Investment Strategy Report
WEEKLY GUIDANCE FROM OUR INVESTMENT STRATEGY COMMITTEE
Investors Shouldn’t Become Too Complacent Chris Haverland, CFA Global Asset Allocation Strategist
October 2, 2017
Key Takeaways
» Financial markets have been impressive this year—with most asset classes posting positive returns and many equity-class gains in the double digits. » The current U.S. equity bull market is in its ninth year, and it looks to have more gas in the tank. We are not calling for this upcycle to end in 2018, but investors should be prepared for modest pullbacks.
What It May Mean for Investors
» Diversifying your strategic asset allocation is one way to participate in long-term financial market growth, while helping to protect on the downside. Tactically, we maintain a slightly defensive posture heading into year-end 2017. What a year 2017 has been for investors so far. With three quarters now in the books, most asset classes are up—with certain equity classes delivering double digit year-todate returns. In fact, we have seen the S&P 500 Index rise for six consecutive months— and on a total return basis, the Index’s performance has been positive in 11 of the past 12 months. Steady economic growth, moderate inflation, solid earnings growth and a still accommodative monetary backdrop all have supported the rally. The expectation for favorable U.S. fiscal policy also has played a role—but likely is not fully priced into the market today.
Year-to-Date Asset Class Performance Emerging Market Equity
Asset Group Overviews Equities ............................ 3
25.3
Developed ex.U.S. Equity
20.5
U.S Large Cap Equity
Fixed Income ................ 4
14.2
U.S. Mid Cap Equity
Real Assets ..................... 5 Alternative Investments ................... 6
28.1
Frontier Market Equity
11.7
U.S. Small Cap Equity
10.9
Emerging Market Fixed Inc
8.7
Developed ex.U.S. Fixed Inc
8.2
Public Real Estate
7.3
U.S. High Yield Fixed Inc
7.0
U.S. Municipal Fixed Inc
4.7
U.S. Taxable Inv Grade Fixed Inc
3.1
U.S. Treasury Fixed Inc
2.3
Commodities
-2.9 -6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
Sources: Wells Fargo Investment Institute, Bloomberg, 9/28/17. Index returns reflect general market results, do not reflect actual portfolio returns or the experience of any investor, nor do they reflect the impact of any fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance do not guarantee future results. Definitions of the indices are provided at the end of this report.
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 1 of 8
Investors Shouldn’t Become Too Complacent Market upswings can last a long time—as evidenced by the latest bull-market run of nearly nine years (the second longest in history). We do believe that this upcycle is closer to the end than the beginning, but we are not calling for it to be over in 2018. Although market cycles typically are measured by age, that factor is irrelevant when it comes to “why” a rally ends. There usually is something else that causes the bull to die, such as an economic recession. Bear markets and recessions often go hand in hand; however, markets historically have reacted well before a recession occurs—so the two are not always in sync. We monitor several economic and financial-recession indicators, and our work suggests that a recession is not on the horizon—and therefore, believe this should not be a concern for markets in the near term. That doesn’t mean that we couldn’t see a smaller pullback in the interim. Market corrections (a decline of at least 10 percent) or market dips (a decrease of at least five percent) are common and can be caused by temporary shocks to the economy, earnings, geopolitics, or something completely unknown to investors today. With such low volatility, these types of market moves have been few and far between during this bull market. Historically speaking, on average, the domestic equity market corrects every 11 months—the last correction was in November 2015. Meanwhile, on average, the U.S. equity market dips three to four times per year. The last dip was in June 2016. Trying to time a bear market, correction or market dip is nearly impossible. A dip could turn into a correction or simply be a temporary pause. A correction could become a bear market or represent a great buying opportunity. The latter has been the case over the past 30 years, with the S&P 500 Index rising by at least 10 percent three months after most correction lows. Our forecasts call for a similar scenario—as we expect an equity-market pullback by year-end 2017, followed by higher equity prices in 2018. One way to participate in the market upside, while helping to limit extreme downside exposure, is to diversify. During the last U.S. equity bear market, a portfolio diversified in stocks, bonds, real assets and alternative investments experienced less downside than the S&P 500 Index and recovered much more quickly 1. Of course, diversification is only part of the equation—which includes monitoring and aligning to your risk budget through periodic rebalancing. This is especially important when riskier assets have accumulated sizable gains in a short amount of time. Bear in mind that diversification cannot guarantee a profit or protect your portfolio in a declining market. Our portfolio positioning continues to be slightly defensive from a tactical perspective, and we remain underweight risk assets such as U.S. small-cap equity and high-yield fixed income—where we view the risk/reward ratio as unfavorable. Instead of overweighting cash alternatives, we see investment-grade fixed income as a better counterbalance to potential equity-market volatility—and a good placeholder as we wait for opportunities elsewhere. Although we are not currently overweight, we have placed international equities (both developed and emerging) at the top of our equity rankings for investment of new assets. At a minimum, these asset classes warrant a full allocation. Finally, as the U.S. equity bull market enters its final stages, we see a greater role for private hedge funds (especially equity hedge and relative value strategies) as a way to remain engaged in the markets while seeking to reduce downside risk.
