Wells Fargo Intrinsic Value Fund

Transcription

1 ito` Quarterly report Q All information is as of unless otherwise indicated. Overview General fund information Ticker: EIVIX Portfolio managers: Jean-Baptiste Nadal, CFA; Miguel Giaconi, CFA; Jeffrey Peck Subadvisor: Wells Capital Management Inc. Category: Large blend Fund strategy Seeks to invest solely in high-quality businesses, defined as those with established operating histories, financial strength, sound competitive positions, and proven management Uses a bottom-up research process to identify high-quality companies that trade at discounts to our estimates of intrinsic value and possess catalysts that we expect to unlock intrinsic value over the next three to five years Concentrates holdings in approximately 40 high-conviction names; manages company and portfolio risk by diversifying the fund across sector, industry, economic cyclicality, and interest-rate sensitivity Average annual total returns (%) as of * Year to Since inception 3 month date 1 year 3 year 5 year 10 year (8-1-06) Intrinsic Value Fund Inst Russell 1000 Value Index *Returns for periods of less than one year are not annualized. Figures quoted represent past performance, which is no guarantee of future results, and do not reflect taxes that a shareholder may pay on a fund. 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 fund s website, wellsfargofunds.com. Institutional Class shares are sold without a front-end sales charge or contingent deferred sales charge. The fund s gross expense ratio is 0.85%. The fund s net expense ratio is 0.70%. The manager has contractually committed, through , to waive fees and/or reimburse expenses to the extent necessary to cap the fund s total annual fund operating expenses after fee waiver at 0.70% for the Institutional Class. Brokerage commissions, stamp duty fees, interest, taxes, acquired fund fees and expenses (if any), and extraordinary expenses are excluded from the cap. Without these reductions, the fund s returns would have been lower. After this time, the cap may be increased or the commitment to maintain the cap may be terminated only with the approval of the Board of Trustees. The expense ratio paid by an investor is the net expense ratio or the total annual fund operating expense after fee waivers, as stated in the prospectus. Key drivers of performance The fund outperformed its benchmark, the Russell 1000 Value Index, for the three-month period that ended September 30, Stock selection aided relative results in the health care and industrials sectors. Sector allocation also aided relative results, especially the fund s sizable 10% overweight to information technology (IT), which was one of the best-performing sectors in the benchmark. Stock selection detracted in the consumer discretionary sector as select brick-and-mortar retail holdings faced increased rivalry from e-commerce competitors. Market and portfolio overview Despite rising geopolitical concerns regarding North Korea and a particularly violent start to the North American hurricane season, the U.S. stock market continued to advance during the quarter as investors were encouraged by synchronized economic growth, muted inflation, and expanding employment. The Russell 1000 Value Index gained more than 3% for the quarter and has risen almost 8% year to date. The U.S. dollar weakened during the quarter, benefiting the fund s investments in larger-cap companies with global revenue exposure. As the quarter ended, the U.S. Federal Reserve (Fed) reiterated its intentions to normalize monetary policy by unwinding its balance sheet and to raise the federal funds short-term interest rate 3 to 4 times in the next 12 months. Commodity prices rebounded during the quarter; oil prices advanced, aiding the fund s investments in select energy companies. Our investment process is focused on bottom-up fundamental research, and we seek to invest in high-quality companies with differentiating fundamentals that seem poised to add value over the long term. We construct the portfolio with a mindset of progressive market normalization, anticipation of moderate economic growth, and an expectation for stable or slightly rising interest rates after years of significant decline. We focus on the long term and continue to expect that the intrinsic value of the fund s holdings may be unlocked over time. CM (See pages 8 9 for important information.) 1

