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Asset Allocation Strategy Report - Wells Fargo Advisors

Page 1 of 31 Asset Allocation Strategy July 18, 2022 Global economic summary. 3 Wells Fargo Investment Institute forecasts 4 fixed income. 6 Equities. 8 Real assets. 10 Alternative investments. 11 Currency guidance. 13 Tactical guidance., 14 capital market assumptions 16 Strategic Asset Allocation , 17 New capital market assumptions and portfolio mixes for 2022-2023 (Continued on the next page.)

Dec 21, 2021 · Fixed income. 5 Equities. 8. Real assets. 11 Alternative investments. moving to the upper end of a 92–99 range in 2022. Additional dollar support should come . 13 Currency guidance. post-COVID-19 monetary policy. 15 Tactical guidance., 16 Capital market assumptions 18 Strategic asset allocation, 19

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Transcription of Asset Allocation Strategy Report - Wells Fargo Advisors

1 Page 1 of 31 Asset Allocation Strategy July 18, 2022 Global economic summary. 3 Wells Fargo Investment Institute forecasts 4 fixed income. 6 Equities. 8 Real assets. 10 Alternative investments. 11 Currency guidance. 13 Tactical guidance., 14 capital market assumptions 16 Strategic Asset Allocation , 17 New capital market assumptions and portfolio mixes for 2022-2023 (Continued on the next page.)

2 As part of our Asset Allocation and investment Strategy , we regularly review our capital market assumptions (CMAs) and strategic Asset - Allocation mixes. CMAs consist of hypothetical return, risk, yield, and correlation expectations for the Asset classes in our investment In keeping with our evolving expectations for broad economic developments over the next few market cycles, we have updated our CMAs (page 16) and recommended Asset mixes (pages 17-25) this month. Several of the key global investment trends we expect over the next 10 to 15 years are: An increase to our long-term inflation expectation due to the likelihood of elevated inflation over the next few years before it trends back to the Federal Reserve s (Fed s) target (see chart below) A smaller cash discount to inflation from previous years as the Fed aggressively raises rates in the early part of the strategic time frameInvestment and Insurance Products.

3 U NOT FDIC Insured u NO Bank Guarantee u MAY Lose Value2022 capital Market Assumptions Page 16 Forecast changes Pages 4 and 5 Guidance changes Pages 6, 10, 14 and 15 Strategic and tactical Allocation changes Pages 17 25 Sources: Bloomberg, Bureau of Labor Statistics, and Wells Fargo Investment Institute. Monthly data from January 1, 1972 to May 31, 2022. Chart is for illustrative purposes only. Start date chosen to reflect 50 years of Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

4 It is calculated by taking price changes for each item in the predetermined basket of goods and averaging trend in inflation picks up10-year moving average year-over-year change (%)012345678910'72'74'76'78'80'82'84'86' 88'90'92'94'96'98'00'02'04'06'08'10'12'1 4'16'18'20'2210-year average of 12-month change in consumer price inflation fixed -income yields rising from historic lows and eventually stabilizing at moderately low rates in the strategic out years Continued capital gains in equities from increased revenues and operational efficiencies with dividend yields lower than historical averages Stronger commodity-price gains as the bull super-cycle advances.

5 Driven by solid demand and lagging supply growth2 Continued use of alternative investments including private capital to generate alpha (excess return over a benchmark) and reduce traditional Asset -class risk1. Correlation measures how two Asset classes or investments move in relation to each other. 2. Super-cycle: Individual commodity prices tend to move together, over very long bull and bear cycles, often lasting a decade or more. Asset Allocation Strategy Report | July 18, 2022 Page 2 of 31 Darrell Cronk, CFA , President, Wells Fargo Investment Institute and CIO, Wealth and Investment ManagementGlobal Asset Allocation teamTracie McMillion, CFA , Head of Global Asset AllocationDouglas Beath, Global Investment StrategistMichael Taylor, CFA , Investment Strategy AnalystVeronica Willis, Investment Strategy AnalystMichelle Wan, CFA , Investment Strategy AnalystGage Hillberg, Investment Strategy AnalystGlobal market strategyPaul Christopher, CFA.

6 Head of Global Market StrategyScott Wren, Senior Global Market StrategistGary Schlossberg, Global StrategistMary Anderson, Investment Strategy AnalystGlobal fixed incomeBrian Rehling, CFA , Head of Global fixed Income StrategyPeter Wilson, Global fixed Income StrategistLuis Alvarado, Investment Strategy AnalystSam Lombardo, Investment Strategy AnalystGlobal equitiesMark Litzerman, CFA , Head of Global Portfolio ManagementChris Haverland, CFA , Global Equity StrategistSameer Samana, CFA , Senior Global Market StrategistChao Ma, PhD, CFA , FRM, Global Portfolio and Investment StrategistAustin Pickle, CFA , Investment Strategy AnalystGlobal real assetsJohn LaForge, Head of Real Asset StrategyMason Mendez, Investment Strategy AnalystGlobal alternative investmentsJim Sweetman, Senior Global Alternative Investments StrategistJustin Lenarcic, Senior Wealth Investment Solutions Analyst Our authorsNew capital market assumptions and portfolio mixes for 2022 2023 (continued).

7 To reflect these trends, we made several changes to our CMAs this year: Overall, we increased return expectations for fixed income, real assets, and alternative investment Asset classes. Equity CMA returns remain in line with our expectations from 2021. In general, returns remain below long-term averages, and risk remains similar to or above long-term averages. We increased our long-term inflation assumption by 25 basis points (bps) to We increased our cash return assumption to , reducing our expected cash discount from 50 bps to 35 bps.

8 We expect that as the Fed raises rates, the expected discounted cash return compared to inflation will decrease from recent historical observations. In fixed Income, we increased return expectations, allowing for the increases in the expected cash return and yield (total return) to flow through to fixed income returns and yields. Higher inflation should lead to higher short-term yields, and modestly higher inflation over the strategic time horizon should result in somewhat higher long-term yields. In Equities, returns for most Asset classes remain at the same level as last year, with the exceptions of Small Cap (SC) Equities and Emerging Market (EM) Equities.

9 We reduced SC returns to account for the expectation that the Sharpe ratio4 will be lower than that for large caps (LC), consistent with historical observations. We also reduced EM returns as declining economic growth and earnings growth for EMs will likely impact returns. In Real Assets, we increased Commodities return expectations due to higher inflation and expectation for the majority of the strategic timeframe to consist of a bull super-cycle. We increased return expectations for Public Real Estate, Master Limited Partnerships (MLPs), and Timberland given the expectation for higher inflation and cash returns to flow through to the majority of real assets.

10 Infrastructure and Private Real Estate return expectations are unchanged. For Alternative Investments, we slightly increased returns for Macro and Event Driven strategies and decreased returns for Equity Hedge. We slightly reduced Macro and increased Event Driven standard deviations. We have also increased return assumptions for private equity and private debt to reflect higher cash return assumptions and attractive opportunities in private strategic allocations Our updated 2022 strategic Asset Allocation recommendations reflect our current assumptions and provide consistency across the various sets of investment objectives.


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