Wells Fargo Investment Insights

In times of chaos, choose to innovate INVESTMENT INSIGHTS Uncovering Driving positive Watching Building a new Embracing Challenging innovation on change with China’s quest playing field machine assumptions the right side municipal for technology with smaller learning for in portfolio of change bonds independence issuers value discovery construction Plus, real stories of conversations with clients and colleagues that shape our leaders’ views on driving innovation.

In this issue INTRODUCTIONS Bring the chaos, we’ll bring the ideas 4 Nico Marais, CFA, CEO, Wells Fargo Asset Management Asking the tough questions 5 Kirk Hartman, CIO, Wells Fargo Asset Management INVESTMENT DISCOVERIES Uncovering innovation on the right side of change 6 Michael Smith, CFA, and Ozo Jaculewicz, CFA Driving positive change with municipal bonds 8 Thomas Stoeckmann; Jeffrey Weaver, CFA; and Terry Goode Watching China’s quest for technology independence 11 Alison Shimada and Connie Ou, CFA 13 Building a new playing field with smaller issuers Janet Rilling, CFA Embracing machine learning for value discovery 15 Craig Pieringer, CFA, and Gustaf Little Challenging assumptions in portfolio construction 18 Brian Jacobsen, Ph.D., CFA, CFP, and Frank Cooke, CFA LEADER INSIGHTS 10 A definitive yes Hannah Skeates Reimagining the conventional 14 Andy Hunt, CFA, FIA Driving innovation with our clients in mind 16 Randy Mangelsen, CFA, CQF, FRM, PRM Less talk, more action 20 Nate Miles, CFA Responding to the need behind the question 21 Dan Morris, AIA 23 The final word: Building a culture that enables innovation Ann Miletti

IN TIMES OF CHAOS CHOOSE TO INNOVATE MESSAGE FROM Nico Marais, CFA Chief Executive Officer Wells Fargo Asset Management Bring the chaos, we’ll bring the ideas We’re at a pivotal stage for the economy and the When there is uncertainty and change, markets. There are many questions, but no clear many businesses choose to adapt and bring answers. together people they trust and develop an innovative new vision aimed at long- term success. Innovation involves new Where are we in the economic and perspectives, new thinking, and new market cycles? action to creatively build new ways of tackling problems. With Phase One done, what’s next with That’s what we’re doing. Our culture—the global trade relations? ethos that drives how we serve our clients— runs on innovation. We feel the uncertainty you do. We feel the urgency of your financial What will the Federal Reserve do next challenges. We know, on any given day, a and when? seismic event could shake the markets. Therefore, we’re focusing on big ideas instead of uncontrollable events—and we What’s going to happen in the Middle recommend you do the same. East and with North Korea? This 2020 outlook might be a bit different from others you’ve seen. We take you inside the walls of Wells Fargo Asset Management It would be easy for me to rattle off many words of predictions or platitudes. I prefer a more direct where our portfolio managers, strategists, approach. On some days, the world of investing, and leaders are creating and using totally and the world itself, can feel incredibly uncertain new ideas to manage assets. The markets and borderline chaotic. may feel chaotic, but our people are So why not pause from asking questions about challenging old ways of doing things and, in events we can’t control and instead ask ourselves: turn, pursuing a path to success. In times like these, what can we do about it? We We believe our innovations can help our think there is a one-word answer: innovate. This clients achieve their desired outcomes, no approach can work for businesses and, in our view, matter what chaos this world delivers. it can work for investors as well. Bring the chaos. We’ll bring the ideas. 4

MESSAGE FROM Kirk Hartman Chief Investment Officer Wells Fargo Asset Management Asking the tough questions Have you ever felt concerned, even during good However, we’ve seen this before. Recall 2008. A financial times? (As CIO, it’s my job to worry.) credit crunch hit the world as part of the Global When markets perform well, investors can become Financial Crisis. I had some very candid, emotional complacent. They stop asking important questions. conversations with clients. A common question they’d ask me: “When will this end?” But in your heart, you know some issues have been bubbling under the surface. The challenge is: How Naturally, clients sought a forecast for when do you react to that? market conditions would change. When chaos is As I look back on 2019, I cannot help but notice outside of your control—and it threatens to affect the phenomenal performance of both equity and your financial goals—it is unnerving. But I couldn’t lead with that type of outlook. Instead, we dug fixed-income markets, even as times of chaos permeated the news—all amid a backdrop of deeper and asked questions such as this: “What are global central banks supporting the markets at we doing about it?” unprecedented levels through low borrowing rates The answer then was innovation, just as I believe and a growing balance sheet. It seemed the world it is now. While the issues leading up to the 2008 was awash with liquidity. Both consumers and credit crunch bubbled under the surface, our businesses were borrowing and spending. Many money market team had been studying credit risk would think: Good times, right? and structure. Our competitors had been turning As we look forward, it’s 2020 and these conditions to credit agency ratings for direction. So, we asked have helped generate a rather large amount of ourselves: “Is there a smarter approach?” That’s when our team decided to build an in-house credit debt in our global financial system. This has been on my mind, and I believe it’s time to ask: What scoring system. happens to all that leverage when a credit crunch To this day, I believe that system helped us avoid hits the markets? the money market bailouts that many others in Investment capital would become harder to the industry were forced to undergo. The reason: secure. Lenders would become wary about We understood structured investments and we loaning to consumers and businesses. And those focused on the quality of the collateral underlying accommodative central banks? Historically, they the debt obligations. This allowed us to avoid many would lower rates in this environment. Instead, credit problems. they have limited room to do that since rates Here’s the takeaway I’d apply to 2020: are already near historical lows and their balance sheets are massive. There will undoubtedly be Say market conditions do end up shifting economic ripple effects. due to events we can’t control. I’d want to look back and know that I acknowledged the concerns, asked tough questions, and tackled issues head-on through innovative thinking. 5 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE INVESTMENT DISCOVERIES Uncovering innovation on the right side of change What does it mean for a company to be on the right side of change in 2020? Put yourself in the shoes of a respected entertainment brand that’s given the magical gift of flight to cars, caretakers, and elephants. You’re known for innovation, but to make your next act work—creating a wearable technology Michael Smith, CFA to enhance the guest experience at your theme parks—you need the gift of Senior Portfolio Manager, top-flight software talent. Fundamental Growth Equity Team But that type of talent can be as elusive as the rightful owner of a glass slipper. This story is emblematic of a digital transformation happening on a massive scale across corporate America. As companies embrace new technologies and strive to meet evolving consumer demands, they must find the talent to manage an array of new digital complexities. Increasingly and across industries, these firms are struggling to do so due to a scarcity of skilled software developers. Two forces are at play: 1. Digital transformation is of strategic importance to many global companies. Ozo Jaculewicz, CFA 2. Trillions of dollars in market cap are resting on the shoulders of the Associate Portfolio Manager search for software developer talent. and Senior Portfolio Specialist, Fundamental Growth Equity Team This is leading companies to turn to external service providers to meet their needs. And they are hunting in all corners of the globe to find this talent. While conducting bottom-up research, we on the Fundamental Growth Equity team identified a compelling theme around this growing supply- and-demand imbalance for software developers. Our research analysts met with multiple management teams from companies of all sizes that noted over and over again how hard it was to find talent. Following our process to “surround the company,” the search for a solution to the developer shortage led our analysts to companies that recruited and developed skilled labor pools outside the U.S. 1 million Number of IT jobs unfilled in the U.S. 80% of about 2,800 Tech-hiring decision-makers at U.S. firms who identified lack of IT talent as a key challenge Sources: IT trade group CompTIA and Robert Half 6

