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Economic Summit for Nonprofits The Global Economy: Navigating Through Economic Opportunities …and How Economies in Cyprus and Elsewhere Affect Us in Utah May 30, 2013 Steve Swensen Sr. Investment Strategist A note about disclosures: Please be sure to read the important disclosures at the end of this presentation Wells Fargo Private Bank provides financial services and products through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return. “Lies, Damned Lies, and Statistics” Mark Twain 2 Today’s Agenda Perception vs. Reality Global Consumers―The Engine of Growth Velocity of Money, Income, and Yields Investment Observations for 2013 3 4 Diversification and the Average Investor GTM – U.S. Source: Dalbar; FactSet; JP Morgan 5 Annual Returns and Intra-year Declines GTM – U.S. S&P 500 Intra-year Declines vs. Calendar Year Returns Despite average intra-year drops of 14.7%, annual returns positive in 25 of 33 years 40% 34 31 30% 27 26 26 27 26 26 23 20 20 17 20% 15 15 14 12 10% 9 7 -10 4 2 1 4 3 -2 -7 -10 -13 -23 -38 0 % -10% -7 -8 -8 -9 -6 -8 -6 -3 -5 -9 -8 -17 -18 -17 -8 -11 -13 -20% 13 13 -12 -19 -20 -7 -8 -10 -10 -14 -16 -17 -19 -30% -28 -30 -34 -34 -40% -50% -49 -60% '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2012. Data are as of 3/31/13. 6 Market Sentiment is Still Low Consumer Confidence 160 140 INDEX 120 100 80 60 40 20 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 As of 04/2013: 68.1 Source: Conference Board; FactSet 7 Economic Growth and the Composition of GDP GTM – U.S. Components of GDP Real GDP 4Q12 nominal GDP, billions USD % chg at annual rate 20-yr avg. 4Q12 10% Real GDP: 2.5% $18,000 2.6% Housing 0.4% 8% $16,000 10.6% Investment ex-housing 6% $14,000 $625 bn of output lost 4% $12,000 2% $10,000 0% $8,000 -2% $964 bn of output recovered -4% $6,000 19.2% Gov’t Spending 70.9% Consumption $4,000 -6% $2,000 -8% $0 - 3.3% Net Exports -10% '04 '06 '08 '10 '12 -$2,000 Source: BEA, FactSet, J.P. Morgan Asset Management. GDP values shown in legend are % change vs. prior quarter annualized and reflect 4Q12 GDP. Data are as of 3/31/13. 8 The Aftermath of the Housing Bubble Monthly Rent vs. Monthly Mortgage Payment GTM – U.S. Home Prices Indexed to 100, seasonally adjusted Vacant properties 160 $1,100 Case Shiller 20-city Monthly Mortgage Payment $950 FHFA Purchase Only 150 Average Existing Home $800 1Q13*: $726 $650 $500 140 $350 1Q13*: $507 Monthly Rent $200 130 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Home Inventories Millions, annual rate, seasonally adjusted 120 4.5 4.0 110 3.5 3.0 100 2.5 2.0 90 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 1.5 Feb. 2013: 2.2 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Sources: (Left) National Association of Realtors, Standard & Poor’s, FHFA, FactSet, J.P. Morgan Asset Management. (Top right) Census Bureau, J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking price. (Bottom right) Census Bureau, National Association of Realtors, J.P. Morgan Asset Management. *1Q13 rent and mortgage payment values are J.P. Morgan Asset Management estimates. 9 Data are as of 3/31/13. Eurozone Troubles High unemployment is constraining economic growth. Record Eurozone Unemployment 13.00 Percent March 2013 12.10% 11.50 10.00 8.50 7.00 1991 1993 Source: FactSet, 04/30/13 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 10 Emerging Economies Have Low Debt/GDP Estimated 2012 Ratio of Public Debt/GDP In general, emerging economies have more fiscal flexibility than the larger developed economies. Emerging Economies Debt/GDP Lower 200 180 160 Japan, $8.09 140 120 Italy, $2.05 100 80 US, $13.11 Trillion Spain, $1.06 India, $1.20 60 Euro Area $8.86 40 Brazil, $0.75 20 Russia, $0.21 Australia, $0.18 0 -4 -3 -2 -1 0 1 China, $1.86 Canada, $0.64 2 3 4 5 6 7 8 9 10 Estimated 2012 Growth Rate (%) Bubble