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Wells Fargo: A Deeper Look at the Performance

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Wells Fargo is one of the largest institutions in the world. In fact, it is considered a Systematically Important Financial Institution (SIFI), in which its failure could potentially lead to a much larger financial crisis, similar to what we experienced in 2008 and 2009. Its reach extends beyond private and commercial banking into investment banking and asset management. A little known fact about Wells Fargo is it was the institution that gave birth the very first index fund in 1973. Nonetheless, while it sparked the implementation of the passive investment movement, it has fully embraced its counterpart – active management.

IFA has produced a series of articles that aim to dissect the performance of well-known fund families in order to educate investors about the potential pitfalls of believing large financial institutions provide expert insight in the investment world. Some examples include American Funds, Fidelity, USAA, Thrivent, JP Morgan, and MFS Investment Management. Empirically, most of the largest institutions do no better than the average investor. While they may be able to provide an all-encompassing financial menu of services, investment management is one of their weakest areas. Their assets under management are merely a product of elite salesmanship versus statistically proven superiority in performance.

Our analysis begins with an examination of the costs associated with investing in funds managed by Wells Fargo. The table below displays the expense ratio and any front or deferred loads, as well as 12b-1 fees. The turnover ratio generally indicates the level of transaction costs associated with each fund (i.e. higher turnover ratio usually means higher transaction costs). 