A chance conversation we had with a software Globant also helped gaming brand Electronic management team at an industry conference added to Arts develop its FIFA soccer game franchise our conviction, as the executive sang the praises of some and partnered with London’s Metropolitan select outsourced developers. Through the execution Police to develop a digital platform for of our investment process, the team developed an accessing police services digitally. investment thesis that Globant—an information technology (IT) services company in Latin America with In conclusion, we believe 2020 will be a 6,000+ IT professionals—has the potential to be a key year where the pace of change continues to accelerate. Technological disruption will beneficiary of the demand for software talent. become even more pervasive. In order to The company’s highly skilled software engineers have thrive, companies will require a far greater done work for a wide variety of businesses, such as amount of digital capabilities than they have American Express, Southwest Airlines, Zynga, and in the past. We believe businesses on the right Google. Globant’s share price at the time did not reflect side of change that can meet the changing the growth opportunity we expected to see from demands of consumers—such as the acute owning it when we purchased the stock. This is where our shortage of software developer talent—can example of a storied entertainment brand comes back be poised to produce strong excess returns. into the picture. Just as major entertainment brands can revolutionize the consumer experience by bringing the right minds together, our team is using a uniquely designed process to capture these opportunities. Can you recall a time in your family history of taking young children to a theme park? Amid the joyful memories, you may remember a certain amount of chaos. The hours of waiting in line for rides. The constant juggling of food, balloons, and at least one child while you fumbled for your wallet to pay for it all. And finally, after a long day, near the point of collapse from exhaustion, you’ve arrived at your hotel room door only to realize you have lost your key. 1 Globant—as reported on its website —helped Disney create a next-generation online experience for its parks and resorts. Perhaps you’ve heard of the MagicBand, a sensor-enabled wristband that—as reported by 2 Wired —allows wearers to avoid lines, pay for meals, and even unlock their hotel room doors. In our conversations with Globant, we learned it 1. As reported on Investors.Globant.com: “Globant— provided talent to help the entertainment brand We Are Ready” 2. As reported on Wired.com: “Disney’s $1 Billion Bet achieve its innovative vision. on a Magical Wristband” 7 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE INVESTMENT DISCOVERIES Driving positive change with municipal bonds A story by Thomas Stoeckmann. This K-12 grade school of choice serving 1,064 students within the local At the intersection of a long school community was rated as “Exceeds hallway filled with the buzz of youthful activity, I stood as a silent Expectations” according to state standards. The vast majority of other observer of what I had witnessed local district and school choice options numerous times before. A young were a woeful 20 to 60 percentage points Jeffrey Weaver, CFA Senior Portfolio Manager, first-grade boy approached the behind our school’s state accountability Head of Municipal and principal, wrapping his arms around rating. Our investment was not in some Short Duration Fixed her legs and fighting back tears that suburban school. Instead, 92% of the Income, WFAM Global had noticeably been flowing for some school’s population is economically Fixed Income time that morning. disadvantaged, 99% of its students are minority, and 10% of its students live with Followed by another staff member, I disabilities. observed as two school leaders’ eyes met, silently communicating that Located near Milwaukee’s north side and this student’s morning was different. just 3.5 miles from where I was born, It wasn’t about the all-too-common mornings that began without food this school site visit was different from the dozens of others I had made. As the Terry Goode or the stressful experience of a bus principal and I wrapped up our meeting ride gone bad. There was something Senior Portfolio in her office, she revealed that the young Manager, WFAM Global more. The principal excused herself boy I had witnessed earlier in the hallway for a few moments from our tour Fixed Income—Municipal was mourning with his mother, who had together to usher the boy and a staff lost her boyfriend to gunshot wounds the member into the nearby counseling evening before. room for some solace. Two things resonated loud and clear Minutes later, as the children settled into their classrooms and that morning: the staff’s support for their student who was enduring the the hallways became quiet, my host returned and we continued our unimaginable, and the staff’s hope of a successful academic future for their Thomas conversation about the school’s community. What was my team’s role in Stoeckmann academic progress. It was apparent this story? Our investment gave us the Head of Municipal from the student work neatly opportunity to make a positive impact. Research, Municipal posted in the hallways that their Credit, WFAM Global methods were working. Witnessing For readers thinking about Fixed Income the students’ engagement and environment, social, and governance positive academic performance (ESG) in 2020 and beyond, there’s a confirmed a primary reason I takeaway here. had recommended the public charter school’s municipal bond to my colleagues on the Municipal Fixed Income team for portfolio 8 investment several years earlier.

