Optimal Blends Putting top money managers to work for your portfolio
Optimal Blends Optimal Blends combine portfolios of varied money managers into single, diversified client portfolios/accounts based on established risk/return objectives. Individual security selection is left to the discretion of the individual money managers who specialize by investment approach and/or asset class. Asset allocation and manager selection and weighting decisions are determined by Wells Fargo Advisors investment professionals. Through a comprehensive process detailed in this report, Optimal Blends combine the art and science of selecting and blending professional money managers to: Help ensure appropriate asset class and market exposures and overall proper portfolio diversification Provide a sophisticated discipline to both seek opportunities and help manage risk, while not overreacting to short-term performance Allow you to better work toward your long-term investment objectives and financial goals
A process designed to effectively manage your portfolio Professional money managers can provide the expertise and discipline to effectively manage an investment portfolio. Optimal Blends can take the guesswork out of finding and combining managers. Managing your investments and reaching your lifetime financial goals is hard work. It requires an abundance of resources, research, discipline and time. Without a comprehensive approach, investors often fail to appreciate the basic constructs and finer elements of portfolio construction, leaving them prone to the dangers of insufficiently diversifying, chasing returns and overreacting to performance ebbs and flows. This is why many investors turn to professional money managers. When doing so, the approach used to select and combine money managers is also of vital importance. The chart below shows how the average stock fund outperformed the average stock fund investor return over a 20-year period. The chart indicates that, left to their own devices, investors often pursue or react to past manager performance to the detriment of their longer-term investment results. Of course, past performance is not a guarantee of future results. Given the large universe of investment managers, how do you identify the right ones? What purpose will selected managers serve in your portfolio? How are managers best combined to address your particular risk tolerance and investment needs? And on what basis should changes be made? Optimal Blends are designed to help investors provide solutions to these questions. The adverse impact of investor behavior on 10 year fund selection average annual (1/1/1993 12/31/2012) returns (Jan. 1, 1991 Dec. 31, 2010) 10% 8 6 8.6% 4 2 4.3% Average stock fund return Average stock fund investor return Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March 2013) and Lipper. Dalbar computed the average stock fund investor return by using industry cash flow reports from the Investment All Dalbar returns Company were Institute. computed The using average the stock S&P 500 fund Index. return Returns figures assume represent reinvestment the average of return dividends for all and funds capital listed gain in distributions. Lipper s U.S. Diversified Equity fund classification model. Dalbar also measured the behavior of an asset allocation investor. The annualized return for this investor type was 2.3% over the time frame measured. All Dalbar returns were computed using the S&P 500 Index. Returns assume reinvestment of dividends and capital gain distributions. The fact that buy and hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. he performance shown is not indicative of any particular Davis investment. Past performance is not a guarantee of future results. Optimal Blends 3
Finding great money managers Money managers are chosen through quantitative and qualitative analysis that examines everything from the unique characteristics and credentials of individual managers to their specific research and portfolio construction approaches and resulting performance records. Optimal Blends are under the care of a number of specialized investment professionals. Third-party money managers select individual securities and decide on their weightings, while Wells Fargo Advisors investment professionals are responsible for guiding the asset allocation of the blends and selecting and weighting the individual money managers. The team that researches and selects money managers and has direct responsibility for the management of Optimal Blends is the Manager Strategy Group (MSG). Manager Strategy Group s 16 investment professionals average over 13 years of industry experience. In selecting money managers, the group makes use of a multilayered process, with the most senior members of the team ultimately responsible for money manager selection decisions. MSG analysts specialize by asset class and sub-asset class. For example, equities are broken down by market capitalization (company size) and investment style (value, growth or core) to arrive at the various sub-asset-class specializations. Analysts are charged with not only knowing their asset classes but with the identification and ongoing assessment of top money managers within those classes. This work involves comprehensive quantitative and qualitative assessments, blending the art and science of investment analysis and money manager selection. Although the systems and resources applied to this effort are extensive, in the end there is no substitute for knowledge of an asset class and experience assessing money managers. Optimal Blends 4