size = 2012 Net (Public) Debt Estimates in US$ trillion (Brazil, China and Russia = Gross Debt in US$ trillion) Source: 2012 Growth Estimates, Wells Fargo Wealth Management, 10/12; IMF, WEO Database, 10/12 11 What Else Could Go Wrong? Washington Policy Risks Economic Paralysis―ObamaCare & Tax Hikes Global Recession Another Lost Decade European Economic Slowdown Too Much Stimulus Leads to Hyperinflation 12 Reality 13 Asset Allocation Matters Not a "Lost Decade" for Diversified Portfolios January 2000 through January 2011 $200,000 $180,000 68.6% $160,000 $140,000 $120,000 7.1% $100,000 -12.5% $80,000 $60,000 $40,000 $20,000 Total Diversified Portfolio S&P 500 TR S&P 500 Price Return $Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Portfolio Blend: Fixed Income 27% (50%/50% Taxable/Tax-Exempt); 55% Equity (35.8% Large/19.2% Developed Int'l); 11% REITS; 7% Commodities Source: WMG Research; Morningstar 14 Asset Performance Not a "Lost Decade" for Diversified Portfolios January 2000 through March 2013 $250,000 130% $200,000 77% $150,000 37% $100,000 $50,000 Total Diversif ied Portf olio 60% S&P 500, 40% Barclays Agg S&P 500 TR Index $0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Portfolio Blend: 3% Cash,;4% Short Term Bonds, 17% Interm Bonds, 5% HY Bonds, 5% Developed Bonds, 5% EM Bonds; 15% US Large C ap, 5% US Mid Cap, 3% US Small Cap, 10% Developed Equiities, 6% EM Equites; 7% REITS; 5% Commodities; 2% Hedge Fund Conserv, 5% HF Diversified, 3% Hedge Fund Aggressive. Rebalanced Quaterly* Source: WMG Research; Morningstar 15 Bull Markets: Historical Perspective History shows that the current bull market may only be in the middle stages. Bull Market Returns Bull Market Return (Percent) 700% Average Bull Market: 68 Months, 178% 600% Current Bull Market: 48 Months, 132% '87-'00 500% 400% 300% '47-'57 '82-'87 Current Average 200% '02-'07 '70-'73 '66-'68 100% '62-'66'57-'61 0% 0 20 40 60 '74-'80 80 100 A larger circle represents a higher return bull market Past performance is no guarantee of future results. S&P 500 is an unmanaged index and is unavailable for direct investment. Source: Bloomberg Finance LLP, S&P 500 Index Price Return as of 04/30/13 120 140 160 Bull Market Length (Months) 16 Central Bank Support Boosting Equities The European Central Bank, U.S. Fed, and the Bank of Japan have enacted monetary easing propelling stock markets higher. The Fed, QE and the S&P 500 1800 1600 +29% +33% Index Level 1400 +80% 1200 1099 1000 1023 QE2 Announced at Jackson Hole Operation Twist & LTRO Operation Twist 800 752 600 07/08 01/09 QE1 07/09 QE2 01/10 07/10 01/11 Source: Federal Reserve Board, Bloomberg Financial LLP, 05/08/13 07/11 QE3 01/12 07/12 01/13 17 Then and Now — Tax Rates 1980 2013 2012 Sources: Tax Foundation, U.S Federal Income Tax Rates. 03/25/2013 18 Then and Now — Tax Rates Estate and Income Tax Rates 1916 - 2012 100 90 80 Percent 70 60 50 40 30 20 10 0 '16 '20 '24 '28 '32 '36 '40 '44 '48 '52 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 Estate Tax: Top Rate Income Tax: Highest Bracket Source: U.S. Internal Revenue Service, May 2012 Note: Income tax brackets reflect rates for “Married and Filing Joint or Surviving Spouses” 19 Taxes – Who Pays What Share of Taxes Paid by Income Quantile 100 90 86.0% 80 72.7 PERCENT 70 61.0 60 50 39.5 40 30 20 12.7 10 4.6 0 -0.3 -10 Top 20% Top 10% Top 5% Top 1% Fourth 20% Middle 20% Second 20% -3.0 Lowest 20% Note: Negative value denotes tax refund Source: Congressional Budget Office 20 Average Tax Rates Average Earnings and Tax Rates by Income Quantile $1,319,700 Average After-Tax Income 1,280,000 640,000 Average Tax Rate 17.6 19.0% 320,000 16.2 14.4 440,500 160,000 289,300 198,300 6.2 80,000 55,300 77,700 40,000 38,000 3.3 20,000 -0.4 17,700 10,000 -6.8 5,000 Top 1% Top 5% Top 10% Top 20% Fourth 20% Middle 20% Second 20% Lowest 20% Note: Negative value denotes tax refund