Municipal fixed-income markets are an ideal space for identifying securities with impact. The asset class at its core is designed for public good and is ripe with inefficiency creating opportunity. We’ve made these kinds of investments in our portfolios over the years. However, we’re now seeing investors’ interest growing to the extent that they want to experience the impact associated with these investments. And, our team’s own longstanding interest in ESG has led us to a few realizations: 1. The ESG investing space for municipal securities is still in the early life cycle phase, and we believe our extensive research expertise can help move the debate forward. 2. The extent to which an investor wants to focus on sustainability as a dimension of their investing can vary—and we need to help facilitate that. 3. There is not yet an obvious recognized benchmark or standardized ways to report sustainability considerations for municipal debt securities. We expect the industry to evolve to meet some of these emerging demands. In order to proactively contribute in this area, over the past year we’ve researched and constructed a framework to help assess whether positive environmental and/or social impacts exist in each municipal security and, if so, to what extent (low positive, medium positive, or high positive). A four-pillar approach to identifying impact with municipal fixed-income investments WFAM ESG impact framework 1 2 3 4 Use of Issuer ESG Underserved Vended proceeds impact population data analysis analysis analysis analysis Why do we believe in this approach? It can allow us to: • Select securities offering the highest potential positive impact • Understand the dynamic between potential returns, credit risk, and impact levels • Customize around impact interests, meaning we can hone our participation across sectors that we feel align with green or social bond principles; in the muni space, this includes sectors such as water/sewer, health care, public power, education, and project finance with environmental and social impacts 9 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE Municipal fixed income, at its core, is geared toward improving essential services around the U.S. It offers investors a way to build communities by raising the education level, helping enable access to Municipal fixed-income markets are an ideal space for identifying quality resources, and reducing the negative effects that result when these services aren’t provided. securities with impact. Sustainability of this sort does not need to be an afterthought. Rather, it can be a key building block in how investors build wealth and effect change in local communities and beyond. LEADER INSIGHTS A definitive YES I met with a large pension focused in part on ensuring investment fund client that was in the managers account for the increasingly process of reviewing its obvious ESG risks we see around us. To me, investment managers. It this is good risk management. And as we was a Tuesday morning in navigate this new normal, WFAM has been Manchester, and I was the formalizing the process by which our analysts Hannah Skeates third manager scheduled to assess ESG issues that could be material Head of Global ESG present. Being third in line is concerns for investment choices. not a great spot, especially when your presentation is the last one prior to a But part of the groundswell is something much-anticipated lunch break. As I prepared to else: a different type of intention. present, the head of the fund’s board asked me a A growing number of investors are looking direct question: at the effects of our current global economy and way of life and are becoming concerned. Shouldn’t everyone be incorporating Negative environmental consequences and ESG information into their investment social pressures such as widening inequality decisions? may undermine the stability of the world in which we live and invest. Things we took for You see, he noticed that some managers in the granted in eras when much of our economic room talked about ESG, but not all. I put aside my and finance theories were written now seem notes and explained why my answer is a definitive fragile. “Yes.” This client’s desire to see ESG data considered in Continued on page 27 regular investment management is not a one-off conversation. I’ve seen a groundswell building, 10

INVESTMENT DISCOVERIES Watching China’s quest for technology independence A story by Connie Ou. This past October, I visited a popular technology conference in Beijing: the 2019 PT EXPO China. In contrast to the chilly weather outside, the expo floor was warm with enthusiasm from the nearly 400 companies showcasing their latest products. The expo had an interesting theme: integrating 5G for a smart and connected world. However, by being on location in Beijing, I obtained a deeper level of insight. In a new era of technological and industrial revolution, China is evolving Alison Shimada Senior Portfolio continuously—with an eye toward achieving transformative economic goals. Manager, Head of SF Global Emerging Markets Equity Team The Chinese government is focusing on two key agenda items: Mastering core technology such as 1. advanced semiconductors Establishing a complete domestic supply chain 2. The economic drivers: • Technology remains the largest part of China’s overall imports, Connie Ou, CFA 1 measured at 21%. • In particular, semiconductors constitute 70% of China’s Associate Portfolio Manager/Senior Analyst, 2 SF Global Emerging technology imports. • More than $300 billion in semiconductors were shipped to China Markets Equity Team 3 in 2018, reflecting about 60% of global semiconductor value. China’s motivation: • Supply stability • National security • Moving up the value chain through economic transformation Sources: 1 and 2: Credit Suisse; 3: World Semiconductor Trade Statistics and China’s General Administration of Customs Under the Beijing government’s supportive industrial policies and “Made in China 2025” initiatives, some success is starting to emerge. Local semiconductor production has been growing at a 20% compound annual growth rate in recent years, according to Credit Suisse. In part, this is because the domestic suppliers offer lower cost compared with foreign companies while also providing better service. 11 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE Chinese foundries that fabricate semiconductor Chinese semiconductors’ content and volume: wafers and companies that design integrated cloud services, internet of things, and smart circuits have been focusing on developing a mature manufacturing. generation of chips and specialty applications. For In our team’s view, on-the-ground insights like example, SMIC, China’s largest and most advanced foundry, can provide integrated circuit foundry and these can place us in a strong position to identify technology services on process technology from companies that will play an integral role in China’s 0.35 microns to 14 nanometers (one nanometer is path to gaining technology independence. It also one-millionth of a millimeter). helps that we’re armed with rich local knowledge, a true understanding of Chinese policymaking and geopolitical issues, and a diligent bottom-up In the semiconductor industry, smaller chip size approach to research. enables a more advanced level of technology. While there is still a long path to silicon A technology gap still exists behind market leaders independence, Chinese companies are rapidly Intel and TSMC. However, SMIC’s first generation increasing production capacity, narrowing of 14-nanometer “fin-field effect” transistors will technology gaps, and equipping themselves with a be used in a broad set of applications, including sizable engineering talent pool. With those pieces high-end consumer products and artificial in place, China’s desire to establish a world-class intelligence capabilities. SMIC plans to accelerate integrated circuit industry value chain by 2030 is a its production capacity by 25% in 2020, given dream that could eventually come true. the rising demand for import substitution. Nevertheless, China is still early in its supply chain We’ll be watching this story as it unfolds in 2020. development and is working to solve for barriers to technology, manufacturing, and high capital expenditure requirements. Where 5G comes into play Transformation in the 5G era I saw something impressive as I spoke with a leading local network equipment- maker at the PT EXPO. A worker was sitting atop a machine from which he controlled a mining operation located far Cloud services Internet Smart away from Beijing. Imagine: A job that of things manufacturing used to be dangerous and costly can now be transformed through human remote After speaking with local company representatives control in the 5G era. at the PT EXPO, it became clear that China’s effort to gain technology independence would greatly As the company showcased its latest 5G-integrated products, I learned that benefit from a new wave of innovation. Most its 5G patent share exceeded 20% notably, 5G technology is expected to cover over 300 Chinese cities by 2020. globally. The firm has been working with telecom operators to provide solutions for manufacturers and local governments, The direct benefits for Chinese semiconductor producers are vast, including demand from focusing on smart manufacturing, smart network build-out and handset upgrades. cities, and other areas. Given the faster speed (10 to 20 times faster than 4G) and low latency (short response time —Connie Ou over the networks), we believe that 5G will lead to increasing connectivity and will trigger rising demand for three areas that can boost 12