The qualities for success MSG seeks to identify money managers with a compelling investment strategy supported by people who are passionate about what they do. It also looks at the processes, investment experience and resources deemed generally consistent with strong results over time. Here s what the team looks for: Through interviews and evaluations, MSG members assess the relative strengths and unique characteristics of individual money managers. Passionate people Each year MSG analysts visit with hundreds of money managers to interview the people behind the results and assess the relative strengths and unique characteristics of individual managers. In the course of these interviews and subsequent evaluations, MSG members assess professional credentials, individual and collective experience, team structure and continuity, leadership capabilities, compensation and incentive plans and the associated proper alignment of interests with clients. They also assess organizational strengths and culture and the demonstrated level of ongoing passion for investment management. Narrowing the field of money managers Universe of thousands of Mutual Funds and Separate Account Managers Initial Screens Quantitative Screening Qualitative Screening Comprehensive Vetting Process Recommended Optimal Blend Managers ~250 Mutual Funds ~200 Separate Account Strategies Manager research is conducted by analysts who specialize by asset class. These analysts are charged with not only knowing the ins and outs of their respective asset classes, but also with the identification and assessment of the primary attributes for success and for recommending top money managers within these asset classes. This work involves quantitative and qualitative analysis, blending both the art and science of investment analysis and money manager selection. 5
When combining money managers within Optimal Blends, it is critical to know the function that each manager is intended to serve. Process Managers investment practices and philosophies are examined, including their overall process conceptualization, research approach and efforts, screening and security selection criteria and processes, levels of process consistency and adaptation, sell disciplines and portfolio construction and risk-management processes and parameters. In addition to identifying top managers, this process helps establish market-based expectations for the managers used within Optimal Blends. Performance Manager performance is assessed on an absolute and risk-adjusted basis over rolling periods and during particular market environments versus peers and appropriate benchmarks. This assessment focuses on consistency and confirmation of the market factors deemed to have a significant impact on an individual manager s performance. When combining money managers within Optimal Blends, it is critical to know the function that each manager is intended to serve. In addition to ensuring appropriate levels of diversification, the intent is to provide portfolios with levels of upside participation and downside preservation of principal in varied market environments that over time are consistent with each Optimal Blend s objectives. The approach seeks to guard against undue market timing risks and ill-informed, emotional reactions to performance and position the long-term investor to potentially benefit from short-term market overreactions. Through this combination of quantitative and qualitative analysis, a broad universe of managers is narrowed to a roster of recommended managers in varied asset classes. Optimal Blends are constructed from this list of proven and thoroughly researched, profiled, and vetted money managers. Optimal Blends 6
Setting the right asset allocation Clients investment objectives and risk tolerance are aligned with an appropriate asset allocation model. ital market assumptions, asset class correlations and quantitative techniques are employed to develop asset allocation models consistent with specific risk, yield and total return goals. Investment Strategy Committee (ISC) The ISC drives the asset allocation decision-making and risk/return framework and objectives for the individual Optimal Blends. The 15 ISC members include Wells Fargo Advisors top economic and market strategists and analysts, who have an average of 20 years of industry experience. Combining asset classes The term asset class pertains to groups of securities that generally exhibit similar characteristics and economic- and market-based performance tendencies. Through a disciplined approach of combining complementary asset classes that can behave differently in varied market environments, a diversified strategic (long-term focused) asset allocation can potentially reduce volatility and market-timing risks while still meeting longer-term return goals. Since different investors have different investment objectives and risk tolerances, the aim is to identify optimal combinations of various asset classes for given levels of risk based on the supposition that higher or increasing levels of potential return will generally require higher or increasing levels of risk (volatility). With the help of Wells Fargo Advisors Envision investment planning process, clients investment goals and assessed risk-tolerance levels are aligned with one of nine asset allocation models. The models are grouped according to three basic objectives: income, growth (focused more on capital appreciation than current income generation) or a combination of the two (growth and income). Each of the three objectives is further broken into three levels of risk: conservative, moderate, and long-term, with long-term representing the objectives of clients with longer time horizons and a willingness to incur higher levels of interim return volatility in exchange for potentially greater longer-term results. The resulting nine asset allocation models are mixes of broad asset classes such as equity, fixed income, real estate, and commodities. Within equities and fixed income, the mixes are broken down into underlying subcomponents (large-cap, mid-cap, small-cap, international equity and debt, emerging markets equity and debt, high-yield fixed income, etc.) The asset mixes for the nine models are then used as guides for the asset allocation and risk/return framework for Optimal Blends. Optimal Blends 7