Source: Congressional Budget Office 21 How We Got Here―Government Debt U.S. and Japan are home to seven percent of the world’s population, but account for what percent of the world’s total government debt? A. 25% B. 33% C. 50% 22 How We Got Here―Medical Costs A 65-year-old retiree contributed what portion of the Medicare benefit they will receive in their lifetime? A. 100% B. 70% C. 40% 23 Policy Detour: Massive Forecast Error Instead of surpluses, the federal debt has nearly tripled in 10 years. Federal Debt Billions of USD Actual Outcome 2011 $10.4 trillion Federal Budget Balance (Deficit) Billions of USD 2011 $890 billion Forecast in 2001 2011 $820 billion Actual Outcome Forecast in 2001 2011 $1.4 trillion Sources: BCA Research Inc, Congressional Budget Office, 04/12 24 U.S. Debt Ceiling and Sequestration While sequestration has had an immediate impact on many government sectors, the private sector has felt only a modest impact so far. U.S. Debt vs. Debt Ceiling $17 $16 U.S. Debt Ceiling and Total Public Debt (in trillions) $15 $14 Debt ceiling was hit on December 31, 2012 $13 $12 $11 $10 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Source: U.S. Treasury Direct, 05/08/13 25 U.S. GDP Outlook U.S. economy grew 2.5 percent in the first quarter of 2013. First Quarter U.S. GDP Growth Rebounds 4.5 Percent 4.0 4.0 4.1 Actual Estimated 3.5 3.1 3.0 2.8 2.6 2.5 2.3 2.2 2.5 2.4 2.3 2.0 2.0 1.5 2.6 2.5 1.5 1.4 1.3 1.3 1.0 0.4 0.5 0.1 0.0 Source: Bloomberg Financial, LLP, 05/08/13 26 Job Gains Reinforce Recovery The unemployment rate fell to 7.5 percent in April as the U.S. economy added 165,000 new jobs. Unemployment Rate Continues to Fall Percent 10 9 April 2009= 8.90% 8 April 2013= 7.5% 7 6 5 4 2003 2004 Source: FactSet, 4/30/13 2005 2006 2007 2008 2009 2010 2011 2012 2013 27 Employment and Income by Educational Level Average Annual Earnings by Highest Degree Earned Unemployment Rate by Education Level Full-time workers aged 18 and older, 2011, USD 18% $90,000 Less than High School Degree High School No College Some College College or Greater 16% 14% $87,981 $80,000 +29K $70,000 Feb. 2013: 11.2% 12% $59,415 $60,000 Feb. 2013: 7.9% 10% $50,000 +24K 8% $40,000 $32,493 Feb. 2013: 6.7% 6% 4% $30,000 $20,000 Feb. 2013: 3.8% 2% $10,000 $0 0% '92 '94 '96 '98 '00 '02 '04 '06 Source: BLS, FactSet, J.P. Morgan Asset Management. '08 '10 '12 High School Graduate Bachelor's Degree Advanced Degree Source: Census Bureau, J.P. Morgan Asset Management. Unemployment rates shown are for civilians aged 25 and older. Data are as of 3/31/13. 28 Housing Recovery Underway Improvements in building permits, new home starts, sales, and pricing are all pointing to a stronger housing market. Summary of Housing Indicators Year over Year (SA) Starts 46.74% Permits 17.95% New Home Sales 18.47% 10.31% 9.36%* 21% Existing Home Sales Price (Case-Shiller)* Foreclosures as % of Sales *as of 02/28/13 Source: FactSet, National Association of Realtors, 04/30/13 29 Consumer and Small Business Confidence Despite some setbacks along the way, consumer and business sentiment has been moving higher since 2009. Confidence is Improving 105 100 Consumer Confidence Survey 100 80 95 60 90 40 85 20 Small Business Confidence Index Level Consumer Confidence Index Level 120 Small Business Optimism Survey 0 2006 80 2007 2008 Source: FactSet, Bloomberg, 05/08/13 2009 2010 2011 2012 2013 30 Policy Detour: Eurozone Crisis The euro area could emerge from recession near the end of 2013 or the beginning of 2014. Euro Area GDP Growth Estimates Percent Actual 3.00 2.2 2.2 2.2 2.4 Estimated 1.6 2.00 1.0 1.00 1.3 0.6 0.3 0.00 -0.1 -1.00 -2.00 -2.3 -3.00 -4.00 -0.9-0.9 -0.7 -0.4 Shallow recession in 2012 expected to continue thru 2013 -4.4 -5.00 -6.00 -0.5 -0.7 -5.3 Source: Bloomberg Finance LLP, Quarterly Consensus Estimates, 05/08/13 31 Sovereign Debt Stresses GDP Growth, Gross Debt