INVESTMENT DISCOVERIES Building a new playing field with smaller issuers So like an R&D lab, we did a series of tests. We Janet Rilling, CFA looked for ways to improve both the benchmark and Senior Portfolio Manager, the portfolio. We focused our efforts on a part of Head of Multi Sector – Plus, the market where we have historically found good Global Fixed Income investment ideas—companies that issue smaller amounts of debt and are generally under-followed. To find better opportunities, sometimes you have to We also drew on our niche as a credit-focused, think bigger than the playing field you’ve been given. bottom-up investment manager. Our research team helps us identify attractive investment candidates. My team was working on several fixed-income Our modest asset size allows us to source enough projects, including one to improve a passive retirement plan strategy and another to help of these small issuers’ bonds to make a difference in our portfolios. For a larger manager, finding pension clients improve the diversification in their enough of these types of bonds to be impactful can long-duration credit mandates. Despite a variety be a challenge. Further, if enough are found, a large of cases, we noticed a pattern—a linked set of manager’s share of the company’s outstanding debt challenges due to the very nature of the bond may be too large, a condition often precluded by markets. In a nutshell, existing fixed-income indices client guidelines. exhibit a degree of concentration. For a pension plan that is striving to match its assets to its With these ideas in mind, we built a new index—the liabilities, such concentration introduces undesirable Wells Fargo Small Issuer Long Credit (SILC) Index. idiosyncratic risk. We started with the constituents of the standard benchmark for pension funds—the Long Credit As we dug deeper, we identified three common obstacles that U.S. pension plans face: Index. Our innovation: Remove the largest 10% of issuers Credit indices are concentrated in from the Long Credit Index 10% 1 “mega” issuers. In fact, the top 10% of the issuers make up about 50% of the Create an Bloomberg Barclays U.S. Long Credit index with the 90% Index (Long Credit Index). remaining 90% of issuers 2 Large issuers may seem like a safer bet because of their size and liquidity, but size does not necessarily equal safety. Despite this change, the characteristics of our SILC Index still closely resembled the Long Credit Index across all relevant factors: duration, credit Many large asset managers tend to focus quality, yield, and industry type. But, importantly, 3 their portfolios on these largest issuers, the enhancement removed exposure to the largest compounding the concentration. issuers that pension plans already tend to have a lot of exposure to. 13 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE As we look to 2020, two developments are driving A comparison of concentration levels increased interest in an active strategy that uses a The SILC Index is less concentrated in a review of its top benchmark like the SILC Index. 25 constituents versus those of the Long Credit Index First, as the economic cycle progresses and the risks Long of downgrades and defaults increase, clients are SILC Credit more focused on reducing idiosyncratic risks. Index Index Second, as the Pension Benefit Guaranty Top 25 as % of index 18.45% 30.09% Corporation premiums continue to rise, pension plans are looking to make contributions and de-risk Largest issuer weight 0.88% 2.57% their plans. And plans that already have a sizable Difference in weight allocation to fixed income want to add something between 1st and 25th 0.26% 1.81% different, rather than more of the same. In both cases, the addition of a SILC strategy to a pension largest constituent plan’s asset portfolio is a simple way to make an Sources: WFAM and Bloomberg Barclays as of incremental credit allocation without adding to the December 31, 2019 large issuer concentration that may already exist. Further, a SILC strategy offers diversification in a part of the market that is less efficient and offers a different alpha source. Reimagining the conventional One of our innovations in helping institutional clients with their fixed-income portfolios has been understanding the limits and potential improvements to traditional fixed-income benchmarks, as discussed by Janet Rilling. Starting from the point of what an investor wants and needs, it becomes “clear that improvements can be achieved. I remember one particular client meeting back in 2016. The client was a corporate pension plan interested in investing in a liability-aware manner, with a view toward establishing a new liability- driven investment portfolio. Their liabilities—like most every pension plan—are long term, and the measurement framework that is important to them is based on high-quality corporate yields. As such, they were interested in a well-constructed long-duration investment-grade portfolio. We started breaking apart the fixed-income world using subsets of traditional bond indices and made good progress, but ultimately we realized we could do more. In my mind, I was impressed by how this client sought to balance liability-like characteristics with the tenets of good investing and was willing to challenge some conventional norms. That client meeting and our idea exchange set in motion a quest to design a widely usable yet complementary portfolio that enabled more diversification where it mattered most—in security- specific risk and in alpha. As illustrated above, we built this idea into an entirely new index: the Small Issuer Long Credit Index. We’ve talked with other institutional clients and consultants about this concept, and it’s resonating well with them. Andy Hunt, CFA, FIA Senior Fixed Income Business Initiatives Leader 14