2 Quarterly attribution analysis Contributors Intrinsic Value Fund versus Russell 1000 Value Index Driven by strong stock selection, health care was a top contributor for the quarter. Many of the fund s holdings outperformed the benchmark by a wide margin, particularly Gilead Sciences, Inc. (see page 4), which announced the acquisition of Kite Pharma, Inc., during the quarter. Shares previously were under pressure as many investors became impatient with management s slow acquisition plan; we, however, were not, and our patience paid off as shares advanced 15% for the quarter. The fund s investments in the industrials sector aided performance. Key contributors included AerCap Holdings N.V. (see page 4) and Sensata Technologies Holding N.V. Shares of AerCap gained as investors were encouraged to see management s ability to put cash to work and grow assets. Sensata has been recovering nicely from the lows of 2016 amid its integration of acquisitions and its improving margins and as the sensor content in cars has continued to increase. Detractors Within the consumer discretionary sector, investors generally were concerned about companies they believed could face competition from online retailer Amazon.com, Inc. Advance Auto Parts, Inc., was a key detractor; shares came under pressure after the company reported operating results that were below analysts' expectations. The continued decline in new-automobile sales further hindered the company's stock price; ironically, this decline, we believe, could benefit Advance Auto because demand for auto parts is likely to increase when consumers fix their older cars rather than purchase new ones. We believe the company's current share price may not fully reflect Advance Auto's fundamentals, and we took advantage of the weakness by adding to the position during the quarter. Weakness within the consumer staples sector was driven by one company: TreeHouse Foods, Inc. Shares came under pressure as investors across the food and beverage industry became concerned about Amazon's competitive threat due to its takeover of Whole Foods Market, Inc. In addition, TreeHouse reported earnings that were below analysts' expectation. However, we believe investors' response was mostly an overreaction and that the company potentially is well positioned to benefit from grocers' increased demand for private-label foods. Consumer Consumer Discretionary Staples Energy Financials Health Care Industrials Info Tech Materials Real Estate Telecom Services Utilities Cash Sector weights (average % weight during the quarter) Intrinsic Value Fund Russell 1000 Value Index Over/underweight Sector returns (%) Fund sector return Index sector return Relative return Sources: FactSet and Wells Fargo Funds Management, LLC Past performance is no guarantee of future results. Sector weights are subject to change and may have changed since the date specified. When reviewing the performance attribution of our portfolio, it is vital to remember that we construct our portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio based on its own investment thesis. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to obtain a sector distribution to resemble an index. Our exposure to any given sector is a result of our security selection process. 2

3 9 Quarterly report Q Trailing 12-month attribution analysis Key drivers of performance For the 12-month period, investments in the health care and energy sectors aided relative results whereas investments in the financials and consumer discretionary sectors detracted. The fund s holdings within the health care sector as a group posted a return that was more than twice the return of the health care sector within the benchmark. Shares of Cigna Corp. advanced after the company canceled its merger with Anthem, Inc. Abbott Laboratories rebounded strongly from earlier weakness. The precise timing of the fund's purchase and sale of Eli Lilly and Co. was another key contributor. Relative performance was aided by the fund's underweight to and stock selection within the energy sector. Oil prices were under pressure for the majority of the 12-month period; as a result, energy stocks retreated. Within the sector, TechnipFMC plc was a key contributor; FMC Technologies, Inc., recently completed its merger with Technip, and we have an optimistic outlook for the combined company's ability to synergize and grow. The fund's significant 11% underweight to financials was a key detractor as the sector rebounded from prior weakness to become the bestperforming sector for the 12-month period. The fund's underweight to larger global banks within the sector further hindered relative results as these banks considerably outperformed their midsize peers for the period because investors expected that larger banks would benefit more from industry deregulation favored by the new administration. Stock selection in the consumer discretionary sector detracted from results, largely due to declines in Advance Auto Parts and The TJX Companies, Inc. Shares of these brick-and-mortar retailers declined as investors became more concerned about increased competition from Amazon. However, we believe these companies remain attractive investment opportunities and that their business models could be far more resistant to online competition than those of their