Fund Name
(Click the Fund Name to See the Alpha Chart)
Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Deferred Load Max Front Load Global Category
Wells Fargo Adjustable Rate Govt Inst EKIZX 10.00 0.46 0.00     US Fixed Income
Wells Fargo Conservative Income Inst WCIIX 80.00 0.27 0.00     US Fixed Income
Wells Fargo Ultra Short-Term Income A SADAX 70.00 0.71 0.00   2 US Fixed Income
Wells Fargo CoreBuilder Shares Series M WFCMX 21.00 0.00 0.00     US Municipal Fixed Income
Wells Fargo Intermediate Tax/AMT-Fr A WFTAX 38.00 0.70 0.00   3 US Municipal Fixed Income
Wells Fargo Wisconsin Tax-Free C WWTCX 28.00 1.45 0.75 1.00   US Municipal Fixed Income
Wells Fargo Minnesota Tx-Fr A NMTFX 20.00 0.85 0.00   4.5 US Municipal Fixed Income
Wells Fargo High Yield Municipal Bd A WHYMX 62.00 0.86 0.00   4.5 US Municipal Fixed Income
Wells Fargo Pennsylvania Tax-Free A EKVAX 15.00 0.74 0.00   4.5 US Municipal Fixed Income
Wells Fargo Colorado Tax-Free A NWCOX 23.00 0.85 0.00   4.5 US Municipal Fixed Income
Wells Fargo North Carolina Tax-Free A ENCMX 12.00 0.85 0.00   4.5 US Municipal Fixed Income
Wells Fargo Municipal Bond B WMFBX 27.00 1.51 0.75 5.00   US Municipal Fixed Income
Wells Fargo Short-Term Municipal Bd C WSSCX 24.00 1.38 0.75 1.00   US Municipal Fixed Income
Wells Fargo California Ltd-Trm Tx-Fr A SFCIX 31.00 0.80 0.00   2 US Municipal Fixed Income
Wells Fargo Strategic Municipal Bd B VMPIX 39.00 1.56 0.75 5.00   US Municipal Fixed Income
Wells Fargo Ultra Shrt-Term Muni IncInst SMAIX 44.00 0.37 0.00     US Municipal Fixed Income
Wells Fargo California Tax-Free A SCTAX 30.00 0.75 0.00   4.5 US Municipal Fixed Income
Wells Fargo Core Plus Bond A STYAX 322.00 0.87 0.00   4.5 US Fixed Income
Wells Fargo Core Bond Admin MNTRX 586.00 0.70 0.00     US Fixed Income
Wells Fargo Government Securities A SGVDX 349.00 0.85 0.00   4.5 US Fixed Income
Wells Fargo Short-Term Bond A SSTVX 57.00 0.73 0.00   2 US Fixed Income
Wells Fargo Short Duration Govt Bd Adm MNSGX 500.00 0.60 0.00     US Fixed Income
Wells Fargo Real Return A IPBAX 57.00 0.85 0.00   4.5 Inflation Linked
Wells Fargo Short-Term Hi Yld Bd A SSTHX 40.00 0.82 0.00   3 High Yield Fixed Income
Wells Fargo High Yield Bond B EKHBX 55.00 1.78 0.75 5.00   High Yield Fixed Income
Wells Fargo High Income A SHBAX 51.00 0.94 0.00   4.5 High Yield Fixed Income
Wells Fargo Strategic Income A WSIAX 53.00 0.91 0.00   4.5 Other Fixed Income
Wells Fargo International Bond Inst ESICX 136.00 0.70 0.00     Global Fixed Income
Wells Fargo Diversified Intl A SILAX 31.00 1.35 0.00   5.75 Global Equity Large Cap
Wells Fargo International Equity B WFEBX 27.00 1.90 0.75 5.00   Global Equity Large Cap
Wells Fargo International Value A WFFAX 18.00 1.35 0.00   5.75 Global Equity Large Cap
Wells Fargo WB Tact Eq Port WB WBGAX 27.00 2.29 0.75   1.5 Global Equity
Wells Fargo Intrinsic World Equity A EWEAX 32.00 1.35 0.00   5.75 Global Equity
Wells Fargo Global Opportunities A EKGAX 42.00 1.55 0.00   5.75 Global Equity
Wells Fargo Emerging Markets Eq Inc A EQIAX 84.00 1.67 0.00   5.75 Emerging Markets Equity
Wells Fargo Emerging Markets Equity A EMGAX 8.00 1.61 0.00   5.75 Emerging Markets Equity
Wells Fargo Asia Pacific A WFAAX 113.00 1.61 0.00   5.75 Asia Equity
Wells Fargo Precious Metals B EKWBX 9.00 1.84 0.75 5.00   Precious Metals Sector Equity
Wells Fargo WealthBuilder Gr Allc WB WBGGX 53.00 2.24 0.75   1.5 Aggressive Allocation
Wells Fargo Index Asset Allocation A SFAAX 43.00 1.16 0.00   5.75 Aggressive Allocation
Wells Fargo Diversified Cap Bldr B EKBBX 69.00 1.90 0.75 5.00   Aggressive Allocation
Wells Fargo Asset Allocation A EAAFX 0.00 1.34 0.00   5.75 Allocation
Wells Fargo Absolute Return A WARAX 6.00 1.51 0.00   5.75 Allocation
Wells Fargo Dow Jones Target 2010 A STNRX 41.00 0.78 0.00   5.75 Target Date 2000-2020