INVESTMENT DISCOVERIES Embracing machine learning for value discovery While the prospect of machine learning might frighten some fundamental analysts, we want to embrace it. We’ve learned firsthand that machine learning doesn’t replace any portion of our investment process—and that, in our view, it can make us even better investors. As 2020 takes shape, we’re thinking about how we can use this technology to supplement our existing process during the new year. Craig Pieringer, CFA Portfolio Manager, Ever since 1988, our team has focused on finding value stocks that are Stageline Value Equity Team away from the crowd. In other words, we look for public companies that are typically underfollowed by the investment community and have current stock prices that we believe inaccurately reflect the companies’ true market values. Over the years, we’ve remained open to considering new and innovative quantitative tools that could prove helpful as we screen companies and analyze potential candidates for the portfolios we manage. In 2018, WFAM’s Investment Analytics team introduced us to new technology it’s been developing—a computer-aided stock selection process called CASPRTM. In Gustaf Little collaboration with the team, we began experimenting with CASPR, using it Associate Portfolio Manager, to sort through a universe of roughly 12,000 stocks in search of companies Stageline Value Equity Team consistent with our process for making investment decisions. Given that we enjoy discovering value where few investors are found and limit Using CASPR investments in top benchmark names, as a resource in we’re sometimes drawn to stocks identifying stocks that don’t screen well initially. Usually, that’s because their value may not be CASPR supports a portfolio immediately obvious. At first blush, the idea appealed to us that a machine manager (PM) team’s stock might be able to uncover value because selection capabilities by simulating this approach would remove human bias previous decisions that have from the investment process. been made in the portfolio through consideration of over 40 fundamental and quantitative Early in our work with CASPR, some factors. stocks it suggested seemed expensive to us. But when several of them kept reappearing in subsequent months, they CASPR doesn’t replace any piqued our interest. portion of a PM team’s investment process—its recommendations supplement their existing process. 15 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE One of these is a leading global consumer products be unveiled at an upcoming analyst meeting. company offering creative solutions to consumers Our conclusion was that we should reestablish a through its diverse portfolio of well-recognized position in the company’s shares. All the elements and widely trusted housewares, health care and at the core of Stageline’s investment process—an home, and beauty brands. The company’s shares attractive valuation, evidence of a quality partner, had declined following a tepid earnings report and and a contrarian opportunity—were evident to us. concerns over the negative impact of potential That decision has proven to be a good one: The tariffs on the firm. We knew this company well, shares have performed well, and we continue to as we had owned shares in the past. We weren’t inclined to reinvest in it, though, because even hold them today. after the sell-off, its shares were priced above its long-term average. Our experience with CASPR has been favorable. We’ve used insights gained from CASPR research to uncover value in other stocks—including a However, CASPR’s repeated suggestions of this restaurant company, an HVAC company, and an stock encouraged us to take another look at the company’s future prospects. electronic components company. For us, machine learning—as demonstrated by CASPR—is an We considered the potential impacts of its possible innovative addition to our mosaic of approaches sale of select personal-care brands and of the for unearthing value. second phase of its growth plan, which would Driving innovation with our clients in mind When it comes to innovation, we embrace the concept of better, simpler, faster. One manifestation of this concept is CASPR, a tool our team is developing to supplement the native idea-generation capabilities of teams that manage fundamental investment strategies across “our firm. CASPR employs machine-learning methods upon a variety of digitized factors to continually improve the quality of its recommendations with experience and repetition. Here, quality means the ability to mimic the nuance and judgment that are employed by human professionals during the often time-consuming and inefficient phase of in-depth fundamental analysis. This part of the process is critical for separating winners from losers among potential portfolio candidates, yet fundamental investment teams have found it notoriously difficult to scale—until now. CASPR pursues more insights and better insights with greater speed than was possible before it and is fully adaptable to the unique success drivers of any fundamentally driven investment process. It is our intention to further develop this capability for the benefit of skilled teams, like Stageline’s, and ultimately for the benefit of our clients. Randy Mangelsen, CFA, CQF, FRM, PRM Co-Head, WFAM Investment Analytics Team 16

These findings might feel like a relief The shifting (and sometimes to advisors. unexpected) impact of But, in an era when data-driven technologies are constantly improving, it’s important to maintain a innovation on today’s mindset of innovation: 1. H ow can advisors enhance their capabilities to prove financial advisors investors are right to prefer a human advisor? 2. A nd how can advisors use technology to strengthen their client relationships? More than 400 fintech businesses focused on investing have launched On the latter point, here’s some food for thought—three in the past several years¹ capabilities that investors rank as important or critical l when working with advisors. Some are apps that aim to automate key aspects of managing one’s investments. l Others channel artificial intelligence in 69% Keeping them motivated and efforts to automate the art of providing on track with financial goals financial advice. How might this wave of tech innovation affect intermediaries such as financial Understanding their personal advisors? According to the Wells Fargo/ 63% Gallup Investor and Retirement Optimism lives and family dynamics Index: 84% of investors say human % % Helping clarify broader life 84 financial advisors will always 55 values and goals be needed and will not be replaced by automated investing technology Remember, innovation isn’t only about reacting to technological advancement. More than half of investors Sometimes it’s as fundamental as discovering ways to revealed they would prefer enhance the human skills needed to help investors live working with an advisor who uses automated investing the best financial lives possible. tools on their behalf Less than one-fourth of < % investors want to use 25 automated investing tools for their own investments Here at Wells Fargo Asset Management, we offer extensive resources designed to help advisors maximize the value they bring to their clients. This includes innovative practice management tools and timely insights on investing and the markets authored by WFAM portfolio management teams—all available on our website, Twitter, and LinkedIn. 17 Sources: Deloitte (1), Q1 Wells Fargo/Gallup Investor and Retirement Optimism Index (all other statistics)

IN TIMES OF CHAOS CHOOSE TO INNOVATE INVESTMENT DISCOVERIES Challenging assumptions in portfolio construction In times of chaos, keeping an open mind to alternative perspectives can help us gain a clearer vision of the path to a better outcome. We believe this mindset applies to portfolio construction techniques. Traditionally, our industry has relied on capital market assumptions (CMAs) that offer estimates of how asset classes might perform in the Brian Jacobsen, Ph.D., CFA, CFP future. While CMAs have had a central position in the design of asset Senior Investment Strategist allocation strategies, we on the Multi-Asset Solutions team believe it’s time to challenge how CMAs are used. In large part, this means downplaying the role of longer-term return estimates in day-to-day portfolio management and elevating the role of expected risk. In our view, a risk-based portfolio construction framework—rather than a traditional asset allocation framework—is crucial for building more Frank Cooke, CFA resilient portfolios, especially in the face of market chaos. We use this Solutions Manager, approach for our institutional clients. Multi-Asset Solutions Team In a nutshell, here’s how it works: 1 We identify asset classes that span the investment universe, representing all major decision points. 2 Next, we set a risk target for each asset class informed by empirical evidence and professional judgment. 3 Finally, we apply a risk targeting process to spend risk across the investment universe to achieve the client’s goal. 18