peers; Advance Auto Parts is a distributor of auto parts for professionals who need parts delivered within an hour of request, and TJX offers a hands-on treasurehunting experience that we believe would be difficult to fully replicate online. Intrinsic Value Fund versus Russell 1000 Value Index Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Info Tech Materials Real Estate Sector weights (average % weight during the past 12 months) Intrinsic Value Fund Russell 1000 Value Index Telecom Services Utilities Cash Over/underweight Sector returns (%) Fund sector return Index sector return Relative return Sources: FactSet and Wells Fargo Funds Management, LLC Past performance is no guarantee of future results. Sector weights are subject to change and may have changed since the date specified. When reviewing the performance attribution of our portfolio, it is vital to remember that we construct our portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio based on its own investment thesis. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to obtain a sector distribution to resemble an index. Our exposure to any given sector is a result of our security selection process. 3

4 CI T Quarterly report Q Portfolio analysis Representative portfolio holdings Company name Descriptor % of fund Company profile Strategic fit and analysis AerCap Holdings N.V. (AER) Contributor 3.06 AerCap Holdings, an integrated global aviation company, provides aircraft and engine leasing, trading, and parts sales; aircraft management services; aircraft and engine maintenance, repair, and overhaul services; and aircraft disassembly services. The company is based in Dublin. AerCap, one of the world s largest aviation companies, is extensively connected with airlines worldwide. AerCap also maintains good relationships with aircraft manufacturers The Boeing Co. and Airbus Group SE, and these connections facilitate timely delivery of aircraft as needed. In addition, with AerCap s dominant position in the industry, favorable pricing and other terms can be negotiated with equipment manufacturers. A key reason for our strong conviction regarding AerCap is the company s shareholder-friendly behavior; AerCap s management team believes in returning capital to shareholders, often through cash flows or by using the proceeds from sales of high-demand planes in the secondary market at prices above their book value. In recent years, AerCap has bought back nearly 20% of its market capitalization from shareholders. During the quarter, AerCap reported favorable results for the second quarter of 2017 as revenue and earnings per share exceeded analysts estimates. The company also reported a 19.2% jump in after-tax profit for the first six months of 2017 compared with the same period a year earlier. In addition, AerCap announced approval of a new share-repurchase program of up to $250 million through December 31, We continue to favor AerCap. We are pleased with the company s ongoing dedication to shareholders. We also are pleased with its plans to add more planes, as a strengthening balance sheet may lead to improved valuation. From our perspective, AerCap s stock has been trading below its intrinsic value; if the company can grow consistently in coming quarters, its stock valuation may rise above book value. Gilead Sciences, Inc. (GILD) Contributor 2.21 Gilead, a biopharmaceutical company, discovers, develops, and markets therapeutics for patients suffering from lifethreatening diseases. The company is primarily focused on treatments for HIV, AIDS, liver disease, and serious cardiovascular and respiratory conditions. Gilead is based in Foster City, California. We originally invested in Gilead based on the company s high quality and attractive attributes. Gilead is an entrepreneurial firm with a strong management team, a best-in-class focus on science, and two strong franchise businesses: HIV treatments and hepatitis C treatments. The company tends to generate strong cash flow and has a history of using that cash to create value through acquisitions. During the quarter, Gilead reported earnings and revenue results for the second quarter of 2017 that beat analysts expectations. The company also raised its product-sales guidance for Perhaps a bigger driver of Gilead s stock during the quarter, though, was the company s announcement that it would acquire Kite Pharma, a company that is developing a chimeric antigen receptor T-cell (CAR-T) cancer therapy, which harnesses the body's own immune cells to recognize and attack malignant cells. We retain strong conviction for Gilead. Its HIV business has been showing good growth, and its hepatitis C business has been picking up. Also, we are pleased with Gilead s selection of Kite Pharma; Gilead s management team took time to find a company they believe brings valuable scientific research and is a good fit with Gilead. (Continued on next page.) 4