Wells Fargo Dow Jones Target 2015 R6 WFSCX 39.00 0.33 0.00     Target Date 2000-2020
Wells Fargo Dow Jones Target 2020 A STTRX 36.00 0.81 0.00   5.75 Target Date 2000-2020
Wells Fargo Dow Jones Target 2025 R6 WFTYX 31.00 0.35 0.00     Target Date 2021-2045
Wells Fargo Dow Jones Target 2030 A STHRX 26.00 0.82 0.00   5.75 Target Date 2021-2045
Wells Fargo Dow Jones Target 2035 R6 WFQRX 22.00 0.37 0.00     Target Date 2021-2045
Wells Fargo Dow Jones Target 2040 A STFRX 18.00 0.83 0.00   5.75 Target Date 2021-2045
Wells Fargo Dow Jones Target 2045 R6 WFQPX 16 0.37 0     Target Date 2021-2045
Wells Fargo Dow Jones Target 2050 R6 WFQFX 16 0.37 0     Target Date 2046
Wells Fargo Dow Jones Target 2055 R6 WFQUX 16 0.37 0     Target Date 2046
Wells Fargo Dow Jones Target Today A STWRX 42 0.76 0   5.75 Target Date 2000-2020
Wells Fargo Dynamic Target Today A WDYAX   0.98 0   5.75 Target Date 2000-2020
Wells Fargo WealthBuilder Gr Bal Port WB WBGBX 89 2.17 0.75   1.5 Moderate Allocation
Wells Fargo Growth Balanced Admin NVGBX 75 0.95 0     Moderate Allocation
Wells Fargo WealthBuilder Mod Bal WB WBBBX 129 2.11 0.75   1.5 Cautious Allocation
Wells Fargo WealthBuilder Cnsrv Allc WB WBCAX 169 2.04 0.75   1.5 Cautious Allocation
Wells Fargo Diversified Income Bldr A EKSAX 63 1.07 0   5.75 Cautious Allocation
Wells Fargo Moderate Balanced Admin NVMBX 84 0.9 0     Cautious Allocation
Wells Fargo Alternative Strategies A WALTX 237 2.25 0   5.75 Multialternative
Wells Fargo Specialized Technology A WFSTX 119 1.45 0   5.75 Technology Sector Equity
Wells Fargo Premier Large Co Gr B EKJBX 44 1.86 0.75 5   US Equity Large Cap Growth
Wells Fargo Growth A SGRAX 35 1.13 0   5.75 US Equity Large Cap Growth
Wells Fargo Diversified Equity Admin NVDEX 38 1 0     US Equity Large Cap Growth
Wells Fargo Omega Growth A EKOAX 94 1.27 0   5.75 US Equity Large Cap Growth
Wells Fargo Large Cap Growth A STAFX 26 1.07 0   5.75 US Equity Large Cap Growth
Wells Fargo WealthBuilder Eq Port WB WBGIX 24 2.29 0.75   1.5 US Equity Large Cap Growth
Wells Fargo Capital Growth Admin WFCDX 114 0.94 0     US Equity Large Cap Growth
Wells Fargo Endeavor Select A STAEX 126 1.19 0   5.75 US Equity Large Cap Growth
Wells Fargo Intrinsic Value A EIVAX 29 1.11 0   5.75 US Equity Large Cap Blend
Wells Fargo Large Cap Core A EGOAX 44 1.14 0   5.75 US Equity Large Cap Blend
Wells Fargo Index Admin WFIOX 4 0.25 0     US Equity Large Cap Blend
Wells Fargo Disciplined US Core A EVSAX 53 0.84 0   5.75 US Equity Large Cap Value
Wells Fargo Large Company Value Admin WWIDX 71 0.98 0     US Equity Large Cap Value
Wells Fargo C&B Large Cap Value A CBEAX 35 1.15 0   5.75 US Equity Large Cap Value
Wells Fargo Small Company Growth Admin NVSCX 58 1.2 0     US Equity Small Cap
Wells Fargo Traditional Sm Cap Gr A EGWAX 73 1.33 0   5.75 US Equity Small Cap
Wells Fargo Emerging Growth Admin WFGDX 56 1.2 0     US Equity Small Cap
Wells Fargo Small/Mid Cap Value Admin WWMDX 33 1.16 0     US Equity Small Cap
Wells Fargo Intrinsic Small Cap Val Inst WFSSX 60 1.01 0     US Equity Small Cap
Wells Fargo Small Cap Opportunities Adm NVSOX 60 1.21 0     US Equity Small Cap
Wells Fargo Small Cap Value A SMVAX 9 1.3 0   5.75 US Equity Small Cap
Wells Fargo Special Small Cap Value A ESPAX 79 1.35 0   5.75 US Equity Small Cap
Wells Fargo Small Company Value A SCVAX 54 1.35 0   5.75 US Equity Small Cap
Wells Fargo Enterprise A SENAX 101 1.18 0   5.75 US Equity Mid Cap
Wells Fargo Discovery Admin WFDDX 87 1.11 0     US Equity Mid Cap
Wells Fargo Opportunity A SOPVX 42 1.2 0   5.75 US Equity Mid Cap
Wells Fargo Common Stock A SCSAX 51 1.24 0   5.75 US Equity Mid Cap
Wells Fargo Special Mid Cap Value Inst WFMIX 58 0.88 0     US Equity Mid Cap
Wells Fargo C&B Mid Cap Value A CBMAX 41 1.25 0   5.75 US Equity Mid Cap
Wells Fargo Util and Telecomms A EVUAX 29 1.15 0   5.75 Utilities Sector Equity

