Dynamic Growth Equity List Strategy

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1 Brian S. Postol, Equity Sector Analyst Dynamic Growth Equity List Strategy Commentary from ASG's Equity Sector Analysts April 20, 2018 Quarterly Review The Dynamic Growth Equity List Strategy focuses on companies that we believe offer above average growth potential and may be on track to become leaders in the markets they serve. Our objective is to offer investors a list of stocks that they can use to help build a well-diversified portfolio or to fill holes in an existing portfolio. 12.0% 10.0% 2017 & 1Q'18 Total Return DG Russell Midcap Growth 8.0% 6.0% 4.0% 2.0% 0.0% 1Q'17 2Q'17 3Q'17 4Q'17 1Q'18 Source: Factset, Wells Fargo Advisors. Performance numbers are through March 31, 2018 Past performance is no guarantee of future results. Quarterly Commentary First-quarter performance for the Dynamic Growth Equity List Strategy (the List) outperformed its benchmark, the Russell Midcap Growth Index, by 350 basis points (100 basis points equal 1 percent), up 5.7% for the first quarter versus the Russell Midcap Growth Index +2.2%. The eleven economic sectors delivered weak performance during the quarter, with only a couple of notable exceptions. Performance disparity Please see pages 5-6 of this report for Important Disclosures, Disclaimers and Analyst Certification Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value Page 1 of 6

2 between the extremes was wide making sector allocations important, as has been the case in recent quarters as the performance disparity between the best- and worst-performing sectors was significant, amounting for nearly 1,100 basis points for the three months. Consumer Discretionary and Information Technology were the strongest performers, producing gains of +3.5% and +3.1%, respectively. The Telecommunications, Consumer Staples and Energy sectors were the poorest relative performers, posting returns of -7.5%, -7.1% and -5.9%, respectively. The quarter s outperformance was mainly attributable to selection effect within the Consumer Discretionary and Information Technology sectors. As previously discussed, not only was Consumer Discretionary one of the best performing sectors across the entire quarter, but also led on a relative basis within the List outperforming by nearly 175 basis points. The List being skewed towards two of our favorite sub-industries Internet Retail and Apparel Retail (primarily Off-Pricers) benefited throughout the quarter as each continued to show strong relative outperformance. Information Technology was also a strong relative performer for the List fueled by Software and Semiconductors & Semiconductor Equipment sub-industries. On the negative side, Telecommunications and Consumer Staples were the largest offset to relative performance. There is a single holding within the Telecom sector that resulted in the underperformance; however, there was nothing that occurred in the quarter that causes us any near-term concerns with the name. Finally, the entire Consumer Staples sector underperformance was a result of one holding during the quarter and we removed that holding from the List during the later parts of the quarter. 8.0% Figure 1: First Quarter 2018 Dynamic Growth Equity List Sector Holdings and Russell Midcap Growth Sector Performance 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% Dynamic Growth Equity List Russell Midcap Growth Total Discretionary Staples Energy Financials Health Care Industrials Technology Materials Real Estate Telecom Source: FactSet, Wells Fargo Advisors. Performance numbers are through March 31, Past performance is no guarantee of future results. Additions and removals During the first quarter, we made the following changes to the lists: On January 16, we added shares of Schneider National Inc. (SNDR-$27.57) and removed the shares of Expeditors International of Washington Inc. (EXPD-$64.37). On February 28, we removed the shares of e.l.f. Beauty Inc. (ELF-$18.94). Page 2 of 6

3 Appendix Dynamic Growth Equity List Strategy by Sector Market Cap (billion) NTM EPS L-T EPS Growth Date Added To List Company Symbol Price NTM PE Consumer Discretionary (average) $ x 16% Amazon.com AMZN $1, $753.5 $ x 29% 11/7/13 Burlington Stores, Inc. BURL $ $9.2 $ x 17% 11/8/13 CarMax, Inc. KMX $62.97 $11.2 $ x 14% 1/27/15 Nike, Inc. NKE $67.51 $106.4 $ x 10% 1/11/16 O'Reilly Automotive, Inc. ORLY $ $18.8 $ x 16% 3/16/15 Planet Fitness PLNT $40.47 $3.6 $ x 17% 2/15/17 Starbucks Corp. SBUX $59.83 $83.4 $ x 16% 6/13/14 Consumer Staples $ x 17% Estee Lauder Cos. Cl A EL $ $55.9 $ x 17% 7/2/12 Energy $ x 30% Concho Resources Inc. CXO $ $23.4 $ % 7/2/12 Matador Resources MTDR $32.08 $3.6 $ x 23% 2/15/17 Financials $ x 13% Affiliated Managers Group Inc. AMG $ $9.5 $ x 13% 1/10/13 Charles Schwab SCHW $53.61 $72.2 $ x 24% 7/20/15 First Republic Bank FRC $89.83 $15.0 $ x 13% 1/11/16 IntercontinentalExchange Inc. ICE $73.43 $43.5 $ x 14% 7/2/12 SVB Financial Group SIVB $ $13.2 $ x 9% 12/13/17 Health Care $ x 18% ABIOMED, Inc. ABMD $ $13.6 $ x 30% 12/13/17 Celgene Corp. CELG $91.10 $68.0 $ x 18% 11/7/13 Danaher DHR $ $70.9 $ x 10% 12/1/15 Industrials $ x 14% Dycom Industries DY $ $3.3 $ x 12% 1/11/16 Schneider National, Inc. SNDR $27.24 $4.9 $ x 14% 1/16/18 WABCO Holdings WBC $ $7.3 $ x - 7/3/12 XPO Logistics XPO $ $12.8 $ x 29% 6/30/17 Source: FactSet, Wells Fargo Advisors, company reports 1 Simple average for market cap, date added. Harmonic average for PE. Median for EPS growth estimate. NTM = next twelve months EPS = earnings per share, funds from operations used for real estate investment trusts PE = price to earnings ratio L-T = long-term Market Cap categories: large cap greater than $12.5 billion, mid cap between $12.5 billion and $3 billion, small cap less than $3 billion Page 3 of 6

