PRINCIPAL FUNDS,
INC. (“PFI”)
Class T
Shares
The date of this Prospectus is March
1, 2018.
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Ticker
Symbols |
Fund |
Class
T |
Global Diversified
Income |
PGKTX |
High Yield |
PHRTX |
Short-Term
Income |
PTDTX |
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The Securities and Exchange
Commission and the Commodity Futures Trading Commission have not approved
or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal
offense. |
This page left blank
intentionally.
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TABLE OF
CONTENTS |
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FUND SUMMARIES |
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GLOBAL DIVERSIFIED INCOME
FUND |
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HIGH YIELD
FUND |
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SHORT-TERM INCOME
FUND |
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ADDITIONAL INFORMATION ABOUT
INVESTMENT STRATEGIES AND RISKS |
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PORTFOLIO HOLDINGS
INFORMATION |
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MANAGEMENT OF THE
FUNDS |
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PRICING OF
FUND SHARES |
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CONTACT PRINCIPAL FUNDS,
INC. |
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PURCHASE OF
FUND SHARES |
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REDEMPTION OF FUND
SHARES |
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EXCHANGE OF FUND
SHARES |
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DIVIDENDS AND
DISTRIBUTIONS |
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FREQUENT PURCHASES AND
REDEMPTIONS |
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TAX
CONSIDERATIONS |
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THE COSTS OF
INVESTING |
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DISTRIBUTION PLANS AND
INTERMEDIARY COMPENSATION |
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FUND ACCOUNT
INFORMATION |
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FINANCIAL
HIGHLIGHTS |
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APPENDIX A - DESCRIPTION
OF BOND RATINGS |
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ADDITIONAL
INFORMATION |
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GLOBAL
DIVERSIFIED INCOME FUND
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Objective: |
The Fund seeks
income. |
Fees and Expenses
of the Fund
This table describes the fees and
expenses that you may pay if you buy and hold Class T shares of the Fund. You
may qualify for sales charge discounts for purchases of at least $250,000 in Class T Shares of Principal
Funds, Inc. More information about these and other discounts is available from
your financial professional and in “The Costs of Investing” beginning on page 44
of the Fund’s prospectus.
Shareholder Fees
(fees paid directly from your investment)
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Share
Class |
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T |
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of offering price) |
2.50% |
Annual Fund
Operating Expenses
(expenses that
you pay each year as a percentage of the value of your investment)
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Share
Class |
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T |
Management Fees |
0.72% |
Distribution and/or Service
(12b-1) Fees |
0.25% |
Other Expenses: |
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Dividend and Interest Expense
on Short Sales |
0.03% |
Remainder of Other
Expenses (1) |
0.20% |
Total Other
Expenses |
0.23% |
Total Annual
Fund Operating Expenses |
1.20% |
Fee Waiver and Expense
Reimbursement (2)(3) |
(0.09)% |
Total Annual
Fund Operating Expenses after Fee Waiver and Expense
Reimbursement |
1.11% |
(1) Based
on estimated amounts for current fiscal year. |
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(2) Principal
Global Investors, LLC ("PGI"), the investment advisor, has contractually
agreed to limit the Fund’s Management Fees through the period ending
February 28, 2019. The fee waiver will reduce the Fund's Management Fees
by 0.01% (expressed as a percent of average net assets on an annualized
basis). It is expected that the fee waiver will continue through the
period disclosed; however, Principal Funds, Inc. and PGI, the parties to
the agreement, may mutually agree to terminate the fee waiver prior to the
end of the period. |
(3) Principal
Global Investors, LLC ("PGI"), the investment advisor, has contractually
agreed to limit the Fund’s expenses by paying, if necessary, expenses
normally payable by the Fund, (excluding interest expense, expenses
related to fund investments, acquired fund fees and expenses, and other
extraordinary expenses) to maintain a total level of operating expenses
(expressed as a percent of average net assets on an annualized basis) not
to exceed 1.08% for Class T. It is expected that the expense limit will
continue through the period ending February 28, 2019; however, Principal
Funds, Inc. and PGI, the parties to the agreement, may mutually agree to
terminate the expense limit prior to the end of the period.
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Example
This Example is intended to help you
compare the cost of investing in the Fund with the cost of investing in other
mutual funds.
The Example assumes that you invest
$10,000 in the Fund for the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the Fund’s operating
expenses remain the same. The calculation of costs takes into account any
applicable contractual fee waivers and/or expense reimbursements for the period
noted in the table above. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
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1
year |
3
years |
5
years |
10
years |
Class
T |
$360 |
$613 |
$885 |
$1,660 |
Portfolio
Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its
portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Fund shares are held in a taxable
account. These costs, which are not reflected in annual fund operating expenses
or in the example, affect the Fund’s performance. During the most recent fiscal
year, the Fund’s portfolio turnover rate was 120.1% of the average value of its
portfolio.
Principal
Investment Strategies
The Fund generally invests a
majority of its assets in fixed income securities, such as high yield bonds
(also known as "junk" bonds), preferred securities, commercial mortgage-backed
securities, and emerging market debt securities, in an effort to provide
incremental yields over a portfolio of government securities. The fixed income
portion of the Fund is not managed to a particular maturity or duration. In
addition, the Fund invests in equity securities to provide incremental dividend
yields and diversify fixed-income related risks in the Fund. The Fund generally
invests a portion of its assets in equity securities of global companies
principally engaged in the real estate industry, equity securities of global
infrastructure companies, and value equities of global companies. As described
below, the Fund will use derivative strategies, primarily in an effort to reduce
risk. A derivative is a financial arrangement, the value of which is derived
from, or based on, a traditional security, asset, or market index. The Fund
actively trades portfolio securities.
The Fund invests in foreign and
emerging market securities of issuers located throughout the world. Under normal
market conditions, the Fund holds investments tied economically to at least 10
countries and invests at least 30% of its net assets in foreign, including
emerging market, securities.
In managing the Fund, Principal
Global Investors, LLC ("PGI"), the Fund’s investment advisor, determines the
Fund's strategic asset allocation among the following general investment
categories, which are executed by PGI and multiple sub-advisors: high yield,
preferred securities, emerging market debt, global real estate, commercial
mortgage-backed securities, global value equity, and publicly-traded
infrastructure. The Fund may invest in such categories to varying degrees at any
time, add categories, or discontinue using a category. The Fund seeks to provide
yield by having those selecting investments for the Fund focus on those
securities offering the best potential for yield, taking risk into
consideration, within their respective investment categories.
The Fund also purchases and sells
call and put options on equity indexes and exchange-traded funds (“ETFs”) in
order to obtain long or short exposures to certain asset categories of the Fund
as determined by PGI. The primary purpose of this investment strategy is to
reduce portfolio volatility in the Fund.
A portion of the Fund's assets is
invested in high yield and other income-producing securities including bank
loans and corporate bonds. These include foreign securities issued in both USD
and non-USD. "High yield" securities are below investment grade bonds (sometimes
called "junk bonds") which are rated at the time of purchase Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") and BB+ or lower by S&P Global
Ratings ("S&P Global") (if the bond has been rated by only one of those
agencies, that rating will determine whether the bond is below investment grade;
if the bond has not been rated by either of those agencies, those selecting such
investments will determine whether the bond is of a quality comparable to those
rated below investment grade). These securities offer a higher yield than other,
higher rated securities, but they carry a greater degree of risk and are
considered speculative with respect to the issuer's ability to pay interest and
to repay principal. This portion of the Fund also invests in currency forwards
and currency options to hedge currency risk.
A portion of the Fund's assets is
invested primarily in preferred securities of U.S. and non-U.S. companies. This
portion of the Fund focuses primarily on the financial services, real estate
investment trust ("REIT"), and utility industries.
A portion of the Fund's assets is
invested in a diversified portfolio of fixed income securities issued primarily
by governments, their agencies, local authorities and instrumentalities, and
corporate entities domiciled in or exercising the predominant part of their
economic activities in emerging markets. This portion of the Fund also invests
in interest rate swaps or Treasury futures to manage fixed income exposure;
credit default swaps to increase or decrease in an efficient manner exposures to
certain sectors or individual issuers; total return swaps to increase or
decrease in an efficient manner exposures to certain sectors; and currency
forwards and currency options to hedge currency risk and express views on the
direction of currency. Here, "emerging market country" means any country which
is considered to be an emerging country by the international financial community
(including the MSCI Emerging Markets Index) and any country included in any J.P.
Morgan Emerging Market Bond Index. These countries generally exclude the U.S.,
Canada, Japan, Hong Kong, Singapore, Australia, and New Zealand, and most
nations located in Western Europe.
A portion of the Fund's assets is
invested in equity securities of global real estate companies. A real estate
company has at least 50% of its assets, income or profits derived from products
or services related to the real estate industry. Real estate companies include
REITs, REIT-like entities, and companies with substantial real estate holdings
such as paper, lumber, hotel and entertainment companies as well as building
supply manufacturers, mortgage lenders, and mortgage servicing
companies.
A portion of the Fund’s assets is
invested in commercial mortgage-backed securities, which are bonds that are
secured by first mortgages on commercial real estate.
A portion of the Fund's assets is
invested in a diversified portfolio of value equity securities of companies
located or operating in the U.S. and foreign countries, including emerging
markets. The Fund invests in equity securities regardless of market
capitalization (small, medium or large). Investing in value equity securities,
is an investment strategy that emphasizes buying equity securities that appear
to be undervalued.
A portion of the Fund's assets is
invested in publicly-listed infrastructure companies (domestic and foreign
public utility, energy, and transportation companies). Publicly-listed
infrastructure equity securities trade on an exchange and include companies
involved to a significant extent in providing products, services or equipment
for: transportation (including toll roads, airports, railways, and ports); the
generation, transmission or distribution of electricity, gas or water
(utilities); or telecommunications activities as well as in companies involved
in the discovery, development, production, generation, transmission, refinement,
measurement, trading, marketing or distribution of energy.
During the fiscal year ended October
31, 2017, the average ratings of the Fund’s fixed-income assets, based on market
value at each month-end, were as follows (all ratings are by Moody’s):
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8.48% in securities rated
Aaa |
13.62% in securities rated
Baa |
15.72% in securities rated
Caa |
0.22% in securities rated
D |
0.79% in securities rated
Aa |
20.72% in securities rated
Ba |
0.20% in securities rated Ca
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12.45% in securities not
rated |
2.51% in securities rated
A |
25.10% in securities rated
B |
0.19% in securities rated
C |
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Principal
Risks
The value of your investment in the
Fund changes with the value of the Fund's investments. Many factors affect that
value, and it is possible to lose money by investing in the Fund. An investment
in the Fund is not a deposit of a bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. The
principal risks of investing in the Fund, in alphabetical order,
are:
Asset Allocation
Risk. A fund's
selection and weighting of asset classes may cause it to underperform other
funds with a similar investment objective.
Bank Loans Risk.
Changes in economic
conditions are likely to cause issuers of bank loans (also known as senior
floating rate interests) to be unable to meet their obligations. In addition,
the value of the collateral securing the loan (if any) may decline, causing a
loan to be substantially unsecured. Underlying credit agreements governing the
bank loans, reliance on market makers, priority of repayment and overall market
volatility may harm the liquidity of loans.
Counterparty
Risk. Counterparty risk
is the risk that the counterparty to a contract or other obligation will be
unable or unwilling to honor its obligations.
Derivatives
Risk. Derivatives may
not move in the direction anticipated by the portfolio manager. Transactions in
derivatives may increase volatility, cause the liquidation of portfolio
positions when not advantageous to do so and result in disproportionate losses
that may be substantially greater than a fund's initial investment.
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Credit
Default Swaps.
Credit default swaps involve special risks in addition to those associated
to swaps generally, because they are difficult to value, are highly
susceptible to liquidity and credit risk, and generally pay a return to
the party that has paid the premium only in the event of an actual default
by the issuer of the underlying obligation (as opposed to a credit
downgrade or other indication of financial difficulty). The protection
“buyer” in a credit default contract may be obligated to pay the
protection “seller” an upfront payment or a periodic stream of payments
over the term of the contract provided generally that no credit event on a
reference obligation has occurred. If a credit event occurs, the seller
generally must pay the buyer the “par value” (full notional value) of the
swap in exchange for an equal face amount of deliverable obligations of
the reference entity described in the swap, or the seller may be required
to deliver the related net cash amount, if the swap is cash settled. The
Fund may be either the buyer or seller in the
transaction. |
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Currency
Contracts.
Derivatives related to currency contracts involve the specific risk of
government action through exchange controls that would restrict the
ability of the fund to deliver or receive
currency. |
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Equity
Index/Exchange-traded Fund (“ETF”) Call Options. A fund that writes equity
index/exchange-traded fund (“ETF”) call options forgoes, during the
option’s life, the opportunity to profit from increases in the market
value of the index on which the call option has been written above the sum
of the premium and the strike price of the call, but retains the risk of
loss should the price of the underlying index decline (net of premiums
received). In addition, a fund bears the risk that the index/ETF on which
the call option has been written behaves differently than the underlying
stocks in the portfolio, which would limit the ability of the call option
overwriting strategy to reduce portfolio
volatility. |
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Forward
Contracts, Futures and Swaps. Forward contracts, futures,
and swaps involve specific risks, including: the imperfect correlation
between the change in market value of the instruments held by the fund and
the price of the forward contract, future, or swap; possible lack of a
liquid secondary market for a forward contract, future, or swap and the
resulting inability to close a forward contract, future, or swap when
desired; counterparty risk; and if the fund has insufficient cash, it may
have to sell securities from its portfolio to meet daily variation margin
requirements. |
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Options.