Of the 93 strategies that have at least 1 year of complete performance history, the average expense ratio is 1.13%. The average turnover ratio is about 68%, which means that the average holding period for each investment within the fund is about 18 months. Without a doubt, Wells Fargo has fully embraced an active approach across the majority of their funds. Further, there is an average maximum front-end load of 4.78% associated with Wells Fargo funds. This is the cost of just buying into the strategy. This cost may be waived depending on where the fund is bought or from whom.

The second part of our analysis consists of comparing the annual performance of each Wells Fargo fund with its Morningstar assigned benchmark since inception. Morningstar assigns a benchmark to each strategy based on metrics such as asset class, market capitalization, and price-to-earnings or price-to-book ratios. Although this kind of comparison is not robust, it gives a decent indication of how well each fund is doing overall. You can find each fund’s alpha chart below or by clicking on their name in the fee table. Of the 93 different strategies analyzed, we can make the following observations:

  • 65 (70%) have a NEGATIVE alpha, which means that they have underperformed their Morningstar assigned benchmark on average since inception
  • 28 (30%) have a POSITIVE alpha, which means that they have outperformed their Morningstar assigned benchmark on average since inception
  • 2 (2.15%) have a POSITIVE significant alpha that is STATISTICALLY SIGNIFICANT at the 95% confident level. This means that the alpha of these two funds has been consistent enough over time that we can be 95% confident that it is likely to persist in the future 

Does this mean that we would suggest that investors should incorporate these particular 2 funds into their overall asset allocation? Not quite! There is sufficient reason to believe that this outperformance is due to random luck versus actual skill. Why?

It is important to note that based on the size of the sample 93 funds, we would actually expect 3 to 4 funds to outperform their benchmark at the 95% confidence level by random chance alone. This is one of the issues with purely relying on statistics and the main inspiration behind Eugene Fama and Ken French’s research paper Luck versus Skill in the Cross-Section of Mutual Fund Returns. When observing the performance of over 3,000 funds domiciled in the US, the distribution of performance looked almost identical to a distribution based on random chance. The fact that only 2 of the 93 funds offered by Wells Fargo outperformed their benchmark by a statistically significant amount only indicates the possibility for being fooled by randomness.

This is backed up by the fact that the overwhelming majority of funds from Wells Fargo have underperformed their benchmark. The processes in place in terms of hiring staff and implementation does not seem to be working in terms of producing outperformance. The potential for 2 separate funds to have a completely separate process for which it implements its strategy seems very unlikely given that it is cost inefficient to do so, especially for a firm the size of Wells Fargo.

Lastly, the two funds that have outperformed their benchmark at the 95% confidence level (WFCMX & EQIAX) have less than 10 years of performance history. While there has been some volatility since the market bottom in 2009, most of the returns have been solidly positive and unidirectional (mainly up). This once again strengthens the hypothesis that their outperformance is a result of Lady Luck.

As we mentioned, the Morningstar assigned benchmark is not a robust analysis. Any deviation between the fund and the benchmark in terms of the dimensions of expected return (market, size and relative-price), may lead to a false attribution of “alpha,” when in reality the outperformance is made up of different forms of beta. To accommodate this potential difference, we can run a multiple regression using the monthly returns of a particular Wells Fargo fund as the dependent variable against the monthly premiums for the market, size, and relative-price factors as the independent variables. After fully adjusting fund performance for these known dimensions of return, we can see the true reflection of a manager’s stock picking or market timing ability.

We took a look at all of Wells Fargo’s U.S. equity funds that had at least 10 years of performance history (48 funds total) and adjusted their returns for the known dimensions of expected return using a three factor model regression. The chart below displays the results for each fund for the 10-year period ending 12/31/2015. This is what is considered an in-sample test. What we really need is an out-of-sample test, but we need to wait another ten years for that. Please read this article to understand the implications of a out-of sample test. 

As you can see, not a single fund or strategy (blue buttons) found itself in the region shaded in green, which is the statistically significant region. Most strategies find themselves hugging that white dashed line at zero, which is what we would expect in an well functioning capital markets. 

What can we conclude? Even the largest financial institutions, with all of the money and resources in the world, have an extremely tough time outperforming the market. In terms of investment advice, it is best to stick with a globally diversified portfolio of index funds in which you try to capture as much as the market has to offer instead of working against it.


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.

 

We have taken a deeper look at the performance of several other mutual fund companies and have come to one universal conclusion: they have failed to deliver on the value proposition they profess, which is to reliably outperform a risk comparable benchmark. You can review by clicking any of the links below: