wells fargo advantage dow jones target date funds: q3 2015 review for institutional investor use...

Wells Fargo Advantage Dow Jones Target Date Funds: Q3 2015 review

FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR USE WITH THE RETAIL PUBLIC

Table of contents

FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR USE WITH THE RETAIL PUBLIC 2

Target date landscape

Investment philosophy

Performance review

Where are we now?

Summary

Target date milestones show increasing concentration in risk


A. First target date funds (TDF) launched.

B. Pension Protection Act of 2006 passed. Clears way for auto features, QDIAs, and significant growth in TDF offerings and assets.

C. Domestic markets sink 55%, testing many TDFs for the first time. Average 2010 fund loses 33.9%. Average income/retirement fund loses 27%.

D. DOL/SEC hold joint hearings on failings of TDFs and providers, citing excessive risk for near-retirees and lack of transparency around risk levels.

E. TDF assets quadruple since 2008 crisis and approach the $1 trillion AUM mark. Risk levels largely the same as pre-2008 levels: Since the global equity market peak on May 22, 2015, the average 2015 fund has lost 6%, nearly half the loss of a global all-equity portfolio (as of 9-30-15).

Data source: Morningstar

A

B DC

E

A bracing year for target date fundsLosses fuel the debate over how these funds should adjust their equity holdings

―The Wall Street Journal, October 4, 2015

Some target date funds are boosting equitiesProviders are changing glide path components as participants show higher risk tolerances

―Pension & Investments, August 18, 2014

Providers’ increased equity exposure puts risk at 2008 levels


Equity exposure in 2015 funds today remains similar to 2010 funds in 2008

The top five providers hold assets that generally add equity-like risk:

Four include high-yield bonds in 2015 funds

Three include commodities

Two include emerging markets debt

Wells Fargo has maintained its time-tested, disciplined approach

Participants nearing retirement were exposed to large losses in 2008. Wells Fargo’s conservative approach led to significant outperformance versus the largest

target date providers during the 2008 downturn and again during recent market volatility.

Lessons not learned from 2008


Figures quoted represent past performance, which is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reinvestment of dividends and capital gains. Current month-end performance is available at the funds’ website, wellsfargoadvantagefunds.com. Class R6 shares are sold without a front-end sales charge or contingent deferred sales charge.

Participants near retirement have realized large losses during market corrections

WF Firm A Firm B Firm C Firm D Firm E Firm F Firm G

2015 fund: Current equity allocation (%)

23 48 56 53 36 45 48 48

Firm target date AUM ($B) 16 209 174 125 35 33 25 24

Source: Morningstar. Firms A-G represent the largest target date suites, based on AUM

A long recovery for most


Source: Morningstar. Past performance is no guarantee of future results. Funds A, B , C , and D represent 2010 funds offered by the largest target date fund suites by AUM.

Fund WF 2010 (Class R6)

Fund A Fund B Fund C Fund D S&P 500 Index

Number of months to recover 18 38 38 36 34 53

Percent rebound required 21% 52% 56% 44% 41% 104%

A 2012 study provides insight into the participant’s views:

Top three reasons indicated for investing in a TDF:

It seems like a safe investment for retirement

To provide diversification among stocks, bonds, and other asset classes

Because of the ease and convenience of the investment

Only 36% of respondents correctly indicated that a TDF does not provide guaranteed income in retirement.

More than half of all respondents (54%) failed to correctly indicate that TDFs with the same year in their names do not necessarilyhave the same mix of stocks and bonds at the target date.

Participants lack understanding of TDF risks and benefits


Source: Siegel and Gale Study: Investor Testing of Target Date Retirement Fund (TDF) Comprehension and Communications, 2012

Several months of net outflows in late 2008 and early 2009 suggest that some investors may have abandoned their TDF near the bottom of the market, potentially missing out on the recovery.

This highlights the importance of choosing a TDF with the appropriate combination of return potential and downside risk management to keep investors on track to meet their goals through volatile markets.

Net outflows from TDF participants during 2008


Sources: Strategic Insight and Wells Fargo Asset Management. Past performance is no guarantee of future results.

Financial crisis period: Morningstar target-date

2000-2010 category flows

Dow Jones Target Date Funds’ differentiators


Key benefits to our approach:

Focus on managing downside volatility for the participant while still providing the opportunity for significant capital appreciation

Funds may be more likely to retain participant assets in volatile markets—helping participants stay invested and avoid irrational selling on market dips increases the odds of a successful savings program

Investment approach provides transparency, objectivity, and repeatability

Glide path as of September 30, 2015


Past performance is no guarantee of future results.Average, highest 12-month, and lowest 12-month returns are from April 1, 2005, through September 30, 2015. Dow Jones Target Date Index inception was April 1, 2005. Allocations are subject to change and may have changed since the date specified. Allocations shown are as of end of period. The information above is based on the composition of the Dow Jones Target Date Indexes, not the Wells Fargo Advantage Dow Jones Target Date Funds.

100% equity portfolio 100% bond portfolio 100% cash portfolio

Average return (%) 6.93 4.27 1.34

Highest 12-month return (%) 66.78 16.94 5.15

Lowest 12-month return (%) -46.67 -3.57 0.01

Underlying portfolio performance

Per

cent

age

of e

quity

ris

k (%

)

Years remaining on risk glide path

Certain non-equity asset classes have not cushioned downside risk


5-year correlations and standard deviations as of 9-30-15

Index5-year correlation with stock CMAC1

5-year standard deviation

(%)

2008 annual return (%)

2015 peak-to-trough

return (%)2

Dow Jones Agressive Portfolio Index 1.00 12.84 -40.69 -14.67

S&P 500 Index 0.96 11.51 -37.00 -10.93

Barclays U.S. High Yield B Index 0.83 5.93 -26.65 -6.92

FTSE NAREIT All Equity REITs 0.66 15.21 -37.73 -4.98

DB Commodity Index 0.57 16.73 -35.63 -17.14

JPM EMBI Global Index 0.56 7.11 -10.91 -4.60

Barclays Majors (ex U.S.) Bond Index 0.25 6.44 11.69 1.01

Barclays 1–3 Month Treasury Bill Index 0.04 0.02 1.77 0.01

Barclays U.S. Aggregate Bond Index -0.14 2.78 5.24 0.54

Past performance is no guarantee of future resultsSource: Morningstar, as of 9-30-151. Composite major asset class, consisting of the nine equally-weighted stock components that make up the stock portion of the Dow Jones Target Date Indexes2. 2015 peak-to-trough period for MSCI World Index (as of 9-30-15) was 5-22-15 through 9-29-15

2015 review: Outperformance in a volatile year


Global equities peak in May and decline through end of Q3

Wells Fargo outperforms peers during equity market drawdown

2015 peak-to-trough: 5-22-15 to 9-29-

15 (%)

Excess return vs. category average (%)

MSCI ACWI -14.91 –

S&P 500 Index -10.93 –

Wells Fargo Advantage DJ Target Today–R6 -2.09 2.90

Wells Fargo Advantage DJ Target 2010–R6 -2.41 3.89





Past performance is no guarantee of future results. Morningstar categories for each fund: Target Today fund: Retirement income category; Target 2010 fund: Target date 2000 – 2010 category; Target 2015 fund: Target date 2011 – 2016 category: Target 2020 fund; Target date 2016 – 2020 category; Target 2025 fund: Target date 2021 – 2025 category; Target 2030 fund; Target date 2026 – 2030 category.

Morningstar total return rankings vs. categories as of 9-30-15


Source: Morningstar, as of 9-30-15. Past performance is no guarantee of future results. Table above shows total return percentile rank of Wells Fargo Advantage Dow Jones Target Date Funds–Class R6 within its Morningstar Categories. Morningstar Categories and number of funds in each Morningstar Category over the various trailing time periods, as of 9-30-15, are as follows: Wells Fargo Advantage DJ Target Today–R6, US OE Retirement Income, 3 mo. 188, YTD 179, 1 yr. 166, 3 yr. 150, 5 yr. 139, 10 yr. 69; Wells Fargo Advantage DJ Target 2010–R6, US OE Target Date 2000-2010, 3 mo. 159, YTD 155, 1 yr. 147, 3 yr. 117, 5 yr. 107, 10 yr. 65; Wells Fargo Advantage DJ Target 2015–R6, US OE Target Date 2011-2015, 3 mo. 188, YTD 180, 1 yr. 171, 3 yr. 127, 5 yr. 112; Wells Fargo Advantage DJ Target 2020–R6, US OE Target Date 2016-2020, 3 mo. 263, YTD 256, 1 yr. 243, 3 yr. 203, 5 yr. 171, 10 yr. 77; Wells Fargo Advantage DJ Target 2025–R6, US OE Target Date 2021-2025, 3 mo. 224, YTD 215, 1 yr. 202, 3 yr. 156, 5 yr. 124; Wells Fargo Advantage DJ Target 2030–R6, US OE Target Date 2026-2030, 3 mo. 263, YTD 256, 1 yr. 243, 3 yr. 203, 5 yr. 171, 10 yr. 77; Wells Fargo Advantage DJ Target 2035–R6, US OE Target Date 2031-2035, 3 mo. 224, YTD 215, 1 yr. 202, 3 yr. 156, 5 yr. 124; Wells Fargo Advantage DJ Target 2040–R6; US OE Target Date 2036-2040, 3 mo. 262, YTD 255, 1 yr. 242, 3 yr. 202, 5 yr. 170, 10 yr. 72; Wells Fargo Advantage DJ Target 2045–R6, US OE Target Date 2041-2045, 3 mo. 224, YTD 215, 1 yr. 202, 3 yr. 155, 5 yr. 123; Wells Fargo Advantage DJ Target 2050–R6, US OE Target Date 2046-2050, 3 mo. 247, YTD 240, 1 yr. 227, 3 yr. 183, 5 yr. 141; Wells Fargo Advantage DJ Target 2055–R6, US OE Target Date 2051+, 3 mo. 294, YTD 247, 1 yr. 217, 3 yr. 114; Wells Fargo Advantage DJ Target 2060–R6, US OE Target Date 2056 – 2060, 3 mo. 294. Morningstar rankings represent a fund’s total return rank relative to all funds that have the same category. The percentile ranking is based on the fund’s total return percentile rank relative to all funds that have the same category for the same time period. The highest (most favorable) percentile rank is 1%, and the lowest (least favorable) percentile rank is 100%. Morningstar rankings do not include the effect of sales charges.

NameTotal return %

rank 3 Mo Total return %

rank YTD Total return % rank 1 year

Total return % rank 3 year



Wells Fargo Advantage DJ Target Today Fund–R6 1 4 23 78 84 38

Wells Fargo Advantage DJ Target 2010 Fund–R6 4 4 9 88 90 25

Wells Fargo Advantage DJ Target 2015 Fund–R6 3 12 25 88 87








Wells Fargo Advantage DJ Target 2055 Fund–R6 89 74 63 56

Wells Fargo Advantage DJ Target 2060 Fund–R6 53

1st percentile 99th

percentile

Three-year and five-year performance now void of 2008 data


Based on the value of the S&P 500 Index, which reached its highest level (peak) on October 9, 2007, and its lowest point (trough) on March 9, 2009.Funds A, B, and C represent the largest target date fund suites by AUM. Performance shown is for least expensive share class with available data. Assumes reinvestment of dividends and capital gains.Source: Morningstar. Past performance is no guarantee of future results.

In-retirement funds

2010

funds

Long-term risk/return profile meets participant and sponsor needs


Dow Jones Target Date Funds outperform Morningstar Categories during GIA manager tenure

We have experienced both bull and bear markets over full portfolio manager tenure (2006).

Over this full cycle, each fund has outperformed its peer-group average, and our shorter-dated funds have generated significantly less volatility than peers.

This risk/return profile across the glide path aligns with our long-term performance goals: capital appreciation potential for younger participants and a balance between capital appreciation and capital preservation for participants as retirement approaches.

Past performance is no guarantee of future results. Source: Morningstar. Current portfolio management team start date was June 26, 2006.

Fourth-longest bull market in U.S. history* may be slowing


Past performance is no guarantee of future results. Source: Zephyr. Current portfolio management team start date was June 26, 2006. Current 5-year performance period is 10-1-10 to 9-30-15. Graphic represents growth of $100 in the S&P 500 Index from 7-1-06 to 9-30-15.*Barron’s, “Outlook 2015: Stick With the Bull,” December 13, 2014

S&P 500 Index performance

Current 5-year performance period

PM team start date

Valuations headed higher?


As of 10-19-15. Sources: GlA and www.multpl.com. Time period: 2000 – present.

Where are we now?


Markets showing signs of stress, increased volatility

Price to sales, market cap to GDP, and other measures of market valuations still high (relative to P/E)—much more potential downside to reach historical norms

Observed flight to perceived safety: domestic large caps and U.S. dollar

Increasing numbers of Baby Boomers reaching retirement every day—more dependent on their retirement savings than ever

Younger investors’ participation falling since 2008—more risk-averse than previous generations?

Most target date solutions still poised to potentially deliver significant losses to those in and near retirement should markets see a correction

Not the time to turn up risk for near-retirees

We must combine dependable investment products with better tools and plan features in an effort to improve the savings behaviors of younger investors

Fund performance as of 9-30-15


*Returns for periods of less than one year are not annualized

1. Fund is less than one year old, cumulative returns shown

Figures quoted represent past performance, which is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reinvestment of dividends and capital gains. Current month-end performance is available at the Funds’ Web site, www.wellsfargoadvantagefunds.com. R6 Class shares are sold without a front-end sales charge or contingent deferred sales charges.

The adviser has contractually committed to certain fee waivers and/or expense reimbursements. Without these reductions, the Fund's returns would have been lower. These reductions may be discontinued. Performance for certain Wells Fargo Advantage Funds reflects a predecessor fund’s performance and may be adjusted to reflect the Wells Fargo Advantage Fund’s sales charges and/or expenses. Predecessor fund information can be found in each fund’s prospectus.

Name 3 Month* YTD* 1 year 3 year 5 year 10 year Inception Indeption date

Wells Fargo Advantage DJ Target Today Fund–R6 -0.82 -1.10 -0.38 1.11 2.75 4.01 5.00 3-1-94

Wells Fargo Advantage DJ Target 2010 Fund–R6 -1.07 -1.29 -0.50 1.70 3.30 4.03 5.78 3-1-94

Wells Fargo Advantage DJ Target 2015 Fund–R6 -1.42 -1.75 -0.78 2.61 4.03 3.32 6-29-07








Wells Fargo Advantage DJ Target 2055 Fund–R6 -8.98 -6.11 -3.96 7.90 6.18 6-30-11

Wells Fargo Advantage DJ Target 2060 Fund–R6 -8.10 -8.10%1 6-30-15

Disclosure


This comparison only discloses some of the similarities and differences between funds. It does not disclose all material differences in the risks, charges, objectives, and expenses of the funds that should be considered before investing.

The target date represents the year in which investors may likely begin withdrawing assets. The funds gradually seek to reduce market risk as the target date approaches and after it arrives by decreasing equity exposure and increasing fixed-income exposure. The principal value is not guaranteed at any time, including at the target date.

Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest-rate changes and their impact on the fund and its share price can be sudden and unpredictable. The use of derivatives may reduce returns and/or increase volatility. Certain investment strategies tend to increase the total risk of an investment (relative to the broader market). This fund is exposed to foreign investment risk, mortgage- and asset-backed securities risk, smaller-company investment risk, and allocation methodology risk (risk that the allocation methodology of the Dow Jones Target Date Index, whose total returns the fund seeks to approximate, before fees and expenses, will not meet an investor’s goals).

Consult the fund’s prospectus for additional information on these and other risks. Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. For a current prospectus and, if available, a summary prospectus, containing this and other information, visit wellsfargoadvantagefunds.com. Read it carefully before investing.

Disclosure


Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Advantage Funds®. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company.

Dow Jones® and Dow Jones Target Date IndexesSM are service marks of Dow Jones Trademark Holdings LLC (Dow Jones); have been licensed to CME Group Index Services LLC (CME Indexes); and have been sublicensed for use for certain purposes by Global Index Advisors, Inc., and Wells Fargo Funds Management, LLC. The Wells Fargo Advantage Dow Jones Target Date Funds, based on the Dow Jones Target Date Indexes, are not sponsored, endorsed, sold, or promoted by Dow Jones, CME Indexes, or their respective affiliates, and none of them makes any representation regarding the advisability of investing in such product(s).

Each Dow Jones Target Date Index is composed of a set of equity, bond, and cash subindexes. As of publication, the equity component is represented by the Dow Jones U.S. Style Indexes, Dow Jones Europe/Canada Index, Dow Jones Asia/Pacific Index, and Dow Jones Emerging Markets Large-Cap Total Stock Market Specialty IndexSM and the fixed-income component is represented by the Barclays U.S. Government Bond Index, Barclays U.S. Mortgage-Backed Securities Index, Barclays U.S. Corporate Investment Grade Bond Index, and Barclays Majors (ex U.S.) Index. The cash component is represented by the Barclays 1–3 Month Treasury Bill Index.

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wells fargo advantage dow jones target date funds: q3 2015 review for institutional investor use...

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