1
Wells Fargo Investment Institute, 9/29/17 © 2017 Wells Fargo Investment Institute. All rights reserved.
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EQUITIES
Stuart Freeman, CFA Co-Head of Global Equity Strategy
The Information Technology Sector—Not in a Bubble Today Underweight U.S. Small Cap Equities
Evenweight
U.S. Large Cap Equities
Evenweight
U.S. Mid Cap Equities
Evenweight Developed Market Ex-U.S. Equities
A fair amount of discussion has taken place surrounding the valuation level of the S&P 500 Information Technology (IT) sector on the heels of its 25 percent year-to-date (YTD) increase (versus a 12 percent move for the S&P 500 Index). The IT sector has generated more than 40 percent of the S&P 500 Index YTD return. Further, the top 10 contributing IT companies have provided 27 percent of the YTD S&P 500 Index total return. The chart below shows the attribution from the 11 primary industry sectors. A summation of current metrics suggests a middling valuation for the IT sector: A 20 year trailing 12-month median price/earnings ratio (P/E) of 22.0x versus the current multiple of 20.1x (an 8 percent discount). A 20 year forward 12-month median P/E of 18.9x versus the current multiple of 19x. A 20-year trailing 12-month trailing P/E premium to market of 25.7 percent (1.5 percent today). A 20-year forward 12-month median P/E premium to market of 16.0 percent (versus 2.7 percent today). While the IT sector represented 32.4 percent of the S&P 500 Index market cap at its peak in 2000 and 15.1 percent at a 2008 low, it now represents roughly 23.1 percent. We expect IT earnings to outperform S&P 500 Index earnings in 2018, and we do not currently consider this sector to be priced in bubble territory. The sector carried an 87x trailing 12-month P/E multiple versus roughly 35x for the S&P 500 Index at the peak of the 2000 technology bubble. Overall, today’s valuations are midrange, and we believe that investors should retain an evenweight (neutral) position as prescribed by their chosen asset allocation.
Key Takeaways » The IT sector has generated more than 40 percent of the S&P 500 Index 13.8 percent YTD total return. » However, IT sector valuations appear to be in the midrange of the valuations over the past 20 years, and we expect their earnings to outperform in 2018.
Portion of S&P 500 Index YTD Return by Sector (Percent) Evenweight Emerging Market Equities
Portions of 2017 S&P 500 Index YTD Total Return by Sector (Percent)
45 40 35 30 25 20 15 10 5 0
-5 -10
Sources: Wells Fargo Investment Institute, Bloomberg; 9/28/17. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. © 2017 Wells Fargo Investment Institute. All rights reserved.
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FIXED INCOME
Brian Rehling, CFA Co-Head of Global Fixed Income Strategy
Bank Loans Look Uninspiring Underweight
High Yield Taxable Fixed Income
Underweight
Developed Market Ex.-U.S. Fixed Income
Evenweight
U.S. Short Term Taxable Fixed Income
Bank-loan (and “leveraged loan”) investments seek to provide investors with a variable income stream based on an interest rate that floats over a specific benchmark, such as the three-month London Interbank Offered Rate (LIBOR). Bank loan floating-rate debt is generally below-investment-grade. While bank loans can help to reduce the interestrate sensitivity of a portfolio, they also can increase a portfolio’s exposure to credit risk. Last week, the average price of the S&P/LSTA Leveraged Loan Index stood at approximately $98.28. As bank loans are callable at or above par ($100), there appears to be limited price-appreciation upside for bank loans today. Instead, we believe that investors should expect coupon-like returns from bank-loan investments, barring any significant credit events or economic downturns. In the current environment in which bank loans appear fully valued, investors must take care to be selective when choosing bank-loan investments. We also recommend that investors consider professional investment managers that are focused on intensive fundamental credit research, given the credit risks that exist in the below-investment-grade space. Mind Your Risk We are concerned that some investors may not fully appreciate bank-loan investment risks in the current environment. We recommend that investors exercise care to:
Avoid a reach for yield: Investors using bank loans to enhance yield in their portfolios need to understand that significant credit risk can be present in these investments. Bank loans should not be used to enhance yield for an investor trying to achieve principal protection or manage liquidity.
Weakening covenants: Given strong demand for bank-loan investments, issuers have been able to offer new loans with fewer investor protections. These covenantlight deals could prove problematic should default trends begin to reverse and defaults move higher. Under such a scenario, we would expect a significant increase in the loan-loss rate, something that many investors might not be prepared to face.
Asymmetric return: The prices of bank loans are unlikely to move much above $100. Yet, significant downside risks remain.
