small Cap Equities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4.0% 2.0% -2.0%Developed Market Ex-U.S. Equities 2.0% 2.0% 0.0% 4.0% 4.0% 0.0% 4.0% 4.0% 0.0%Emerging Market Equities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%TOTAL REAL ASSETS 5.0% 5.0% 0.0% 6.0% 8.0% 2.0% 8.0% 10.0% 2.0%Public Real Estate 2.0% 2.0% 0.0% 2.0% 4.0% 2.0% 3.0% 5.0% 2.0%Private Real Estate* 3.0% 3.0% 0.0% 4.0% 4.0% 0.0% 5.0% 5.0% 0.0%Commodities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%TOTAL ALTERNATIVE INVESTMENTS* 11.0% 15.0% 4.0% 13.0% 17.0% 4.0% 13.0% 18.0% 5.0%Hedge Funds–Relative Value 5.0% 9.0% 4.0% 5.0% 9.0% 4.0% 5.0% 10.0% 5.0%Hedge Funds–Macro 3.0% 3.0% 0.0% 5.0% 5.0% 0.0% 5.0% 5.0% 0.0%Hedge Funds–Event Driven 3.0% 3.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%Hedge Funds–Equity Hedge 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Private Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

GROW

TH A

ND IN

COM

E CASH ALTERNATIVES 3.0% 4.0% 1.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%TOTAL FIXED INCOME 39.0% 36.0% -3.0% 29.0% 26.5% -2.5% 21.0% 16.5% -4.5%U.S. Taxable Investment Grade Fixed Income 25.0% 27.0% 2.0% 15.0% 17.5% 2.5% 7.0% 8.5% 1.5% U.S. Short Term Taxable 4.0% 4.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. Intermediate Term Taxable 14.0% 16.0% 2.0% 10.0% 12.5% 2.5% 2.0% 3.5% 1.5% U.S. Long Term Taxable 7.0% 7.0% 0.0% 5.0% 5.0% 0.0% 5.0% 5.0% 0.0%High Yield Taxable Fixed Income 6.0% 4.0% -2.0% 6.0% 3.0% -3.0% 6.0% 2.0% -4.0%Developed Market Ex-U.S. Fixed Income 3.0% 0.0% -3.0% 2.0% 0.0% -2.0% 2.0% 0.0% -2.0%Emerging Market Fixed Income 5.0% 5.0% 0.0% 6.0% 6.0% 0.0% 6.0% 6.0% 0.0%TOTAL EQUITIES 32.0% 28.0% -4.0% 40.0% 35.0% -5.0% 48.0% 44.0% -4.0%U.S. Large Cap Equities 14.0% 14.0% 0.0% 18.0% 18.0% 0.0% 22.0% 22.0% 0.0%U.S. Mid Cap Equities 6.0% 6.0% 0.0% 7.0% 7.0% 0.0% 8.0% 8.0% 0.0%U.S. Small Cap Equities 4.0% 0.0% -4.0% 5.0% 0.0% -5.0% 6.0% 2.0% -4.0%Developed Market Ex-U.S. Equities 5.0% 5.0% 0.0% 6.0% 6.0% 0.0% 7.0% 7.0% 0.0%Emerging Market Equities 3.0% 3.0% 0.0% 4.0% 4.0% 0.0% 5.0% 5.0% 0.0%TOTAL REAL ASSETS 10.0% 11.0% 1.0% 11.0% 13.0% 2.0% 11.0% 14.0% 3.0%Public Real Estate 3.0% 6.0% 3.0% 3.0% 7.0% 4.0% 3.0% 8.0% 5.0%Private Real Estate* 5.0% 5.0% 0.0% 6.0% 6.0% 0.0% 6.0% 6.0% 0.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 2.0% 0.0% -2.0%TOTAL ALTERNATIVE INVESTMENTS* 16.0% 21.0% 5.0% 17.0% 22.5% 5.5% 17.0% 22.5% 5.5%Hedge Funds–Relative Value 4.0% 6.5% 2.5% 3.0% 5.5% 2.5% 2.0% 4.5% 2.5%Hedge Funds–Macro 4.0% 4.0% 0.0% 3.0% 3.0% 0.0% 3.0% 3.0% 0.0%Hedge Funds–Event Driven 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 2.0% 2.0% 0.0%Hedge Funds–Equity Hedge 0.0% 2.5% 2.5% 2.0% 5.0% 3.0% 2.0% 5.0% 3.0%Private Equity 6.0% 6.0% 0.0% 7.0% 7.0% 0.0% 8.0% 8.0% 0.0%




Table of Contents


16

These allocations span the set of investments available to investors, utilizing broad diversification to help manage portfolio risk. Special issues such as liquidity, cash flow, and taxability would be taken into consideration in the choice of investment vehicles for each asset class. Depending on their tax bracket and on market conditions, investors may elect taxable or municipal bonds to implement their fixed income allocation. The tactical asset allocation overweights and underweights are designed to provide guidance on shorter-term (6–18 months) weightings in the portfolio.

Strategic and Tactical Asset AllocationFour Asset Groups: Fixed Income, Equities, Real Assets, Alternative Investments (continued),




GROW

TH CASH ALTERNATIVES 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 2.0% 2.0% 0.0%TOTAL FIXED INCOME 14.0% 14.0% 0.0% 9.0% 9.0% 0.0% 4.0% 4.0% 0.0%U.S. Taxable Investment Grade Fixed Income 4.0% 7.0% 3.0% 2.0% 6.0% 4.0% 0.0% 2.0% 2.0% U.S. Short Term Taxable 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. Intermediate Term Taxable 2.0% 5.0% 3.0% 0.0% 4.0% 4.0% 0.0% 2.0% 2.0% U.S. Long Term Taxable 2.0% 2.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0%High Yield Taxable Fixed Income 5.0% 2.0% -3.0% 4.0% 0.0% -4.0% 2.0% 0.0% -2.0%Developed Market Ex-U.S. Fixed Income 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Emerging Market Fixed Income 5.0% 5.0% 0.0% 3.0% 3.0% 0.0% 2.0% 2.0% 0.0%TOTAL EQUITIES 56.0% 51.0% -5.0% 63.0% 57.0% -6.0% 70.0% 64.0% -6.0%U.S. Large Cap Equities 24.0% 24.0% 0.0% 24.0% 24.0% 0.0% 24.0% 24.0% 0.0%U.S. Mid Cap Equities 9.0% 9.0% 0.0% 10.0% 10.0% 0.0% 12.0% 12.0% 0.0%U.S. Small Cap Equities 7.0% 2.0% -5.0% 8.0% 2.0% -6.0% 9.0% 3.0% -6.0%Developed Market Ex-U.S. Equities 9.0% 9.0% 0.0% 11.0% 11.0% 0.0% 12.0% 12.0% 0.0%Emerging Market Equities 7.0% 7.0% 0.0% 10.0% 10.0% 0.0% 13.0% 13.0% 0.0%TOTAL REAL ASSETS 12.0% 14.0% 2.0% 12.0% 15.0% 3.0% 11.0% 14.0% 3.0%Public Real Estate 3.0% 7.0% 4.0% 3.0% 8.0% 5.0% 3.0% 6.0% 3.0%Private Real Estate* 7.0% 7.0% 0.0% 7.0% 7.0% 0.0% 8.0% 8.0% 0.0%Commodities 2.0% 0.0% -2.0% 2.0% 0.0% -2.0% 0.0% 0.0% 0.0%TOTAL ALTERNATIVE INVESTMENTS* 16.0% 19.0% 3.0% 14.0% 17.0% 3.0% 13.0% 16.0% 3.0%Hedge Funds–Relative Value 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Hedge Funds–Macro 3.0% 3.0% 0.0% 2.0% 2.0% 0.0% 0.0% 0.0% 0.0%Hedge Funds–Event Driven 2.0% 2.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Hedge Funds–Equity Hedge 2.0% 5.0% 3.0% 2.0% 5.0% 3.0% 2.0% 5.0% 3.0%Private Equity 9.0% 9.0% 0.0% 10.0% 10.0% 0.0% 11.0% 11.0% 0.0%


0%

20%

40%

60%

80%

100%



U.S. Equities

Portf

olio A

lloca

tions

Foreign Equities

Real Assets

Other Fixed Income


Cash Alternatives



0%

20%

40%

60%

80%

100%



U.S. Equities

Foreign Equities

Real Assets

Other Fixed Income


Cash Alternatives


Portf

olio A

lloca

tions



Table of Contents


17

Cyclical Asset Allocation.