Options involve
specific risks, including: imperfect correlation between the change in
market value of the instruments held by the fund and the price of the
options, counterparty risk, difference in trading hours for the options
markets and the markets for the underlying securities (rate movements can
take place in the underlying markets that cannot be reflected in the
options markets), and an insufficient liquid secondary market for
particular options. |
Emerging Markets
Risk. Investments in
emerging market countries may have more risk than those in developed market
countries because the emerging markets are less developed and more illiquid.
Emerging market countries can also be subject to increased social, economic,
regulatory, and political uncertainties and can be extremely
volatile.
Equity Securities
Risk. The value of
equity securities could decline if the issuer's financial condition declines or
in response to overall market and economic conditions. A fund's principal market
segment(s) (such as market capitalization or style) may underperform other
market segments or the equity markets as a whole.
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Small and
Medium Market Capitalization Companies Risk. Investments in small and
medium sized companies may involve greater risk and price volatility than
investments in larger, more mature companies.
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Value Stock
Risk. Value
stocks may continue to be undervalued by the market for extended periods,
including the entire period during which the stock is held by a fund, or
the events that would cause the stock price to increase may not occur as
anticipated or at all. Moreover, a stock that appears to be undervalued
actually may be appropriately priced at a low level and therefore would
not be profitable for the fund. |
Fixed-Income
Securities Risk.
Fixed-income securities are subject to interest rate risk and credit quality
risk. The market value of fixed-income securities generally declines when
interest rates rise, and an issuer of fixed-income securities could default on
its payment obligations.
Foreign Currency
Risk. Risks of
investing in securities denominated in, or that trade in, foreign (non-U.S.)
currencies include changes in foreign exchange rates and foreign exchange
restrictions.
Foreign
Securities Risk. The
risks of foreign securities include loss of value as a result of: political or
economic instability; nationalization, expropriation or confiscatory taxation;
settlement delays; and limited government regulation (including less stringent
reporting, accounting, and disclosure standards than are required of U.S.
companies).
High Yield
Securities Risk. High
yield fixed-income securities (commonly referred to as "junk bonds") are subject
to greater credit quality risk than higher rated fixed-income securities and
should be considered speculative.
Portfolio
Duration Risk. Portfolio duration is a measure of
the expected life of a fixed-income security and its sensitivity to changes in
interest rates. The longer a fund's average portfolio duration, the more
sensitive the fund will be to changes in interest rates.
Portfolio
Turnover (Active Trading) Risk. High portfolio turnover (more than
100%) caused by actively trading portfolio securities may result in accelerating
the realization of taxable gains and losses, lower fund performance and
increased brokerage costs.
Preferred
Securities Risk.
Because preferred securities have a lower priority claim on assets or earnings
than senior bonds and other debt instruments in a company's capital structure,
they are subject to greater credit and liquidation risk than more senior debt
instruments. In addition, preferred securities are subject to other risks, such
as limited or no voting rights, deferring or skipping distributions, interest
rate risk, and redeeming the security prior to any stated maturity
date.
Real Estate
Investment Trusts (“REITs”) Risk. In addition to risks associated with
investing in real estate securities, REITs are dependent upon management skills,
are not diversified, and are subject to heavy cash flow dependency, risks of
default by borrowers, and self-liquidation. Investment in REITs also involves
risks similar to risks of investing in small market capitalization companies,
such as limited financial resources, less frequent and limited volume trading,
and may be subject to more abrupt or erratic price movements than larger company
securities. A REIT could fail to qualify for tax-free pass-through of income
under the Internal Revenue Code. Fund shareholders will indirectly bear their
proportionate share of the expenses of REITs in which the fund invests.
Real Estate
Securities Risk.
Investing in real estate securities subjects the fund to the risks associated
with the real estate market (which are similar to the risks associated with
direct ownership in real estate), including declines in real estate values, loss
due to casualty or condemnation, property taxes, interest rate changes,
increased expenses, cash flow of underlying real estate assets, regulatory
changes (including zoning, land use and rents), and environmental problems, as
well as to the risks related to the management skill and creditworthiness of the
issuer.
Redemption Risk.
A fund that serves as
an underlying fund for a fund of funds is subject to certain risks. When a fund
of funds reallocates or rebalances its investments, an underlying fund may
experience relatively large redemptions or investments. These transactions may
cause the underlying fund to sell portfolio securities to meet such redemptions,
or to invest cash from such investments, at times it would not otherwise do so,
and may as a result increase transaction costs, result in changes to expense
ratios and increased expenses, and adversely affect underlying fund performance.
Moreover, a fund of fund's redemptions or reallocations among share classes of
an underlying fund may result in changes to the expense ratios of affected
classes, which may increase the expenses paid by shareholders of the class that
experienced the redemption.
Securitized
Products Risk. Investments in securitized products
are subject to risks similar to traditional fixed income securities, such as
credit, interest rate, liquidity, prepayment, extension, and default risk, as
well as additional risks associated with the nature of the assets and the
servicing of those assets. Unscheduled prepayments on securitized products may
have to be reinvested at lower rates. A reduction in prepayments may increase
the effective maturities of these securities, exposing them to the risk of
decline in market value over time (extension risk).
Volatility
Mitigation Risk.
Volatility mitigation strategies may increase fund transaction costs, which
could increase losses or reduce gains. These strategies may not protect the
fund from market declines and may reduce the fund’s participation in market
gains.
Performance
The following information provides
some indication of the risks of investing in the Fund. Past performance (before
and after taxes) is not necessarily an indication of how the Fund will perform
in the future. You may get updated performance information by calling
1-800-222-5852 or online at www.principalfunds.com.
Using the historical performance of
the Fund's Institutional Class shares, adjusted as described below, the bar
chart shows the investment returns of the Fund’s Class T shares for each full
calendar year of operations for 10 years (or, if shorter, the life of the Fund).
These annual returns do not reflect sales charges on Class T shares; if they
did, results would be lower. The table shows, for the Fund's Class T shares and
for the last one, five, and ten calendar year periods (or, if shorter, the life
of the Fund), how the Fund’s average annual total returns compare with those of
one or more broad measures of market performance.
Life of Fund results are measured
from the date the Fund's shares were first sold (December 15,
2008).
For periods prior to the inception
date of Class T shares (June 12, 2017), the performance shown in the bar chart
and the table for Class T shares is that of the Fund's Institutional Class
shares, adjusted to reflect the fees and expenses of Class T. These adjustments
result in performance for such periods that is no higher than the historical
performance of the Institutional Class shares. The Institutional Class shares,
which are not presented in this prospectus, would have substantially similar
annual returns because the shares are invested in the same portfolio of
securities, and the annual returns would differ only to the extent that the
classes do not have the same expenses.
During 2017, Class T experienced a
significant one-time gain of approximately $0.14/Share as a result of a
particular set of shareholder activity and the impact of the dividend
reinvestment. If such gain had not been recognized, the total return amounts
expressed herein would have been lower.
Total Returns as
of December 31
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Highest
return for a quarter during the period of the bar chart
above: |
Q2
'09 |
20.79 |
% |
Lowest
return for a quarter during the period of the bar chart
above: |
Q3
'11 |
(8.14 |
)% |
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Average
Annual Total Returns |
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For the
periods ended December 31, 2017 |
1
Year |
|
5
Years |
Life of
Fund |
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Class T
Return Before Taxes |
8.24% |
(1) |
5.34% |
10.87% |
|
Class T
Return After Taxes on Distributions |
6.34% |
(1) |
3.10% |
8.18% |
|
Class T
Return After Taxes on Distributions and Sale of Fund
Shares |
4.81% |
(1) |
3.13% |
7.60% |
|
Bloomberg Barclays U.S.
Corporate High Yield 2% Issuer Capped Index (reflects no deduction for
fees, expenses, or taxes) |
7.50% |
|
5.78% |
13.87% |
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Bloomberg Barclays Global
Credit Index (reflects no deduction for fees, expenses, or
taxes) |
9.19% |
|
2.86% |
6.63% |
|
Bloomberg Barclays Global High
Yield Index (reflects no deduction for fees, expenses, or
taxes) |
10.43% |
|
5.67% |
13.85% |
|
MSCI ACWI Value Index (reflects
no deduction for fees, expenses, or taxes) |
18.26% |
|
9.46% |
10.73% |
|
Global Diversified Income
Blended Index (reflects no deduction for fees, expenses, or
taxes) |
12.24% |
|
5.72% |
10.15% |
|
(1) During 2017, the
Class experienced a significant one time gain of approximately $0.14/Share
as a result of a particular set of shareholder activity and the impact of
the dividend reinvestment. If such gain had not been recognized, the total
return amounts expressed herein would have been
lower. |
After-tax returns are calculated
using the historical highest individual federal marginal income tax rates and do
not reflect the impact of state and local taxes. Actual after-tax returns depend
on an investor’s tax situation and may differ from those shown. The after-tax
returns shown are not relevant to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
Performance of a blended index shows
how the Fund’s performance compares to a blend of indices with similar
investment objectives. Performance of each component of the blended index is
also shown. The weightings for the Global Diversified Income Blended Index are:
40% Bloomberg Barclays Global Credit Index; 30% Bloomberg Barclays Global High
Yield Index; and 30% MSCI ACWI Value Index. The custom or blended index returns
reflect the allocation in effect for the time period(s) for which the fund
returns are disclosed. Previous weightings or allocations of the custom or
blended index are not restated.
Management
Investment
Advisor and Portfolio Managers:
Principal Global Investors,
LLC
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• |
Jake S. Anonson (since 2014),
Portfolio Manager |
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• |
Jessica S. Bush (since 2014),
Portfolio Manager |
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• |
Marcus W. Dummer (since 2014),
Portfolio Manager |
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• |
Kelly A. Grossman (since
2010), Portfolio Manager |
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• |
Benjamin E. Rotenberg (since
2014), Portfolio Manager |
Sub-Advisors:
Analytic Investors, LLC
Colonial First State Asset
Management (Australia) Limited
DDJ Capital Management,
LLC
Logan Circle Partners,
L.P.
Post Advisory Group, LLC
Principal Real Estate Investors,
LLC
Spectrum Asset Management,
Inc.
Stone Harbor Investment Partners
LP
W. H. Reaves & Co., Inc. (doing
business as Reaves Asset Management)
Purchase and Sale
of Fund Shares
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Investment
Type |
Purchase
Minimum Per Fund |
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|
Initial
Investment |
$1,000(1) |
Initial Investment for accounts
with an Automatic Investment Plan (AIP) |
$100 |
Subsequent
Investments |
$100(1) |
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|
(1) |
Some exceptions apply; see
"Purchase of Fund Shares - Minimum Investments" for more information.
|
You may purchase or redeem shares on
any business day (normally any day when the New York Stock Exchange is open for
regular trading) through your plan, intermediary, or Financial
Professional.
Tax
Information
The Fund’s distributions you receive
are generally subject to federal income tax as ordinary income or capital gain
and may also be subject to state and local taxes, unless you are tax-exempt or
your account is tax-deferred in which case your distributions would be taxed
when withdrawn from the tax-deferred account.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a
broker-dealer or other financial intermediary (such as a bank, insurance
company, investment adviser, etc.), the Fund and its related companies may pay
the intermediary for the sale of Fund shares and related services. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another
investment, or to recommend one share class of the Fund over another share
class. Ask your salesperson or visit your financial intermediary's website for
more information.
HIGH YIELD
FUND
|
|
Objective: |
The Fund seeks to provide a
high level of current income. |
Fees and Expenses
of the Fund
This table describes the fees and
expenses that you may pay if you buy and hold Class T shares of the Fund. You
may qualify for sales charge discounts for purchases of at least $250,000 in Class T Shares of Principal
Funds, Inc. More information about these and other discounts is available from
your financial professional and in “The Costs of Investing” beginning on page 44
of the Fund’s prospectus.
Shareholder Fees
(fees paid directly from your investment)
|
|
|
|
Share
Class |
|
T |
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of offering price) |
2.50% |
Annual Fund
Operating Expenses
(expenses that
you pay each year as a percentage of the value of your investment)
|
|
|
|
Share
Class |
|
T |
Management Fees |
0.51% |
Distribution and/or Service
(12b-1) Fees |
0.25% |
Other Expenses (1) |
0.34% |
Acquired Fund Fees and
Expenses |
0.01% |
Total Annual
Fund Operating Expenses |
1.11% |
Expense Reimbursement
(2)
|
(0.20)% |
Total Annual
Fund Operating Expenses after Expense Reimbursement |
0.91% |
(1) Based
on estimated amounts for the current fiscal year. |
(2) Principal
Global Investors, LLC ("PGI"), the investment advisor, has contractually
agreed to limit the Fund’s expenses by paying, if necessary, expenses
normally payable by the Fund, (excluding interest expense, expenses
related to fund investments, acquired fund fees and expenses, and other
extraordinary expenses) to maintain a total level of operating expenses
(expressed as a percent of average net assets on an annualized basis) not
to exceed 0.90% for Class T. It is expected that the expense limit will
continue through the period ending February 28, 2019; however, Principal
Funds, Inc. and PGI, the parties to the agreement, may mutually agree to
terminate the expense limit prior to the end of the
period. |
Example
This Example is intended to help you
compare the cost of investing in the Fund with the cost of investing in other
mutual funds.
The Example assumes that you invest
$10,000 in the Fund for the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the Fund’s operating
expenses remain the same. The calculation of costs takes into account any
applicable contractual fee waivers and/or expense reimbursements for the period
noted in the table above. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
|
|
|
|
|
|
|
1
year |
3
years |
5
years |
10
years |
Class
T |
$341 |
$575 |
$827 |
$1,550 |
Portfolio
Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its
portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Fund shares are held in a taxable
account. These costs, which are not reflected in annual fund operating expenses
or in the example, affect the Fund’s performance. During the most recent fiscal
year, the Fund’s portfolio turnover rate was 51.2% of the average value of its
portfolio.