Evenweight
U.S. Long Term Taxable Fixed Income
Evenweight
Emerging Market Fixed Income
Overweight
U.S. Taxable Investment Grade Fixed Income
At present, we recommend that investors hold an underweight position in high-yield debt holdings, which would include exposure to bank loans. Generally speaking, bank loans can provide investors with an opportunity to invest in a different asset class—one that can add diversification to a high-yield debt allocation. Within the high-yield sector, we have a neutral rating on the bank-loan sector.
Key Takeaways » We see limited upside in bank loans—overall returns in this sector are likely to be commensurate with current yield, absent a risk-off event.
Overweight
U.S. Intermediate Term Taxable Fixed Income
» If the Federal Reserve (Fed) is more aggressive than expected, this could lead to higher bank-loan yields. A more dovish Fed could disappoint bank-loan investors. » Bank loans can help to diversify a high-yield portfolio.
© 2017 Wells Fargo Investment Institute. All rights reserved.
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REAL ASSETS
John LaForge
“Patience is power. Patience is not an absence of action; rather it is timing; it waits on the right time to act, for the right principles and the right way.”
Head of Real Asset Strategy
--Fulton J. Sheen
Oil—Why $60 Will Be Hard to Hold Underweight
Commodities
Evenweight
Private Real Estate
Overweight
Public Real Estate
We urge patience on oil. We don’t recommend jumping on the bullish bandwagon; not at these levels anyway. Last week, Brent crude oil, a global benchmark, sat near $58 per barrel, while West Texas Intermediate (WTI), a U.S. benchmark, sat at around $52. We believe that these levels have additional upside, but not much more. Both Brent and WTI have futures curves that are in “backwardation”; a condition that has been in place for more than a month now. Backwardation means that prices for oil deliveries today are more expensive than for future deliveries. It suggests strong shortterm demand, and typically rising oil prices. Because of this, we do see Brent crude oil reaching $60 per barrel, and WTI rising to $54-$55 over the next month or so. With that said, we doubt that these higher levels will be held for long. The reason is that pesky commodity bear super-cycle we love to discuss. It has a habit of keeping commodity prices range-bound as supply is quick to meet rising prices. In the case of WTI, we suspect that its range for the next few years will be between $30 and $60 per barrel. The chart below highlights why we believe that $60 may be the high end of the range. The top panel is the price of WTI, while the bottom panel shows weekly U.S. oil rig counts. Since 2015, oil producers have added more rigs once oil prices climbed near $55. We suspect that the same dynamic will take place over the next few months, which should pressure oil prices into year-end.
Key Takeaways » Brent crude oil looks like it may hit $60 per barrel, based on short-term demand. » Yet, we expect oil prices to be pressured into year-end as extra supplies should soon come to market.
Crude Oil Price versus Rig Count 55
55
50
50
45
45
40
40 $55 - $60 oil brought rigs
35
$45 - $55 oil brought rigs back online
35
30
30
25 20
25 20
10
10
0
0
Oil Price (U.S. Dollar/Barrel)
Oil Price (U.S. Dollar/Barrel)
-10
-10
-20
-20
-30
-30 U.S. Oil Rig Count (Weekly Change)
-40
-40
-50
-50
-60
-60
-70
-70
Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17
Number of Rigs
60
Number of Rigs
WTI Crude Oil Spot Price
60
Sources: Bloomberg, Baker Hughes, Wells Fargo Investment Institute, 9/28/17. Data sample is weekly from 3/6/2015 to 9/22/2017. © 2017 Wells Fargo Investment Institute. All rights reserved.
Page 5 of 8
ALTERNATIVE INVESTMENTS
Jim Sweetman
“Don’t’ approach life’s challenges by being “reactive.” Be “proactive.” Prepare for the possibilities before they arrive.”
Senior Global Alternative Investment Strategist
--Stephen Covey, “The Seven Habits of Highly Effective People”
Proactive Investing in Today’s Markets Evenweight
Private Equity
Evenweight
Private Debt
Evenweight
Hedge Funds-Macro
Evenweight
Hedge Funds-Event Driven
A proactive approach focuses on anticipating challenges before they materialize, while a reactive approach responds to events after they have occurred. That is the challenge faced today as investors analyze their portfolios. The current equity-market rally, which began in March 2009, is in its ninth year, making it the second-longest period without a negative 20-percent decline since the Great Depression. The rally’s duration, combined with above-average equity valuations and historically low volatility, suggests that investors generally are not worried. We believe that this could be a good time for investors to consider strategies, such as hedge funds, which can help to diversify portfolios and potentially mitigate risk in more challenging market conditions as we enter the later stages of the current equity and credit cycle. We recognize that the recent past has been a great environment for long-only investing, but we believe that these benign market conditions won’t persist indefinitely. While we are not forecasting a recession in the near term, we believe that equity markets potentially will not be as robust going forward. The chart below shows the rolling 12-month return of hedge funds (HFRI Fund Weighted Index) and the MSCI World Index for January 1990 through August 2017. In “flat” global equity markets (with returns of +/- 3 percent), hedge funds have outperformed global equities by approximately 8.5 percent. In down markets (with a return of less than 3 percent), hedge funds have done an excellent job of helping to mitigate downside risk in portfolios. We believe that proactively allocating to hedge funds which can opportunistically deploy capital at different points in the cycle could provide meaningful value today—by capitalizing on idiosyncratic opportunities to help enhance potential returns and mitigate risk.