to GDP and Borrowing Costs 10% Bubble size = 10-year government bond yield China 8% Indonesia 10% Real GDP Growth (2011 – 2013F) 6% India Malaysia 5% Turkey 4% Russia Korea Singapore Mexico Brazil 2% Australia U.S. Germany South Africa Japan France EU 0% U.K. Italy Spain -2% Portugal -4% Emerging Markets -6% Greece Developed Markets -8% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 240% Gross Debt-to-GDP Ratios (2012F) Source: IMF, FactSet, Bloomberg, J.P. Morgan Economics, Barclays, J.P. Morgan Asset Management. Growth and debt data are based on the October 2012 World Economic Outlook. Borrowing costs based on local currency debt. EU overall borrowing cost based on Barclays Capital Euro-Aggregate 7-10 year treasury. South Africa’s borrowing cost is based on 7-year government bond yield due to data availability. Data as of 3/31/13. 32 Eurozone: Sovereign Bond Yields GTM – U.S. European Sovereign Funding Costs 3/31/13 10-year benchmark bond yield 35% Euro launch 30% Greece 10.90% Portugal 6.26% Spain Italy Ireland 4.2% 5.06% 4.68% 4.40% 1.28% Germany 25% 20% LTRO 15% OMT 10% 5% 0% '95 '97 '99 '01 '03 '05 '07 '09 '11 Source: Tullett Prebon, FactSet, J.P. Morgan Asset Management. Note: The ECB announced the second round of Long Term Refinancing Operations (LTRO) in February 2012. The Outright Monetary Transaction (OMT) program was announced in September 2012. Data are as of 3/31/13. 33 Global Consumers― The Engine of Growth 34 The World’s Economic Face is Changing Emerging Economies Overtaking Developed Percent Share of Global GDP (PPP) 65 60 Emerging Economies 2017 54% e 55 50 Developed Economies 2017 46% e 45 40 35 2000 2002 2004 2006 2008 2010 2012 2014 2016 The Purchasing Power Parity (PPP) exchange rate is defined as the amount of currency needed to purchase the same basket of goods and services as one unit of the reference currency, usually the U.S. dollar. Source: IMF, 10/12 35 Emerging Economies’ Growing Middle Class Middle class consumers are increasing at a rapid pace, especially in emerging economies, adding spending power to the global markets. 6,000,000,000 More Global Middle Class1 Consumers 5,000,000,000 5,000,000,000 4,000,000,000 3,000,000,000 1,800,000,000 2,000,000,000 1,100,000,000 1,000,000,000 0 1980 2009 Source: McKinsey Quarterly, 01/12 1 Defined as having daily per capita spending of $10 to $100 in purchasing-power-parity terms. 2030 36 More People, More Demand 37 Demographics Drive Demand Global demographics support the shift in global consumption trends. Global Age Distribution as % of Regional Population 0.0 0.2 0.5 100+ 90-94 1.4 2.4 80-84 3.2 4.1 4.4 70-74 AGE RANGE 0.0 0.0 0.1 0.3 0.7 1.3 1.8 2.4 6.1 6.6 7.1 7.2 7.1 7.0 6.9 6.9 6.7 5.9 5.4 5.5 5.5 60-64 50-54 40-44 30-34 20-24 10-14 0-4 12 10 8 6 Emerging Country Population (%) Developed Country Population (%) 3.3 4.4 4.9 6.3 7.1 7.4 7.6 8.4 9.1 8.9 8.7 8.7 8.8 4 2 0 2 4 6 8 10 12 PERCENT OF TOTAL REGION Source: U.S. Census Bureau: International Database 38 Global Manufacturing Wages Manufacturing Wages Nominal, average USD per month $4,000 Emerging Countries Developed Countries $2,000 $3,885 2001* $3,716 $3,500 Latest $1,750 $3,000 $1,500 $2,958 $2,942 $2,500 $1,250 $2,000 $2,089 $1,000 $2,077 $866 $1,500 $750 $1,000 $500 $455 $500 $309 $352 $348 $74 $323 $139 $250 $193 $112 $52 $148 $0 $0 U.S. Germany Japan Brazil Mexico China Thailand Vietnam Indonesia Source: ILO (International Labor Organization), U.S. Bureau of Labor Statistics, Ministry of Labor-Mexico, EM Advisors Group, Thailand National Statistical Office, General Statistics Office of Vietnam, Statistics Indonesia, IMF, FactSet, J.P. Morgan Asset Management. Chinese wages are those of rural migrant workers as a proxy. *Data begins in 2005 for Vietnam due to availability of data. Data is from 2012 for Mexico, China, and Thailand; 2011 for United States, Vietnam (preliminary), and Indonesia (preliminary); and 2010 for Brazil, Germany, and Japan. Data as of 3/31/13. 