Principal
Investment Strategies
Under normal circumstances, the Fund
invests at least 80% of its net assets, plus any borrowings for investment
purposes, in below investment grade bonds and bank loans (sometimes called “high
yield” or "junk") which are rated, at the time of purchase, Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") and BB+ or lower by S&P Global
Ratings ("S&P Global") (if the bond or bank loan has been rated by only one
of those agencies, that rating will determine whether it is below investment
grade; if the bond or bank loan has not been rated by either of those agencies,
those selecting such investments will determine whether it is of a quality
comparable to those rated below investment grade). The Fund also invests in
investment grade bank loans (also known as senior floating rate interests) and
securities of foreign issuers, including those located in developing or emerging
countries. Under normal circumstances, the Fund maintains an average portfolio
duration that is within ±20% of the duration of the Bloomberg Barclays US High
Yield 2% Issuer Capped Index, which as of December 31, 2017 was 3.86 years . The Fund is not managed to a
particular maturity.
During the fiscal year ended October
31, 2017, the average ratings of the Fund’s fixed-income assets, based on market
value at each month-end, were as follows (all ratings are by Moody’s):
|
|
|
|
|
0.37% in securities rated
Aaa |
9.85% in securities rated
Baa |
6.61% in securities rated
Caa |
0.00% in securities rated
D |
0.00% in securities rated Aa
|
45.85% in securities rated
Ba |
0.16% in securities rated
Ca |
0.78% in securities not
rated |
0.05% in securities rated A
|
36.33% in securities rated
B |
0.00% in securities rated
C |
|
Principal
Risks
The value of your investment in the
Fund changes with the value of the Fund's investments. Many factors affect that
value, and it is possible to lose money by investing in the Fund. An investment
in the Fund is not a deposit of a bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. The
principal risks of investing in the Fund, in alphabetical order,
are:
Bank Loans
Risk. Changes in
economic conditions are likely to cause issuers of bank loans (also known as
senior floating rate interests) to be unable to meet their obligations. In
addition, the value of the collateral securing the loan (if any) may decline,
causing a loan to be substantially unsecured. Underlying credit agreements
governing the bank loans, reliance on market makers, priority of repayment and
overall market volatility may harm the liquidity of loans.
Emerging Markets
Risk. Investments in
emerging market countries may have more risk than those in developed market
countries because the emerging markets are less developed and more illiquid.
Emerging market countries can also be subject to increased social, economic,
regulatory, and political uncertainties and can be extremely
volatile.
Fixed-Income
Securities Risk.
Fixed-income securities are subject to interest rate risk and credit quality
risk. The market value of fixed-income securities generally declines when
interest rates rise, and an issuer of fixed-income securities could default on
its payment obligations.
Foreign Currency
Risk. Risks of
investing in securities denominated in, or that trade in, foreign (non-U.S.)
currencies include changes in foreign exchange rates and foreign exchange
restrictions.
Foreign
Securities Risk. The
risks of foreign securities include loss of value as a result of: political or
economic instability; nationalization, expropriation or confiscatory taxation;
settlement delays; and limited government regulation (including less stringent
reporting, accounting, and disclosure standards than are required of U.S.
companies).
High Yield
Securities Risk. High
yield fixed-income securities (commonly referred to as "junk bonds") are subject
to greater credit quality risk than higher rated fixed-income securities and
should be considered speculative.
Portfolio
Duration Risk. Portfolio duration is a measure of
the expected life of a fixed-income security and its sensitivity to changes in
interest rates. The longer a fund's average portfolio duration, the more
sensitive the fund will be to changes in interest rates.
Redemption Risk.
A fund that serves as
an underlying fund for a fund of funds is subject to certain risks. When a fund
of funds reallocates or rebalances its investments, an underlying fund may
experience relatively large redemptions or investments. These transactions may
cause the underlying fund to sell portfolio securities to meet such redemptions,
or to invest cash from such investments, at times it would not otherwise do so,
and may as a result increase transaction costs, result in changes to expense
ratios and increased expenses, and adversely affect underlying fund performance.
Moreover, a fund of fund's redemptions or reallocations among share classes of
an underlying fund may result in changes to the expense ratios of affected
classes, which may increase the expenses paid by shareholders of the class that
experienced the redemption.
Performance
The following information provides
some indication of the risks of investing in the Fund. Past performance (before
and after taxes) is not necessarily an indication of how the Fund will perform
in the future. You may get updated performance information by calling
1-800-222-5852 or online at www.principalfunds.com.
Using the historical performance of
the Fund's Class A shares, adjusted as described below, the bar chart shows the
investment returns of the Fund’s Class T shares for each full calendar year of
operations for 10 years (or, if shorter, the life of the Fund). These annual
returns do not reflect sales charges on Class T shares; if they did, results
would be lower. The table shows, for the Fund's Class T shares and for the last
one, five, and ten calendar year periods (or, if shorter, the life of the Fund),
how the Fund’s average annual total returns compare with those of one or more
broad measures of market performance.
For periods prior to the inception
date of Class T shares (June 12, 2017), the performance shown in the bar chart
and the table for Class T shares is that of the Fund's Class A shares, adjusted
to reflect the fees and expenses of Class T. However, where this adjustment for
fees and expenses results in performance for Class T shares that is higher than
the historical performance of the Class A shares, the historical performance of
the Class A shares is used (without respect to sales charges, which are not
applicable to Class T). These adjustments result in performance for such periods
that is no higher than the historical performance of the Class A shares. The
Class A shares, which are not presented in this prospectus, would have
substantially similar annual returns because the shares are invested in the same
portfolio of securities, and the annual returns would differ only to the extent
that the classes do not have the same expenses.
Total Returns as
of December 31
|
|
|
|
|
Highest
return for a quarter during the period of the bar chart
above: |
Q2
'09 |
18.88 |
% |
Lowest
return for a quarter during the period of the bar chart
above: |
Q4
'08 |
(11.89 |
)% |
|
|
|
|
|
Average
Annual Total Returns |
For the
periods ended December 31, 2017 |
1
Year |
5
Years |
10
Years |
Class T
Return Before Taxes |
5.05% |
5.02% |
6.83% |
Class T
Return After Taxes on Distributions |
2.85% |
2.27% |
3.83% |
Class T
Return After Taxes on Distributions and Sale of Fund
Shares |
2.85% |
2.57% |
4.03% |
Bloomberg Barclays U.S.
Corporate High Yield 2% Issuer Capped Index (reflects no deduction for
fees, expenses, or taxes) |
7.50% |
5.78% |
8.09% |
After-tax returns are calculated
using the historical highest individual federal marginal income tax rates and do
not reflect the impact of state and local taxes. Actual after-tax returns depend
on an investor’s tax situation and may differ from those shown. The after-tax
returns shown are not relevant to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
Management
Investment
Advisor and Portfolio Managers:
Principal Global Investors,
LLC
|
|
• |
Mark P. Denkinger (since
2009), Portfolio Manager |
|
|
• |
Josh Rank (since 2015),
Portfolio Manager |
|
|
• |
Darrin E. Smith (since 2009),
Portfolio Manager |
Purchase and Sale
of Fund Shares
|
|
|
Investment
Type |
Purchase
Minimum Per Fund |
|
|
Initial
Investment |
$1,000(1) |
Initial Investment for accounts
with an Automatic Investment Plan (AIP) |
$100 |
Subsequent
Investments |
$100(1) |
|
|
(1) |
Some exceptions apply; see
"Purchase of Fund Shares - Minimum Investments" for more
information. |
You may purchase or redeem shares on
any business day (normally any day when the New York Stock Exchange is open for
regular trading), through your plan, intermediary, or Financial
Professional.
Tax
Information
The Fund’s distributions you receive
are generally subject to federal income tax as ordinary income or capital gain
and may also be subject to state and local taxes, unless you are tax-exempt or
your account is tax-deferred in which case your distributions would be taxed
when withdrawn from the tax-deferred account.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a
broker-dealer or other financial intermediary (such as a bank, insurance
company, investment adviser, etc.), the Fund and its related companies may pay
the intermediary for the sale of Fund shares and related services. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another
investment, or to recommend one share class of the Fund over another share
class. Ask your salesperson or visit your financial intermediary's website for
more information.
SHORT-TERM INCOME
FUND
|
|
Objective: |
The Fund seeks to provide as
high a level of current income as is consistent with prudent investment
management and stability of principal. |
Fees and Expenses
of the Fund
This table describes the fees and
expenses that you may pay if you buy and hold Class T shares of the Fund. You
may qualify for sales charge discounts for purchases of at least $250,000 in Class T Shares of Principal
Funds, Inc. More information about these and other discounts is available from
your financial professional and in “The Costs of Investing” beginning on page 44
of the Fund’s prospectus.
Shareholder Fees
(fees paid directly from your investment)
|
|
|
|
Share
Class |
|
T |
Maximum Sales Charge (Load)
Imposed on Purchases (as a percentage of offering price) |
2.50% |
Annual
Fund Operating Expenses
(expenses that
you pay each year as a percentage of the value of your investment)
|
|
|
|
Share
Class |
|
T |
Management Fees |
0.41% |
Distribution and/or Service
(12b-1) Fees |
0.25% |
Other Expenses (1) |
0.20% |
Total Annual
Fund Operating Expenses |
0.86% |
Expense Reimbursement
(2) |
(0.07)% |
Total Annual
Fund Operating Expenses after Expense Reimbursement |
0.79% |
(1) Based
on estimated amounts for the current fiscal year. |
(2) Principal
Global Investors, LLC ("PGI"), the investment advisor, has contractually
agreed to limit the Fund’s expenses by paying, if necessary, expenses
normally payable by the Fund, (excluding interest expense, expenses
related to fund investments, acquired fund fees and expenses, and other
extraordinary expenses) to maintain a total level of operating expenses
(expressed as a percent of average net assets on an annualized basis) not
to exceed 0.79% for Class T. It is expected that the expense limit will
continue through the period ending February 28, 2019; however, Principal
Funds, Inc. and PGI, the parties to the agreement, may mutually agree to
terminate the expense limit prior to the end of the period.
|
Example
This Example is intended to help you
compare the cost of investing in the Fund with the cost of investing in other
mutual funds.
The Example assumes that you invest
$10,000 in the Fund for the time periods indicated. The Example also assumes
that your investment has a 5% return each year and that the Fund’s operating
expenses remain the same. The calculation of costs takes into account any
applicable contractual fee waivers and/or expense reimbursements for the period
noted in the table above. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
|
|
|
|
|
|
|
1
year |
3
years |
5
years |
10
years |
Class
T |
$329 |
$511 |
$708 |
$1,278 |
Portfolio
Turnover
The Fund pays transaction costs,
such as commissions, when it buys and sells securities (or “turns over” its
portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Fund shares are held in a taxable
account. These costs, which are not reflected in annual fund operating expenses
or in the example, affect the Fund’s performance. During the most recent fiscal
year, the Fund’s portfolio turnover rate was 59.5% of the average value of its
portfolio.
Principal
Investment Strategies
The Fund invests primarily in high
quality short-term bonds and other fixed-income securities that, at the time of
purchase, are rated BBB- or higher by S&P Global Ratings ("S&P Global")
or Baa3 or higher by Moody's Investors Service, Inc. ("Moody's") or, if unrated,
in the opinion of those selecting such investments, are of comparable quality.
The Fund's investments also include corporate securities, U.S. and foreign
government securities, mortgage-backed and asset-backed securities (securitized
products), and real estate investment trust ("REIT") securities. The Fund
invests in securities denominated in foreign currencies and in securities of
foreign issuers.
Under normal circumstances, the Fund
maintains an effective maturity of five years or less and an average portfolio
duration that is within ±15% of the duration of the Bloomberg Barclays Credit
1-3 Year Index which as of December 31, 2017 was 1.88 years .
Principal
Risks
The value of your investment in the
Fund changes with the value of the Fund's investments. Many factors affect that
value, and it is possible to lose money by investing in the Fund. An investment
in the Fund is not a deposit of a bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. The
principal risks of investing in the Fund, in alphabetical order, are:
Fixed-Income
Securities Risk.
Fixed-income securities are subject to interest rate risk and credit quality
risk. The market value of fixed-income securities generally declines when
interest rates rise, and an issuer of fixed-income securities could default on
its payment obligations.
Foreign Currency
Risk. Risks of
investing in securities denominated in, or that trade in, foreign (non-U.S.)
currencies include changes in foreign exchange rates and foreign exchange
restrictions.
Foreign
Securities Risk. The
risks of foreign securities include loss of value as a result of: political or
economic instability; nationalization, expropriation or confiscatory taxation;
settlement delays; and limited government regulation (including less stringent
reporting, accounting, and disclosure standards than are required of U.S.
companies).
Portfolio
Duration Risk. Portfolio duration is a measure of
the expected life of a fixed-income security and its sensitivity to changes in
interest rates. The longer a fund's average portfolio duration, the more
sensitive the fund will be to changes in interest rates.
Real Estate
Investment Trusts (“REITs”) Risk. In addition to risks associated with
investing in real estate securities, REITs are dependent upon management skills,
are not diversified, and are subject to heavy cash flow dependency, risks of
default by borrowers, and self-liquidation. Investment in REITs also involves
risks similar to risks of investing in small market capitalization companies,
such as limited financial resources, less frequent and limited volume trading,
and may be subject to more abrupt or erratic price movements than larger company
securities. A REIT could fail to qualify for tax-free pass-through of income
under the Internal Revenue Code. Fund shareholders will indirectly bear their
proportionate share of the expenses of REITs in which the fund invests.
Real Estate
Securities Risk. Investing in real estate securities
subjects the fund to the risks associated with the real estate market (which are
similar to the risks associated with direct ownership in real estate), including
declines in real estate values, loss due to casualty or condemnation, property
taxes, interest rate changes, increased expenses, cash flow of underlying real
estate assets, regulatory changes (including zoning, land use and rents), and
environmental problems, as well as to the risks related to the management skill
and creditworthiness of the issuer.
Redemption Risk.
A fund that serves as
an underlying fund for a fund of funds is subject to certain risks. When a fund
of funds reallocates or rebalances its investments, an underlying fund may
experience relatively large redemptions or investments. These transactions may
cause the underlying fund to sell portfolio securities to meet such redemptions,
or to invest cash from such investments, at times it would not otherwise do so,
and may as a result increase transaction costs, result in changes to expense
ratios and increased expenses, and adversely affect underlying fund performance.
Moreover, a fund of fund's redemptions or reallocations among share classes of
an underlying fund may result in changes to the expense ratios of affected
classes, which may increase the expenses paid by shareholders of the class that
experienced the redemption.
Securitized
Products Risk. Investments in securitized products
are subject to risks similar to traditional fixed income securities, such as
credit, interest rate, liquidity, prepayment, extension, and default risk, as
well as additional risks associated with the nature of the assets and the
servicing of those assets. Unscheduled prepayments on securitized products may
have to be reinvested at lower rates. A reduction in prepayments may increase
the effective maturities of these securities, exposing them to the risk of
decline in market value over time (extension risk).
U.S. Government
Securities Risk. Yields
available from U.S. government securities are generally lower than yields from
many other fixed-income securities.
U.S.
Government-Sponsored Securities Risk. Securities issued by U.S.
government-sponsored or -chartered enterprises such as the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, and the Federal
Home Loan Banks are not issued or guaranteed by the U.S. Treasury.
Performance
The following information provides
some indication of the risks of investing in the Fund. Past performance (before
and after taxes) is not necessarily an indication of how the Fund will perform
in the future. You may get updated performance information by calling
1-800-222-5852 or online at www.principalfunds.com.
Using the historical performance of
the Fund's Class A shares, adjusted as described below, the bar chart shows the
investment returns of the Fund’s Class T shares for each full calendar year of
operations for 10 years (or, if shorter, the life of the Fund). These annual
returns do not reflect sales charges on Class T shares; if they did, results
would be lower. The table shows, for the Fund's Class T shares and for the last
one, five, and ten calendar year periods (or, if shorter, the life of the Fund),
how the Fund’s average annual total returns compare with those of one or more
broad measures of market performance.
For periods prior to the inception
date of Class T shares (June 12, 2017), the performance shown in the bar chart
and the table for Class T shares is that of the Fund's Class A shares, adjusted
to reflect the fees and expenses of Class T. However, where this adjustment for
fees and expenses results in performance for Class T shares that is higher than
the historical performance of the Class A shares, the historical performance of
the Class A shares is used (without respect to sales charges, which are not
applicable to Class T). These adjustments result in performance for such periods
that is no higher than the historical performance of the Class A shares. The
Class A shares, which are not presented in this prospectus, would have
substantially similar annual returns because the shares are invested in the same
portfolio of securities, and the annual returns would differ only to the extent
that the classes do not have the same expenses.
Total Returns as
of December 31
|
|
|
|
|
Highest
return for a quarter during the period of the bar chart
above: |
Q2
'09 |
3.96 |
% |
Lowest
return for a quarter during the period of the bar chart
above: |
Q4
'08 |
(1.87 |
)% |
|
|
|
|
|
Average
Annual Total Returns |
For the
periods ended December 31, 2017 |
1
Year |
5
Years |
10
Years |
Class T
Return Before Taxes |
(0.84)% |
0.74% |
2.34% |
Class T
Return After Taxes on Distributions |
(1.54)% |
0.09% |
1.51% |
Class T
Return After Taxes on Distributions and Sale of Fund
Shares |
(0.47)% |
0.27% |
1.47% |
Bloomberg Barclays Credit 1-3
Year Index (reflects no deduction for fees, expenses, or
taxes) |
1.66% |
1.44% |
2.82% |
After-tax returns are calculated
using the historical highest individual federal marginal income tax rates and do
not reflect the impact of state and local taxes. Actual after-tax returns depend
on an investor’s tax situation and may differ from those shown. The after-tax
returns shown are not relevant to investors who hold their Fund shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement
accounts.
Management
Investment
Advisor and Portfolio Managers:
Principal Global Investors,
LLC
|
|
• |
John R. Friedl (since 2010),
Portfolio Manager |
|
|
• |
Ryan P. McCann (since 2010),
Portfolio Manager |
|
|
• |
Scott J. Peterson (since
2010), Portfolio Manager |
Purchase and Sale
of Fund Shares
|
|
|
Investment
Type |
Purchase
Minimum Per Fund |
|
|
Initial
Investment |
$1,000(1) |
Initial Investment for accounts
with an Automatic Investment Plan (AIP) |
$100 |
Subsequent
Investments |
$100(1) |
|
|
(1) |
Some exceptions apply; see
"Purchase of Fund Shares - Minimum Investments" for more
information. |
You may purchase or redeem shares on
any business day (normally any day when the New York Stock Exchange is open for
regular trading) through your plan, intermediary, or Financial
Professional.
Tax
Information
The Fund’s distributions you receive
are generally subject to federal income tax as ordinary income or capital gain
and may also be subject to state and local taxes, unless you are tax-exempt or
your account is tax-deferred in which case your distributions would be taxed
when withdrawn from the tax-deferred account.
Payments to
Broker-Dealers and Other Financial Intermediaries
If you purchase the Fund through a
broker-dealer or other financial intermediary (such as a bank, insurance
company, investment adviser, etc.), the Fund and its related companies may pay
the intermediary for the sale of Fund shares and related services. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another
investment, or to recommend one share class of the Fund over another share
class. Ask your salesperson or visit your financial intermediary's website for
more information.
ADDITIONAL
INFORMATION ABOUT INVESTMENT STRATEGIES AND RISKS
Each Fund’s investment objective is
described in the summary section for each Fund. The summary section also
describes each Fund’s principal investment strategies, including the types of
securities in which each Fund invests, and the principal risks of investing in
each Fund. The principal investment strategies are not the only investment
strategies available to each Fund, but they are the ones each Fund primarily
uses to achieve its investment objective.
Except for Fundamental Restrictions
described in the Fund’s Statement of Additional Information (“SAI”), the Board
of Directors may change any Fund's objective or investment strategies without a
shareholder vote if it determines such a change is in the best interests of the
Fund. If there is a material change to a Fund's investment objective or
investment strategies, you should consider whether the Fund remains an
appropriate investment for you. There is no guarantee that each Fund will meet
its objective.
Each Fund is designed to be a
portion of an investor's portfolio. No Fund is intended to be a complete
investment program. Investors should consider the risks of a Fund before making
an investment; it is possible to lose money by investing in a Fund.
Active
Management
The performance of a fund that is
actively managed will reflect in part the ability of those managing the
investments of the fund to make investment decisions that are suited to
achieving the fund's investment objective. Actively-managed funds may invest
differently from the benchmark against which the Fund's performance is compared.
When making decisions about whether to buy or sell equity securities,
considerations may include, among other things, a company’s strength in
fundamentals, its potential for earnings growth over time, its ability to
navigate certain macroeconomic environments, the current price of its securities
relative to their perceived worth and relative to others in its industry, and
analysis from computer models. When making decisions about whether to buy or
sell fixed-income investments, considerations may include, among other things,
the strength of certain sectors of the fixed-income market relative to others,
interest rates, a range of economic, political and financial factors, the
balance between supply and demand for certain asset classes, the credit quality
of individual issuers, the fundamental strengths of corporate and municipal
issuers, and other general market conditions.
An active fund's investment
performance depends upon the successful allocation of the fund's assets among
asset classes, geographical regions, industry sectors, and specific issuers and
investments. There is no guarantee that these allocation techniques and
decisions will produce the desired results. It is possible to lose money on an
investment in a fund as a result of these allocation decisions. If a fund's
investment strategies do not perform as expected, the fund could underperform
other funds with similar investment objectives or lose money. Moreover, buying
and selling securities to adjust the fund’s asset allocation may increase
portfolio turnover and generate transaction costs.
Investment advisors with large
assets under management in a Fund, or in other funds that have the same strategy
as a Fund, may have difficulty fully investing such Fund’s assets according to
its investment objective due to potential liquidity constraints and high
transaction costs. Typically, small-cap, mid-cap and emerging market equity
funds are more susceptible to such a risk. A Fund may add additional investment
advisors or close the Fund to new investors to address such risks.
Liquidity
Certain fund holdings may be deemed
to be less liquid or illiquid because they cannot be readily sold without
significantly impacting the value of the holdings. A fund is exposed to
liquidity risk when trading volume, lack of a market maker, or legal
restrictions impair its ability to sell particular securities or close
derivative positions at an advantageous price. Funds with principal investment
strategies that involve securities of companies with smaller market
capitalizations, foreign securities, derivatives, high yield bonds and bank
loans or securities with substantial market and/or credit risk tend to have the
greatest exposure to liquidity risk.
Liquidity risk also refers to the
risk of unusually high redemption requests, redemption requests by certain large
shareholders such as institutional investors or asset allocators, or other
unusual market conditions that may make it difficult for a fund to sell
investments within the allowable time period to meet redemptions. Meeting such
redemption requests could require a fund to sell securities at reduced prices or
under unfavorable conditions, which would reduce the value of the
fund.
Market Volatility
and Securities Issuers
The value of a fund's portfolio
securities may decrease in response to overall stock or bond market movements.
Markets tend to move in cycles, with periods of rising prices and periods of
falling prices. Stocks tend to go up and down in value more than bonds. If a
fund's investments are concentrated in certain sectors, its performance could be
worse than the overall market. The value of an individual security or particular
type of security can be more volatile than the market as a whole and can perform
differently from the value of the market as a whole. The value of a security may
decline for reasons directly related to the issuer, such as management
performance, financial leverage, and reduced demand for the issuer’s goods or
services.
Temporary
Defensive Measures
From time to time, as part of its
investment strategy, a Fund may invest without limit in cash and cash
equivalents for temporary defensive purposes in response to adverse market,
economic, or political conditions. For this purpose, cash equivalents include:
bank notes, bank certificates of deposit, bankers' acceptances, repurchase
agreements, commercial paper, and commercial paper master notes, which are
floating rate debt instruments without a fixed maturity. In addition, a Fund may
purchase U.S. government securities, preferred stocks, and debt securities,
whether or not convertible into or carrying rights for common stock. There is no
limit on the extent to which a Fund may take temporary defensive measures. In
taking such measures, a Fund may lose the benefit of upswings and may limit its
ability to meet, or fail to achieve, its investment objective.
Strategy and Risk
Table
The following table lists each Fund
and identifies whether the strategies and risks discussed in this section
(listed in alphabetical order) are principal, non-principal, (meaning they are
relevant to a Fund but to a lesser degree than those designated as principal),
or not applicable for each Fund. The risks described below for each fund that
operates as a fund of funds (as identified in the table) include risks at both
the fund of funds level and underlying funds level. Each fund is also subject to
the risks of any underlying funds in which it invests.
The SAI contains additional
information about investment strategies and their related risks.
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INVESTMENT
STRATEGIES
AND
RISKS |
GLOBAL
DIVERSIFIED
INCOME |
HIGH
YIELD |
SHORT-TERM
INCOME |
Bank Loans (also known as
Senior Floating Rate interests) |
Principal |
Principal |
Not
Applicable |
Contingent Convertible
Securities |
Non-Principal |
Non-Principal |
Non-Principal |
Convertible
Securities |
Non-Principal |
Non-Principal |
Non-Principal |
Counterparty
Risk |
Principal |
Non-Principal |
Non-Principal |
Derivatives |
Principal |
Non-Principal |
Non-Principal |
Emerging
Markets |
Principal |
Principal |
Non-Principal |
Equity
Securities |
Principal |
Non-Principal |
Not
Applicable |
|
Non-Principal |
Non-Principal |
Not
Applicable |
• Small and Medium
Market Capitalization Companies |
Principal |
Non-Principal |
Not
Applicable |
|
Principal |
Non-Principal |
Not
Applicable |
Fixed-Income
Securities |
Principal |
Principal |
Principal |
Foreign
Currency |
Principal |
Principal |
Principal |
Foreign
Securities |
Principal |
Principal |
Principal |
Hedging |
Non-Principal |
Non-Principal |
Non-Principal |
High Yield
Securities |
Principal |
Principal |
Non-Principal |
Investment Company
Securities |
Non-Principal |
Non-Principal |
Non-Principal |
Leverage |
Non-Principal |
Non-Principal |
Non-Principal |
Master Limited Partnerships
("MLPs") |
Non-Principal |
Not Applicable |
Not
Applicable |
Municipal Obligations and
AMT-Subject Bonds |
Non-Principal |
Not Applicable |
Non-Principal |
Portfolio
Duration |
Principal |
Principal |
Principal |
Portfolio Turnover (Active
Trading) |
Principal |
Non-Principal |
Non-Principal |
Preferred
Securities |
Principal |
Non-Principal |
Non-Principal |
Real Estate Investment Trusts
("REITs") |
Principal |
Non-Principal |
Principal |
Real Estate
Securities |
Principal |
Non-Principal |
Principal |
Redemption Risk |
Principal |
Principal |
Principal |
Securitized
Products |
Principal |
Non-Principal |
Principal |
U.S. Government and U.S.
Government Sponsored Securities |
Non-Principal |
Non-Principal |
Principal |
Volatility
Mitigation |
Principal |
Non-Principal |
Not
Applicable |
Bank Loans (also
known as Senior Floating Rate Interests)
Bank loans typically hold the most
senior position in the capital structure of a business entity (the "Borrower"),
are secured by specific collateral, and have a claim on the Borrower's assets
and/or stock that is senior to that held by the Borrower's unsecured
subordinated debtholders and stockholders. The proceeds of bank loans primarily
are used to finance leveraged buyouts, recapitalizations, mergers, acquisitions,
stock repurchases, dividends, and, to a lesser extent, to finance internal
growth and for other corporate purposes. Bank loans are typically structured and
administered by a financial institution that acts as the agent of the lenders
participating in the bank loan. Most bank loans that will be purchased by a fund
are rated below-investment-grade (sometimes called "junk") or will be comparable
if unrated, which means they are more likely to default than investment-grade
loans. A default could lead to non-payment of income which would result in a
reduction of income to the fund, and there can be no assurance that the
liquidation of any collateral would satisfy the Borrower's obligation in the
event of non-payment of scheduled interest or principal payments, or that such
collateral could be readily liquidated. Most bank loans are not traded on any
national securities exchange. Bank loans generally have less liquidity than
investment-grade bonds and there may be less public information available about
them. Bank loan interests may not be considered “securities,” and purchasers
therefore may not be entitled to rely on the anti-fraud protections of the
federal securities laws.
The primary and secondary market for
bank loans may be subject to irregular trading activity, wide bid/ask spreads
and extended trade settlement periods, which may cause a fund to be unable to
realize full value and thus cause a material decline in a fund's net asset
value. Because transactions in bank loans may be subject to extended settlement
periods, a fund may not receive proceeds from the sale of a bank loan for a
period of time after the sale. As a result, sale proceeds may not be available
to make additional investments or to meet a fund’s redemption obligations for a
period of time after the sale of the bank loans, which could lead to a fund
having to sell other investments, borrow to meet obligations, or borrow to
remain fully invested while awaiting settlement.
Bank loans pay interest at rates
which are periodically reset by reference to a base lending rate plus a spread.
These base lending rates are generally the prime rate offered by a designated
U.S. bank or the London InterBank Offered Rate ("LIBOR") or the prime rate
offered by one or more major U.S. banks.
Bank loans generally are subject to
mandatory and/or optional prepayment. Because of these prepayment conditions and
because there may be significant economic incentives for the borrower to repay,
prepayments may occur.
Contingent
Convertible Securities ("CoCos")
Contingent convertible securities
(“CoCos”) are hybrid debt securities intended to either convert into equity or
have their principal written down upon the occurrence of certain “triggers.” The
triggers are generally linked to regulatory capital thresholds or regulatory
actions calling into question the issuing banking institution’s continued
viability as a going-concern, if the conversion trigger were not exercised.
CoCos’ unique equity conversion or principal write-down features are tailored to
the issuing banking institution and its regulatory requirements. Some additional
risks associated with CoCos include, but are not limited to, the
following:
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The occurrence of a conversion
event is inherently unpredictable and depends on many factors, some of
which will be outside the issuer’s control. Because of the uncertainty
regarding whether a conversion event will occur, it may be difficult to
predict when, if at all, a CoCo will be converted to equity, and a fund
may suffer losses as a result. |
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CoCos may have no stated
maturity and fully discretionary coupons. This means coupon (i.e.,
interest) payments can be canceled at the banking institution’s discretion
or at the request of the relevant regulatory authority in order to help
the bank absorb losses, without causing a
default. |
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CoCos are usually issued in
the form of subordinated debt instruments to provide the appropriate
regulatory capital treatment. If an issuer liquidates, dissolves or
winds-up before a conversion to equity has occurred, the rights and claims
of the holders of the CoCos (such as a fund) against the issuer generally
rank junior to the claims of holders of unsubordinated obligations of the
issuer. In addition, if the CoCos are converted into the issuer’s
underlying equity securities after a conversion event (i.e., a “trigger”),
each holder will be further subordinated. |
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The value of CoCos is
unpredictable and is influenced by many factors including, without
limitation: the creditworthiness of the issuer and/or fluctuations in such
issuer’s applicable capital ratios; supply and demand for CoCos; general
market conditions and available liquidity; and economic, financial and
political events that affect the issuer, its particular market or the
financial markets in general. Moreover, the performance of CoCos may be
correlated with one another and as a result negative information of one
issuer may cause decline in the value of CoCos of many other issuers.
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Due to these features, CoCos may
have substantially greater risk than other securities in times of financial
stress. If the trigger level is breached, the issuer’s decision to write down,
write off or convert a CoCo may result in the fund's complete loss on an
investment in CoCos with no chance of recovery even if the issuer remains in
existence.
Convertible
Securities
Convertible securities are usually
fixed-income securities that a fund has the right to exchange for equity
securities at a specified conversion price. Convertible securities could also
include corporate bonds, notes, or preferred stocks of U.S. or foreign issuers.
Convertible securities allow a fund to realize additional returns if the market
price of the equity securities exceeds the conversion price. For example, a fund
may hold fixed-income securities that are convertible into shares of common
stock at a conversion price of $10 per share. If the market value of the shares
of common stock reached $12, the fund could realize an additional $2 per share
by converting its fixed-income securities.
Convertible securities have lower
yields than comparable fixed-income securities. In addition, at the time a
convertible security is issued the conversion price exceeds the market value of
the underlying equity securities. Thus, convertible securities may provide lower
returns than non-convertible fixed-income securities or equity securities
depending upon changes in the price of the underlying equity securities.
However, convertible securities permit a fund to realize some of the potential
appreciation of the underlying equity securities with less risk of losing its
initial investment.
Depending on the features of the
convertible security, a fund will treat a convertible security as a fixed-income
security, equity security, or preferred security for purposes of investment
policies and limitations because of the unique characteristics of convertible
securities. Funds that invest in convertible securities may invest in
convertible securities that are below investment grade (sometimes referred to as
"junk"). Many convertible securities are relatively illiquid.
Counterparty
Risk
Counterparty risk is the risk that
the counterparty to a contract or other obligation will be unable or unwilling
to honor its obligations. If a counterparty fails to meet its contractual
obligations, goes bankrupt, or otherwise experiences a business interruption, a
fund could miss investment opportunities or otherwise hold investments it would
prefer to sell, resulting in losses for the fund. In addition, a fund may suffer
losses if a counterparty fails to comply with applicable laws or other
requirements. Counterparty risk is pronounced during unusually adverse market
conditions and is particularly acute in environments in which financial services
firms are exposed to systemic risks.
Derivatives
Generally, a derivative is a
financial arrangement, the value of which is derived from, or based on, a
traditional security, asset, or market index. A fund may invest in certain
derivative strategies to earn income, manage or adjust the risk profile of the
fund, replace more direct investments, or obtain exposure to certain markets. A
fund may enter into forward commitment agreements, which call for the fund to
purchase or sell a security on a future date at a fixed price. A fund may also
enter into contracts to sell its investments either on demand or at a specific
interval.
The risks associated with derivative
investments include:
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increased volatility of a fund
and/or the failure of the investment to mitigate volatility as
intended; |
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the inability of those
managing investments of the fund to predict correctly the direction of
securities prices, interest rates, currency exchange rates, asset values,
and other economic factors; |
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losses caused by unanticipated
market movements, which may be substantially greater than a fund's initial
investment and are potentially unlimited; |
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• |
the possibility that there may
be no liquid secondary market, which may make it difficult or impossible
to close out a position when desired; |
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the possibility that the
counterparty may fail to perform its obligations;
and |
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the inability to close out
certain hedged positions to avoid adverse tax
consequences. |
There are many different types of
derivatives and many different ways to use them. The specific derivatives that
are principal strategies of each Fund are listed in its Fund
Summary.
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Commodity Index-Linked Notes
are derivative debt instruments issued by U.S. and foreign banks,
brokerage firms, insurance companies and other corporations with principal
and/or coupon payments linked to the performance of commodity indices.
These notes expose a fund to movements in commodity prices. They are also
subject to credit, counterparty, and interest rate risk. Commodity
index-linked notes are often leveraged, increasing the volatility of each
note's market value relative to changes in the underlying commodity index.
At the maturity of the note, a fund may receive more or less principal
than it originally invested. A fund may also receive interest payments on
the note that are less than the stated coupon interest payments.
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Credit Default Swap Agreements
may be entered into by a fund as a "buyer" or "seller" of credit
protection. Credit default swap agreements involve special risks because
they may be difficult to value, are highly susceptible to liquidity and
credit risk, and generally pay a return to the party that has paid the
premium only in the event of an actual default by the issuer of the
underlying obligation (as opposed to a credit downgrade or other
indication of financial difficulty). Credit default swaps can increase
credit risk because a fund has exposure to both the issuer of the
referenced obligation and the counterparty to the credit default
swap. |
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Foreign Currency Contracts
(such as foreign currency options and foreign currency forward and swap
agreements) may be used by funds to increase exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one
country to another. A forward currency contract involves a privately
negotiated obligation to purchase or sell a specific currency at a future
date at a price set in the contract. For currency contracts, there is also
a risk of government action through exchange controls that would restrict
the ability of a fund to deliver or receive
currency. |
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Forwards, futures contracts
and options thereon (including commodities futures); options (including
put or call options); and swap agreements and over-the-counter swap
agreements (e.g., interest rate swaps, total return swaps and credit
default swaps) may be used by funds for hedging purposes in order to try
to mitigate or protect against potential losses due to changing interest
rates, securities prices, asset values, currency exchange rates, and other
market conditions; non-hedging purposes to seek to increase the fund's
income or otherwise enhance return; and as a low-cost method of gaining
exposure to a particular market without investing directly in those
securities or assets. |
These derivative investments are
subject to special risk considerations, particularly the imperfect correlation
between the change in market value of the instruments held by a fund and the
price of the derivative instrument. If a fund has insufficient cash, it may have
to sell securities from its portfolio to meet daily variation margin
requirements, even when it may be disadvantageous to do so. Options and Swap
Agreements also involve counterparty risk. With respect to options, there may be
difference in trading hours for the options markets and the markets for the
underlying securities (rate movements can take place in the underlying markets
that cannot be reflected in the options markets) and an insufficient liquid
secondary market for particular options.
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Index/structured securities.
Certain derivative securities are described more accurately as
index/structured securities, which are derivative securities whose value
or performance is linked to other equity securities (such as depositary
receipts), currencies, interest rates, indices, or other financial
indicators (reference indices). |
Emerging
Markets
The Funds consider a security to be
tied economically to an emerging market country (an "emerging market security")
if the issuer of the security has its principal place of business or principal
office in an emerging market country, has its principal securities trading
market in an emerging market country, or derives a majority of its revenue from
emerging market countries.
Usually, the term "emerging market
country" (also called a "developing country") means any country that is
considered to be an emerging country by the international financial community
(including the MSCI Emerging Markets Index or Bloomberg Barclays Emerging
Markets USD Aggregate Bond Index). These countries generally exclude the U.S.,
Canada, Japan, Hong Kong, Singapore, Australia, New Zealand, and most nations
located in Western Europe.
Investments in companies of emerging
market countries are subject to higher risks than investments in companies in
more developed countries. These risks include:
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increased social, political,
and economic instability; |
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a smaller market for these
securities and low or nonexistent trading volume that results in a lack of
liquidity and greater price volatility; |
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lack of publicly available
information, including reports of payments of dividends or interest on
outstanding securities; |
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foreign government policies
that may restrict opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national
interests; |
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relatively new capital market
structure or market-oriented economy; |
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the possibility that recent
favorable economic developments may be slowed or reversed by unanticipated
political or social events in these
countries; |
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restrictions that may make it
difficult or impossible for a fund to vote proxies, exercise shareholder
rights, pursue legal remedies, and obtain judgments in foreign courts;
and |
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possible losses through the
holding of securities in domestic and foreign custodial banks and
depositories. |
In addition, many developing
countries have experienced substantial and, in some periods, extremely high
rates of inflation for many years. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies,
currencies, interest rates, and securities markets of those
countries.
Repatriation of investment income,
capital, and proceeds of sales by foreign investors may require governmental
registration and/or approval in some developing countries. A fund could be
adversely affected by delays in or a refusal to grant any required governmental
registration or approval for repatriation.
Further, the economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade.
Equity
Securities
Equity securities include common
stocks, convertible securities, depositary receipts, rights (an offering of
common stock to investors who currently own shares which entitle them to buy
subsequent issues at a discount from the offering price), and warrants (the
right to purchase securities from the issuer at a specified price, normally
higher than the current market price). Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. The value of a
company's stock may fall as a result of factors directly relating to that
company, such as decisions made by its management or lower demand for the
company's products or services. A stock's value may also fall because of factors
affecting not just the company, but also companies in the same industry or in a
number of different industries, such as increases in production costs. The value
of a company's stock may also be affected by changes in financial markets that
are relatively unrelated to the company or its industry, such as changes in
interest rates or currency exchange rates. In addition, a company's stock
generally pays dividends only after the company invests in its own business and
makes required payments to holders of its bonds and other debt. For this reason,
the value of a company's stock will usually react more strongly than its bonds
and other debt to actual or perceived changes in the company's financial
condition or prospects.
Some funds focus their investments
on certain market capitalization ranges. Market capitalization is defined as
total current market value of a company's outstanding equity securities. The
market capitalization of companies in a fund’s portfolios and their related
indexes will change over time, and a fund will not automatically sell a security
just because it falls outside of the market capitalization range of its
index(es).
Growth
Stock
The prices of growth stocks may be
based largely on expectations of future earnings, and their prices can decline
rapidly and significantly in reaction to negative news about such factors as
earnings, revenues, the economy, political developments, or other news. Growth
stocks may underperform value stocks and stocks in other broad style categories
(and the stock market as a whole) over any period of time and may shift in and
out of favor with investors generally, sometimes rapidly, depending on changes
in market, economic, and other factors. As a result, a fund that holds
substantial investments in growth stocks may underperform other funds that
invest more broadly or favor different investment styles. Because growth
companies typically reinvest their earnings, growth stocks typically do not pay
dividends at levels associated with other types of stocks, if at
all.