Key Takeaways Overweight
Hedge Funds-Relative Value
» In anticipation of challenging markets, now may be the time to seek out strategies, such as hedge funds, to diversify, insulate and protect capital. » During previously challenging market environments, hedge funds historically have outperformed equity markets, while helping to mitigate downside risk. » We recommend that hedge fund allocations be managed to specific investment goals. Further, manager selection is critical and access to a diverse range of strategies is crucial to creating a portfolio that can meet investor goals.
Hedge Funds-Equity Hedge
Performance of HFRI Fund Weighted Index versus MSCI All Country World Index The HFRI Fund Weighted Composite Index is a 20.00% 15.00%
Rolling 12 Month Annualized Return
Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.
250
220 17.12% 8.48%
10.00%
14.21%
66
5.00%
100
0
-0.17%
-0.86%
150
50
35 0.00%
200
-50
-5.00%
-100
-10.00%
-150
-15.00%
Number of Rooling 12 Month Periods
Overweight
-200 -16.75%
-20.00%
MSCI AC World < -3%
-250 MSCI AC World in +/- 3%
HFRI Fund Weighted Composite Index
MSCI World Index
MSCI AC World > 3% Number of Periods
Sources: Wells Fargo Investment Institute, Bloomberg; 9/28/17. See disclosures for index definitions. © 2017 Wells Fargo Investment Institute. All rights reserved.
global, equal-weighted index of over 2,000 singlemanager funds that report to HFR Database. The MSCI All Country World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. It consists of 46 country indexes comprising 23 developed and 23 emerging market countries. Because the HFR indices are calculated based on information that is voluntarily provided actual returns may be higher or lower than those reported. Unlike most asset class indices, HFR Index returns reflect deduction for fees and expenses. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Page 6 of 8
Risks Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Bank loans are subject to interest rate and credit risk. They are generally below investment grade and are subject to defaults and downgrades. These loans have the potential to hedge exposure to interest-rate risk but they also carry significant credit and call risk. Call risk is the risk that the issuer will redeem the issue prior to maturity. This results in reinvestment risk which means the proceeds will generally be reinvested in a less favorable environment. Bank loans are difficult to value, have long settlement times and are relatively illiquid. As a result, an investor's portfolio could face liquidity challenges. Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing. Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.
Index Definitions U.S. Taxable Inv Grade Fixed Income: The Bloomberg Barclays U.S. Aggregate: The Barclays U.S. Aggregate Bond Index is unmanaged and is composed of the Bloomberg Barclays U.S. Government/Credit Index and the Bloomberg Barclays U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities. U.S. High Yield Fixed Income: The Bloomberg Barclays U.S. Corporate High-Yield Index covers the universe of fixed rate, non-investment grade debt. U.S. Treasury Fixed Income: The Bloomberg Barclays U.S. Treasury Index is the U.S. Treasury component of the U.S. Government Index. The index consists of public obligations of the U.S. Treasury with a remaining maturity of one year or more. U.S. Municipal Fixed Income: The Bloomberg Barclays U.S. Municipal Index represents municipal bonds with a minimum credit rating of at least Baa, an outstanding par value of at least $3 million and a remaining maturity of at least one year. The index excludes taxable municipal bonds, bonds with floating rates, derivatives and certificates of participation Commodities: The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. Public Real Estate: The FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real-estate companies and REITs in developed countries worldwide. Developed ex. U.S. Fixed Income: The JPMorgan Global ex-U.S. Government Bond Index measures the performance of non-U.S. government bonds. Emerging Market Fixed Income: The JPMorgan Emerging Markets Bond Index (EMBI Global) currently covers 27 emerging market countries. Included in the EMBI © 2017 Wells Fargo Investment Institute. All rights reserved.
Page 7 of 8
Developed ex. U.S Equity: The 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 US & Canada. Emerging Market Equity: The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Frontier Market Equity: The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of frontier markets. The MSCI Frontier Markets Index consists of 24 frontier market country indexes. U.S. Small Cap Equity: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately eight percent of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. U.S. Mid Cap Equity: The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27 percent of the total market capitalization of the Russell 1000 companies. U.S. Large Cap Equity: The S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.
General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS 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. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0917-05159
© 2017 Wells Fargo Investment Institute. All rights reserved.
Page 8 of 8
Investors Shouldn’t Become Too Complacent Chris Haverland, CFA Global Asset Allocation Strategist
October 2, 2017
Key Takeaways
» Financial markets have been impressive this year—with most asset classes posting positive returns and many equity-class gains in the double digits. » The current U.S. equity bull market is in its ninth year, and it looks to have more gas in the tank. We are not calling for this upcycle to end in 2018, but investors should be prepared for modest pullbacks.