Asset allocation models for a range of investors Return Conservative Income Moderate Income Long-term Income Conservative Growth & Income Conservative Moderate Growth Growth & Income Risk Long-term Growth & Income Moderate Growth Long-term Growth Equity Mid- Equity Equity International Equity Emerging Markets Equity Short-term Fixed-Income Intermediate Fixed-Income Long-term Fixed-Income International Fixed-Income High-Yield Fixed-Income Emerging Markets Debt REIT Equity Commodities Alternatives With the help of Wells Fargo Advisors Envision investment planning technology, clients investment goals and assessed risk-tolerance levels are aligned with one of nine Wells Fargo Advisors asset allocation models. The models are grouped according to three basic objectives: income, growth (focused more on capital appreciation than current income generation) or a combination of the two. Each of the three objectives is broken down further to three levels of risk: conservative, moderate, and long-term, with long-term representing the objectives of clients with longer time horizons and a willingness to incur higher levels of interim return volatility. The resulting nine asset allocation models are mixes of broad asset classes such as equity, fixed income, real estate, and commodities. Within equities and fixed income, the mixes are broken down into underlying subcomponents (large-cap, mid-cap, small-cap, international equity and debt, emerging markets equity and debt, high-yield fixed income, etc.) The asset mixes for the nine models are then used as guides for the asset allocation and risk/return framework for Optimal Blends. When deciding on the asset allocations for the nine models, the ISC utilizes a building-block approach to establish risk, return and correlation assumptions known as capital market assumptions (CMAs) for various asset classes. The approach starts with inflation expectations and a supposed risk-free return (such as a 90-day Treasury-bill return) as the initial building blocks and adds expected risk premiums (additional return) to compensate for the additional volatility of each asset class based on historical, current and anticipated economic and market trends. The CMAs are based on a long-term, 10- to 15-year outlook. Based on these forecasts and the observed correlation tendencies between asset classes, quantitative techniques are employed with the goal of matching the asset allocation of each Optimal Blend with its individual long-term-risk, yield, and total-return objectives. While these rolling 10- to 15-year forecasts are annually reviewed and adjusted as warranted, the intent is to maintain a disciplined investment approach that focuses on longer-term objectives. 8
The longer-term focus of strategic allocations is intended to take advantage of longer investor time horizons and avoid potential overreaction to interim market fluctuations. While the outlook will always remain long-term in nature, extreme market moves, changing data sets, and/or structural market changes assessed during periodic reviews will, at times, lead to changes in strategic allocations. While most Optimal Blends utilize a strategic allocation framework, a more dynamic asset allocation approach is available within the FundSource program through its Global Opportunities (GO) series for clients seeking a more tactical asset allocation approach. The GO Optimal Blends utilize managers with more flexible mandates, which allows for relatively sizable allocation shifts across varied market capitalizations, geographic regions and asset classes based on the perceived market opportunities and risks associated with these managers. While the asset allocation approach is intended to be more dynamic in nature, the asset allocation ranges are regularly monitored by MSG and generally expected to remain in line with the blends prescribed investment objectives and risk framework through the maintenance of sufficient broad asset-class diversification. The value of asset allocation 2002 2012 BEST WORST 39.2% 38.8% 28.7% 4.5% 1.0% 03 22.6% 20.7% 10.9% 4.2% 1.2% 04 14.0% 7.7% 4.9% 3.0% 2.5% 05 26.9% 15.8% 15.1% 4.8% 3.8% 06 11.6% 7.3% 5.5% 4.8% 0.3% 07 Year 5.0% 8.6% 2.1% 1.0% Barclays U.S. Treasury Bills (1-3M) An index that is representative of money markets. Merrill Lynch U.S. Government/Corporate Master Index A statistical composite tracking the performance of the entire U.S. corporate bond market over time. S&P Small 600 Index The 600 smallest U.S. companies in the S&P Composite 1500 index as measured by market capitalization. MSCI EAFE Represents all of the MSCI developed markets outside of North America. S&P 500 Covers 500 industrial, utility, transportation and financial companies in the U.S. markets. 0.1% 11.7% As of Dec. 31, 2012. Past performance is no guarantee of future results. You cannot invest directly in an index. See important disclosures on page 16. 1.8% 31.1% 37.0% 43.1% 08 32.5% 26.5% 25.6% 4.8% 0.2% 09 26.3% 15.1% 8.2% 6.8% 0.1% 10 11 17.9% 16.3% 16.0% 5.1% 0.1% 12 While seeking to maintain sufficient flexibility for opportunistic investing, all Optimal Blends will maintain a level of broad asset class diversification that is consistent with their respective investment objectives. The intent is to diversify the risks of unforeseen events and resulting radical shifts in performance by asset class. This chart depicts the yearly performance of various asset classes over a 10-year period. Notice how bonds a relatively stable asset class have been both the best and worst performers, as well as everywhere in between. The maintenance of broad asset class diversification can potentially help reduce overall portfolio volatility and avoid excessive market timing risks. Optimal Blends 9