Why is this innovative? Because innovation implies improvement, and we think risk-based portfolio construction can do the following: • Produce a better range of outcomes than traditional asset allocation • Specifically, lead to portfolios that can more readily withstand uncertain market conditions and that are more relevant to solving real-world problems • Overall, improve both investment efficiency and efficacy The specific mix of objectives (protecting wealth, generating income from wealth, or growing wealth) is unique to each client, as are the constraints (regulatory, tax, or others). Let’s assume a hypothetical client’s risk profile is best met from a simplified risk-balanced portfolio that allocates 50% of the total portfolio risk contribution to equities and 50% to bonds (the risk-balanced proxy portfolio shown in Figure 1 below). The risk allocation translates to a capital allocation of roughly 25% to equities and 75% to bonds, generating an expected return of cash plus 3%. But, what if the desired risk allocation produces a return expectation that is insufficient to meet the client’s objectives? Figure 1: How four approaches to portfolio construction could achieve different levels of target portfolio returns Using risk and return targets, we compare how four hypothetical portfolios, based on a hypothetical investor’s willingness and ability to invest in cash or borrow cash to invest in the portfolios, could perform. 6 Hypothetical unconstrained Hypothetical relaxed 5 leverage portfolio leverage portfolio Hypothetical growth proxy 4 portfolio eturns (%) 3 olio r tf Hypothetical risk-based proxy portfolio 2 get por ar T 1 0 0 1 2 3 4 5 6 7 8 9 10 Risk (targeted level of volatility) (%) Gold line: The capital allocation line where an investor invests between cash and the hypothetical risk-based proxy portfolio. To aim for a higher return (up and to the right of the hypothetical risk-based proxy portfolio) assumes borrowing to invest in the hypothetical risk-based proxy portfolio. Purple line: Trajectory for the portfolio holder who does not add leverage. Here the path to pursuing higher returns entails taking on more risk compared with investing along the gold line. Portfolios along this line may be more concentrated, or less diversified, than portfolios along the gold line. Source: WFAM Multi-Asset Solutions. For illustrative purposes only, not intended to represent investment in any product managed by Wells Fargo Asset Management. Any target is indicative only and not guaranteed in any way. Target figures do not take into account any fees or charges on investment returns. 19 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE To achieve a higher return target (say, cash LEADER INSIGHTS plus 5%), we could simply apply leverage to the simplified risk-balanced portfolio (unconstrained Less talk, portfolio in Figure 1). But many clients may face constraints in their use of leverage. This is where more action our framework comes into play. We can derive reasonable risk and return assumptions from the risk-balanced portfolio to construct a cash- Nate Miles, CFA plus-5% portfolio with no leverage (growth proxy portfolio in Figure 1) or one with modest leverage Head of Retirement (relaxed leverage portfolio in Figure 1). In place of leverage, we can concentrate risks in assets with favorable characteristics to simultaneously In my role, I have the opportunity to meet satisfy the client’s unique mix of objectives and constraints. often with retirement plan sponsors. During these meetings, I explain what WFAM’s Our foundational risk-based portfolio is fully research reveals about retirement, mainly unconstrained, but it can serve as the starting from two equally important perspectives: point for building portfolios for institutional clients. saving for it and spending during it. We For example: want to equip plan sponsors with our latest learnings so they can help employees achieve • Clients that need more growth may need the financial independence they need to more leverage, but if they are leverage- enjoy the retirement they want. constrained, then we can determine the right amount of portfolio concentration to help Just as important, I learn a lot in these achieve the goal. meetings. • If the client is more interested in preserving Plan sponsors use this time to tell me wealth, then we can ratchet down the what worries them about their employees’ leverage or incorporate downside risk retirement situations and to ask what they management strategies. can do about it. One question I’ve been • Clients that face risk-based capital rules must hearing repeatedly lately that we’re taking to have those rules incorporated as constraints heart at WFAM: “What can we do, right now, in the portfolio construction process. to solve the retirement income challenges A variety of measures are used by asset managers, our employees are facing?” They’ve told including ourselves, to quantify risk. Ultimately, me there have been numerous ideas and however, the most important measure of risk to theories published on this topic, but no clear the investor is the probability of not meeting their path forward that they can follow. objectives and by how much. Plan sponsors have been patient, but they’re The innovation behind risk-based portfolio worried. From my perspective, they’re ready construction is that it puts risk front and center as for less talk and more action. the driver of capital allocation. This focus makes One step we’re encouraging plan sponsors the resulting portfolio more resilient to market to take now is to start reemphasizing the shocks that may come in 2020 and beyond— and more practical to the client’s unique set of significant role Social Security could play in circumstances, today and tomorrow. an employee’s retirement income stream. Continued on page 28 20

INNOVATION VIEWPOINTS Responding to the need behind the question A story by Dan Morris. This was it: my first client where I was the lead strategist! After years of mathematics, actuarial training, and client meetings, I was ready. What could go wrong? Dan Morris, AIA The chair of trustees had given me specific instructions on how to reach the board Head of Systematic room at the top of a Canary Wharf skyscraper in London and the topics that they Investments wanted me to address to the trustees of the company’s defined benefit plan. I was anxious yet fully prepared, waiting in the glassed lobby to be summoned in. As I entered, the room was daunting and crowded, but I received a warm and friendly welcome from the group, which calmed my nerves. After introductions, the meeting continued. The chair began, “We have a change of plans for today. Our sponsor is funding the defined benefit plan’s deficit and is closing it down. The real challenge is helping all of the members in the defined contribution plan achieve something as good. What should we do?” As abruptly, a spontaneous debate broke out on technical aspects of risks faced by the defined contribution plan’s members, engaging the room and animating many of whom had financial backgrounds. Yet the clamoring discussion was brought to a murmur by one trustee, calling across the room: “We all understand volatility, but this means very little to many of our members. Tell me what they will retire with?” We were now onto basic goals, the risks of missing those goals, and the available levers a saver has to pull to get back on track. W ith nothing specific prepared on the topic, it was time for me to go back to first principles and work out what really was being asked. How could I salvage this meeting? I began to piece together a translation of volatility, discussed earlier, into something more tangible that could get to the root of this trustee’s concern. 21 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE He was right of course. Volatility in this context • Whereas, for someone very close to their means very little. You see, the same technical planned retirement date, a loss that causes them measure of risk for someone 40 years away from to delay retirement by five years would have a planned retirement at age 65 means something greater consequences, since they could have: very different to someone only 5 years away. If – Less time to make meaningful contributions both investors hold a portfolio of equities, then to take corrective action both would face: • Volatility of, say, 18% (based on capital market – Fewer years for investment performance to assumptions centered on U.S. large-cap come back equities) – Less time to adjust their spending needs • A 1-in-20 drawdown risk of about 40% (a Furthermore, there may be other reasons why 1-in-20 risk reflects a degree of certainty working for longer than planned is simply not an event could occur 1 in 20 years; 40% realistic. represents the size of market movement during that hypothetical event) This translation of a technical risk expression into a real-world consequence could allow members This is the risk we might see on our portfolio a better way to understand their personal risk management screens but it is not the risk that tolerance and their actual risk exposure. members experience. • Do I have other sufficient assets to support The real consequence of this risk occurring is that my retirement? someone may have to delay their retirement— • Could I work for longer? but by how much? We can think of this risk as the additional years required to receive the same • What are the trade-offs if I reduce that risk? pension. Imagine a risk event that causes a saver So, what saved the meeting? Well it turns out to delay retirement by, say, five years. The effect the key was listening and responding to the need on a member would differ depending upon how behind the question. The simplicity and clarity of many years away their planned retirement is. For addressing the underlying concern left a palpable example: sense of relief on the trustees and a path forward. • A risk event that occurs a long time prior to For me, it was the start of a special journey to a member’s planned retirement could have outcome-based investing that has shaped my very little impact on that person delaying career to this day. retirement, since they would potentially have: – Many years for investment returns to recover and get them back on track – Many years to pay more in contributions – A plan to have less in retirement 22