What It May Mean for Investors
» Diversifying your strategic asset allocation is one way to participate in long-term financial market growth, while helping to protect on the downside. Tactically, we maintain a slightly defensive posture heading into year-end 2017. What a year 2017 has been for investors so far. With three quarters now in the books, most asset classes are up—with certain equity classes delivering double digit year-todate returns. In fact, we have seen the S&P 500 Index rise for six consecutive months— and on a total return basis, the Index’s performance has been positive in 11 of the past 12 months. Steady economic growth, moderate inflation, solid earnings growth and a still accommodative monetary backdrop all have supported the rally. The expectation for favorable U.S. fiscal policy also has played a role—but likely is not fully priced into the market today.
Year-to-Date Asset Class Performance Emerging Market Equity
Asset Group Overviews Equities ............................ 3
25.3
Developed ex.U.S. Equity
20.5
U.S Large Cap Equity
Fixed Income ................ 4
14.2
U.S. Mid Cap Equity
Real Assets ..................... 5 Alternative Investments ................... 6
28.1
Frontier Market Equity
11.7
U.S. Small Cap Equity
10.9
Emerging Market Fixed Inc
8.7
Developed ex.U.S. Fixed Inc
8.2
Public Real Estate
7.3
U.S. High Yield Fixed Inc
7.0
U.S. Municipal Fixed Inc
4.7
U.S. Taxable Inv Grade Fixed Inc
3.1
U.S. Treasury Fixed Inc
2.3
Commodities
-2.9 -6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
Sources: Wells Fargo Investment Institute, Bloomberg, 9/28/17. Index returns reflect general market results, do not reflect actual portfolio returns or the experience of any investor, nor do they reflect the impact of any fees, expenses or taxes applicable to an actual investment. An index is unmanaged and not available for direct investment. Past performance do not guarantee future results. Definitions of the indices are provided at the end of this report.
© 2017 Wells Fargo Investment Institute. All rights reserved.
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Investors Shouldn’t Become Too Complacent Market upswings can last a long time—as evidenced by the latest bull-market run of nearly nine years (the second longest in history). We do believe that this upcycle is closer to the end than the beginning, but we are not calling for it to be over in 2018. Although market cycles typically are measured by age, that factor is irrelevant when it comes to “why” a rally ends. There usually is something else that causes the bull to die, such as an economic recession. Bear markets and recessions often go hand in hand; however, markets historically have reacted well before a recession occurs—so the two are not always in sync. We monitor several economic and financial-recession indicators, and our work suggests that a recession is not on the horizon—and therefore, believe this should not be a concern for markets in the near term. That doesn’t mean that we couldn’t see a smaller pullback in the interim. Market corrections (a decline of at least 10 percent) or market dips (a decrease of at least five percent) are common and can be caused by temporary shocks to the economy, earnings, geopolitics, or something completely unknown to investors today. With such low volatility, these types of market moves have been few and far between during this bull market. Historically speaking, on average, the domestic equity market corrects every 11 months—the last correction was in November 2015. Meanwhile, on average, the U.S. equity market dips three to four times per year. The last dip was in June 2016. Trying to time a bear market, correction or market dip is nearly impossible. A dip could turn into a correction or simply be a temporary pause. A correction could become a bear market or represent a great buying opportunity. The latter has been the case over the past 30 years, with the S&P 500 Index rising by at least 10 percent three months after most correction lows. Our forecasts call for a similar scenario—as we expect an equity-market pullback by year-end 2017, followed by higher equity prices in 2018. One way to participate in the market upside, while helping to limit extreme downside exposure, is to diversify. During the last U.S. equity bear market, a portfolio diversified in stocks, bonds, real assets and alternative investments experienced less downside than the S&P 500 Index and recovered much more quickly 1. Of course, diversification is only part of the equation—which includes monitoring and aligning to your risk budget through periodic rebalancing. This is especially important when riskier assets have accumulated sizable gains in a short amount of time. Bear in mind that diversification cannot guarantee a profit or protect your portfolio in a declining market. Our portfolio positioning continues to be slightly defensive from a tactical perspective, and we remain underweight risk assets such as U.S. small-cap equity and high-yield fixed income—where we view the risk/reward ratio as unfavorable. Instead of overweighting cash alternatives, we see investment-grade fixed income as a better counterbalance to potential equity-market volatility—and a good placeholder as we wait for opportunities elsewhere. Although we are not currently overweight, we have placed international equities (both developed and emerging) at the top of our equity rankings for investment of new assets. At a minimum, these asset classes warrant a full allocation. Finally, as the U.S. equity bull market enters its final stages, we see a greater role for private hedge funds (especially equity hedge and relative value strategies) as a way to remain engaged in the markets while seeking to reduce downside risk.
1
Wells Fargo Investment Institute, 9/29/17 © 2017 Wells Fargo Investment Institute. All rights reserved.
