ASSESSING RISK WHAT HAS CHANGED BETA RISK MANAGEMENT

“ASSESSING RISK – WHAT HAS CHANGED? ” BETA RISK MANAGEMENT - THE NEW INVESTMENT PARADIGM PRESENTATION TO HAWAII CFA Richard Sandulli – Global Co-Head - Institutional Investment Solutions Wells Fargo Securities, LLC July 14, 2009

Table of Contents Section I: Risk Awareness Section II: Value Proposition and Content Section III: Risk Management Solutions How Can They be Delivered? Basic Product Descriptions Section IV: Portfolio Effect 2 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS 3 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – Negative Correlation? Where? 4 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – Is Volatility as an Asset Class? Volatility as a Diversification / Risk Management Tool • Negative convexity tied to Equity Markets • Increased Vega hedging needs • Supply constraints on Vega • Low interest rates • Wide credit spreads • Lack of capital raise alternatives • Expensive Reinsurance Source: Wachovia Capital Markets, LLC. 5 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – Using Volatility For Risk Hedging Implied Volatility for SPX has changed significantly through the term structure Note: Approx. 16% annual vol. implies 1% average daily moves in S&P The implied daily volatility on 1 yr term went from 1. 25% to 2. 25% 12/08 3/09 6/09 9/08 6/08 Many Investors consider ‘Tail Risk Hedging’ when its extremely expensive and abandon the strategy when it is optimal to implement it 6 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group Source: Wachovia Capital Markets, LLC.

RISK AWARENESS – Desperately Seeking Alpha · “One irrefutable truth about equity investing is that the aggregate efforts of all active managers is the market. Investment management boards, consultants, and managing fiduciaries are forever trying to identify the silver bullet that will enable them to identify tomorrow’s best managers; they have been quite adept at identifying yesterday’s winners. In a zero-sum game, being right only slightly better than half the time seems like an easy proposition, until you try to accomplish that feat. While studies can demonstrate that only one in four active managers exceed the median manager in two consecutive years and one in eight for three such years, within our industry, woefully little is done with this knowledge. (John L Maginn and Donald L. Tuttle, Managing Investment Portfolios: A Dynamic Process, 2 nd ed) “Anecdotal evidence and data from major investment consultants show that institutional enhanced index products have delivered on their performance promise – consistent outperformance with low levels of additional risk – generating high information ratios. ” Callan Associates, “Enhanced Indexing: In Search of a free lunch? ” (1999) · ·“My comment… was that if there’s $30 billion of market inefficiency (alpha) in a world of $30+ trillion of equities and bonds, then we have about 0. 1% inefficiency – less than the typical bid-ask spread!” – David Hseih, Fuqua School of Business at Duke University as quoted in Barron’s, March 2006 “If he’s right about the $30 billion figure, a lot of well-heeled individuals and institutions could be paying large sums to get the same market (or Beta) risks available at a fraction of the cost…” – Jack Willoughby from same article, Barron’s, March 2006 · * Michael Mueller as quoted in “Active Index Investing” by Steven Schoenfeld , © 2004 page 542/543 7 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – Alpha? Where’s the Beef? OVERALL AVERAGE RESULTS FOR EQUITY MUTUAL FUNDS RELATIVE TO VANGUARD 500 INDEX Return Differentials (1978 - 1998)* Needed: A change in mind-set. 20 years 15 years 10 years With Survivor Bias No Survivor Bias Relative Pre-Tax Returns -1. 75% -2. 12% -3. 50% -4. 17% -3. 06% -3. 51% Relative After Cap. Gain & Div. Tax -2. 58% -2. 82% -4. 55% -5. 06% -4. 17% -4. 49% Relative After All Taxes -2. 00% -3. 73% -3. 18% * Including deferred taxes, at current capital gains rate, at the end of the period *SOURCE: How Well Have Taxable Investors Been Served in the 1980 s and 1990 s, Arnott, Berkin & Ye, Journal of Portfolio Management 2000 Vol. 26, No. 4 Note: Vanguard index includes fees and expenses for the Vanguard 500 Index, a proxy for the S&P 500 Index 8 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – Use of Volatility For Risk Hedging Considerations • Strategic Necessity • Targeted Cost (real or opportunity) vs. Targeted Risk • Understanding and hedging the right factors (equity, rates, FX, etc. ) • Robust Scenario Analysis The implied daily volatility on 1 yr term went from 1. 25% to 2. 25% • Market-Implied Risks vs. Capital Market Assumptions Many Investors consider ‘Tail Risk Hedging’ when its • Timing expected returns vs. scheduled or anticipated liabilities extremely expensive anof strategy when it is optimal to implement it 9 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK AWARENESS – “A better way to achieve index exposure” 10 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

VALUE PROPOSITION AND CONTENT 11 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

VALUE PROPOSITION AND CONTENT Ø Work directly with institutional investors with to create innovative, strategic and tactical solutions they require to balance return expectations with risk tolerance. Ø Help our institutional clients use superior risk management support to achieve long term investment goals by generating “alpha” through better management of “beta”. Ø Provide transparency, liquidity, credit diversification and innovation. Ø Deliver solutions in a variety of way (structured notes, SPVs, Separate Accounts) Ø Do this for substantially lower average cost than traditional “alpha” seeking models. 12 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