Small
and Medium Market Capitalization Companies
Investments in companies with
smaller market capitalizations may involve greater risks and price volatility
(wide, rapid fluctuations) than investments in larger, more mature companies.
Small company stocks may decline in price as large company stocks rise, or rise
in price while larger company stocks decline. The net asset value of a fund that
invests a substantial portion of its assets in small company stocks may
therefore be more volatile than the shares of a fund that invests solely in
larger company stocks. Small companies may be less significant within their
industries and may be at a competitive disadvantage relative to their larger
competitors. Smaller companies may be less mature than larger companies. At this
earlier stage of development, the companies may have limited product lines,
reduced market liquidity for their shares, limited financial resources, or less
depth in management than larger or more established companies. While smaller
companies may be subject to these additional risks, they may also realize more
substantial growth than larger or more established companies.
Unseasoned issuers are companies
with a record of less than three years continuous operation, including the
operation of predecessors and parents. Many unseasoned issuers also may be small
companies and involve the risks and price volatility associated with smaller
companies. Unseasoned issuers by their nature have only a limited operating
history that can be used for evaluating the company's growth prospects. As a
result, these securities may place a greater emphasis on current or planned
product lines and the reputation and experience of the company's management and
less emphasis on fundamental valuation factors than would be the case for more
mature growth companies.
Value
Stock
Value stocks present the risk that
they may decline in price or never reach their expected full market value
because the market fails to recognize the stock's intrinsic worth. Value stocks
may underperform growth stocks and stocks in other broad style categories (and
the stock market as a whole) over any period of time and may shift in and out of
favor with investors generally, sometimes rapidly, depending on changes in
market, economic, and other factors. As a result, a fund that holds substantial
investments in value stocks may underperform other funds that invest more
broadly or favor different investment styles.
Fixed-Income
Securities
Fixed-income securities include
bonds and other debt instruments that are used by issuers to borrow money from
investors (examples include corporate bonds, convertible securities,
mortgage-backed securities, U.S. government securities and asset-backed
securities). The issuer of a fixed-income security generally pays the investor a
fixed, variable, or floating rate of interest. The amount borrowed must be
repaid at maturity. Some debt securities, such as zero coupon bonds, do not pay
current interest, but are sold at a discount from their face
values.
Fixed-income securities are
sensitive to changes in interest rates. In general, fixed-income security prices
rise when interest rates fall and fall when interest rates rise. If interest
rates fall, issuers of callable bonds may call (repay) securities with high
interest rates before their maturity dates; this is known as call risk. In this
case, a fund would likely reinvest the proceeds from these securities at lower
interest rates, resulting in a decline in the fund's income. Floating rate
securities generally are less sensitive to interest rate changes but may decline
in value if their interest rates do not rise as much, or as quickly, as interest
rates in general. Conversely, floating rate securities will not generally
increase in value if interest rates decline.
Fixed-income securities are also
affected by the credit quality of the issuer. Investment-grade debt securities
are medium and high quality securities. Some bonds, such as lower grade or
"junk" bonds, may have speculative characteristics and may be particularly
sensitive to economic conditions and the financial condition of the issuers.
Credit risk refers to the possibility that the issuer of the security will not
be able to make principal and interest payments when due.
Funds may invest in fixed-income
securities of companies with small- or medium-sized market capitalizations.
Investments in companies with smaller market capitalizations may involve greater
risks, price volatility (wide, rapid fluctuations), and less liquidity than
investments in larger, more mature companies.
Foreign
Currency
Certain of a fund’s investments will
be denominated in foreign currencies or traded in securities markets in which
settlements are made in foreign currencies. Any income on such investments is
generally paid to a fund in foreign currencies. In addition, funds may engage in
foreign currency transactions for both hedging and investment purposes, as well
as to increase exposure to a foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The value of foreign currencies
relative to the U.S. dollar varies continually, causing changes in the dollar
value of a fund’s portfolio investments (even if the local market price of the
investments is unchanged) and changes in the dollar value of a fund’s income
available for distribution to its shareholders. The effect of changes in the
dollar value of a foreign currency on the dollar value of a fund’s assets and on
the net investment income available for distribution may be favorable or
unfavorable. Transactions in non-U.S. currencies are also subject to many of the
risks of investing in foreign (non-U.S.) securities; for example, changes in
foreign economies and political climates are more likely to affect a fund that
has foreign currency exposure than a fund that invests exclusively in U.S.
companies and currency. There also may be less government supervision of foreign
markets, resulting in non-uniform accounting practices and less publicly
available information. Transactions in foreign currencies, foreign currency
denominated debt and certain foreign currency options, futures contracts and
forward contracts (and similar instruments) may give rise to ordinary income or
loss to the extent such income or loss results from fluctuations in the value of
the foreign currency concerned.
A fund may incur costs in connection
with conversions between various currencies. In addition, a fund may be required
to liquidate portfolio assets, or may incur increased currency conversion costs,
to compensate for a decline in the dollar value of a foreign currency occurring
between the time when a fund declares and pays a dividend, or between the time
when a fund accrues and pays an operating expense in U.S. dollars. To protect
against a change in the foreign currency exchange rate between the date on which
a fund contracts to purchase or sell a security and the settlement date for the
purchase or sale, to gain exposure to one or more foreign currencies or to “lock
in” the equivalent of a dividend or interest payment in another currency, a fund
might purchase or sell a foreign currency on a spot (i.e., cash) basis at the prevailing
spot rate.
Currency hedging involves some of
the same general risks and considerations as other transactions with similar
instruments (i.e., derivative instruments) and hedging. Currency transactions
are also subject to additional risks. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be adversely
affected by government exchange controls, limitations or restrictions on
repatriation of currency, and manipulations or exchange restrictions imposed by
governments. These forms of governmental actions can result in losses to a fund
if it is unable to deliver or receive currency or monies in settlement of
obligations. They could also cause hedges the fund has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Settlement of a currency forward contract for the purchase of
most currencies must occur at a bank based in the issuing nation. The ability to
establish and close out positions on trading options on currency futures
contracts is subject to the maintenance of a liquid market that may not always
be available.
Foreign
Securities
The Funds consider a security to be
tied economically to countries outside the U.S. (a "foreign security") if the
issuer of the security has its principal place of business or principal office
outside the U.S., has its principal securities trading market outside the U.S.,
or derives a majority of its revenue from outside the U.S.
Foreign companies may not be subject
to the same uniform accounting, auditing, and financial reporting practices as
are required of U.S. companies. In addition, there may be less publicly
available information about a foreign company than about a U.S. company.
Securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commissions on foreign securities
exchanges may be generally higher than those on U.S. exchanges.
Foreign markets also have different
clearance and settlement procedures than those in U.S. markets. In certain
markets, there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct these
transactions. Delays in settlement could result in temporary periods when a
portion of fund assets is not invested and earning no return. If a fund is
unable to make intended security purchases due to settlement problems, the fund
may miss attractive investment opportunities. In addition, a fund may incur a
loss as a result of a decline in the value of its portfolio if it is unable to
sell a security.
With respect to certain foreign
countries, there is the possibility of nationalization, expropriation or
confiscatory taxation, political or social instability, or diplomatic
developments that could affect a fund's investments in those countries. In
addition, a fund may also suffer losses due to differing accounting practices
and treatments. Investments in foreign securities are subject to laws of the
foreign country that may limit the amount and types of foreign investments.
Changes of governments or of economic or monetary policies, in the U.S. or
abroad, changes in dealings between nations, currency convertibility or exchange
rates could result in investment losses for a fund.
Foreign securities are often traded
with less frequency and volume, and therefore may have greater price volatility,
than is the case with many U.S. securities. Brokerage commissions, custodial
services, and other costs relating to investment in foreign countries are
generally more expensive than in the U.S. Though the fund intends to acquire the
securities of foreign issuers where there are public trading markets, economic
or political turmoil in a country in which a fund has a significant portion of
its assets or deterioration of the relationship between the U.S. and a foreign
country may reduce the liquidity of a fund's portfolio. The fund may have
difficulty meeting a large number of redemption requests. Furthermore, there may
be difficulties in obtaining or enforcing judgments against foreign
issuers.
A fund may invest in a foreign
company by purchasing depositary receipts. Depositary receipts are certificates
of ownership of shares in a foreign-based issuer held by a bank or other
financial institution. They are alternatives to purchasing the underlying
security but are subject to the foreign securities risks to which they
relate.
If a fund's portfolio is
over-weighted in a certain geographic region, any negative development affecting
that region will have a greater impact on the fund than a fund that is not
over-weighted in that region.
Hedging
Hedging is a strategy that can be
used to limit or offset investment risk. The success of a fund’s hedging
strategy will be subject to the ability of those managing the fund's investments
to correctly assess the degree of correlation between the performance of the
instruments used in the hedging strategy and the performance of the investments
in the portfolio being hedged. Since the characteristics of many securities
change as markets change or time passes, the success of a fund’s hedging
strategy will also be subject to the ability of those managing the fund's
investments to continually recalculate, readjust, and execute hedges in an
efficient and timely manner. For a variety of reasons, those managing the fund's
investments may not seek to establish a perfect correlation between such hedging
instruments and the portfolio holdings being hedged. Such imperfect correlation
may prevent a fund from achieving the intended hedge or expose a fund to risk of
loss. In addition, it is not possible to hedge fully or perfectly against any
risk, and hedging entails its own costs.
High Yield
Securities
Below investment grade bonds, which
are rated at the time of purchase Ba1 or lower by Moody's Investors Service,
Inc. ("Moody's") and BB+ or lower by S&P Global Ratings ("S&P Global")
(if the bond has been rated by only one of those agencies, that rating will
determine if the bond is below investment grade; if the bond has not been rated
by either of those agencies, those managing investments of the fund will
determine whether the bond is of a quality comparable to those rated below
investment grade), are sometimes referred to as high yield or "junk bonds" and
are considered speculative. Such securities could be in default at time of
purchase.
Investment in high yield bonds
involves special risks in addition to the risks associated with investment in
highly rated debt securities. High yield bonds may be regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. Moreover, under certain circumstances, such securities
may be less liquid than higher rated debt securities.
Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities. The ability of a fund to achieve its investment
objective may, to the extent of its investment in high yield bonds, be more
dependent on such credit analysis than would be the case if the fund were
investing in higher quality bonds.
High yield bonds may be more
susceptible to real or perceived adverse economic and competitive industry
conditions than higher-grade bonds. The prices of high yield bonds have been
found to be less sensitive to interest rate changes than more highly rated
investments, but more sensitive to adverse economic downturns or individual
corporate developments. If the issuer of high yield bonds defaults, a fund may
incur additional expenses to seek recovery. To the extent that such high yield
issuers undergo a corporate restructuring, such high yield securities may become
exchanged for or converted into reorganized equity of the underlying issuer.
High yield bonds oftentimes include complex legal covenants that impose various
degrees of restriction on the issuer’s ability to take certain actions, such as
distribute cash to equity holders, incur additional indebtedness, and dispose of
assets. To the extent that a bond indenture or loan agreement does not contain
sufficiently protective covenants or otherwise permits the issuer to take
certain actions to the detriment of the holder of the fixed-income security, the
underlying value of such fixed-income security may decline.
The secondary market on which high
yield bonds are traded may be less liquid than the market for higher-grade
bonds. Less liquidity in the secondary trading market could adversely affect the
price at which a fund could sell a high yield bond and could adversely affect
and cause large fluctuations in the daily price of the fund's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the value and liquidity of high yield bonds, especially
in a thinly traded market.
The use of credit ratings for
evaluating high yield bonds also involves certain risks. For example, credit
ratings evaluate the safety of principal and interest payments, not the market
value risk of high yield bonds. Also, credit rating agencies may fail to change
credit ratings in a timely manner to reflect subsequent events. If a credit
rating agency changes the rating of a portfolio security held by a fund, the
fund may retain the security if those managing the investments of the fund think
it is in the best interest of shareholders.
Investment
Company Securities
Securities of other investment
companies, including shares of closed-end investment companies, unit investment
trusts, various exchange-traded funds ("ETFs"), and other open-end investment
companies, represent interests in professionally managed portfolios that may
invest in a variety of instruments. Certain types of investment companies, such
as closed-end investment companies, issue a fixed number of shares that trade on
a stock exchange or over-the-counter at a premium or a discount to their net
asset value. Others are continuously offered at net asset value, but may also be
traded in the secondary market. ETFs are often structured to perform in a
similar fashion to a broad-based securities index. Investing in ETFs involves
generally the same risks as investing directly in the underlying instruments.
Investing in ETFs involves the risk that they will not perform in exactly the
same fashion, or in response to the same factors, as the index or underlying
instruments. Shares of ETFs may trade at prices other than NAV.
A fund that invests in another
investment company is subject to the risks associated with direct ownership of
the securities in which such investment company invests. Fund shareholders
indirectly bear their proportionate share of the expenses of each such
investment company, including its advisory and administrative fees. The Fund
would also continue to pay its own advisory fees and other expenses.
Consequently, the Fund and its shareholders would, in effect, absorb two levels
of fees with respect to investments in other investment companies.
A fund may invest in affiliated
underlying funds, and those who manage such fund's investments and their
affiliates may earn different fees from different underlying funds and may have
an incentive to allocate more fund assets to underlying funds from which they
receive higher fees.