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EQUITIES
Stuart Freeman, CFA Co-Head of Global Equity Strategy
The Information Technology Sector—Not in a Bubble Today Underweight U.S. Small Cap Equities
Evenweight
U.S. Large Cap Equities
Evenweight
U.S. Mid Cap Equities
Evenweight Developed Market Ex-U.S. Equities
A fair amount of discussion has taken place surrounding the valuation level of the S&P 500 Information Technology (IT) sector on the heels of its 25 percent year-to-date (YTD) increase (versus a 12 percent move for the S&P 500 Index). The IT sector has generated more than 40 percent of the S&P 500 Index YTD return. Further, the top 10 contributing IT companies have provided 27 percent of the YTD S&P 500 Index total return. The chart below shows the attribution from the 11 primary industry sectors. A summation of current metrics suggests a middling valuation for the IT sector: A 20 year trailing 12-month median price/earnings ratio (P/E) of 22.0x versus the current multiple of 20.1x (an 8 percent discount). A 20 year forward 12-month median P/E of 18.9x versus the current multiple of 19x. A 20-year trailing 12-month trailing P/E premium to market of 25.7 percent (1.5 percent today). A 20-year forward 12-month median P/E premium to market of 16.0 percent (versus 2.7 percent today). While the IT sector represented 32.4 percent of the S&P 500 Index market cap at its peak in 2000 and 15.1 percent at a 2008 low, it now represents roughly 23.1 percent. We expect IT earnings to outperform S&P 500 Index earnings in 2018, and we do not currently consider this sector to be priced in bubble territory. The sector carried an 87x trailing 12-month P/E multiple versus roughly 35x for the S&P 500 Index at the peak of the 2000 technology bubble. Overall, today’s valuations are midrange, and we believe that investors should retain an evenweight (neutral) position as prescribed by their chosen asset allocation.
Key Takeaways » The IT sector has generated more than 40 percent of the S&P 500 Index 13.8 percent YTD total return. » However, IT sector valuations appear to be in the midrange of the valuations over the past 20 years, and we expect their earnings to outperform in 2018.
Portion of S&P 500 Index YTD Return by Sector (Percent) Evenweight Emerging Market Equities
Portions of 2017 S&P 500 Index YTD Total Return by Sector (Percent)
45 40 35 30 25 20 15 10 5 0
-5 -10
Sources: Wells Fargo Investment Institute, Bloomberg; 9/28/17. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. © 2017 Wells Fargo Investment Institute. All rights reserved.
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FIXED INCOME
Brian Rehling, CFA Co-Head of Global Fixed Income Strategy
Bank Loans Look Uninspiring Underweight
High Yield Taxable Fixed Income
Underweight
Developed Market Ex.-U.S. Fixed Income
Evenweight
U.S. Short Term Taxable Fixed Income
Bank-loan (and “leveraged loan”) investments seek to provide investors with a variable income stream based on an interest rate that floats over a specific benchmark, such as the three-month London Interbank Offered Rate (LIBOR). Bank loan floating-rate debt is generally below-investment-grade. While bank loans can help to reduce the interestrate sensitivity of a portfolio, they also can increase a portfolio’s exposure to credit risk. Last week, the average price of the S&P/LSTA Leveraged Loan Index stood at approximately $98.28. As bank loans are callable at or above par ($100), there appears to be limited price-appreciation upside for bank loans today. Instead, we believe that investors should expect coupon-like returns from bank-loan investments, barring any significant credit events or economic downturns. In the current environment in which bank loans appear fully valued, investors must take care to be selective when choosing bank-loan investments. We also recommend that investors consider professional investment managers that are focused on intensive fundamental credit research, given the credit risks that exist in the below-investment-grade space. Mind Your Risk We are concerned that some investors may not fully appreciate bank-loan investment risks in the current environment. We recommend that investors exercise care to:
Avoid a reach for yield: Investors using bank loans to enhance yield in their portfolios need to understand that significant credit risk can be present in these investments. Bank loans should not be used to enhance yield for an investor trying to achieve principal protection or manage liquidity.
Weakening covenants: Given strong demand for bank-loan investments, issuers have been able to offer new loans with fewer investor protections. These covenantlight deals could prove problematic should default trends begin to reverse and defaults move higher. Under such a scenario, we would expect a significant increase in the loan-loss rate, something that many investors might not be prepared to face.
Asymmetric return: The prices of bank loans are unlikely to move much above $100. Yet, significant downside risks remain.
Evenweight
U.S. Long Term Taxable Fixed Income
Evenweight
Emerging Market Fixed Income
Overweight
U.S. Taxable Investment Grade Fixed Income
At present, we recommend that investors hold an underweight position in high-yield debt holdings, which would include exposure to bank loans. Generally speaking, bank loans can provide investors with an opportunity to invest in a different asset class—one that can add diversification to a high-yield debt allocation. Within the high-yield sector, we have a neutral rating on the bank-loan sector.
Key Takeaways » We see limited upside in bank loans—overall returns in this sector are likely to be commensurate with current yield, absent a risk-off event.