INNOVATION VIEWPOINTS The final word: Building a culture that enables innovation Part of my job is to make sure the resources are in place for our equity teams to provide the highest value for our clients’ hard-earned capital. We are constantly evaluating new quantitative tools, data, risk systems, and software to improve our decision-making. Yet the ingredient that is most critical to the ongoing success of our business is ironically the only constant in the formula. Ann Miletti Head of Fundamental I see it going up and down the stairwells every day. Equity Teams It’s no secret that building human capital begins with selecting the right people, but a significantly more challenging aspect of this pursuit is protecting a culture that can retain and develop talent to its true potential. Protecting the freedom to ask questions and challenge common assumptions is key to this development, and I think its benefits can be realized at the earliest stages of one’s career, as it did mine. In a prior life, I was an educator. I remember vividly my first days of work in our offices in Menomonee Falls, Wisconsin, in the 1990s. I was excited about the change in my career path but nervous about the knowledge of my new teammates seated next to me. Many were newly minted finance graduates and others had some industry experience at respected firms. I recall thinking, how can I compete? 23

IN TIMES OF CHAOS CHOOSE TO INNOVATE But, I quickly learned that preconceived notions Reflecting on our history, the asset management or self expectations could sometimes trip up even business has changed a great deal since I began my my brightest colleagues, making them unwilling to career. Experiencing its rapid growth, maturity, and ask timely questions or hesitant to take on certain now consolidation over a relatively short period, projects that could reveal ignorance or a blind spot. my peers and I have seen our industry follow a life In contrast, I felt free to ask questions and was cycle similar in trajectory to the various companies encouraged by the response of my peers and team and sectors we have followed across our leaders who appreciated a different perspective. investment disciplines. As much as our business I remember one particular week, after a series of has changed, it remains our ongoing responsibility grueling meetings, someone I deeply respected to identify and allocate capital to the best available pulled me aside and said: opportunities. Investors continue to seek out the investment firms they trust the most to carry out “I’m glad you’ve been raising your hand, because I’ve this task. been afraid to do that.” As I interact with my colleagues day to day, it That comment stuck with me, and it continues to becomes all the more clear from my perspective: drive how I think about this business. Today, I know that the sheer breadth, specialization, In times of change, it’s our people who’ll inspire and constant change in capital markets can that trust. make the most talented investment professional an expert one day and a new student the next. How well they can learn has a lot to do with the confidence they have in themselves and the trust they have in team members to reveal themselves and take initiative. This self-innovation is something I encourage throughout our organization as I look to the next generation of leaders. 24

In times of chaos, we hope you’ll also choose to innovate Here’s a summary of the six investment discovery themes that are on our radar in 2020 and beyond. 1. Uncovering innovation on the right side 2. Driving positive change with of change municipal bonds • In 2020, businesses that can enhance their • Municipal fixed-income markets are an ideal digital capabilities and meet changing space for identifying securities with impact. consumer demands can be poised to produce At their core, muni bonds are geared toward strong excess returns. improving essential services. • To achieve this, companies must find the right • Issuers’ projects can offer ways to raise a talent—but firms are struggling to do so, due community’s education level, enable access to a scarcity of skilled software developers. to quality resources, and reduce the negative • Conversations between WFAM’s Fundamental effects resulting from the absence of these Growth Equity team and various companies’ services. leaders led them to a compelling theme around • WFAM’s Municipal Fixed Income team has companies that recruit and develop skilled made these kinds of investments in its labor pools outside the U.S. portfolios over the years. And, we’re now • J ust as companies can revolutionize the seeing investors’ interest growing to the extent that they want to experience the impact consumer experience by bringing the right minds associated with these investments. together, the Fundamental Growth Equity team is using a uniquely designed process to pursue • O ver the past year, the team researched and these opportunities. built an ESG impact framework to assess whether—and to what extent—positive environmental and/or social impacts exist in specific municipal securities. 25

IN TIMES OF CHAOS CHOOSE TO INNOVATE 3. Watching China’s quest for technology 5. Embracing machine learning for the art independence of discovery • A trip to China revealed a major initiative with • While the prospect of machine learning support from the Chinese government, as innovation might frighten some fundamental discovered by WFAM’s SF Global Emerging analysts in our industry, WFAM’s Stageline Markets Equity team. The initiative focuses Value Equity team embraces it. on mastering advanced semiconductor technologies and establishing a fully integrated • The team has learned firsthand that this domestic technology supply chain. technology doesn’t replace any portion of their investment process—they believe it can make • There’s still a long path to what we call Silicon them even better investors. Independence, but Chinese companies are • Stageline has been using a computer-aided TM increasing production capacity, narrowing stock selection process called CASPR to sort technology gaps, and recruiting engineering through a universe of ~12,000 stocks in search talent. of companies that align with their investment process. • With the advancement of 5G technology as • M achine learning has served as a valuable a catalyst, the SF Global Emerging Markets complement to the Stageline team’s approach Equity team believes that China’s desire to establish a world-class integrated circuit of finding value stocks that are “away from industry value chain is a dream that could the crowd” (are typically underfollowed) and eventually come true. have current stock prices the team believes inaccurately reflect the companies’ true market • To identify companies that will likely play a key values. role in China’s quest, the SF Global Emerging Markets Equity team applies its rich local 6. Challenging assumptions in portfolio knowledge, true grasp of Chinese policymaking, construction and diligent bottom-up research approach. • Capital market assumptions have had a central 4. Bu ilding a new playing field with position in the design of asset allocation smaller issuers strategies. WFAM’s Multi-Asset Solutions (MAS) team believes it’s time to update how • Credit indices are concentrated in “mega” they’re used. issuers, which might seem like a safer bet • In large part, this means downplaying the role because of their size and liquidity. However, of longer-term return estimates in day-to-day size does not necessarily equal safety. portfolio management and elevating the role • For a pension plan that is striving to match of expected risks. its assets to its liabilities, such concentration • In the MAS team’s view, a risk-based introduces undesirable idiosyncratic risk. framework can produce more reasonable capital allocations early in the portfolio • WFAM’s Multi Sector – Plus Fixed Income construction process—these are crucial for team built a new index—SILC (Small Issuer Long Credit)—that removes the largest 10% building more resilient portfolios, especially in the face of market chaos. of issuers from a well-known long credit index and keeps the remaining 90%, with an eye on • MAS uses this risk-based approach for its companies that issue smaller amounts of debt. institutional clients, driven by the belief that the • Our index and its related institutional strategy most important measure of risk to the investor is draw upon the team’s niche as a credit-focused, the probability of not meeting their objectives. bottom-up investment manager—and its modest asset size, which allows it to access enough of the small issuers’ bonds to provide a 26 meaningful weighting in portfolios.

Continued from page 10 Many investors now envision a different picture Compared with a decade ago, when a client’s for our future: a sustainable one, widely framed strategy may have focused on excluding certain through a combination of: types of companies or issuers from their • A global transition to a “net-zero” carbon investments, today’s clients want our help: economy (in which carbon dioxide emissions • Putting companies or issuers into context are reduced to as near to zero as possible and within a shift to a sustainable, low-carbon netted to zero with other processes) economy (as asset managers, strong active • Consideration of positive or negative stewardship plays a role here) contributions to the United Nations • Providing new investment solutions that allow clients to make conscious choices along this Sustainable Development Goals new dimension of investing We’re seeing this manifest now. A group of the world’s largest pension funds and insurance I believe that it will become normal for investment managers to show a fund’s or strategy’s ESG companies created the “Net-Zero Asset Owner characteristics, in the same way that food Alliance” in 2019. This group, collectively controlling more than $2.4 trillion in investments, companies show people the calories on the is committing to carbon-neutral portfolios by packages of food they buy. And, to use another 2050. Imagine—portfolios that will need net-zero food metaphor, many clients want a menu choice that includes an organic version. carbon investments! —Hannah Skeates Here at our firm, the WFAM Climate Change Working Group partners with analysts across the organization to take this top-down thinking and apply it to bottom-up, issuer-level opinions. It also helps us work with clients to address specific climate considerations they have for their investments. 27 2020

IN TIMES OF CHAOS CHOOSE TO INNOVATE Continued from page 20 This valuable income source (Social Security) has How we’re helping plan sponsors help employees been slipping out of many retirement income pursue retirement success: projections—especially for younger workers, even though 66% of Gen Xers and 64% of Millennials • Developing estimates of a retirement plan’s who participated in the 2019 Wells Fargo Annual success ratio: Based on its current plan design, we can project the plan’s potential for helping Retirement Study agreed with this statement: participants accumulate adequate savings for “I have no idea what I would do without Social their retirement income needs. Security in retirement if it weren’t there.” • Creating retirement income checklists: In our view, even if the Social Security program Among other things, the checklist facilitates is modified at some point down the road, understanding a plan’s design to allow for its retirement benefits are likely to remain a taking various types of distributions during substantial income component for many future retirement. retirees. Educating employees about the projected • Considering innovative retirement income contribution of Social Security benefits to their solutions: These would be intended to future retirement income provides information pensionize some or all of a person’s retirement that’s essential as they work toward a financially savings into a recurring income stream that independent future. lasts a lifetime. We’re also asking plan sponsors to promote a • Researching non-guaranteed income options: “planning mindset” within their organization. We These would be intended for use by plan characterize employees with a planning mindset sponsors who don’t wish to incorporate a as those who set short- and long-term financial solution that includes annuities. goals and actively work toward achieving them. Wells Fargo’s research shows that participants with a planning mindset are more likely to describe their —Nate Miles lives as “thriving,” have less financial stress, and have more assets saved for retirement. To make it easier for employees to adopt a planning mindset, we’ve developed tools—like our retirement planning guide, “New Rules of the Road: A Road Map for Pursuing Retirement Success”—to help simplify their retirement planning process. Going forward, we’ll continue striving to deliver even more features and tools, like those on the right, designed to help plan sponsors help their employees attain financial independence throughout retirement. 28

We want to help clients build for successful outcomes, defend portfolios against uncertainty, and create long-term financial well-being. To learn more, investment professionals can contact us: l To reach our U.S.-based investment professionals, contact your existing client relations director, or contact us at WFAMInstitutional@wellsfargo.com. l To reach our U.S.-based intermediary sales professionals, contact your dedicated regional director, or call us at 1-888-877-9275. l To reach our U.S.-based retirement professionals, contact Nathaniel Miles, head of Retirement at Wells Fargo Asset Management, at nathaniel.s.miles@wellsfargo.com. l To discuss environmental, social, and governance (ESG) investing solutions, contact Hannah Skeates, global head of ESG at Wells Fargo Asset Management, at hannah.skeates@wellsfargo.com. CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. The views expressed and any forward-looking statements are as of January 1, 2020, and are those of the authors and/or Wells Fargo Asset Management. Discussions of individual securities, or the markets generally ells Fargo Fund are not intended as individual , or any W recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Asset Management disclaims any obligation to publicly update or revise any views expressed or forward-looking statements. All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics. Investing in environmental, social, and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, some ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not use a responsible investment strategy. Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker-dealer and Member FINRA). n n INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE © 2020 Wells Fargo & Company. All rights reserved. WFAM 408726 1-20