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Fund positioning

Market activity

Result Negative


The fund’s duration was slightly short during the quarter, which hurt results because yields fell.

Yields on bonds with maturities less than five years were little changed during the quarter, and longer-term yields declined. Higher yields and better price performance helped longer-term bonds outperform shorter-term bonds.

Yield curve

Our barbell strategy owned variable-rate demand notes (VRDNs) and floating-rate notes (FRNs) in the short end and 10- to 25-year bonds in the other end of the barbell.

Although the municipal yield curve flattened during the quarter, it remained quite steep versus the long-term historical average, with longer-dated yields significantly higher than shorter-term yields.

Slight positive


The fund benefited from overweight positions in the industrial development revenue/pollution control revenue (IDR/PCR) and local general obligation (GO) sectors and underweight positions in state GOs, electric power, and prerefunded bonds. Within the allocation to states and territories, performance was buoyed by overweight positions in Illinois and California and underweight positions in New York and Massachusetts, while an underweight to Puerto Rico weighed on performance.

GO, revenue, and insured bonds advanced more than 2.00% during the quarter, while prerefunded bonds gained only 0.60%. State of Illinois bonds continued to do well following the state’s commitment to fixing its pension problems. Puerto Rico was the standout performer among states and territories, returning 4.51% within the benchmark (after declining 11.93% in 2013).



The fund remained overweight BBB-rated securities, which helped results as did being underweight AA-rated and AAA- rated securities. We continued to find value in credit, particularly in the BBB-rated and high-yield categories, because their spreads remained attractive and we believe the yield levels compensated investors for the credit risk.

Within the benchmark, BBB-rated bonds were the best-performing quality tier for the quarter, returning 3.75%. Due to its downgrade to high yield, there is now little unenhanced Puerto Rico debt remaining within the fund’s benchmark. High-yield bonds outperformed investment-grade credits. Despite narrowing during the quarter, credit spreads remained wider than historical averages.


Issue selection

Issue selection was the most significant contributor to the fund’s outperformance during the quarter. Our selection within IDR/PCR bonds, especially among prepaid gas bonds, which traded up in sympathy with banks, benefited results. Results also benefited from good selection in local GO and transportation subsectors. Within California and Illinois, we benefited from our emphasis on zero-coupon bonds (often from school districts), which outperformed. Our bias toward shorter- term health care detracted modestly from performance.

The vast majority of state and local municipal issuers have seen improved financial situations. The noteworthy credit news during the quarter was that Puerto Rico was downgraded to junk status. Detroit remains in the midst of bankruptcy proceedings; a decision about whether its general obligation debt will be treated as secured or unsecured debt will affect bondholder recovery rates.


Quarterly Report Q1 2014

Wells Fargo Advantage Intermediate Tax/AMT-Free Fund

Strategy and performance attribution (gross of expenses4 )

4. The gross of expenses performance attribution does not reflect the deduction of the fund’s expenses as shown in the prospectus.


Wells Fargo Advantage Intermediate Tax/AMT-Free Fund

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