Three Asset Groups: Fixed Income, Equities, Real Assets.

Quarterly update; as of July 2017Our cyclical asset allocation process is based on a rolling three-year outlook—which means that the Global Investment Strategy Committee evaluates how the portfolios are expected to perform over the next 36 months based on asset valuations as well as economic and market outlooks. The cyclical approach is driven by fundamental valuations, which can lead to entering and exiting positions as opportunities arise. Over time, this approach may help avoid chasing unsustainable market swings driven by fear and greed near the end of cyclical declines or advances.

Cyclical Asset Allocation Mixes

Moderate IncomeConservative

Growth & IncomeModerate

Growth & Income Moderate Growth Aggressive Growth

Cash Alternatives 2% 2% 2% 2% 2%

Fixe

d In

com

e Total Fixed Income 74% 53% 44% 20% 10%U.S. Short Term Taxable Fixed Income 21% 10% 6% 5% 3%U.S. Intermediate Term Taxable Fixed Income 36% 23% 20% 6% 2%U.S. Long Term Taxable Fixed Income 8% 12% 9% 4% 3%High Yield Taxable Fixed Income 3% 3% 4% 2%Developed Market Ex-U.S. Fixed IncomeEmerging Market Fixed Income 6% 5% 5% 3% 2%

Equi

ties Total Equities 18% 37% 46% 71% 81%

U.S. Large Cap Equities 12% 19% 23% 30% 30%U.S. Mid Cap Equities 2% 7% 9% 13% 15%U.S. Small Cap Equities 2% 3% 8% 10%Developed Market Ex-U.S. Equities 4% 5% 6% 10% 14%Emerging Market Equities 4% 5% 10% 12%

Real

As

sets Total Real Assets 6% 8% 8% 7% 7%

Public Real Estate 6% 8% 8% 7% 7%Commodities

Total Portfolio 100% 100% 100% 100% 100%

Cash Equivalents

For more information, please request our Cyclical Asset Allocation Quarterly Report.

Portfolio Allocations across the Efficient Frontier

0%

20%

40%

60%

80%

100%

Other Fixed Income

Foreign Equities

U.S. Equities

Real Assets

Complementaries


Cash Alternatives

ModerateIncome

ModerateGrowth & Income

AggressiveGrowth

ConservativeGrowth & Income

ModerateGrowth

Portf

olio A

lloca

tions

Table of Contents


18

Tactical Asset Allocation.

Recommended Tactical Tilts.

No changes this month.The strategic (evenweight) asset allocations are based on long-term strategies. However, capital markets tend to move in cycles, and there may be short-term opportunities to enhance the risk/return relationship within a portfolio by temporarily adjusting the allocations. The tactical asset allocation overweights and underweights are designed to provide guidance on shorter-term (6–18 months) weightings in the portfolio. The minimum position of any asset class is zero, meaning that no short selling is permitted. The maximum position of all asset classes together is 100 percent, meaning that no leverage is permitted. The actual extent of overweights and underweights is a judgment call. It should be enough to make a difference without crowding out other assets or creating a vacuum. Also, all the tactical recommendations have to be considered together. It would not be mathematically possible to underweight two asset groups while maintaining an evenweight in the other two. Adjustments must be made to bring all the broad asset classes into a proper relationship. These are guidelines to be used prudently for investors with temperaments that agree with a more aggressive, tactical investment style.

Additional Asset Class Guidance.

Consider long/short equity strategies: These strategies provide diversification in an equity portfolio by utilizing both long and short exposures to the asset class. While they do provide diversification, investors should expect higher tracking error to traditional benchmarks from these strategies. Prudent use through controlled allocations is recommended.

Underweight Evenweight Overweight

Cash & Fixed Income

High Yield Taxable Fixed IncomeDeveloped Market Ex.-U.S. Fixed Income

Cash AlternativesU.S. Short Term Taxable Fixed IncomeU.S. Long Term Taxable Fixed Income

Emerging Market Fixed Income

U.S. Taxable Investment Grade Fixed IncomeU.S. Intermediate Term Taxable Fixed Income

Equities

U.S. Small Cap Equities U.S. Large Cap EquitiesU.S. Mid Cap Equities

Developed Market Ex.-U.S. EquitiesEmerging Market Equities

Real Assets

Commodities Private Real Estate* Public Real Estate

Alternative Investments*

Private Equity*Private Debt*

Hedge Funds–Macro*Hedge Funds–Event Driven*

Hedge Funds–Relative Value*Hedge Funds–Equity Hedge*

Underweight Evenweight Overweight


Table of Contents


19


Tactical Recommendations Summary.

Asset Class Weight, Rationale and Further Detail,

Fixe

d In

com

e: U.S. Taxable Investment Grade Fixed Income:

Overweight IG bond yields currently remain attractive on a global scale. Our outlook for continued U.S. economic expansion is generally supportive.

U.S. Short Term Taxable: Evenweight. We continue to expect the Fed to raise rates at a slow pace. Short-term, fixed-income securities are a defensive investment— which may help reduce bond holdings’ exposure to an unexpected rise in yields or decline in prices due to a stronger-than-expected economic recovery or unanticipated inflation.

U.S. Intermediate Term Taxable:

Overweight We believe that the yield curve remains attractive through the intermediate term. We expect the Fed to keep rates relatively low through 2017. We recommend that investors consider owning more intermediate maturities given the potential yield pickup.

U.S. Long Term Taxable Evenweight Uncertainty around implementation and timing of the Trump administration’s proposed policies presents this asset class with a wide range of potential outcomes. An evenweight position reflects our more balanced perception of the risks to yields going forward.

High Yield Taxable Fixed Income:

Underweight

Valuations, on a spread basis, have become more expensive in the High Yield class. Given the rise in valuations and the laws of bond math, High Yield is faced with an asymmetric risk profile. Within the overall portfolio and the fixed-income asset group, we believe that better risk-adjusted return opportunities present themselves elsewhere.

Developed Market Ex-U.S. Fixed Income:

Underweight. Sovereign yields should remain relatively low given a moderate global recovery and continued central-bank support. We maintain a somewhat positive tactical view on the U.S. dollar, but we do not recommend currency hedging any portion of developed-market bond holdings. See page 24 of this report for additional information.

Emerging Market Fixed Income:

Evenweight. Higher yields and spreads in U.S.-dollar-denominated sectors may offer the potential for more stable returns, but local-currency bonds are expected to be more volatile. We recommend a 100 percent dollar-denominated strategy.