Leverage
If a fund makes investments in
futures contracts, forward contracts, swaps and other derivative instruments,
these instruments provide the economic effect of financial leverage by creating
additional investment exposure, as well as the potential for greater loss. If a
fund uses leverage through activities such as borrowing, entering into short
sales, purchasing securities on margin or on a “when-issued” basis or purchasing
derivative instruments in an effort to increase its returns, the fund has the
risk of magnified capital losses that occur when losses affect an asset base,
enlarged by borrowings or the creation of liabilities, that exceeds the net
assets of the fund. The net asset value of a fund employing leverage will be
more volatile and sensitive to market movements. Leverage may involve the
creation of a liability that requires the fund to pay interest. Leveraging may
cause a fund to liquidate portfolio positions to satisfy its obligations or to
meet segregation requirements when it may not be advantageous to do so. To the
extent that a fund is not able to close out a leveraged position because of
market illiquidity, a fund’s liquidity may be impaired to the extent that it has
a substantial portion of liquid assets segregated or earmarked to cover
obligations.
Master Limited
Partnerships ("MLPs")
A master limited partnership ("MLP")
that invests in a particular industry (e.g., oil and gas) will be harmed by
detrimental economic events within that industry. For example, the business of
certain MLPs is affected by supply and demand for energy commodities because
such MLPs derive revenue and income based upon the volume of the underlying
commodity produced, transported, processed, distributed, and/or marketed. Many
MLPs are also subject to various federal, state and local environmental laws and
health and safety laws as well as laws and regulations specific to their
particular activities.
MLPs tend to pay relatively higher
distributions than other types of companies. The amount of cash that an MLP can
distribute to its partners will depend on the amount of cash it generates from
operations, which will vary from quarter to quarter depending on factors
affecting the market generally and on factors affecting the particular business
lines of the MLP. Available cash will also depend on the MLP's level of
operating costs (including incentive distributions to the general partner),
level of capital expenditures, debt service requirements, acquisition costs (if
any), fluctuations in working capital needs and other factors.
Certain benefits derived from
investment in MLPs depend largely on the MLPs being treated as partnerships for
federal income tax purposes. As a partnership, an MLP has no federal income tax
liability at the entity level. MLPs taxed as partnerships file a partnership tax
return for U.S. federal, state, and local income tax purposes and communicate
the Fund's allocable share of the MLP's income, gains, losses, deductions, and
expenses via a "Schedule K-1." Each year, the Fund will send you an annual tax
statement (Form 1099) to assist you in completing your tax returns. In some
circumstances the Fund may need to send you a corrected Form 1099, which could
require you to amend your tax returns. For example, if the Fund keeps MLP
investments until the basis (generally the price paid for the units, as adjusted
downwards with each distribution and allocation of deductions and losses, and
upwards with each allocation of taxable income and gain) is zero, subsequent
distributions will be taxable to the Fund at ordinary income rates and
shareholders may receive a corrected Form 1099.
If, as a result of a change in
current law or a change in an MLP's business, an MLP was treated as a
corporation for federal income tax purposes, the MLP would be obligated to pay
federal income tax on its income at the corporate tax rate. If an MLP was
classified as a corporation for federal income tax purposes, the amount of cash
available for distribution would be reduced and the distributions received might
be taxed entirely as dividend income.
To the extent a distribution
received by a fund from an MLP is treated as a return of capital, the fund's
adjusted tax basis in the interests of the MLP will be reduced, which may
increase the fund's tax liability upon the sale of the interests in the MLP or
upon subsequent distributions in respect of such interests.
Municipal
Obligations and AMT-Subject Bonds
The term “municipal obligations”
generally is understood to include debt obligations issued by municipalities to
obtain funds for various public purposes. The two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge of its full faith and credit, with
either limited or unlimited taxing power for the payment of principal and
interest. Revenue bonds are not supported by the issuer's full taxing authority;
generally, they are payable only from the revenues of a particular facility, a
class of facilities, or the proceeds of another specific revenue
source.
"AMT-subject bonds" are municipal
obligations issued to finance certain "private activities," such as bonds used
to finance airports, housing projects, student loan programs, and water and
sewer projects. Interest on AMT-subject bonds is an item of tax preference for
purposes of the federal individual alternative minimum tax ("AMT"). See "Tax
Considerations" for a discussion of the tax consequences of investing in the
fund.
Current federal income tax laws
limit the types and volume of bonds qualifying for the federal income tax
exemption of interest, which may have an effect upon the ability of the fund to
purchase sufficient amounts of tax-exempt securities.
Portfolio
Duration
Average duration is a mathematical
calculation of the average life of a bond (or for a bond fund, the average life
of the fund's underlying bonds, weighted by the percentage of the fund's assets
that each represents) that serves as a useful measure of its price risk.
Duration is an estimate of how much the value of the bonds held by a fund will
fluctuate in response to a change in interest rates. For example, if a fund has
an average duration of 4 years and interest rates rise by 1%, the value of the
bonds held by the fund will decline by approximately 4%, and if the interest
rates decline by 1%, the value of the bonds held by the fund will increase by
approximately 4%. Longer term bonds and zero coupon bonds are generally more
sensitive to interest rate changes. Duration, which measures price sensitivity
to interest rate changes, is not necessarily equal to average
maturity.
Portfolio
Turnover (Active Trading)
"Portfolio Turnover" is the term
used in the industry for measuring the amount of trading that occurs in a fund's
portfolio during the year. For example, a 100% turnover rate means that on
average every security in the portfolio has been replaced once during the year.
Funds with high turnover rates (more than 100%) are considered actively-traded
and often have higher transaction costs (which are paid by the fund), may result
in higher taxes when fund shares are held in a taxable account, and may lower
the fund's performance. High portfolio turnover can result in a lower capital
gain distribution due to higher transaction costs added to the basis of the
assets or can result in lower ordinary income distributions to shareholders when
the transaction costs cannot be added to the basis of assets. Both events reduce
fund performance.
Please consider all the factors when
you compare the turnover rates of different funds. You should also be aware that
the "total return" line in the Financial Highlights section reflects portfolio
turnover costs.
Preferred
Securities
Preferred securities include
preferred stock and various types of junior subordinated debt and trust
preferred securities. Preferred securities may pay fixed rate or adjustable rate
distributions and generally have a payment "preference" over common stock, but
are junior to the issuer's senior debt in a liquidation of the issuer's assets.
Preference would mean that a company must pay on its preferred securities before
paying on its common stock, and that any claims of the preferred security holder
would typically be ahead of common stockholders' claims on assets in a corporate
liquidation.
Holders of preferred securities
usually have no right to vote for corporate directors or on other matters. The
market value of preferred securities is sensitive to changes in interest rates
as they are typically fixed income securities; the fixed-income payments are
expected to be the primary source of long-term investment return. While some
preferred securities are issued with a final maturity date, others are perpetual
in nature. In certain instances, a final maturity date may be extended and/or
the final payment of principal may be deferred at the issuer’s option for a
specified time without triggering an event of default for the issuer. In
addition, an issuer of preferred securities may have the right to redeem the
securities before their stated maturity date. For instance, for certain types of
preferred securities, a redemption may be triggered by a change in federal
income tax or securities laws. As with call provisions, a redemption by the
issuer may reduce the return of the security held by the fund. Preferred
securities may be subject to provisions that allow an issuer, under certain
circumstances to skip (indefinitely) or defer (possibly up to 10 years)
distributions. If a fund owns a preferred security that is deferring its
distribution, the fund may be required to report income for tax purposes while
it is not receiving any income.
Preferred securities are typically
issued by corporations, generally in the form of interest or dividend bearing
instruments, or by an affiliated business trust of a corporation, generally in
the form of beneficial interests in subordinated debentures or similarly
structured securities. The preferred securities market is generally divided into
the $25 par “retail” and the $1,000 par “institutional” segments. The $25 par
segment includes securities that are listed on the New York Stock Exchange
(exchange traded), which trade and are quoted with accrued dividend or interest
income, and which are often callable at par value five years after their
original issuance date. The institutional segment includes $1,000 par value
securities that are not exchange-listed (over the counter), which trade and are
quoted on a “clean” price, i.e., without accrued dividend or interest income,
and which often have a minimum of 10 years of call protection from the date of
their original issuance. Preferred securities can also be issued by real estate
investment trusts and involve risks similar to those associated with investing
in real estate investment trust companies.
Real Estate
Investment Trusts ("REITs")
REITs involve certain unique risks
in addition to the risks associated with investing in the real estate industry
in general (such as possible declines in the value of real estate, lack of
availability of mortgage funds, or extended vacancies of property). REITs are
characterized as: equity REITs, which primarily own property and generate
revenue from rental income; mortgage REITs, which invest in real estate
mortgages; and hybrid REITs, which combine the characteristics of both equity
and mortgage REITs. Equity REITs may be affected by changes in the value of the
underlying property owned by the REITs, while mortgage REITs may be affected by
the quality of any credit extended. REITs are dependent upon management skills,
are not diversified, and are subject to heavy cash flow dependency, risks of
default by borrowers, and self-liquidation. A fund that invests in a REIT is
subject to the REIT’s expenses, including management fees, and will remain
subject to the fund's advisory fees with respect to the assets so invested.
REITs are also subject to the possibilities of failing to qualify for the
special tax treatment accorded REITs under the Code, and failing to maintain
their exemptions from registration under the 1940 Act.
Regular REIT dividends received by a
Fund from a REIT will not qualify for the corporate dividends-received deduction
and generally will not constitute qualified dividend income for U.S. income tax
purposes. Any distribution of income attributable to regular REIT dividends from
a Fund's investment in a REIT will not qualify for the deduction that would be
available to a non-corporate shareholder were the shareholder to own
such REIT directly.
Investment in REITs also involves
risks similar to those associated with investing in small market capitalization
companies. REITs may have limited financial resources, may trade less frequently
and in a limited volume, and may be subject to more abrupt or erratic price
movements than larger company securities.
Real Estate
Securities
Investing in securities of companies
in the real estate industry subjects a fund to the special risks associated with
the real estate market and the real estate industry in general. Generally,
companies in the real estate industry are considered to be those that have
principal activity involving the development, ownership, construction,
management or sale of real estate; have significant real estate holdings, such
as hospitality companies, healthcare facilities, supermarkets, mining, lumber
and/or paper companies; and/or provide products or services related to the real
estate industry, such as financial institutions that make and/or service
mortgage loans and manufacturers or distributors of building supplies.
Securities of companies in the real estate industry are sensitive to factors
such as loss to casualty or condemnation, changes in real estate values,
property taxes, interest rates, cash flow of underlying real estate assets,
occupancy rates, government regulations affecting zoning, land use and rents,
and the management skill and creditworthiness of the issuer. Companies in the
real estate industry may also be subject to liabilities under environmental and
hazardous waste laws.
Redemption
Risk
An underlying fund to a fund of
funds may experience relatively large redemptions or purchases as the fund of
funds periodically reallocates or rebalances its assets. These transactions may
accelerate the realization of taxable income if sales of portfolio securities
result in gains and could increase transaction costs. In addition, when a fund
of funds reallocates or redeems significant assets away from an underlying fund,
the loss of assets to the underlying fund could result in increased expense
ratios for that fund. Moreover, a fund of fund's redemptions or reallocations
among share classes of an underlying fund may result in changes to the expense
ratios of affected classes, which may increase the expenses paid by shareholders
of the class that experienced the redemption.
Principal Global Investors, LLC
("PGI") is the advisor to the Principal LifeTime Funds, the Principal LifeTime
Hybrid Funds, Real Estate Allocation Fund, the SAM Portfolios, PVC Diversified
Balanced Account, PVC Diversified Balanced Managed Volatility Account, PVC
Diversified Balanced Volatility Control Account, PVC Diversified Growth Account,
PVC Diversified Growth Managed Volatility Account, PVC Diversified Growth
Volatility Control Account, PVC Diversified Income Account, PVC Multi-Asset
Income Account, and each of the underlying funds. Principal Real Estate
Investors, LLC ("Principal-REI") is sub-advisor to the Real Estate Allocation
Fund, Principal-REI also serves as Sub-Advisor to some of the underlying funds.
PGI and Principal-REI are committed to minimizing the potential impact of
underlying fund risk on underlying funds to the extent consistent with pursuing
the investment objectives of the fund of funds that it manages. Each may face
conflicts of interest in fulfilling its responsibilities to all such
funds.
As of October 31, 2017, the PFI
Principal LifeTime Funds, PFI Principal LifeTime Hybrid Funds, PFI Real Estate
Allocation Fund, PFI SAM Portfolios, PVC Principal LifeTime Accounts, PVC
Diversified Balanced Account, PVC Diversified Balanced Managed Volatility
Account, PVC Diversified Balanced Volatility Control Account, PVC Diversified
Growth Account, PVC Diversified Growth Managed Volatility Account, PVC
Diversified Growth Volatility Control Account, PVC Diversified Income Account,
PVC Multi-Asset Income Account, PVC SAM Portfolios owned the following
percentages, in the aggregate, of the outstanding shares of the underlying funds
listed below:
|
|
|
Fund |
Total
Percentage of Outstanding Shares Owned |
Global Diversified
Income |
9.93% |
High Yield |
7.44% |
Short-Term
Income |
44.06% |
Securitized
Products
Securitized products
are fixed income instruments that represent interests in underlying pools of
collateral or assets. The value of the securitized product is derived from the
performance, value, and cash flows of the underlying asset(s). The specific
securitized products that are principal strategies of each Fund are listed in
its Fund Summary.