Overweight
U.S. Intermediate Term Taxable Fixed Income
» If the Federal Reserve (Fed) is more aggressive than expected, this could lead to higher bank-loan yields. A more dovish Fed could disappoint bank-loan investors. » Bank loans can help to diversify a high-yield portfolio.
© 2017 Wells Fargo Investment Institute. All rights reserved.
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REAL ASSETS
John LaForge
“Patience is power. Patience is not an absence of action; rather it is timing; it waits on the right time to act, for the right principles and the right way.”
Head of Real Asset Strategy
--Fulton J. Sheen
Oil—Why $60 Will Be Hard to Hold Underweight
Commodities
Evenweight
Private Real Estate
Overweight
Public Real Estate
We urge patience on oil. We don’t recommend jumping on the bullish bandwagon; not at these levels anyway. Last week, Brent crude oil, a global benchmark, sat near $58 per barrel, while West Texas Intermediate (WTI), a U.S. benchmark, sat at around $52. We believe that these levels have additional upside, but not much more. Both Brent and WTI have futures curves that are in “backwardation”; a condition that has been in place for more than a month now. Backwardation means that prices for oil deliveries today are more expensive than for future deliveries. It suggests strong shortterm demand, and typically rising oil prices. Because of this, we do see Brent crude oil reaching $60 per barrel, and WTI rising to $54-$55 over the next month or so. With that said, we doubt that these higher levels will be held for long. The reason is that pesky commodity bear super-cycle we love to discuss. It has a habit of keeping commodity prices range-bound as supply is quick to meet rising prices. In the case of WTI, we suspect that its range for the next few years will be between $30 and $60 per barrel. The chart below highlights why we believe that $60 may be the high end of the range. The top panel is the price of WTI, while the bottom panel shows weekly U.S. oil rig counts. Since 2015, oil producers have added more rigs once oil prices climbed near $55. We suspect that the same dynamic will take place over the next few months, which should pressure oil prices into year-end.
Key Takeaways » Brent crude oil looks like it may hit $60 per barrel, based on short-term demand. » Yet, we expect oil prices to be pressured into year-end as extra supplies should soon come to market.
Crude Oil Price versus Rig Count 55
55
50
50
45
45
40
40 $55 - $60 oil brought rigs
35
$45 - $55 oil brought rigs back online
35
30
30
25 20
25 20
10
10
0
0
Oil Price (U.S. Dollar/Barrel)
Oil Price (U.S. Dollar/Barrel)
-10
-10
-20
-20
-30
-30 U.S. Oil Rig Count (Weekly Change)
-40
-40
-50
-50
-60
-60
-70
-70
Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17
Number of Rigs
60
Number of Rigs
WTI Crude Oil Spot Price
60
Sources: Bloomberg, Baker Hughes, Wells Fargo Investment Institute, 9/28/17. Data sample is weekly from 3/6/2015 to 9/22/2017. © 2017 Wells Fargo Investment Institute. All rights reserved.
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ALTERNATIVE INVESTMENTS
Jim Sweetman
“Don’t’ approach life’s challenges by being “reactive.” Be “proactive.” Prepare for the possibilities before they arrive.”
Senior Global Alternative Investment Strategist
--Stephen Covey, “The Seven Habits of Highly Effective People”
Proactive Investing in Today’s Markets Evenweight
Private Equity
Evenweight
Private Debt
Evenweight
Hedge Funds-Macro
Evenweight
Hedge Funds-Event Driven
A proactive approach focuses on anticipating challenges before they materialize, while a reactive approach responds to events after they have occurred. That is the challenge faced today as investors analyze their portfolios. The current equity-market rally, which began in March 2009, is in its ninth year, making it the second-longest period without a negative 20-percent decline since the Great Depression. The rally’s duration, combined with above-average equity valuations and historically low volatility, suggests that investors generally are not worried. We believe that this could be a good time for investors to consider strategies, such as hedge funds, which can help to diversify portfolios and potentially mitigate risk in more challenging market conditions as we enter the later stages of the current equity and credit cycle. We recognize that the recent past has been a great environment for long-only investing, but we believe that these benign market conditions won’t persist indefinitely. While we are not forecasting a recession in the near term, we believe that equity markets potentially will not be as robust going forward. The chart below shows the rolling 12-month return of hedge funds (HFRI Fund Weighted Index) and the MSCI World Index for January 1990 through August 2017. In “flat” global equity markets (with returns of +/- 3 percent), hedge funds have outperformed global equities by approximately 8.5 percent. In down markets (with a return of less than 3 percent), hedge funds have done an excellent job of helping to mitigate downside risk in portfolios. We believe that proactively allocating to hedge funds which can opportunistically deploy capital at different points in the cycle could provide meaningful value today—by capitalizing on idiosyncratic opportunities to help enhance potential returns and mitigate risk.