Equi

ties: U.S. Large Cap Equities: Evenweight

.Second-quarter earnings growth was meaningfully better than we expected, but it was not as robust as the rise in first-quarter earnings. Further, we expect tougher comparisons over the balance of 2017. We continue to believe that the index is likely near its highs for 2017 and expect a modest pullback by year-end. The Fed tightening cycle, the negative effect of potential wage gains on corporate margins, stretched valuations, and lack of fiscal progress in Washington, D.C. all are potential headwinds.

U.S. Mid Cap Equities: Evenweight. We look for mid caps to perform largely in line with large caps this year. Mid caps, historically, have been late-cycle underperformers. In our opinion, we are not yet at that point.

U.S. Small Cap Equities: Underweight We believe that modest U.S. economic growth this year makes it unlikely that small-cap companies will meet the current aggressive consensus earnings-growth estimates for this year or in 2018. Consensus earnings estimates for next year continue to come down. We also believe that small-cap valuations are too high versus fundamentals.

Developed Market Ex.-U.S. Equities:

Evenweight Our fundamental outlook for developed-market equities is more balanced—as political uncertainty and our expectations for a modestly stronger dollar from current levels coexist with improving economic growth and an upturn in earnings. Central-bank actions will be a key to performance.

Emerging Market Equities: Evenweight We believe that emerging-market growth should outpace developed-market growth. Yet, selectivity is important, as economic and political challenges remain. Earnings growth for many commodity-centric markets remains a challenge.

Real

Ass

ets: Commodities: Underweight We believe that commodities remain in a bear market and should enter a long-term consolidation period as supply and

demand balance.

Public Real Estate: Overweight Fundamentals for U.S. equity REITs remain relatively supportive, and they have strengthened for international equity REITs. We believe that Public Real Estate may be positioned to outperform other asset classes in 2017.

Private Real Estate*. Evenweight. We prefer opportunistic real-estate strategies, particularly in Europe, but also those strategies with an increased focus on Asia. Going forward, we expect income to represent a larger portion of total return for core real estate than it has for the past five years.

Alte

rnat

ive In

vest

men

ts*: Hedge Funds–Relative Value*: Overweight , Fundamentals in both commercial and residential real estate remain supportive of securitized credit. In particular, the yield

differential between commercial mortgage-backed securities and high-yield credit remains wide, offering attractive relative value in our view. Opportunities in Long/Short Credit are presenting themselves, especially with spreads at tight levels.

Hedge Funds–Macro*: Evenweight. We believe that this strategy’s historically low correlation to risk assets should benefit investors in the event of a prolonged correction, when it can help provide downside protection and potentially positive performance. Yet, current correlations to equities are high. This could potentially limit the diversification benefit in the event of a short-term correction.

Hedge Funds–Event Driven*: Evenweight We see improvement in the opportunity set for Event Driven strategies, in particular within Distressed Credit. Though spreads are tight and defaults currently are low, rising interest rates and a fundamentally-challenged retail sector may provide opportunities as the credit cycle matures.

Hedge Funds–Equity Hedge*: Overweight, We believe that this is a stock picker’s environment; yet low-to-moderate global equity exposure is preferred over more directional exposure. Sector dispersion remains elevated, resulting in an improved environment for gains on both the long and short sides.

Private Equity*, Private Debt*:

Evenweight. We are most constructive on international Distressed/Special Situation strategies, particularly in Europe, where opportunities should continue to emerge. We believe that large-cap buyouts will be challenged due to high valuations, but we remain constructive on small-and mid-cap buyouts.


Table of Contents


20

Tactical Asset Allocation.Fixed Income Sector Strategy: Domestic Investment-Grade Securities.

For more information, please request our Monthly Fixed Income Guidance report.

Total Sector Returns

Sector 1 Month Year-to-Date 12 Months

U.S. Government 1.1% 3.1% -0.8%Credit 0.8% 5.3% 1.9%Securitized 0.7% 2.5% 0.8%U.S. Municipal Bonds 0.8% 5.2% 0.9%

Source: FactSet, 8/31/17 Past performance is no guarantee of future results.

U.S. Government (Evenweight): Uncertainties surrounding potential fiscal stimulus present the possibility for increased volatility in this sector. Yet, we recommend that investors consider holding government allocations for diversification and liquidity. Government securities may offer a hedge in the event of unexpected international events or an economic slowdown and are generally the beneficiary of risk-off market events.

Investment-Grade Credit (Evenweight): High-quality corporate debt can allow portfolios to generate yield through exposure to high-grade credits. We believe that high-grade corporate debt offers better liquidity than most other credit holdings. Yet, this sector appears to be fully valued, especially when considering increased leverage ratios. We continue our bias toward higher quality in the current market.

Investment-Grade Securitized (Evenweight): Yield is an important component of an investor’s sector selection. The securitized sector can offer investors income opportunities that cannot be found in other highly-rated, fixed-income securities. This sector can add diversification to a fixed-income portfolio and generally does not move in lockstep with other sectors. Additionally, with credit spreads tight (low), we believe that mortgage-backed securities (MBS) are a more compelling alternative at current levels. We expect the Fed to slowly taper reinvestment of its substantial mortgage portfolio in the next year. This could impact MBS spreads, bringing them closer to historical averages over time.

Duration (Evenweight): Duration positioning is critical for fixed-income investors. (Duration measures a bond’s price sensitivity to interest-rate changes.) Bonds with shorter duration tend to be less sensitive to changes in interest rates (assuming a parallel shift in the yield curve). We recommend that investors position duration near their individually-selected benchmark levels. There may be opportunities to adjust duration should rate volatility move yields meaningful higher or lower from current levels.

U.S. Municipal Bonds: The municipal market continued its rally in August, with yields falling by approximately 8–10 basis points for short-to-intermediate maturities. Municipal yields followed Treasury yields lower, but also were supported by demand outweighing (low) new supply. From a valuation perspective, municipals remain rich relative to their taxable Treasury counterparts. We recommend caution on portfolio duration, but remain neutral. Market volatility may rise in the face of the traditional, seasonal rise in net supply each fall, along with the nearing Fed balance-sheet reduction plans. Tax policy appears to be the next effort to watch in Congress. As new tax proposals emerge, we will continue to watch for municipal-market implications. State pension funding gaps continue to make headlines and offer another possible headwind for municipal bond performance. Increased attention to this issue could be necessary as time goes on.

Sector Recommendations

SectorBenchmark

WeightRecommended

WeightTactical Recommendation

– U.S. Government 40% 40% Evenweight– Credit 30% 30% Evenweight– Securitized 30% 30% Evenweight

Total 100% 100%

– Duration Evenweight

Source: Wells Fargo Investment Institute, 8/31/17. See end of report for important definitions and disclosures.

Sector Guidance

Taxable Sectors Guidance

– Treasury Securities Neutral– Agencies Unfavorable– Inflation-Linked Fixed Income Favorable– Corporate Securities Neutral– Preferred Securities Neutral– Residential MBS Neutral– Commercial MBS Unfavorable– Asset Backed Securities Neutral

Tax-Exempt Sectors Guidance

– Taxable Municipal Neutral– State and Local General Obligation Neutral– Essential Service Revenue Favorable– Pre-Refunded Neutral

Source: Wells Fargo Investment Institute, 8/31/17

Table of Contents


21


Domestic Equity Sector Strategy.