VALUE PROPOSITION AND CONTENT Applying Risk Management involves re-configuring components of risk and return in order to: (i) control and manage risks; (ii) leverage investors’ return expectations; (iii) balance investors’ return requirements with their risk tolerance. (iv) better “beta” management can lead to superior investment results vs. “alpha” seeking Beta management strategies are simply ways to manage market risks to generate superior LOWER COST RISK-ADJUSTED RETURNS It’s important to understand most investors (esp. pensions and individuals) have an asymmetric risk/return profile… in other words, they feel more pain from a 50% loss then they do pleasure from a 50% gain. The Key - to implementing a successful risk management portfolio practice is to exchange things the investor does not place a high value on for things the investor does place a high value on… in other words, give up what the investor doesn’t need for something they want. Market and Educate along these lines! It is now how much return you make that determines how good an investor you are, but rather how much return you make PER UNIT OF RISK. In the long term, the market rewards those investors who seek out the best return per unit of risk absorbed. The best investors can synthesize risk that is best priced in any market and transport the associated return into any asset class. 13 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS 14 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - How can they be delivered? 15 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Principal Protected Products · Principal protected structured products are structured to return the investor’s principal at maturity plus a “supplemental payment” that is based on the performance of an underlying asset. · For example, in addition to receiving 100 percent of their principal at maturity, investors could be entitled to receive a percentage of the appreciation of an underlying asset such as an equity security, equity index, currency and commodity. The most “common” of these principal protected notes is convertible bond (correlated equity / credit risk). · In return for receiving principal protection, investors may receive below-market interest (or no interest). Additionally, it is important to note that the protection is only as strong as the credit quality of the issuer of the structured product. · There are numerous ways that performance maybe calculated in determining the supplemental payment, such as an average of the performance of an underlying asset on specified dates, a percentage of point-to -point performance, or a periodic return subject to a cap. · In the fixed income arena, some products also seek to protect the market value of investor’s securities (e. g. floating rate notes) and / or the purchasing power of investors’ assets (e. g. inflation linked notes) in addition to protection of principal at maturity. 16 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Principal Protected Products Basic Financial Insurance – Example S&P 500 Index RISK - 100% Downside S&P 500 Principal Protected Note RETURN - 100% Upside RETURN RISK - 100% Downside - 100% Upside - Dividends Sometimes: - <100% Protected - Averaging - Caps/Call Rights - Exchange Features - Currency Protection Target Market: A Wide Range of Investors Ideally for: a) Less tax-sensitive accounts b) Baby-boomers, Pensions, Insurance Make sure you ask about: a) Possible Path-Dependency of payout b) Tax implications 17 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Principal Protected Products Past performance cannot predict future results 18 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group Hypothetical Pricing for illustration purposes only

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Growth A variation on the traditional covered call strategy • Traditional Covered Call (income enhancement) ü investor agrees to a cap on upside performance of underlying equity and, in exchange, receives payment of option premium Fundamental Concept • Enhanced Growth Strategy (growth enhancement) ü investor agrees to same cap on upside performance of underlying equity but, in exchange, receives enhanced participation in the underlying equity up to the cap ü investor is functionally re-investing the option premium from the sale of the cap on the underlying equity in additional call spreads (and potentially put spreads to reduce downside risk) on the underlying equity 19 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Growth · Enhanced Growth structured product allows for potential enhanced participation in the movement of an underlying asset within a certain range · For example – while a direct investment in the underlying asset provides for 100 percent participation in the price appreciation and depreciation of the asset, an investment in an enhanced growth structured product might provide for 200 percent participation in the price appreciation of the underlying asset, subject to a maximum return or cap. · In return for a specified multiple of the price appreciation, investors forego potential upside potential if the return of the underlying asset exceeds the maximum return or cap. · Enhanced growth securities can be structured on equity securities, equity indices, currencies or commodities. 20 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Growth (with 10% “Buffer”) ILLUSTRATION OF PAYOUT AT MATURITY BASED ON FINAL SPX VALUE (Final Term = 2. 0 yrs) 21 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Growth (with 10% Buffer) * Fixed Income allocation assumes 3. 7% p. a. return over holding period based. Hypothetical Price Return Illustration for Selected “Equity” Allocation Alternatives – 2 yr Holding Period EXTREMELY BULLISH MODERATE BEARISH 100% SPX (Price Return) 50% SPX Price Return 50% SPX 2 x EGS (10% Buffer) 33% Fixed Income* 67% SPX 1. 5 x EGS (10% Buffer) 50% Fixed Income* 50% SPX 3 x EGS (10% Buffer) -25. 0% -20. 8% -8. 7% -4. 6% -20. 0% -15. 6% -5. 0% -1. 8% -15. 0% -10. 3% -1. 2% 1. 0% -10. 0% -5. 0% 2. 5% 3. 8% -5. 0% -2. 5% 3. 8% 0. 0% 2. 5% 3. 8% +5. 0% 7. 5% 11. 3% +10. 0% 15. 0% 12. 5% 17. 0% +15. 0% 22. 0% 17. 6% 17. 0% +20. 0% 24. 5% 22. 6% 17. 0% +25. 0% 27. 0% 25. 3% 17. 0% +30. 0% 29. 5% 25. 3% 17. 0% +35. 0% 32. 0% 25. 3% 17. 0% +40. 0% - Institutional Investment 34. 5% Solutions Group 22 | Wells Fargo Securities, LLC