Key Takeaways Overweight
Hedge Funds-Relative Value
» In anticipation of challenging markets, now may be the time to seek out strategies, such as hedge funds, to diversify, insulate and protect capital. » During previously challenging market environments, hedge funds historically have outperformed equity markets, while helping to mitigate downside risk. » We recommend that hedge fund allocations be managed to specific investment goals. Further, manager selection is critical and access to a diverse range of strategies is crucial to creating a portfolio that can meet investor goals.
Hedge Funds-Equity Hedge
Performance of HFRI Fund Weighted Index versus MSCI All Country World Index The HFRI Fund Weighted Composite Index is a 20.00% 15.00%
Rolling 12 Month Annualized Return
Alternative investments, such as hedge funds, private equity, private debt and private real estate funds are not suitable for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.
250
220 17.12% 8.48%
10.00%
14.21%
66
5.00%
100
0
-0.17%
-0.86%
150
50
35 0.00%
200
-50
-5.00%
-100
-10.00%
-150
-15.00%
Number of Rooling 12 Month Periods
Overweight
-200 -16.75%
-20.00%
MSCI AC World < -3%
-250 MSCI AC World in +/- 3%
HFRI Fund Weighted Composite Index
MSCI World Index
MSCI AC World > 3% Number of Periods
Sources: Wells Fargo Investment Institute, Bloomberg; 9/28/17. See disclosures for index definitions. © 2017 Wells Fargo Investment Institute. All rights reserved.
global, equal-weighted index of over 2,000 singlemanager funds that report to HFR Database. The MSCI All Country World Index is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. It consists of 46 country indexes comprising 23 developed and 23 emerging market countries. Because the HFR indices are calculated based on information that is voluntarily provided actual returns may be higher or lower than those reported. Unlike most asset class indices, HFR Index returns reflect deduction for fees and expenses. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
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Risks Considerations Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions. Bank loans are subject to interest rate and credit risk. They are generally below investment grade and are subject to defaults and downgrades. These loans have the potential to hedge exposure to interest-rate risk but they also carry significant credit and call risk. Call risk is the risk that the issuer will redeem the issue prior to maturity. This results in reinvestment risk which means the proceeds will generally be reinvested in a less favorable environment. Bank loans are difficult to value, have long settlement times and are relatively illiquid. As a result, an investor's portfolio could face liquidity challenges. Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is suitable only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing. Hedge fund strategies, such as Equity Hedge, Event Driven, Macro and Relative Value, may expose investors to the risks associated with the use of short selling, leverage, derivatives and arbitrage methodologies. Short sales involve leverage and theoretically unlimited loss potential since the market price of securities sold short may continuously increase. The use of leverage in a portfolio varies by strategy. Leverage can significantly increase return potential but create greater risk of loss. Derivatives generally have implied leverage which can magnify volatility and may entail other risks such as market, interest rate, credit, counterparty and management risks. Arbitrage strategies expose a fund to the risk that the anticipated arbitrage opportunities will not develop as anticipated, resulting in potentially reduced returns or losses to the fund.
Index Definitions U.S. Taxable Inv Grade Fixed Income: The Bloomberg Barclays U.S. Aggregate: The Barclays U.S. Aggregate Bond Index is unmanaged and is composed of the Bloomberg Barclays U.S. Government/Credit Index and the Bloomberg Barclays U.S. Mortgage-Backed Securities Index, and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities. U.S. High Yield Fixed Income: The Bloomberg Barclays U.S. Corporate High-Yield Index covers the universe of fixed rate, non-investment grade debt. U.S. Treasury Fixed Income: The Bloomberg Barclays U.S. Treasury Index is the U.S. Treasury component of the U.S. Government Index. The index consists of public obligations of the U.S. Treasury with a remaining maturity of one year or more. U.S. Municipal Fixed Income: The Bloomberg Barclays U.S. Municipal Index represents municipal bonds with a minimum credit rating of at least Baa, an outstanding par value of at least $3 million and a remaining maturity of at least one year. The index excludes taxable municipal bonds, bonds with floating rates, derivatives and certificates of participation Commodities: The Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. Public Real Estate: The FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real-estate companies and REITs in developed countries worldwide. Developed ex. U.S. Fixed Income: The JPMorgan Global ex-U.S. Government Bond Index measures the performance of non-U.S. government bonds. Emerging Market Fixed Income: The JPMorgan Emerging Markets Bond Index (EMBI Global) currently covers 27 emerging market countries. Included in the EMBI © 2017 Wells Fargo Investment Institute. All rights reserved.
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Developed ex. U.S Equity: The 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 US & Canada. Emerging Market Equity: The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Frontier Market Equity: The MSCI Frontier Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of frontier markets. The MSCI Frontier Markets Index consists of 24 frontier market country indexes. U.S. Small Cap Equity: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately eight percent of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. U.S. Mid Cap Equity: The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27 percent of the total market capitalization of the Russell 1000 companies. U.S. Large Cap Equity: The S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.
General Disclosures Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company. The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS 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. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company. CAR 0917-05159
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