Total Returns: S&P 500 Index Groups

Sector 1 Month Year-to-Date 12 Months

Consumer Discretionary -1.8% 11.0% 13.2%Consumer Staples -1.1% 7.5% 3.8%Energy -5.2% -15.1% -6.1%Financials -1.6% 7.0% 26.0%Health Care 1.8% 19.1% 13.8%Industrials 0.2% 9.7% 17.5%Information Technology 3.5% 26.6% 31.2%Materials 0.9% 11.9% 15.7%Real Estate 1.1% 8.9% 2.7%Telecom Services -3.0% -7.9% -4.4%Utilities 3.3% 15.0% 15.6%S&P 500 Index 0.3% 11.9% 16.2%

Source: FactSet, 8/31/17 Past performance is no guarantee of future results.

Sector Recommendations

Sector

S&P 500 Index

Weight*Recommended

WeightTactical Recommendation

– Consumer Discretionary 12.1% 14.9% Overweight

– Consumer Staples 8.5% 5.5% Underweight– Energy 5.7% 4.0% Underweight– Financials 14.2% 16.4% Overweight

– Health Care 14.7% 17.2% Overweight

– Industrials 10.1% 11.6% Overweight

– Information Technology 23.5% 21.8% Evenweight– Materials 2.9% 3.0% Evenweight– Real Estate 3.0% 3.1% Evenweight– Telecom Services 2.1% 2.5% Evenweight– Utilities 3.3% 0.0% Underweight

Total 100.0% 100.0%

Sources: Bloomberg, Wells Fargo Investment Institute, 8/31/17. Recommended Weights as of 8/31/17. *Sector weightings may not add to 100% due to rounding.

Consumer Discretionary (Overweight): The labor market continues to improve, and we believe this means that wage gains could possibly accelerate in 2018. Jobless claims remain near historically low levels. We anticipate higher consumer spending levels next year, and expect that the labor market will continue to improve. We also expect this sector to outperform the S&P 500 Index in the intermediate term. Consumer Staples (Underweight): The Consumer Staples sector is seeing headwinds from international markets and has underperformed the S&P 500 Index YTD. Unit-volume growth has been modest, and pricing power remains minimal. Valuations are quite elevated relative to levels over the past 15 years. We remain underweight. Energy (Underweight): Our analysis suggests that Energy-sector valuations are still high relative to history. The Trump administration is proposing U.S. “energy independence.” Energy-related infrastructure spending would increase Industrial-sector benefits, but likely would depress energy prices with more supply on the market. Lower energy prices likely would lead to lower Energy-sector equity prices. We remain underweight. Financials (Overweight): We look for modestly higher economic growth over the next 18 months. That trend should help Financials, but a flattening yield curve is a concern. We also expect a loan-demand pickup in 2018. The time frame for this tactical positioning likely will be a bit longer than most, at an estimated 12 to 24 months (as we currently view it). We remain overweight. Health Care (Overweight): We believe that relative valuations remain compelling in this sector. Health Care has been the second best equity-sector performer YTD. Health-Care concerns largely have related to the administration’s comments on drug pricing. It appears that investors do not believe that the pricing issue will be meaningful for the pharmaceutical and biotechnology sub-industry groups. We are overweight.

Industrials (Overweight): Our Industrials overweight position reflects our anticipation of better global economic growth in this portion of the cycle. Industrials have outperformed the S&P 500 Index since July 2015. Increased infrastructure spending also would be a positive for this sector in the coming years. Information Technology (Evenweight): This sector remains the best-performing S&P 500 Index sector on a YTD basis. Better global growth should benefit Information Technology. Valuations remain largely in line with the historical median. Information Technology remains the most heavily weighted sector in the S&P 500 Index. Materials (Evenweight): This sector has reflected erratic performance relative to the S&P 500 Index since the beginning of this year—as the commodity complex has remained volatile. We expect modestly improving global growth and market-matching performance in the months ahead. We remain evenweight. Real Estate (Evenweight): Real Estate has underperformed on a YTD basis. Yet, this sector appears to be trying to find a bottom. At this point, we are comfortable with an evenweight equity-sector recommendation. Telecom Services (Evenweight): Telecom Services currently offers the highest yields within the 11 S&P 500 Index sectors, but has meaningfully underperformed the index YTD. Pricing and competition is rough in this sector, but potential regulatory relief may be a benefit. Utilities (Underweight): Earnings growth for the Utilities sector is expected to be in the low-to-mid single digits this year. An above-average dividend yield has helped this sector as the 10-year Treasury yield has fallen. We expect Utilities to underperform in the coming months. Growth versus Value (Neutral): Growth has outperformed Value YTD. The administration’s policies are likely to play into this performance once we gain more clarity. Looking ahead, when the typical cycle reaches its ending stages, Growth usually outperforms Value. For now, we remain neutral.

Table of Contents


22


International Equity Market Strategy.,

Developed Market Ex.-U.S. Equities.Europe Region (Neutral Rating).We maintain our neutral rating on European equities as mixed economic fundamentals and favorable equity-market valuations have been balanced against negative market internals.Economic: Broad measures of economic activity have trended higher for France, the Netherlands, Germany, and Spain. The U.K. and Switzerland (43 percent of the index) continue to face soft economic conditions relative to long-term averages. Market Valuations: Valuations are broadly more favorable after last month’s equity market sell-off. Rising earnings growth in the region also has put downward pressure on valuations, making stocks relatively cheaper.Market Internals: The rally in European stocks this year has upwardly biased the number of regional stocks above their long-term averages, suggesting a bearish outlook. This view is confirmed by bearish market internals and our technical analysis work.

Pacific Region (Favorable Rating).Our favorable rating for the Pacific region remains intact after coming under pressure last month. Positive near- and longer-term economic trends, supportive valuations, and balanced market internals continue to underpin our current regional rating.Economic: Measures of long-term economic trends suggest positive activity in Japan, Australia, Singapore, and Hong Kong. Surprises (a measure of actual releases beating consensus expectations) have increased, most notably in Japan.Market Valuations: Valuations became more attractive in August as geopolitical concerns temporarily weighed on equity prices. Rising earnings growth in the region has also put downward pressure on valuations, making stocks relatively cheaper.Market Internals: Internals suggest generally balanced market conditions. Market volumes signal slightly overbought conditions, while technicals reflect a stable price positive trend.

Emerging Market Equities.Emerging Asia (Favorable Rating).Improving economic fundamentals and attractive market internals underpin our favorable rating for the Emerging Asia region. Economic stabilization in China and a rebound in global trade are translating into higher earnings for companies in the region.Economic: Long-term economic trends are generally positive for the region and notably improving for China and South Korea. A growing number of positive economic surprises suggest the weak trend for China and Korea may be ending. Market Valuations: Equity markets in Emerging Asia have become a somewhat more expensive in recent months, largely due to stretched valuations in Chinese and South Korean markets. We expect an earnings recovery in the region to support more favorable valuations, but view the region as fairly valued. Market Internals: Measures of breadth, volume, and number of stocks breaking long-term averages suggest neutral market positioning. Market technicals are positively oriented toward our current regional rating.

Emerging Europe, Middle East and Africa (EMEA) Region (Unfavorable Rating).Stabilization in commodity prices could be a positive development for the Russian and South African economies in the coming months. Yet, economic uncertainties reinforce our unfavorable rating for the region. Economic: With the exception of those in Poland, long-term growth trends in EMEA economies are generally weak—notably in South Africa, Russia, and Turkey. Positive economic surprises among hard-hit countries suggest that this trend is reversing. Market Valuations: Equity markets in Russia and Poland have rallied strongly, leading to stretched market valuations. South African and Turkish stocks are fairly priced.Market Internals: Market internals suggest neutral market positioning, while technicals continue to reflect an unfavorable trend in market prices.