The art and science of combining managers Optimal Blends go beyond mere labels and broad categorizations of managers. Look through analyses align managers combined market exposures with Optimal Blends asset allocation and risk profiles. Managers are also scrutinized based on more than 200 qualitative attributes and potential biases and tendencies. Manager combinations within each Optimal Blend are based on quantitative and qualitative determinations of precisely what each manager brings to the blend. While all MSG analysts are involved in deliberations and manager selection pertinent to their asset class specializations, a smaller group of senior MSG members are ultimately responsible for the construction and management of the Optimal Blends. Based on its ongoing assessments and profiling of investment managers, MSG seeks to select and pair complementary investment approaches that align with the asset allocations and overall risk/return objectives of each Optimal Blend. Within each asset class, the individual managers within Optimal Blends employ varied time horizons and investment approaches focused on both long-term and opportunistic investing at the sector, industry, and individual security levels. Although managers often have enduring principles and specific criteria that guide their investment process and largely influence their longer-term risk/return profiles, most allow for varied market exposures based on perceived opportunities and risks. For example, a primarily large-cap manager may also have substantial exposure to mid-cap stocks, or an international equity manager may have substantial investments in both developed and emerging-market stocks. In the fixed-income arena, managers with a primary focus on a certain maturity segment or issue type may also have select exposures in other maturities or sectors (for instance, Treasuries, investment-grade credits and high-yield). Changing market conditions can, over time, also result in material shifts in areas of emphasis and ensuing portfolio structures and characteristics. Despite such varied exposures and changes in portfolio complexion, for the ease of maintaining broad categorizations, money managers are typically classified according to distinct categories (such as large-cap value equity or developed international equity) based on metrics and historical return correlations attributed to prevailing investment style, market capitalization, yield curve, credit and regional orientations. MSG recognizes, however, that such categorizations and historical return-based assessments often fail to reveal the broader exposures and changing nuances of diversified money managers who are not necessarily managing portfolios to conform to preconceived 10
The look through approach is used to align specific fixed income, equity and other market exposures with the asset allocation and risk profiles of the Optimal Blends. categorizations. For that reason, when combining managers, MSG assesses combined portfolio exposures and other characteristics based on historical and recently published or observed holdings in addition to traits and characteristics of a particular investment management approach or team that are considered more enduring in nature. This holdings- and characteristics-based look through approach is used to align specific fixed income, equity and other market exposures with the asset allocations and risk profiles of the Optimal Blends as opposed to simply relying on the generic investment categorizations of each manager. For fixed income, the look through analysis includes varied yield curve, investment quality and sector and regional exposures. For equities, the analysis includes investment style, market capitalization, investment quality and regional and economic sector exposures. In performing the holdings-based exposure assessments, MSG makes use of third-party applications and proprietary tools. The danger of not conducting such assessments and relying only on general manager classifications could be market exposures that may substantially deviate from what was intended, altering both the return and risk profile relative to the targeted asset allocation. Optimal Blends 11
MSG further breaks down managers according to more than 200 qualitative factors that are used to profile the common characteristics, tendencies and portfolio structures of managers used within Optimal Blends. The assessment seeks to fine-tune manager characterizations relative to such criteria as: Investment style Philosophy and process Sector exposure Regional exposures Research approach Valuation techniques Market-based performance drivers and expectations In combining MSG s collective observations and quantitative research, the goal is to know exactly what a manager brings to the blend and how it may complement or interact with other managers. To further determine the potential contribution of a manager to an Optimal Blend, numerous performance- and risk-based metrics for each manager and potential manager combinations are examined. The metrics incorporate absolute, relative and risk-adjusted returns over multiple time periods and for specific market environments. Manager selection, weighting or removal decisions are made in light of knowledge gleaned through our collective analyses, research and observations. This puts our clients at a distinct advantage over investors relying on investment approaches that simply monitor strong or weak performance over a given time frame. For example, a manager with a noted proclivity toward and/or skill set in a certain market segment may be one of the weakest performers in an Optimal