39 Out of Extreme Poverty In East Asia, the number of “working poor” ($2/day) has decreased dramatically. East Asia*―Working Poor ($2/day) as % of Total Employment 76.7% 1998E 18.0% 2011E *China, Hong Kong, Macau, Taiwan, North Korea, South Korea, Mongolia E: Estimate Source: United Nations, International Labour Organization, Global Employment Trends 2007-2011 & Global Employment Trends 2012: Preventing a Deeper Job Crisis 40 Rising Incomes Spur Migration Rising urban incomes continue to attract rural migrants to China’s cities, promoting consumption. China Per Capita Annual Urban Disposable Income $4,500 Annual Per Capita Income in Current $ $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Bloomberg Finance LLP, 03/11/13 41 Uneven Growth Among Countries Debt-heavy developed nations are expected to grow more slowly than emerging and frontier economies. Global Macro GDP Forecasts 2013 Percent 9 Developed Economies 8 7.8 7.8 Emerging Economies 7 6.7 6.7 6.7 6.1 5.9 6.0 FrontierEconomies 6 5.3 5 4.2 4 3 2.3 2 2.8 3.0 1.6 0.6 0.7 1 1.1 0.0 0 -1 2.5 3.6 3.4 3.4 3.4 3.5 3.5 3.2 3.2 3.3 -0.6 -2 Source: Wells Fargo Wealth Management, 03/31/13 42 43 Crude Oil and Energy Independence U.S. production and imports of crude oil have reversed a 25-year trend. Energy Independence―Progress In thousands of barrels 6,000,000 Total Imports 2005-2012 Production Up 25% Production 5,000,000 4,000,000 2005 3,000,000 2005-2012 Imports Down 16% Peak Imports 2,000,000 1,000,000 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 0 Source: U.S. Energy Information Agency, 04/09/13 44 Velocity of Money, Income, and Yields 45 Velocity of Money is Low Increased money supply has been absorbed by banks, corporations, and individuals. Willingness to Spend is Still Low M2 Velocity 2.2 2.1 M2 Money Supply (in billions) 11000 Money Supply M2 Velocity of Money 10000 2 9000 1.9 8000 1.8 7000 1.7 6000 1.6 5000 1.5 1999 4000 2002 2005 2008 2011 Source: Bloomberg Finance LLP, 03/11/13 46 Consumers Making Progress Lower interest rates have helped bring U.S. household debt service costs to the lowest level in 32 years. U.S. Household Debt Service Ratio 14.5 14 Estimated Ratio of Debt Payments to Disposable Income (in percent) 13.5 13 12.5 12 11.5 11 10.5 10 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 Source: Bloomberg Finance LLP, 04/09/13 47 Historical Rate Perspective Treasury rates are at historic lows. We believe there are better opportunities elsewhere. Rate (in percent) 10-Year U.S. Treasury Yield 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 04/30/2013 = 1.68% 0.0 '81 '83 '85 '87 '89 '91 '93 Past performance is no guarantee of future results. Source: FactSet, as of 04/30/13 '95 '97 '99 '01 '03 '05 '07 '09 '11 48 Fixed Income: Yields vs. Price Source: WMG Research 49 Lots of “Dry Powder” on the Sidelines Ample liquidity remains available to support financial market growth as risk appetites improve. $ Billions Liquidity on the Sidelines 4,500 4,000 3,500 3,000 2,500 2,000 15-Year Average 1,500 1,000 500 0 1996 1998 2000 2002 2004 Source: ICI, as of 04/30/13 Liquidity represented by money market mutual fund assets. 2006 2008 2010 2012 50 Beware of Holding Too Much Cash Inflation can eat away at investment returns. Exposure to equities may help to maintain purchasing power. Dollars $2.50 $2.00 Real Growth of a Dollar Cash - Scenario 1 Cash - Scenario 2 Cash - Scenario 3 S&P 500 $1.96 $1.50 $1.00 $1.00 $0.50 $0.54 0.0% $0.74 1.5% 3.0% 6.4% $0.00 Next 20 Years Cash–Scenario 1 assumes 0.0% nominal return, Cash–Scenario 2 assumes 1.5% nominal return, Cash–Scenario 3 assumes 3.0% nominal return, S&P 500 assumes 6.4% nominal return, and the inflation assumption is 3.0 percent. Source: FactSet, 02/12 51 2013 Investment Observations 52 A Dynamic World Requires