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Growth (with 10% Buffer) Maturity Payoff Profile for Selected Equity Allocation Alternatives (2 yr Term) 23 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Yield · Enhanced yield structured product encompasses a number of income-oriented structures which provide higher current yields than could be achieved by investing directly in an equity security or in traditional debt instruments of similar credit quality and maturity. In many of these structures, investors give up some potential price appreciation. · For example, a simple enhanced yield structured product linked to an underlying asset such as common stock or a commodity may incorporate a capped return or a call feature; this enhanced yield structured product would pay a coupon that is higher than the current yield on the underlying asset, such as the dividend on an underlying stock. · Enhanced yield structured product allow for enhanced yield in return for the “reallocation” of the return profile of a low (or zero) yielding underlying asset. · Enhanced yield securities may provide an investment opportunity for investors who have moderate growth expectations for the underlying investments, and are willing to forego price appreciation above a specified level in return for a higher current yield than the existing yield of the underlying. 24 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Yield Income Generating Opportunities XYZ Common Stock RETURN RISK RETURN -100% Upside -100% Downside - 100% Upside - Dividends - Contingent Trigger - Dividends RISK - 100% Downside XYZ Enhanced Yield w Contingent Protection (-25%) - Yield Enhancement (+600 -1200 bps) Sometimes: - 100% Downside exposure - Upside participation, subject to cap or call Target Market: Suitable High-Yield Investors Ideally for: High-Yield Bond Alternative, buy a portfolio! Make sure you ask about: a) the Trigger Level and how it works b) Tax Treatment 25 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Enhanced Yield A. Type: i. Reverse Converts Past performance cannot predict future results 26 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group Hypothetical Pricing for illustration purposes only

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Access · Access Securities provide direct exposure to global markets, industry sectors, investment strategies and/or asset classes that may not be available to investors or that may not be available in a cost-efficient manner. · For example, an investor can participate in the price movement of normally inaccessible investments such as oil, currencies, gold, commodities, investment strategies etc. through access securities. · Access securities can also fall under principal protected or enhanced growth strategy 27 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Access PIMCO Commodity Real Return Strategy Fund A (PCRAX) (1) Investment Process Rather than invest directly in physical commodities, the Fund employs an "enhanced-index" strategy. Specifically, the Fund gains exposure to the commodity markets through investments in commodityindex-linked derivative instruments and through investments in the PIMCO Cayman Commodity Fund I Ltd. , a wholly-owned subsidiary of the Fund organized under the laws of the Cayman Islands (the “Subsidiary”). The derivative instruments in which the Fund and the Subsidiary primarily intend to invest are instruments linked to certain commodity indices, specifically the Dow Jones [UBS] Commodity Total Return Index. Additionally, the Fund or the Subsidiary may invest in derivative instruments linked to the value of a particular commodity or commodity futures contract, or a subset of commodities or commodity futures contracts. The Fund collateralizes the commodityindex-linked derivative instruments by investing its assets in an actively managed portfolio of inflation-indexed bonds and other fixed-income securities. About Commodity-Index-Linked Instruments Commodities are assets that have tangible properties, such as oil, metals and agricultural products. Rather than invest directly in these physical commodities, the Fund may use a range of index-linked instruments to gain exposure to the commodities market. As with any commodity-index-linked instruments, the value of these instruments may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political and regulatory developments. The market for these instruments has evolved and become more sophisticated, offering risk management solutions and often acting as a substitute for direct securities ownership. (1) Source Alliance /Pimco Website 28 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

RISK MANAGEMENT SOLUTIONS - Basic Product Descriptions Access Principal Protected at Maturity - $10. 00 Maximum Payment at Maturity - $13. 00 Past performance cannot predict future results 29 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group Hypothetical Pricing for illustration purposes only

PORTFOLIO IMPACT 30 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

PORTFOLIO IMPACT Efficient Frontier • Structured Products can help build more efficient portfolios, thereby maximizing the return per unit of risk Past performance cannot predict future results 31 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group Hypothetical Pricing for illustration purposes only

PORTFOLIO IMPACT Large Cap Equities vs. Principal Protected Large Cap Equities vs. Enhanced Growth Large Cap Past performance cannot predict future results 32 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group

PORTFOLIO IMPACT – Example BXM vs. S&P 500 Index CBOE/S&P 500 BUY-WRITE MONTHLY INDEX (“BXM”) – SOURCE: Ibbotson & Associates Past performance cannot predict future results 33 | Wells Fargo Securities, LLC - Institutional Investment Solutions Group