Blend over a given period. However, this market segment may be a weak performer in general, and the overall weighting of this segment within the Optimal Blend may be in line with the blend s benchmark although more concentrated in the manager with noted expertise in the segment. When this segment comes back in favor, this manager would be expected to be a leading performance contributor. This potential for investment gains would be eliminated if an investor without full knowledge of each piece of the puzzle simply reacted to performance alone. Historical back-tests of various manager combinations also include an assessment of absolute, relative and excess return correlations versus specified benchmarks. Such analysis provides an assessment of how managers historical return streams have complemented one another. Based on the covariance (level of tandem movement) of manager returns, the historical individual risk (versus return) contributions of each manager within potential blends are examined at various weights. Optimal Blends are constructed and managed based on these collective qualitative and quantitative assessments and scenario analyses. 12
Optimal Blend construction process Strategic Allocations and Investment Objectives ital market assumptions and Strategic Allocation derived by Investment Strategy Commitee aligned to 9 model-based investment objectives. Serves as basis for Optimal Blends asset allocation and investment objectives. Iterative Model Management Team and Analyst Vetting Model management team leads process constructing blends with iterative consultation with asset class analysts. Varied manager combinations are considered and tested. Look Through Factor Exposure Analysis Looking beyond generic categorizations, this step involves a comprehensive assessment of current/historical factor exposures to gain true understanding of how portfolios are constructed and blend together. Qualitative Characteristics Assessment and Blending Heat Map and assess over 200 qualitative factors to further formulate exposure, risk and performance expectations for each fund/blend. Risk/Return Contribution and Scenario Analysis Analyze blends over historical trailing, rolling and discrete periods to assess correlations and risk/return characteristics and contributions relative to investment expectations and objectives. Final Manager Selection and Weightings Model team formulates/modifies Optimal Blends with final review by senior Manager Strategy Group personnel and asset class analysts. Optimal Blends 13
Investing in Optimal Blends Optimal Blend investors gain access to the expertise and performance potential of some of the industry s leading money managers that are made available through the FundSource and DMA programs. FundSource FundSource Optimal Blends use mutual funds as the sole investment vehicle and include the Standard, Tax Managed, Global Opportunities, and Core American series. FundSource Standard: Strategically allocated Optimal Blends aligned with 10- to 15-year CMA-directed asset allocations for nine distinct asset allocation models. Standard with Alternatives: Similar to Standard blends in basic approach, but blends both traditional equity and fixed income allocations with allocations to low correlated alternative strategy mutual funds as a means to reduce overall volatility and seek to further enhance diversification and potential risk/return outcomes over a full investment cycle. FundSource Tax Managed: Similar in design and investment approach to Standard Optimal Blends but uses municipal bond managers for the domestic fixed income allocation and, within equities, places an emphasis on managers with lower turnover or other active means of enhancing tax efficiency. FundSource Global Opportunities: This series of Optimal Blends is focused on managers with more dynamic and flexible investment processes and portfolio structures. This group of managers includes all-cap managers, global managers and asset allocation funds. While not intended to be a market-timing vehicle, the more dynamic investment approaches incorporated in these Optimal Blends allow for increased tactical responses to perceived market opportunities and risks relative to a longer-term investment approach. FundSource Core American: The primary distinguishing factor for this series of Optimal Blends is an emphasis on the use of American Funds. Generally, the overall allocation to American Funds will approximate 50% or more of each of these Optimal Blends, with the remainder allocated to complementary funds from other fund families. This series of blends was developed for clients attracted to American Funds basic approach and select offerings but wanting additional diversification. The Mutual Funds in the FundSource program are sold by prospectus. Free prospectuses are available from Wells Fargo Advisors for any funds in Optimal Blends. The prospectus contains information on charges and expenses, risks, investment objectives and other information on the investment company. Read and consider it carefully before you invest. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost. Optimal Blends 14
The Alternative Strategies Model seeks to enhance portfolio diversification through sophisticated trading and portfolio management strategies, including short-selling and the use of derivatives. Diversified Managed Allocations (DMA) DMA Optimal Blends are also strategically allocated portfolios aligned with the asset allocation models set forth by ISC, but are distinct in their ability to use combinations of both separately managed accounts (SMAs) and mutual funds. Through this combined approach, DMA Optimal Blends seek to combine the unique strengths of both SMAs and mutual funds. The majority of DMA Optimal Blends will be invested in SMA strategies and use mutual funds to seek to enhance diversification and gain exposure to asset classes not conducive to SMAs due to account minimums and/or trading issues. Alternative Strategies Model The Alternative Strategies Model can be used within both FundSource and DMA. The model seeks to offer complementary low-volatility, absolute-return-focused investment results that are relatively independent of those generated by the long-only traditional equity and fixed income asset class exposures. The model s aim is to further enhance portfolio diversification, reduce overall portfolio volatility and better help preserve capital in periods of market distress, thereby offering the potential for enhanced risk/reward outcomes over a full market cycle. To achieve its objectives, the model s individual constituents may incorporate more sophisticated trading and portfolio management strategies, including short-selling and the use of derivative securities. Optimal Blend client benefits Flexibility Diversification Risk and Management Professionally Constructed Models Rebalancing Simplicity Professional Money Management Due Diligence Optimal Blend Access to Funds and Lower Fee Shares Objectivity 15
Important disclaimers International/Emerging Market Securities or Funds: Investing in international securities or funds that invest in these securities takes on special risk. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets normally accentuates these risks. Securities or Funds: Investing in small companies or mutual funds that invest in small companies involves additional risk. Smaller companies typically have a higher risk of failure and are not as well established as larger blue chip companies. Historically, smaller-company stocks have experienced a greater degree of price volatility than the overall market average. Mid- Securities or Funds: Investing in companies with market capitalization of $1 to $5 billion or funds that invest in these companies involves additional risk. The securities of these companies may be more volatile and less liquid than the securities of larger companies. High Yield Funds: Investing in lower-rated debt securities (commonly referred to as junk bonds) or funds that invest in such securities involves additional risk because of the lower credit quality of the security or fund portfolio. These securities or funds are subject to a higher level of volatility and increased risk of default, or loss of principal. Fixed Income Securities: Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Real Estate Investment Trusts (REITS): Investing in REITS involves special risks, including the potential for illiquidity of REIT securities if they are not listed on an exchange. REITS have limited historical data and their historical behavior has varied over time. There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner s tax bracket. Treasuries: Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. Asset allocation and diversification does not guarantee a profit or protect against loss. FundSource Optimal Blends are discretionarily managed. The program s investment process is heavily reliant on the selection of the mutual funds to satisfy specified investment objectives and asset allocations. Strategic asset allocation generally refers to a strategy that is designed to be long term and static in nature. In certain instances, individual mutual funds in the portfolio may close to new investors. In these instances, the program may choose to use its investment process to substitute alternative mutual funds, in the same asset class, and or create a new portfolio version to accommodate new accounts. In addition, at the program s discretion, new capital market assumptions and a new portfolio allocation may be implemented and existing accounts and models may be rebalanced to the new allocation. The Model assumes all mutual funds and capital market assumptions change at the time of program implementation and therefore individual accounts may vary. The target allocation among the selected mutual funds applies at the time the account is established in the FundSource Program. Additions to, and withdrawals from, the account will generally be allocated based on the target allocation. Fluctuations in the market value of assets, as well as other factors, however, will affect the actual allocation at any given time. In order to maintain a client s overall account in conformance with the client s target allocation, a clients account defaults to an annual auto-rebalance, usually based on the client s inception date [and may rebalance if the allocation strays from the targeted allocation by a given percentage (certain restrictions apply)]. The client may elect to rebalance more or less frequently, including on demand. Such variance in rebalancing frequency and timing may cause returns to vary. In addition, the performance results of each individual Client account, under management by the same Financial Advisor, may differ. Frequency of rebalancing, tax sensitive strategies, account restrictions, and timing of flows are factors that can influence the returns of any given Portfolio. The FundSource program is not designed for excessively traded or inactive accounts and may not be suitable for all investors. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services. The minimum account size for this program is $25,000. The fees for the Diversified Managed Allocations (DMA) program are assessed quarterly in advance. The fees include Advisory Ser-vices, performance measurement, transaction costs, custody services and trading. The fee schedule, which is negotiable, is based on account size and an assumed active equity portfolio. A minimum annual fee may apply for this program. Fee based programs are not designed for excessively traded or inactive accounts and may not be suitable for all investors. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services and information on all fees and expenses. The minimum account size for this program is $250,000. Your Financial Advisor may modify your individual portfolio based on their understanding of your personal situation. Alternative investment/strategy risks Relative to broad, long-only traditional asset class mutual funds, alternative mutual funds may employ more complex strategies, investments, and portfolio structures. In doing so, some of these strategies may expose investors to additional risks, including but not limited to the following: short selling, leverage risk, counterparty risk, liquidity risk, commodity price volatility risk, and/or managed futures roll yield risk. Derivatives risk Investors should be aware that some alternative mutual funds often employ derivatives to gain desired market exposures and in seeking to meet stated risk/return objectives. Derivatives involve financial contracts for which values are derived from a traditional security (e.g., a stock or a bond), an asset (such as a commodity or specified currency) or a market index. Derivatives can lead to losses due to adverse movements in the price or value of the underlying asset, index, benchmark rate or instrument due to specific security or varied market and/or economic factors. Derivatives are also subject to counterparty risk, the risk that the other party in a trading agreement/contract will not pay (such as in the case of default). Short selling risk Investors should be aware that some alternative mutual funds utilize short selling in an attempt to profit from a bearish or negative view and/or hedge market exposure. Short selling involves borrowing stock from a market participant and then selling the borrowed stock within the marketplace with profits being generated if the price of the stock declines and the borrowed shares can be purchased and returned at the lower price. If a shorted stock s price rises in value, however, the risk of loss will be directly linked to the upward movement in stock price, which is theoretically unlimited. Because borrowing takes place, short selling with no corresponding long position is also a form of leverage which can expose participating strategies to greater return volatility and loss potential. Increased net asset value volatility due to leverage is largely determined by the amount of leverage employed, along with the increase/decrease in the value of any security sold short. Commodities risk Some alternative mutual funds provide exposure to the commodities markets through futures and other derivative contracts, which may subject such funds to greater volatility than investments in traditional securities. Because the value of commodity-linked derivative investments is typically based to a large degree upon the price and price volatility of a physical commodity (such as heating oil, livestock, or agricultural products), the value of such contracts may be affected by changes in commodity market movements/ dynamics, volatility of assigned benchmarks, changes in interest rates, broad political or economic events, or factors affecting a particular industry or commodity (such as weather). Leverage risk While explicit borrowing is limited within mutual funds by the 40 Act and subsequent SEC guidance, clients should be aware that various forms of leverage may exist within some alternative mutual funds. Mutual Funds may employ leverage through such means as bank borrowing, selling a security short, or using derivatives to garner the right to market exposure greater than the principal amount invested. Such activities may incur correspondingly greater return and loss potential in the form of Net Asset Value (NAV) volatility. Increased NAV volatility due to leverage is largely determined by the amount of leverage employed, along with the increase/ decrease in the value of any security sold short, instrument underlying a derivative, and/or security purchased with bank borrowings. Envision methodology: Based on accepted statistical methods, the tool uses a simulation model to test your ideal, acceptable and recommended investment plans. The simulation model uses assumptions about inflation, financial market returns and the relationships among these variables. These assumptions were derived from analysis of historical data. Using Monte Carlo simulation the tool simulates 1,000 different potential outcomes over a lifetime of investing varying historical risk, return, and correlation amongst the assets. Some of these scenarios will assume strong financial market returns, similar to the best periods of history for investors. Others will be similar to the worst periods in investing history. Most scenarios will fall somewhere in between. Elements of this report s presentations and simulation results are under license from Financeware, Inc. Important: The projections or other information generated by Envision regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time. 2001-2010 Financeware, Inc. U.S. Patents 7,562,040, 7,650,303 and 7,765,138. Other U.S. and international patents pending. All Rights Reserved. Financeware, Inc. is a separate entity and is not directly affiliated with Wells Fargo Advisors or Wells Fargo Advisors Financial Network. Optimal Blends 16
Put Optimal Blends to work in your portfolio Your Financial Advisor is your personal link to the investment professionals managing Optimal Blends and to the combinations of money managers within them. Investment and Insurance Products: u NOT FDIC Insured u NO Bank Guarantee u MAY Lose Value Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. First Clearing, LLC is a registered broker-dealer and non-bank affiliate of Wells Fargo & Company. 2011-2013 Wells Fargo Advisors, LLC. All rights reserved. 84323-v4 0113-05503 e6949