Discipline and Flexibility Governmental response to various crises—such as the Eurozone debt crisis, unrest in the Middle East, and slowing growth in emerging economies—could change the short-term outlook for returns Tax code changes in U.S. require planning review Strategies Discipline: develop diversified strategic allocation Flexibility: implement tactical tilts to take advantage of temporary opportunities - Reduce Fixed Income; Add to Equities Safety: maintain liquidity to avoid having to sell on unfavorable terms Monitor: to avoid risk exposure drift Source: Wells Fargo Wealth Management, 04/13 53 Take the Long-Term View Large Cap Rolling 10-Year Returns Annualized S&P 500 Total Returns 25% Rolling 10-Year Return Average 20% 15% 10% 5% 0% -5% -10% '35 '39 '43 '47 '51 '55 '59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 Source: WMG Research; FactSet 54 And Keep Performance in Perspective Bear Markets 10000 S&P 500 Price Index 1950 - 2010 1000 -49% -57% -34% 100 -27% -21% -22% -36% -48% -28% 10 '50 '53 '56 '59 '62 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 Source: Bloomberg 55 Core Investment Beliefs The greatest risk faced by individual investors is not meeting their goals. To minimize this risk we: Employ broad asset class diversification and broad global diversification Pay attention to the portfolio risks beyond volatility Provide our clients access to objective and impartial investment choices Develop long-term relationships with our clients and their families 56 Disclosures Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. The information and opinions in this report were prepared by the investment management division within Wells Fargo Private Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Bank’s opinion as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. This material is for general information only, is not suitable for all investors and is not soliciting any action from any particular investor. Information and opinions presented have been obtained or derived from sources we believe reliable, but we cannot guarantee their accuracy or completeness. Opinions represent WFB’s judgment as of the date of the report and are subject to change without notice. WFC affiliates may issue reports or have opinions, which are inconsistent with, and reach different conclusions from, this report. This report is not an offer to buy or sell or a solicitation of an offer to buy or sell any securities mentioned. Wells Fargo & Company and/or its affiliates may trade for their own accounts, be on the opposite side of customer orders, or have a long or short position in the securities mentioned herein. The investments discussed or recommended in this report are not insured by the Federal Deposit Insurance Corporation (FDIC) and may be unsuitable for some investors depending on their specific investment objectives and financial position. Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments also may fluctuate. There is always the potential for loss as well as gain. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Investing in foreign securities presents certain risks that may not be present in domestic securities and may not be suitable for all investors. Real estate investment carries a certain degree of risk and may not be suitable for all investors. Some real assets may be available to pre-qualified investors only. Some alternative investments and complementary strategies may be available to prequalified investors only. Hedge strategies and private investments may be speculative and involve a high degree of risk. Hedge strategies and private investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. There is no secondary market for the investor’s interest in a hedge fund or private equity investment and none is expected to develop. There may be restrictions on transferring interests in a hedge fund or private equity investment. Fixed income securities are subject to availability and market fluctuation. These securities may be worth less than the original cost upon redemption. Certain high-yield/high-risk bonds carry particular market risks and may experience greater volatility in market value than investment grade corporate bonds. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in some instances, the alternative minimum tax. 57 Disclosures (cont.) Investing in foreign securities presents certain risks that may not be present in domestic securities and may not be suitable for all investors. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Unlike U.S. Treasuries, municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending in the specific issuer. Corporate bonds generally provide higher yields than U.S. Treasuries while incurring higher risk. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your situation at the time your tax preparer submits your return . You cannot invest directly in an index. The Institute of Supply Management (ISM) Purchasing Manager’s Index gauges internal demand for raw materials/goods that go into end-production. An index values over 50 indicate expansion; below 50 indicates contraction. The values for the index can be between 0 and 100. You cannot invest directly in an index. The S&P/Case-Shiller® U.S. National Home Price Index is a broad, market value-weighted composite of single-family home price indices for the nine U.S. Census divisions and is calculated quarterly. S&P 500 Index is a capitalization-weighted index calculated on a total-return basis with dividends reinvested. The index includes 500 widely held U.S. market industrial, utility, transportation and financial companies. S&P Midcap 400 Index is an unmanaged capitalization-weighted index of common stocks representing all major industries in the mid-range of the U.S. stock market. S&P Small Cap 600 Index is an unmanaged capitalization-weighted index of common stocks representing all major industries in the small-cap (between $300mn and $2 billion) are of the market. The Market Volatility Index (VIX) is an index designed to track market volatility as an independent entity. The index calculated based on option activity and is used as an indicator of investor sentiment, with high values implying pessimism and low values implying optimism. Wilshire 5000® Equity Index is an unmanaged index made up of all U.S. stocks regularly traded on the three major U.S. exchanges, including the New York Stock Exchange, American Stock Exchange, and Nasdaq. Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. 58 Disclosures (cont.) Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 ® Index, which represents approximately 8% of the total market capitalization of the Russell 3000®. Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index. MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. As of June 2007 the MSCI EAFE Index consisted of 21 developed-market country indices. MSCI Europe, Australasia, Far East & Canada Gross Return Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. Morgan Stanley Capital International (MSCI) Emerging Markets Global Index is a market capitalization-weighted benchmark index made up of equities from 29 developing countries. FTSE NAREIT Equity REIT Total Return Index is an unmanaged index reflecting performance of the U.S. real estate investment trust market. Equity Hedge: Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques. Relative Value Arbitrage: Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Short Term Asset Management (STAM) is designed for investors seeking professional assistance in managing short-term fixed-income portfolios with an average maturity of generally less than one year. Additional information is available upon request. © 2013 Wells Fargo Bank, N.A. All rights reserved. 59