5 2.07 Quarterly report Q Portfolio analysis Representative portfolio holdings (continued) Company name Descriptor % of fund Company profile Strategic fit and analysis Comcast Corp. (CMCSA) Detractor 2.64 Comcast a provider of media and television broadcasting services to customers worldwide offers video streaming, television programming, high-speed internet, cable television, and communication services. Comcast is based in Philadelphia. Comcast comprises a unique combination of a major U.S. cable distribution company, Comcast Cable, and a media-content and entertainment company, NBCUniversal. Comcast Cable accounts for roughly two-thirds of sales and delivers 75% of Comcast s earnings before interest, taxes, depreciation, and amortization while NBCUniversal represents the remainder. As the largest U.S. cable company, Comcast Cable has substantial leverage that has proven beneficial in negotiating with other media companies. Its size also has enabled Comcast Cable to invest more in its network relative to competitors. NBCUniversal provides Comcast Cable with a strong collection of sports and other content, including NBC Sunday Night Football and film franchises such as Despicable Me, Jurassic World, and Fast and Furious. In the period since acquiring NBCUniversal, Comcast has successfully monetized the assets of that business through endeavors such as adding new content to theme parks, continuing a run of blockbuster films, bundling out a consumer-products business, and leveraging content obtained through its DreamWorks Animation acquisition across theme parks and consumer products. During the quarter, Comcast s stock declined following the company s announcement that videosubscriber trends in its cable business would be down 100,000 to 150,000 for the quarter due to aggressive promotions by AT&T Inc. and the effects of the recent hurricanes. We continue to like Comcast and believe the company s businesses and valuation remain appealing. The company has a history rewarding investors through share buybacks and dividends; Comcast has been buying back 5 billion shares per year and intends to pay $3 billion in dividends in Treehouse Foods, Inc. (THS) Detractor 2.40 TreeHouse Foods is a food and beverage manufacturer selling private-label and branded products in the U.S. and Canada through various distribution channels, including grocery retailers and foodservice distributors as well as food manufacturers and repackagers of foodservice products. The company is based in Oak Brook, Illinois. TreeHouse, which makes snacks, meals, baked goods, and condiments and is a leader in private label branded food, has been facing challenges as consumers have moved away from packaged and canned foods in favor of fresh and healthier foods containing fewer or no additives. The company also has been managing the integration of a competitor it acquired in While we view the acquisition as a potentially good opportunity over the longer term, it has created some issues that TreeHouse has been dealing with over the shorter term. In addition, pricing has become more competitive in the private-label foods business in During the quarter, TreeHouse reported that net sales for the second quarter of 2017 decreased 1.2% compared with the same period in 2016 and lowered its fiscal-year earnings guidance. The company also announced a multiyear restructuring program that will involve several plant closings. TreeHouse said the measures are needed to remain competitive in the rapidly changing packaged-foods marketplace. We believe that over the longer term, TreeHouse potentially can deliver good earnings power. The restructuring program the company has introduced may increase the company s margins from 6% to 9% by We also believe TreeHouse may continue to benefit from grocers strong interest in private-label foods, despite increased price competition. 5

6 Market analysis Market summary Outlook Most equity markets worldwide continued to move higher during the quarter and ended the period at or near all-time highs. Similar to the previous two quarters, international equity markets outperformed U.S. equities. Emerging markets returned 7.89%, international developed markets delivered 5.40%, and the broad U.S. market posted 4.57% (as measured by the MSCI Emerging Markets Index (Net), MSCI EAFE Index (Net), and Russell 3000 Index, respectively). Moderate acceleration in global economic growth was supported by improving corporate earnings, low inflation pressure, and still-low interest rates. Corporate earnings reports were favorable overall as companies continued to benefit from healthy operating leverage. Global commodity prices climbed during the quarter. Oil prices rebounded, partly due to a better balance between supply and demand. The price of copper also increased during the quarter; its 10% gain reflected a