4 Market Cap (billion) NTM EPS L-T EPS Growth Date Added To List Symbol Price NTM PE Information Technology $ x 18% Electronic Arts EA $ $37.8 $ x 13% 12/1/15 Facebook, Inc. FB $ $488.5 $ x 24% 3/2/16 NVIDIA Corp. NVDA $ $138.8 $ x 11% 10/5/17 PayPal Holdings PYPL $80.03 $95.6 $ x 19% 7/20/15 Proofpoint, Inc. PFPT $ $6.3 $ x 24% 10/5/17 RedHat RHT $ $28.3 $ x 18% 1/27/15 salesforce.com CRM $ $90.5 $ x 23% 3/16/15 Visa, Inc. V $ $280.0 $ x 18% 3/2/16 WEX Inc. WEX $ $7.0 $ x 15% 1/10/13 Materials $ x 12% Ecolab Inc. ECL $ $43.1 $ x 12% 7/2/12 Real Estate $ x 32% SBA Communications SBAC $ $19.3 $ x 32% 1/26/15 Telecommunications Services $ x 28% Zayo Group Holdings ZAYO $36.42 $9.1 $ x 28% 10/5/17 Dynamic Growth Equity List Average 1 $ x 17% S&P 500 SP50 $2,693 $45.5 $ x 12% Source: FactSet, Wells Fargo Advisors, company reports 1 Simple average for market cap, date added. Harmonic average for PE. Median for EPS growth estimate. NTM = next twelve months EPS = earnings per share, funds from operations used for real estate investment trusts PE = price to earnings ratio L-T = long-term Market Cap categories: large cap greater than $12.5 billion, mid cap between $12.5 billion and $3 billion, small cap less than $3 billion Page 4 of 6

5 IMPORTANT DISCLOSURES Disclosure information... For important disclosure information, please contact: Wells Fargo Advisors Attn: Advisory Services (Disclosure Information) One North Jefferson, St. Louis, MO Or call phone (888) Please remember to specify the issuer(s) with respect to which you would like to receive disclosure information. ANALYST CERTIFICATION: The Analyst who prepared this report hereby certifies that the views expressed in this report accurately reflect his/her personal views about the subject companies and their securities. The Analyst also certifies that he/she has not been, is not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Disclaimers Prices and estimates are as of April 19, 2018, unless indicated otherwise. You should be aware that investments can fluctuate in price, value and/or income, and you may get back less than you invested. We recommend that existing shareholders consider their objectives, their risk tolerance, and the size of their positions relative to their portfolios when evaluating their holdings. Equity investments are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities. Growth stocks may be more volatile than other stocks. The growth style of investing cannot guarantee appreciation in the market value of the Fund s holdings and growth may not be realized. The growth style of investing tends to shift in and out of favor. There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Technology and Internet-related stocks, especially of smaller, less-seasoned companies, tend to be more volatile than the overall market. Investments in the energy sector are subject to the adverse economic events within that industry. A downturn in the energy sector of the economy, adverse political, legislative or regulatory developments or other events could have a large impact on a portfolio s investments in this sector. The prices of small and mid-cap 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. Dividends can be increased, decreased or totally eliminated at any point without notice. EV/EBITDA is Enterprise Value/EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-tobook ratios and higher forecasted growth values. The stocks are also members of the Russell 1000 Growth index. Page 5 of 6

6 S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group, among other factors. It is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. An index is not managed and is unavailable for direct investment. Earnings per share (EPS) is the portion of a company s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company s profitability. Price to earnings ratio (PE ratio) is a valuation ratio of company s current share price compared to its per-share earnings. PE = market value per share/eps. Wells Fargo Advisors publishes several theme-based lists of recommended equity securities. Each list is based on a specific investment objective and time horizon which may be different from the other lists. This may cause Wells Fargo Advisors to recommend an equity security to be added to one list and removed from another list. Thus, one list may contain different recommendations or conclusions that could result in short-term price movements contrary to the recommendations in another list. Wells Fargo Advisors research analysts receive no compensation in connection with the firm s investment banking, sales and trading, or principal trading revenues. Analysts may be eligible for annual bonus compensation based on the overall profitability of the firm, which takes into account revenues derived from all the firm s business activities, including its investment banking business, sales and trading, and principal trading. The Advisory Services Group (ASG) of Wells Fargo Advisors works with information received from various resources including, but not limited to, research from affiliated and unaffiliated research correspondents as well as other sources. ASG does not assign ratings to or project target prices for any of the securities mentioned in this report. ASG receives research from affiliated and unaffiliated correspondent research providers with which Wells Fargo Advisors has an agreement to obtain research reports. Each correspondent research report reflects the different assumptions, opinions, and the methods of the analysts who prepare them. Any opinions, prices or estimates contained in this report is as of the date of this publication and is subject to change without notice. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice. 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 Wells Fargo Clearing Services, LLC. All rights reserved. Page 6 of 6