Latin America Region (Unfavorable Rating).Imbalances in Latin American market valuations, economic fundamentals, and market internals continue to support our unfavorable rating for the region. Economic: Measures of long-term activity continue to suggest that Brazil’s economy is contracting, but at a less-negative rate (as reflected in rising numbers of positive economic surprises). Long-term measures of economic activity in Mexico remain positive, but have come under pressure from a weaker peso and trade-policy uncertainties. Market Valuations: Valuations for Brazilian stocks remain rich following its market rally this year. In contrast, multiples on Mexican equities are fairly valued, but could be at risk from a potential earnings decline. Market Internals: Measures of breadth, volume, and number of stocks moving above their 20-day moving averages suggest neutral market positioning. Technicals continue to suggest an unfavorable rating for Latin American stocks.

International Equity Guidance by Regions

Region. Principal Members.Regional Guidance.

Benchmark Weight*.

Developed Market Ex.-U.S. Equities (Evenweight)Europe. Denmark, France, Germany, Great Britain, Italy,

Netherlands, Spain, Sweden, Switzerland.Neutral 62%.

Pacific. Australia, Hong Kong, Japan, Singapore. Favorable 38%.Total 100%

Emerging Market Equities (Evenweight)EM Asia China, India, Indonesia, Malaysia, Philippines,

South Korea, Taiwan, Thailand.Favorable. 71%.

EM Europe, Middle East and Africa.

Poland, Russia, South Africa, Turkey. Unfavorable. 15%.

Latin America.

Brazil, Chile, Mexico. Unfavorable. 14%.

Total 100%

*Benchmarks are MSCI EAFE for DM and MSCI Emerging Markets for EM. Source: Wells Fargo Investment Institute, 8/31/17

We provide additional context for this regional tactical positioning in our Global Perspectives reports.

Table of Contents


23


Alternative Investment Strategic Outlook.

Our Quantitative Outlook is based on a collection of multi-market factors that we believe to be important drivers of performance for the hedge fund strategies shown. The direction and persistency of trends within these factors determine our quantitative outlook. Our Qualitative Outlook integrates top-down and bottom-up views on the opportunity set for each strategy, adding observations from portfolio managers including changes in portfolio composition, exposure, and leverage. The Quantitative and Qualitative Outlooks are combined to produce our Overall Outlook.

HFR maintains two sets of indices to report hedge fund performance. This report generally uses the HFRI series, which covers a select subset of the manager universe.

Relative Value strategy performance is represented by the HFRI Relative Value Arbitrage Index. Arbitrage strategy performance is represented by the HFRI Relative Value: Fixed Income—Sovereign Index. Long/short credit strategy performance is represented by the HFRI Relative Value: Fixed Income—Corporate Index. Structured Credit/Asset Backed strategy performance is represented by the HFRI Relative Value: Fixed Income—Asset Backed Index.

Macro strategy performance is represented by the HFRI Macro/CTA Index. Systematic strategy performance is represented by the HFRI Macro: Systematic Diversified CTA Index. Discretionary strategy performance is represented by the HFRI Macro: Discretionary Thematic Index.

Event Driven strategy performance is represented by the HFRI Event Driven Index. Activist strategy performance is represented by the HFRI Event Driven: Activist Index. Distressed Credit strategy performance is represented by the HFRI Event Driven: Distressed Restructuring Index. Merger Arbitrage strategy performance is represented by the HFRI Event Driven: Merger Arbitrage Index.

Equity Hedge strategy performance is represented by the HFRI Equity Hedge Index. Directional Equity strategy performance is represented by the HFRX Equity Hedge: Multi-Strategy Index. Equity-Market Neutral strategy performance is represented by the HFRI Equity Hedge: Equity Market Neutral Index.

An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Notes on performance numbers,

Alternative Investment Strategies Outlook*

Hedge Fund Strategies

HFRI YTD Performance

(Through 8/31/17)

2017 OutlookChange in Outlook Since Prior MonthQuantitative Outlook Qualitative Outlook Overall Outlook

Relative Value 3.7% Favorable Favorable Overweight No Change

Arbitrage 4.7% Neutral Unfavorable Evenweight No Change

Long/Short Credit 4.0% Favorable Favorable Overweight No Change

Structured Credit/Asset-Backed 6.1% Favorable Favorable Overweight No Change

Macro 0.9% Neutral Neutral Evenweight No Change

Systematic -0.2% Neutral Unfavorable Underweight No Change

Discretionary 0.7% Neutral Favorable Overweight No Change

Event Driven 4.9% Favorable Neutral Evenweight No Change

Activist 2.8% Favorable Unfavorable Underweight No Change

Distressed Credit 4.5% Neutral Neutral Evenweight No Change

Merger Arbitrage 3.8% Favorable Neutral Evenweight No Change

Equity Hedge 8.5% Favorable Favorable Overweight No Change

Directional 7.4% Favorable Favorable Overweight No Change

Equity Market Neutral 2.4% Favorable Favorable Evenweight No Change


Highest-Conviction Strategies

Long/Short Credit Structured Credit Discretionary Macro Directional/Low Net Equity Hedge Private Debt

Table of Contents


24

Currency Hedging Guidance.

The U.S. Dollar versus Developed-Market Currencies. Market Observations.The DXY closed lower in August for the sixth consecutive month, but only marginally, ending at 92.67 versus 92.86 in July. The euro and yen ended 0.6 percent and 0.3 percent stronger against the dollar, respectively. The euro pushed above 1.20 late in the month on continued talk about a reduction in the European Central Bank’s bond-buying program. Yet, it failed to hold those gains as central-bank officials reportedly were concerned about the currency’s rise. The dollar was hampered by uncertainty over U.S. politics and economic policy, but there were tentative signs of a turnaround—notably gains against small components in the dollar index such as the Australian and New Zealand dollar. The pound was especially weak, -2.2 percent versus the dollar, as acrimonious Brexit negotiations made little progress.

Wells Fargo Investment Institute Perspective. We expect a partial recovery from the dollar’s decline and a somewhat stronger U.S. currency by the end of this year. The range implied by our year-end 2017 forecasts for the euro and yen in terms of the DXY is approximately 93.50 to 101 (compared to the August month-end levels below 93). Our year-end 2018 forecasts for the dollar envisage a moderate decline compared to year-end 2017 levels, with the DXY trading broadly between 90 and 97. This is based on a year-end 2018 target range of 1.16 to 1.24 dollars per euro and 110–120 yen per dollar. Rising U.S. interest rates and residual European political risks in 2018 (such as an Italian election) may only partially offset euro-positive factors, which include recovering European economic growth and reduced monetary stimulus. By contrast, full-throttle Japanese monetary stimulus (continued negative policy rates and a zero-percent 10-year sovereign yield target) implies yen depreciation. U.S. political uncertainty, policy debates in the Eurozone and U.K., and rising geopolitical tension in East Asia, suggest that these currency rates may be subject to greater-than-usual volatility in the coming year.

Year-End 2017 Currency Targets.

August 31, 2017.

Year-end 2018 Forecasts.

Expected Return vs. U.S. Dollar.

Dollars per euro: $1.19 $1.16-1.24 0.8%,.

Yen per dollar: ¥110 ¥110-120 -4.4%.

Source: Wells Fargo Investment Institute, 8/31/17.

The U.S. Dollar versus Emerging-Market Currencies.Market Observations.Emerging-market (EM) currencies enjoyed another positive month against the dollar in August, with the benign environment for EM assets generally remaining intact—including continued global growth, higher rates in EM countries, and relatively low global volatility. With most of the market noise over the quiet summer months coming from developed markets (U.S. political dysfunction, in particular), the higher yields and low volatility available in many EM bond markets continued to attract inflows. Given this, gains were quite broad-based and regionally dispersed, with the Russian ruble, Turkish lira, South African rand, and Chilean and Colombian peso among the best performers. Exceptions were the Brazilian real and Mexican peso, which declined against the dollar on profit booking after strong July gains.

Wells Fargo Investment Institute Perspective. We have a neutral outlook for the dollar against EM currencies for the remainder of 2017, but remain wary of risks from any global or regional shocks after strong dollar gains. In 2018, we anticipate that the relatively benign backdrop for EM assets may persist, so we expect moderate EM currency appreciation of between 4 and 5 percent against the dollar. Investment flows have favored EMs for two years, and this may continue. EM currencies may find some further support as U.S. interest rates remain low. These currencies should remain subject to many political and economic risks in 2018, so we may expect volatility and wide trading ranges. For example, China may accelerate its economic reforms, a potential negative for EM currencies. Also, U.S. trade policy may yet become an issue for key currencies such as the Mexican peso or Brazilian real. Finally, an unexpected shift to a more aggressive pace of U.S. rate hikes could provoke sudden depreciation in exchange rates around the world.

Currency Hedging.Based on our views on the direction of the dollar, we provide our currency-hedging guidance in the matrix below. For DM fixed income, although longer-term fundamentals still favor the dollar, our tactical outlook anticipates modest dollar gains this year and a more neutral outlook for 2018. In line with this tactical currency view, and given the fact that we are already exposed to a stronger dollar (via our DM-bond underweight), we do not recommend hedging any portion of DM bond holdings.

For EM fixed income, the strategic benchmark consists exclusively of dollar-denominated sovereign EM bonds— so our evenweight recommendation for this asset class and our relatively neutral view on the dollar versus EM local currencies suggest that hedging is unnecessary.

Hedging Matrix.

Asset Class.Strategic Benchmark.

Currency Advice.

Developed Market Ex-U.S. Fixed Income, Local currency, No hedge.Developed Market Ex-U.S. Equities, Local currency, No hedge.Emerging Market Fixed Income, U.S. dollar, No hedge.Emerging Market Equities, Local currency, No hedge.

Source: Wells Fargo Investment Institute, 8/31/17,

The table above provides guidance for investors who want and are able to hedge against currency losses, or to take advantage of the dollar’s move in either direction. Please note that implementation may vary according to the hedging instruments available to investors.

We do not favor hedging currency risk for equities at this time. The hurdle to hedging currency risk is higher for equities than for bonds because, in equity markets, currency movements have had a smaller influence on total return than for fixed income. Further, the cost and complexity of currency hedging for equities may be greater. It is important to consider that many actively managed mutual funds already may incorporate an element of currency hedging. In addition, the cost of hedging against losses from EM currencies is far higher than for those of DMs, and the availability of efficient hedging instruments is limited.

Table of Contents


25

Risk Considerations.Past performance does not indicate future results. The value or income associated with a security or an investment may fluctuate. There is always the potential for loss as well as gain. Investments discussed in this report may be unsuitable for some investors depending on their specific investment objectives and financial position.

Asset allocation and diversification are investment methods used to manage risk. They do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Your individual allocation may be different than the strategic long-term allocation above due to your unique individual circumstances, but is targeted to be in the allocation ranges detailed. The asset allocation reflected above may fluctuate based on asset values, portfolio decisions, and account needs.

Alternative investments, such as hedge funds and private capital funds, carry specific investor qualifications and involve the risk of investment loss, including the loss of the entire amount invested. While investors may potentially benefit from the ability of alternative investments to potentially improve the risk-reward profiles of their portfolios, the investments themselves can carry significant risks. Government regulation and monitoring of these types of investments may be minimal or nonexistent. There may be no secondary market for alternative investment interests and transferability may be limited or even prohibited.

The use of alternative investment strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, are speculative and involve a high degree of risk. These strategies may expose investors to risks such as short selling, leverage risk, counterparty risk, liquidity risk, volatility risk, the use of derivatives and other significant risks. Distressed credit strategies invest in, and might sell short, the securities of companies where the security’s price has been, or is expected to be, affected by a distressed situation. This may involve reorganizations, bankruptcies, distressed sales, and other corporate restructurings. Investing in distressed companies is speculative and involves a high degree of risk. Because of their distressed situation, these securities may be illiquid, have low trading volumes, and be subject to substantial interest rate and credit risks. Structured credit strategies aim to generate returns via positions in the credit sensitive area of the fixed income markets. The strategy generally involves the purchase of corporate bonds with hedging of interest rate exposure. The use of alternative investment strategies may require a manager’s skill in assessing corporate events, the anticipation of future movements in securities prices, interest rates, or other economic factors. No assurance can be given that a manager’s view of the economy will be correct which may result in lower investment returns or higher return volatility.

Privately offered real estate funds are speculative and involve a high degree of risk. Investments in real estate and real estate investments trusts have special risks, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations, and the impact of varied economic conditions. There can be no assurance a secondary market will exist and there may be restrictions on transferring interests.

Investing in commodities is not suitable for all investors. 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.

Investments in fixed-income securities are subject to market, interest rate, credit/default, liquidity, inflation and other 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. High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. They are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Mortgage-related and asset-backed securities are subject to the risks associated with investment in debt securities. In addition, they are subject to prepayment and call risks. Changes in prepayments may significantly affect yield, average life and expected maturity. If called prior to maturity, similar yielding investments may not be available for the Fund to purchase. These risks may be heightened for longer maturity and duration securities.

Currency hedging is a technique used to seek to reduce the risk arising from the change in price of one currency against another. The use of hedging to

manage currency exchange rate movements may not be successful and could produce disproportionate gains or losses in a portfolio and may increase volatility and costs.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities.

Investing in foreign securities presents certain risks that may not be present in domestic securities. For example, investments in foreign, emerging and frontier markets present special risks, including currency fluctuation, the potential for diplomatic and potential instability, regulatory and liquidity risks, foreign taxation and differences in auditing and other financial standards.

Investing in gold, silver or other precious metals involves special risk considerations such as severe price fluctuations and adverse economic and regulatory developments affecting the sector or industry.

Master Limited Partnerships (MLPs) involves certain risks which differ from an investment in the securities of a corporation. MLPs may be sensitive to price changes in oil, natural gas, etc., regulatory risk, and rising interest rates. A change in the current tax law regarding MLPs could result in the MLP being treated as a corporation for federal income tax purposes which would reduce the amount of cash flows distributed by the MLP. Other risks include the volatility associated with the use of leverage; volatility of the commodities markets; market risks; supply and demand; natural and man-made catastrophes; competition; liquidity; market price discount from Net Asset Value and other material risks.

There are special risks associated with investing in preferred securities. Preferred securities are subject to interest rate and credit risks and 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.

Private debt has speculative characteristics that include potential default, limited liquidity and the infrequent availability of independent credit ratings for private companies.

Investing in real estate involves special risks, including the possible illiquidity of the underlying property, credit risk, interest rate fluctuations and the impact of varied economic conditions.

The prices of small and mid size 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.

Sovereign debt is generally a riskier investment when it comes from a developing country and tends to be a less risky investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk.

Technology and internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market.

Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk, especially when real interest rates rise. This may cause the underlying value of the bond to fluctuate more than other fixed income securities. 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.

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained.

Index and Other Definitions.An index is unmanaged and not available for direct investment.

Inflation is the change in the Consumer Price Index (CPI). The CPI measures the price of a fixed basket of goods and services purchased by an average consumer.

Core inflation is the change in the core Consumer Price Index (CPI). The core CPI measures the price of a fixed basket of goods and services—excluding the volatile food and energy components—purchased by an average consumer.

Conference Board’s Leading Economic Index (LEI) is a composite average of ten leading indicators in the US. It one of the key elements in the Conference Board’s analytic system, which is designed to signal peaks and troughs in the business cycle.

Disclosures.

Table of Contents


26

Consumer Confidence Index measures consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

Markit Manufacturing Purchasing Managers Index (PMI) tracks manufacturing and service sector activity in the Eurozone. An Index value over 50 indicates expansion; below 50 indicates contraction. The values for the index can be between 0 and 100.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.

The Institute of Supply Management (ISM) Purchasing Manager’s Index gauges internal demand for raw materials/goods that go into end-production. An Index value over 50 indicates expansion; below 50 indicates contraction. The values for the index can be between 0 and 100.

The US Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners’ currencies.

The Institute of Supply Management (ISM) Non-manufacturing Index (ISM Services Survey) measures the rate and direction of change in activity in the nonmanufacturing industries. An index with a score over 50 indicates that the industry is expanding, and a score below 50 shows a contraction. The values for the index can be between 0 and 100.

Real economic growth is the change in the gross domestic product (GDP) adjusted for inflation—that is, the volume of services and goods produced in the United States.

West Texas Intermediate Crude Oil is a light, sweet (i.e., low sulfur) crude oil which is the main type of U.S. crude oil traded in U.S. futures markets.

Brent Crude Oil is a light, sweet crude oil extracted from the North Sea. It serves as a major benchmark price for purchases of oil worldwide.

Fixed Income Representative Indices.U.S. Taxable Investment Grade Fixed Income. Bloomberg Barclays US Aggregate Bond Index is a broad-based measure of the investment grade, U.S. dollar- denominated, fixed-rate taxable bond market.

Short Term Taxable Fixed Income. Bloomberg Barclays US Aggregate 1-3 Year Bond Index is the one to three year component of the Barclays US Aggregate Index, which represents fixed-income securities that are SEC-registered, taxable, dollar-denominated, and investment-grade.

Intermediate Term Taxable Fixed Income. Bloomberg Barclays US Aggregate 5-7 Year Bond Index is composed of the Bloomberg Barclays US Government/Credit Index and the Bloomberg Barclays US Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities with maturities of 5-7 years.

Long Term Taxable Fixed Income. Bloomberg Barclays US Aggregate 10+ Year Bond Index is composed of the Bloomberg Barclays US Government/Credit Index and the Bloomberg Barclays US Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage- backed securities with maturities of 10 years or more.

Cash Alternatives/Treasury Bills. Bloomberg Barclays US Treasury Bills (1-3M) Index is representative of money markets.

U.S. Treasury. Bloomberg Barclays US Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more.

U.S. Municipal Bond. Bloomberg Barclays US Municipal Index is considered representative of the broad market for investment grade, tax-exempt bonds with a maturity of at least one year.

U.S. TIPS. Bloomberg Barclays US TIPS Index represents Inflation-Protection securities issued by the U.S. Treasury.

U.S. Government. Bloomberg Barclays US Government Bond Index includes U.S.-dollar-denominated, fixed-rate, nominal U.S. Treasury securities and U.S. agency debentures.

Credit. Bloomberg Barclays US Credit Index includes investment-grade, U.S.- dollar-denominated, fixed-rate, taxable corporate- and government-related bonds.

Securitized. Bloomberg Barclays US Mortgage Backed Securities (MBS) Index includes agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

High Yield Taxable Fixed Income. Bloomberg Barclays US Corporate High-Yield Index covers the universe of fixed-rate, non-investment-grade debt.

Developed Market Ex-U.S. Fixed Income (Unhedged). J.P. Morgan GBI Global ex-US 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.

Developed Market Ex-U.S. Fixed Income (Hedged). J.P. Morgan Non-U.S. Global Government Bond Index (Hedged) is an unmanaged market index representative of the total return performance, on a hedged basis, of major non-U.S. bond markets. It is calculated in U.S. dollars.

Emerging Market Fixed Income (U.S. Dollar). J.P. 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.

Emerging Market Fixed Income (Local Currency). J.P. Morgan Government Bond Index-Emerging Markets Global (USD Unhedged) is a comprehensive global local emerging markets index, and consists of regularly traded, liquid fixed-rate, domestic currency government bonds.

Equity Representative Indices.U.S. Large Cap Equities. 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.

U.S. Large Cap Equities 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.

U.S. Large Cap Equities 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.

U.S. Mid Cap Equities. Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe.

U.S. Mid Cap Equities Growth. Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values.

U.S. Mid Cap Equities Value. Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.

U.S. Small Cap Equities. Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8 percent of the total market capitalization of the Russell 3000 Index.

U.S. Small Cap Equities Growth. Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values.

U.S. Small Cap Equities Value. Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

Developed Market Ex-U.S. Equities (U.S. Dollar)/(Local). MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of 21 developed markets, excluding the U.S. and Canada.

Emerging Market Equities (U.S. Dollar)/(Local). MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 23 emerging markets.

Frontier Market Equities (U.S. Dollar/Local). MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 24 frontier (least developed) markets.

Real Assets Representative Indices. Pubic Real Estate. FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real-estate companies and REITs in developed countries 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. It represents all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets, other than mortgages secured by real property that also meet minimum size and liquidity criteria.

Disclosures (continued)

Table of Contents


27


International REITs. FTSE EPRA/NAREIT Developed ex US Index is designed to track the performance of listed real estate companies in developed countries worldwide other than the United States.

MLPs. Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs) that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. The index, which is calculated using a float-adjusted, capitalization-weighted methodology, is disseminated real-time on a price-return basis and on a total-return basis.

Commodities (BCOM). Bloomberg Commodity Index is a broadly diversified index comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

Alternative Investments Representative Indices.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.

Relative Value. HFRI Relative Value (Total) Index. Strategy is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but as opposed to ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction.

Arbitrage. HFRI RV: Fixed Income Sovereign Index. Includes strategies predicated on realization of a spread between related instruments in which one or multiple components of the spread is a sovereign fixed income instrument. Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple sovereign bonds or between a corporate and risk free government bond. Fixed Income Sovereign typically employ multiple investment processes including both quantitative and fundamental discretionary approaches and relative to other Relative Value Arbitrage sub-strategies, these have the most significant top-down macro influences, relative to the more idiosyncratic fundamental approaches employed.

Long/Short Credit. HFRI RV: Fixed Income—Corporate Index. Includes strategies predicated on realization of a spread between related instruments in which one or multiple components of the spread is a corporate fixed-income instrument. Strategies are designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple corporate bonds or between a corporate and risk free government bond. They typically involve arbitrage positions with little or no net credit market exposure, but are predicated on specific, anticipated idiosyncratic developments.

Structured Credit/Asset Backed. HFRI RV: Fixed Income—Asset Backed Index. Includes strategies predicated on realization of a spread between related instruments in which one or multiple components of the spread is a fixed-income instrument backed by physical collateral or other financial obligations (loans, credit cards) other than those of a specific corporation. Strategies are designed to isolate attractive opportunities between a variety of fixed income instruments specifically securitized by collateral commitments, which frequently include loans, pools and portfolios of loans, receivables, real estate, machinery or other tangible financial commitments. Investment thesis may be predicated on an attractive spread given the nature and quality of the collateral, the liquidity characteristics of the underlying instruments and on issuance and trends in collateralized fixed-income instruments, broadly speaking. In many cases, investment managers hedge, limit, or offset interest-rate exposure in the interest of isolating the risk of the position to strictly the disparity between the yield of the instrument and that of the lower-risk instruments.

Macro. HFRI Macro (Total) Index. Encompass a broad range of strategies predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard-currency, and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top-down and bottom-up theses, quantitative and fundamental approaches and long- and short-term holding periods. Although

some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments rather than on realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposed to EH, in which the fundamental characteristics on the company are the most significant are integral to investment thesis.

Systematic Macro. HFRI Macro: Systematic Diversified Index. Diversified strategies employing mathematical, algorithmic and technical models, with little or no influence of individuals over the portfolio positioning. Strategies are designed to identify opportunities in markets exhibiting trending or momentum characteristics across individual instruments or asset classes. Strategies typically employ quantitative processes which focus on statistically robust or technical patterns in the return series of the asset, and they typically focus on highly liquid instruments and maintain shorter holding periods than either discretionary or mean-reverting strategies. Although some strategies seek to employ counter-trend models, strategies benefit most from an environment characterized by persistent, discernible trending behavior. Typically have no greater than 35 percent of portfolio in either dedicated currency or commodity exposures over a given market cycle.

Discretionary Macro. HFRI Macro: Discretionary Thematic Index. Strategies primarily rely on the evaluation of market data, relationships and influences, as interpreted by individuals who make decisions on portfolio positions; strategies employ an investment process most heavily influenced by top-down analysis of macroeconomic variables. Investment Managers may trade actively in developed and emerging markets, focusing on both absolute and relative levels on equity markets, interest rates/fixed income markets, currency and commodity markets; they frequently employ spread trades to isolate a differential between instrument identified by the Investment Manager as being inconsistent with expected value. Portfolio positions typically are predicated on the evolution of investment themes the Manager expects to develop over a relevant time frame, which in many cases contain contrarian or volatility-focused components.

Event Driven. HFRI Event Driven (Total) Index. Maintains positions in companies currently or prospectively involved in corporate transactions of a wide variety including 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. Exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company-specific developments. Investment theses are typically predicated on fundamental (as opposed to quantitative) characteristics, with the realization of the thesis predicated on a specific development exogenous to the existing capital structure.

Activist. HFRI ED: Activist Index. Strategies may obtain or attempt to obtain representation on the company’s board of directors in an effort to impact the firm’s policies or strategic direction and in some cases may advocate activities such as division or asset sales, partial or complete corporate divestiture, dividends or share buybacks, and changes in management. Strategies employ an investment process primarily focused on opportunities in equity and equity-related instruments of companies that are currently or prospectively engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst-oriented situation. These involve both announced transactions and situations in which no formal announcement is expected to occur. Activist strategies would expect to have greater than 50 percent of the portfolio in activist positions, as described.

Distressed Credit. HFRI ED: Distressed/Restructuring Index. Strategies focus on corporate fixed-income instruments, primarily 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 proceedings or financial-market perception of near-term proceedings. Managers are typically actively involved with the management of these companies; they are frequently involved on creditors’ committees in negotiating the exchange of securities for alternative obligations, either swaps of debt, equity or hybrid securities. Managers employ fundamental credit processes focused on valuation and asset coverage of securities of distressed firms; in most cases portfolio exposures are concentrated in instruments that are publicly traded, in some cases actively and in others under reduced liquidity but in general for which a reasonable public market exists. Strategies employ primarily debt (greater than 60 percent) but also may maintain related equity exposure.

Merger Arbitrage. HFRI ED: Merger Arbitrage Index. Strategies primarily focus on opportunities in equity and equity-related instruments of companies that are currently engaged in a corporate transaction. Merger Arbitrage involves primarily announced transactions, typically with limited or no exposure to

Table of Contents


28


situations in which no formal announcement is expected to occur. Opportunities are frequently presented in cross-border, collared, and international transactions that incorporate multiple geographic regulatory institutions, typically with minimal exposure to corporate credits. Strategies typically have over 75 percent of positions in announced transactions over a given market cycle.

Equity Hedge. HFRI Equity Hedge (Total) Index. Equity Hedge: Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, 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. EH managers would typically maintain at least 50 percent exposure to, and may in some cases be entirely invested in, equities, both long and short.

Directional Equity. HFRX EH: Multi-Strategy Index. Managers maintain positions both long and short in primarily equity and equity-derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, 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, holding period, concentrations of market capitalizations, and valuation ranges of typical portfolios. Managers typically do not maintain more than 50 percent exposure to any one Equity Hedge sub-strategy

Equity Market Neutral. HFRI EH: Equity Market Neutral Index. Strategies employ sophisticated quantitative techniques to analyze price data to ascertain information about future price movement and relationships between securities. These can include both Factor-based and Statistical Arbitrage/Trading strategies. Factor-based investment strategies include strategies predicated on the systematic analysis of common relationships between securities. In many 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 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; trading strategies may also be based on technical analysis or designed opportunistically to exploit new information that the investment manager believes has not been fully, completely, or accurately discounted into current security prices. Strategies typically maintain characteristic net equity market exposure no greater than 10 percent long or short.

Note: While the HFRI Indices are frequently used, they have limitations (some of which are typical of other widely used indices). These limitations include survivorship bias (the returns of the indices may not be representative of all the hedge funds in the universe because of the tendency of lower performing funds to leave the index); heterogeneity (not all hedge funds are alike or comparable to one another, and the index may not accurately reflect the performance of a described style); and limited data (many hedge funds do not report to indices, and, therefore, the index may omit funds, the inclusion of which might significantly affect the performance shown. The HFRI Indices are based on information hedge fund managers decide on their own, at any time, whether or not they want to provide, or continue to provide, information to HFR Asset Management, L.L.C. Results for funds that go out of business are included in the index until the date that they cease operations. Therefore, these indices may not be complete or accurate representations of the hedge fund universe, and may be biased in several ways. Returns of the underlying hedge funds are net of fees and are denominated in USD.

General Disclosures.Wells Fargo Wealth and Investment Management, a division within the Wells Fargo & Company enterprise, provides financial products and services through bank and brokerage affiliates of Wells Fargo & Company. Brokerage products and services offered through Wells Fargo Clearing Services, LLC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. Bank products are offered through Wells Fargo Bank, N.A.

Global Investment Strategy (GIS) and Global Alternative Investments are divisions of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the Global Investment Strategy division of WFII. Opinions represent WFII opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS 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.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not an offer to buy or sell or solicitation of an offer to buy or sell any securities mentioned. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs, and investment time horizon. Your actual portfolio allocation may differ from the strategic and tactical allocations reflected in this report.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.

Additional information is available upon request.

© 2017 Wells Fargo Investment Institute. All rights reserved.

WFA00133 (201709003) Valid through March 2019 CAR 0917-02176

asset allocation strategy - · pdf filetracie mcmillion, cfa, head of global asset allocation....

Documents