pickup in global industrial activity. While North Korea s recent missile launches and nuclear testing raised serious concerns around the world, the heightened geopolitical risk had relatively minimal impact on the quarter s equity returns. Europe s accelerating economy led to narrowing of the gap between Europe s growth rate and that of the U.S. The narrowing in turn contributed to continued weakening of the U.S. dollar, which was down roughly 3% for the quarter. The dollar was pressured as well by ongoing low inflation, concerns regarding upcoming monetary policy actions by the Fed and the European Central Bank, and lack of momentum in the implementation of progrowth policies that were widely expected following the election of Donald Trump as U.S. president. The dollar s slide had a positive impact on U.S. multinational corporations, which enjoyed currency-exchange tailwinds because a weaker dollar makes U.S. products cheaper for buyers in other countries. U.S. economic data released during the quarter reflected a generally healthy economy. Second-quarter economic output grew at a 3.1% annual rate, a welcome pickup following a modest 1.4% pace in the first quarter, and consumers who account for more than twothirds of economic demand displayed more willingness to spend. Stronger global growth, better consumer demand, the rising stock market, and a weaker dollar all contributed to a pickup in manufacturing activity. Meanwhile, the Fed maintained the target range for the federal funds rate at 1.00% to 1.25%, noting that inflation had remained below the Fed s 2.00% objective. Reflecting continued confidence in the U.S. economy, Fed officials also stated the possibility of one more 0.25% increase in the federal funds rate by the end of 2017 and announced they would begin the process of unwinding the Fed s quantitativeeasing program, which will involve shrinking its $4.5 trillion portfolio of bonds and other assets. The growth style of investing continued to perform better than the value style during the quarter. Thus far in 2017, the gap between growth and value has been staggering especially in the U.S., where the Russell 1000 Value Index has lagged the Russell 1000 Growth Index by nearly 13% through the end of the third quarter. Looking at individual sectors in the Russell 1000 Value Index, the materials and energy sectors led the U.S. market with quarterly gains of 8.35% and 6.88%, respectively. In contrast, the consumer staples and real estate sectors declined 0.42% and 0.10%, respectively, and were the only sectors within the index to post losses. We view the current economic environment, with moderate growth and low inflation, as stable for equities. We anticipate the eventual normalization of interest rates worldwide, from which financials companies, especially banks, stand to benefit. We also see potential investment opportunities among companies that have been temporarily set back due to recent severe weather primarily businesses in the materials, consumer discretionary, and consumer staples sectors, especially in the U.S. In addition, the energy sector may have more room to run if demand remains healthy and supplies are controlled. Many energy companies have taken steps to streamline operations, reduce capital expenses, and improve cash flow, and their stock prices generally continue to be well below the highs from a few years ago. Should global growth continue to accelerate, we may see the value style of investing gain momentum. Growth stocks could become less appealing, especially given their valuations in certain cases. Faster economic growth also could lead to higher energy prices, which would benefit companies linked to that sector. Overall, businesses that tend to benefit from cyclical rebounds may do well in this type of environment. High-quality companies with strong balance sheets likely may perform better than lower-quality companies that have high valuations today due to access to currently cheap capital. From our perspective, international equities continue to provide more favorable investment opportunities than U.S. equities do. We believe international companies, many of which have been taking steps to reduce costs and improve operating leverage, offer the potential for stronger earnings growth. As quite a few international companies have demonstrated, even a slight improvement in topline growth can have a large impact on the bottom line. The weaker U.S. dollar has been a boon for international companies because they can purchase U.S. goods and materials at cheaper prices than they could before. In terms of risks, we believe the equity market would be most at risk if economic growth were to stall globally or if the Fed moves too quickly and too far in the process of normalizing U.S. monetary policy. Investors will be watching the Fed s actions closely, and the reaction could be significant should investors feel the Fed has overreached. Geopolitical issues also pose a threat to equities. Although the market thus far has appeared to brush aside the rising concerns over North Korea, that response could change rapidly. Another key risk confronting the market is the possibility that lack of momentum in Washington, D.C., could continue indefinitely and that, as a result, expectations for tax reform, deregulation, and other progrowth initiatives won t be fulfilled. Given all of these risks, we would not rule out the possibility of a market correction at some point. 6

7 Fund information Top holdings Stock % of net assets Alphabet Inc. Class C 3.36 EOG Resources, Inc U.S. Bancorp 3.10 AerCap Holdings NV 3.06 Microsoft Corporation 3.00 Honeywell International Inc BB&T Corporation 2.99 Vulcan Materials Company 2.97 Verizon Communications Inc Synchrony Financial 2.82 Portfolio characteristics Russell 1000 Value Fund Index Weighted average market cap $136.01B $118.21B Weighted median market cap $83.20B $64.17B EPS growth (3- to 5-year forecast) 9.22% 8.68% P/E ratio (trailing 12-month) 20.48x 18.84x Turnover¹ 26.87% P/B ratio 2.67x 2.04x P/S ratio 2.32x 1.73x Number of equity holdings Source: FactSet Fund facts Inception date Net expense ratio Inst 0.70% Assets all share classes $921.63M Portfolio holdings and characteristics are subject to change and may have changed since the date specified. The holdings listed should not be considered recommendations to purchase or sell a particular security. 1. Calculated based on a one-year period. Performance (%) 1 year 3 year 5 year 10 year Intrinsic Value Fund Inst Russell 1000 Value Index Lipper Large-Cap Core Funds Average Morningstar Large Blend Average Rankings and ratings Morningstar total return rankings Institutional Class (as of ) Morningstar Category: Large blend 1 year 1,235 out of 1,396 funds 3 year 1,037 out of 1,218 funds 5 year 886 out of 1,083 funds 10 year 286 out of 799 funds Overall Morningstar Rating The Overall Morningstar Rating, a weighted average of the 3-, 5-, and 10-year (if applicable) ratings, is out of 1,218 funds in the large blend category, based on risk-adjusted returns as of Performance and volatility measures 2 Fund Alpha Beta 0.96 Sharpe ratio 0.68 Standard deviation 10.19% R-squared 0.93 Information ratio Upside capture 86.92% Downside capture 93.95% Past performance is no guarantee of future results. 2. Calculated for the Institutional Class based on a three-year period. Relative measures are compared with the fund s benchmark. 7

8 Share class availability Share class Ticker Gross expense ratio (%) Net expense ratio (%) Contractual expense waiver date R EIVTX A EIVAX C EIVCX Admin EIVDX Inst EIVIX R4 EIVRX R6 EIVFX The manager has contractually committed to waive fees and/or reimburse expenses to the extent necessary to cap the fund s total annual fund operating expenses after fee waiver at 1.36% (R), 1.11 (A),1.86 (C), 0.95 (Admin), 0.70 (I), 0.80 (R4), and 0.65 (R6). Brokerage commissions, stamp duty fees, interest, taxes, acquired fund fees and expenses (if any), and extraordinary expenses are excluded from the cap. After this time, the cap may be increased or terminated only with the approval of the Board of Trustees. Without this cap, the fund s returns would have been lower. The expense ratio paid by an investor is the net expense ratio or the total annual fund operating expense after fee waivers, as stated in the prospectus. Attribution analysis: Performance attribution and sector returns are calculated using the Brinson-Fachler attribution model. As such, performance attribution calculations may differ from the fund s actual investment results. Benchmark descriptions: The Morgan Stanley Capital International Emerging Markets (MSCI Emerging Markets) Index (Net) is a free-float-adjusted market-capitalization-weighted index designed to measure the equity market performance in the global emerging markets. The index is currently composed of 21 emerging markets country indexes. You cannot invest directly in an index. Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. The Morgan Stanley Capital International Europe, Australasia, and Far East (MSCI EAFE) Index (Net) is a free-float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. You cannot invest directly in an index. The MSCI EAFE Index (Net) consists of the following 21 developed markets country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. You cannot invest directly in an index. Benchmark descriptions continued: The Lipper averages are compiled by Lipper, Inc., an independent mutual fund research and rating service. Each Lipper average represents a universe of funds that are similar in investment objective. You cannot invest directly in a Lipper average. The Morningstar Category average is the average return for the peer group based on the returns of each individual fund within the group. The total return of the Morningstar Category average does not include the effect of sales charges. You cannot invest directly in a Morningstar Category average. The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price/book ratios and lower forecasted growth values. You cannot invest directly in an index. The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price/book ratios and higher forecasted growth values. You cannot invest directly in an index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. You cannot invest directly in an index. Definition of terms: Alpha measures the excess return of an investment vehicle, such as a mutual fund, relative to the return of its benchmark given its level of risk (as measured by beta). Beta measures fund volatility relative to general market movements. It is a standardized measure of systematic risk in comparison with a specified index. The benchmark beta is 1.00 by definition. Downside capture measures a fund s replication of its benchmark during periods of negative returns. During periods of negative benchmark returns, a downside capture ratio less than 100% reflects product performance greater than the benchmark and a downside capture ratio greater than 100% reflects performance less than the benchmark. Information ratio measures how much the fund outperformed the benchmark per unit of additional risk taken. This value is determined by taking the annualized excess return over a benchmark and dividing it by the standard deviation of excess return. R-squared is a statistical measure that reflects the percentage of a fund s movements that can be explained by movements in its benchmark index. The measure ranges from 0.0, which means that the fund's performance bears no relationship to the performance of the index, to 1.0, which means that the fund's performance was perfectly synchronized with the performance of the benchmark. Sharpe ratio measures the potential reward offered by a mutual fund relative to its risk level. The ratio uses a fund s standard deviation and its excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the fund s historical risk-adjusted performance. Standard deviation of return measures the average deviations of a return series from its mean and is often used as a measure of risk. Tracking error measures the extent to which a manager s performance mimics that of a benchmark. The value is the standard deviation of the difference between a fund s performance and a benchmark s performance. Upside capture measures a fund s replication of its benchmark during periods of positive returns. During periods of positive benchmark returns, an upside capture ratio greater than 100% reflects product performance greater than the benchmark and an upside capture ratio less than 100% reflects performance less than the benchmark. 8

9 Risks: Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. 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 and focused portfolio risk. Consult the fund s prospectus for additional information on these and other risks. The views expressed in this document are as of and are those of the portfolio manager(s). The views are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any Wells Fargo Fund. Any specific securities discussed may or may not be current or future holdings of the fund. The securities discussed should not be considered recommendations to purchase or sell a particular security. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar risk-adjusted return measure that accounts for variation in a fund s monthly performance (including the effects of sales charges, loads, and redemption fees, unless otherwise indicated), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and is rated separately, which may cause slight variations in the distribution percentages.) Across U.S.- domiciled large blend funds, the Intrinsic Value Fund received 2 stars among 1,218 funds, 2 stars among 1,083 funds, and 3 stars among 799 funds for the 3-, 5-, and 10-year periods, respectively. Morningstar Ratings and Rankings are for the Institutional Class only; other classes may have different performance characteristics. The Morningstar Return ranking is based on the fund s total return rank relative to all funds that have the same category for the same time period. Past performance is no guarantee of future results. 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 wellsfargofunds.com. Read it carefully before investing. Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo 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. Neither Wells Fargo Funds Distributor nor Wells Fargo Funds Management holds fund shareholder accounts or assets. This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind including a recommendation for any specific investment, strategy, or plan CM