A fund’s investments
in securitized products are subject to risks similar to traditional fixed income
securities, such as credit, interest rate, liquidity, prepayment, extension, and
default risk, as well as additional risks associated with the nature of the
assets and the servicing of those assets. Prepayment risk may
make it difficult to calculate the average life of a fund’s investment in
securitized products. Securitized products are generally issued as pass-through
certificates, which represent the right to receive principal and interest
payments collected on the underlying pool of assets, which are passed through to
the security holder. Therefore, repayment depends on the cash flows generated by
the underlying pool of assets. The securities may be rated as investment-grade
or below-investment-grade.
|
|
• |
Mortgage-backed
securities (“MBS”) represent an interest in a pool of underlying mortgage
loans secured by real property. MBS are sensitive to changes in interest
rates, but may respond to these changes differently from other fixed
income securities due to the possibility of prepayment of the underlying
mortgage loans. If interest rates fall and the underlying loans are
prepaid faster than expected, the fund may have to reinvest the prepaid
principal in lower yielding securities, thus reducing the fund’s income.
Conversely, rising interest rates tend to discourage refinancings and the
underlying loans may be prepaid more slowly than expected, reducing a
fund’s potential to reinvest the principal in higher yielding securities
and extending the duration of the underlying loans. In addition, when
market conditions result in an increase in default rates on the underlying
loans and the foreclosure values of the underlying real estate is less
than the outstanding amount due on the underlying loan, collection of the
full amount of accrued interest and principal on these investments may be
doubtful. The risk of such defaults is generally higher in the case of
underlying mortgage pools that include sub-prime mortgages (mortgages
granted to borrowers whose credit histories would not support conventional
mortgages). |
|
|
• |
Commercial
mortgage-backed securities (“CMBS”) represent an interest in a pool of
underlying commercial mortgage loans secured by real property such as
retail, office, hotel, multi-family, and industrial properties. Certain
CMBS are issued in several classes with different levels of yield and
credit protection, and the CMBS class in which a fund invests usually
influences the interest rate, credit, and prepayment
risks. |
|
|
• |
Asset-backed
securities (“ABS”) are backed by non-mortgage assets such as company
receivables, truck and auto loans, student loans, leases and credit card
receivables. ABS entail credit risk. They also may present a risk that, in
the event of default, the liquidation value of the underlying assets may
be inadequate to pay any unpaid interest or principal.
|
U.S. Government
and U.S. Government-Sponsored Securities
U.S. Government securities, such as
Treasury bills, notes and bonds and mortgage-backed securities guaranteed by the
Government National Mortgage Association (Ginnie Mae), are supported by the full
faith and credit of the United States; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; and still others are supported only by the credit of the issuing
agency, instrumentality, or enterprise.
Although U.S. Government-sponsored
enterprises such as the Federal Home Loan Mortgage Corporation (Freddie Mac) and
the Federal National Mortgage Association (Fannie Mae) may be chartered or
sponsored by Congress, they are not funded by Congressional appropriations, and
their securities are not issued by the U.S. Treasury nor supported by the full
faith and credit of the U.S. Government.
There is no assurance that the U.S.
Government would provide financial support to its agencies and instrumentalities
if not required to do so. In addition, certain governmental entities have been
subject to regulatory scrutiny regarding their accounting policies and practices
and other concerns that may result in legislation, changes in regulatory
oversight and/or other consequences that could adversely affect the credit
quality, availability, or investment character of securities issued by these
entities. The value and liquidity of U.S. Government securities may be affected
adversely by changes in the ratings of those securities.
Volatility
Mitigation
Volatility mitigation strategies may
increase fund transaction costs, which could increase losses or reduce
gains. These strategies may not protect the fund from market declines and
may reduce the fund’s participation in market gains.
PORTFOLIO
HOLDINGS INFORMATION
A description of the Fund's policies
and procedures with respect to disclosure of the Fund's portfolio securities is
available in the Fund's Statement of Additional Information.
MANAGEMENT OF THE
FUNDS
The Manager and
Advisor
Principal Global Investors, LLC
(“PGI”), an indirect subsidiary of Principal Financial Group, Inc.
("Principal®"), serves as the manager and
advisor for the Fund. Through the Management Agreement with the Fund, PGI
provides investment advisory services and certain corporate administrative
services for the Fund.
|
|
Advisor: |
Principal
Global Investors, LLC ("PGI"), 711 High Street, Des Moines,
IA 50392, is part of a diversified global asset management organization
which utilizes a multi-boutique strategy of specialized investment groups
and affiliates to provide institutional investors and individuals with
diverse investment capabilities, including fixed income, equities, real
estate, currency, asset allocation and stable value. PGI also has asset
management offices of affiliate advisors in non-U.S. locations including
London, Singapore, Tokyo, Hong Kong and Sydney. PGI has been an investment
advisor since 1998. |
|
|
Funds: |
In fulfilling its investment
advisory responsibilities, PGI provides day-to-day discretionary
investment services (directly making decisions to purchase or sell
securities) for the following Funds: |
|
|
– |
a portion of Global
Diversified Income (global value equity, opportunistic mortgage-backed
securities, and one of the high yield portions; and, on a temporary basis,
one or more strategies that seek to track the performance of an index
related to a particular sector or asset
class) |
The Global Diversified Income Fund
has multiple Sub-Advisors. A team within Principal Portfolio Strategies
SM
, a specialized boutique of
PGI and whose members are identified in the Fund summary and listed below,
determines the portion of the Fund’s assets each Sub-Advisor will manage and may
reallocate Fund assets among the Sub-Advisors from time-to-time. This team
agrees on allocation decisions and shares authority and responsibility for
day-to-day portfolio management, with no limitation on the authority of one
portfolio manager in relation to another.
The decision to reallocate Fund
assets between PGI acting in a discretionary advisory capacity and the Sub-
Advisors may be based on a variety of factors, including but not limited to: the
investment capacity of PGI and each Sub-Advisor, portfolio diversification,
volume of net cash flows, fund liquidity, investment performance, investment
strategies, changes in PGI or each Sub-Advisor's firm or investment
professionals or changes in the number of Sub- Advisors. Ordinarily,
reallocations of Fund assets among Sub-Advisors occur as a Sub-Advisor
liquidates assets in the normal course of portfolio management or with net new
cash flows; however, at times existing Fund assets may be reallocated among
Sub-Advisors.
The Fund summaries identified the
portfolio managers and the funds they manage. Additional information about the
portfolio managers follows. References to Principal® include the entire
Principal organization. As reflected in the fund summaries, the day-to-day
portfolio management, for some funds, is shared by multiple portfolio managers.
In each such case, the portfolio managers operate as a team, sharing authority
and responsibility for research and the day-to-day management of the portfolio
with no limitation on the authority of one portfolio manager in relation to
another.
Jake S. Anonson
was with
Principal® from 1998-2010 and re-joined
Principal® in 2012. Mr. Anonson is responsible
for the asset allocation and manager selection for Principal Portfolio
StrategiesSM. Mr. Anonson earned a bachelor’s
degree in Finance and Economics from the University of Northern Iowa and an
M.B.A. from Iowa State University. He has earned the right to use the Chartered
Financial Analyst designation.
Jessica S. Bush
has been with
Principal® since 2006. Ms. Bush is responsible
for the asset allocation and manager selection for Principal Portfolio
StrategiesSM. Ms. Bush earned a bachelor’s
degree in Business Administration from the University of Michigan. She has
earned the right to use the Chartered Financial Analyst
designation.
Mark P. Denkinger
has been with
Principal® since 1990. He earned a bachelor’s
degree in Finance and an M.B.A. with a Finance emphasis from the University of
Iowa. Mr. Denkinger has earned the right to use the Chartered Financial Analyst
designation.
Marcus W. Dummer
has been with
Principal® since 2003. Mr. Dummer is
responsible for the asset allocation and manager selection for Principal
Portfolio StrategiesSM. Mr. Dummer earned a bachelor’s
degree in Finance and an M.B.A. from the University of Utah. He has earned
the right to use the Chartered Alternative Investment Analyst
designation.
John R. Friedl
has been with
Principal® since 1998. He earned a B.A. in
Communications and History from the University of Washington and a master's
degree in Finance from Seattle University. Mr. Friedl has earned the right to
use the Chartered Financial Analyst designation.
Kelly A. Grossman
has been with
Principal® since 1991. Ms. Grossman is
responsible for the asset allocation and manager selection for Principal
Portfolio StrategiesSM. Ms. Grossman earned a bachelor’s
degree in Mathematics and Computer Science from the University of Northern
Iowa. Ms. Grossman is a Fellow of the Society of Actuaries and a member of
the American Academy of Actuaries.
Ryan P.
McCann has been with
Principal® since 2010. He earned a B.A. in
Business Administration from Washington State University. Mr. McCann has earned
the right to use the Chartered Financial Analyst designation.
Scott J. Peterson
has been with
Principal® since 2002. He earned a bachelor’s
degree in Mathematics from Brigham Young University and an M.B.A. from New York
University’s Stern School of Business. Mr. Peterson has earned the right to use
the Chartered Financial Analyst designation.
Josh Rank
has been with
Principal® since 2013. Prior to that, he
worked at Aviva Investors Americas from 2005 to 2013. He earned a bachelor's
degree in Finance from Iowa State University. Mr. Rank has earned the right to
use the Chartered Financial Analyst designation.
Benjamin E.
Rotenberg has been with
Principal® since 2014. Prior to that, he was
employed at Cliffwater LLC from 2007-2014. Mr. Rotenberg is responsible for the
asset allocation and manager selection for Principal Portfolio
StrategiesSM. Mr. Rotenberg earned a bachelor’s
degree in International Relations and Russian from Pomona College. He has earned
the right to use the Chartered Financial Analyst and the Chartered Alternative
Investment Analyst designations.
Darrin E. Smith
has been with
Principal® since 2007. He earned a bachelor’s
degree in Economics from Iowa State University and an M.B.A. from Drake
University. Mr. Smith has earned the right to use the Chartered Financial
Analyst designation.
The
Sub-Advisors
PGI has signed contracts with
various Sub-Advisors. Under the sub-advisory agreements, the Sub-Advisor agrees
to assume the obligations of PGI to provide investment advisory services to the
portion of the assets of a specific Fund allocated to it by PGI. For these
services, PGI pays the Sub-Advisor a fee.
PGI or the Sub-Advisor provides the
Fund's Board with a recommended investment program. The program must be
consistent with the Fund's investment objective and policies. Within the scope
of the approved investment program, the Sub-Advisor advises the Fund on its
investment policy and determines which securities are bought or sold, and in
what amounts.
The Fund summaries identified the
sub-advisors and portfolio managers and the funds they manage. Additional
information follows.
|
|
Sub-Advisor: |
Analytic
Investors, LLC (“Analytic Investors”), 555 West Fifth Street, Los
Angeles, CA 90013 is an SEC registered investment advisor and has been in
the business of investment management since 1970.
|
|
|
Fund: |
a portion of Global
Diversified Income (equity volatility reduction overlay
strategy) |
|
|
Sub-Advisor: |
Colonial
First State Asset Management (Australia) Limited (“Colonial
First State”), Level 3, Darling Park Tower
1, 201 Sussex Street, Sydney NSW 2000, is a global asset manager, which
has experience across a range of asset classes and specialist investment
sectors. Colonial First State manages
investments on behalf of institutional investors, pension funds, wholesale
distributors and platforms, financial advisers and their
clients. |
|
|
Fund: |
a portion of Global
Diversified Income (one of the sub-advisors for the publicly-listed
infrastructure strategy) |
|
|
Sub-Advisor: |
DDJ Capital
Management, LLC (“DDJ”), 130 Turner Street, Building 3,
Suite 600, Waltham, MA 02453, is an SEC registered investment advisor. DDJ
was formed in 1996 and presently manages opportunistic high yield, core
high yield, bank loan, and total return credit strategies on behalf of
domestic and international institutional investors.
|
|
|
Fund: |
a portion of Global
Diversified Income (high yield strategy) |
|
|
Sub-Advisor: |
Logan
Circle Partners, L.P. (“Logan Circle”), Three Logan
Square,
1717 Arch Street,
Suite 1500, Philadelphia, PA 19103, is a registered investment advisor
founded in 2007. |
|
|
Fund: |
a portion of Global
Diversified Income (one of the sub-advisors for the emerging markets debt
strategy) |
|
|
Sub-Advisor: |
Post
Advisory Group, LLC (“Post”), 2049 Century Park East, Suite
3050, Los Angeles, CA 90067, founded in 1992, is a global investment
manager specializing in high yield securities with a multi-strategy,
value-oriented investment approach. |
|
|
Fund: |
a portion of Global
Diversified Income (one of the sub-advisors for the high yield
strategy) |
|
|
Sub-Advisor: |
Principal
Real Estate Investors, LLC (“Principal - REI”), 711 High Street, Des Moines,
IA 50392, was founded in 2000 and manages commercial real estate across
the spectrum of public and private equity and debt investments, primarily
for institutional investors. |
|
|
Fund: |
a portion of Global
Diversified Income (global real estate and CMBS
strategies) |
|
|
Sub-Advisor: |
Spectrum
Asset Management, Inc. (“Spectrum”), 2 High Ridge Park, Stamford,
CT 06905, founded in 1987, manages portfolios of preferred securities for
corporate, pension fund, insurance and endowment clients, open-end and
closed-end mutual funds, and separately managed account programs for high
net worth individual investors as well as providing volatility mitigation
solutions for some client portfolios. |
|
|
Fund: |
a
portion of Global
Diversified Income (preferred securities
strategy) |
|
|
Sub-Advisor: |
Stone
Harbor Investment Partners LP (“Stone Harbor”), 31 West 52nd Street, 16th Floor, New York,
New York 10019, was established in 2006 and provides
investment advisory services to clients located throughout the
world. |
|
|
Fund: |
a
portion of Global
Diversified Income (European high yield asset strategy and one of the
sub-advisors for the emerging market debt strategy)
|
|
|
Sub-Advisor: |
W. H.
Reaves & Co., Inc. (doing business as Reaves Asset
Management), 10
Exchange Place, 18th Floor, Jersey City, NJ 07302, was founded in
1961 as an institutional research firm and is an SEC registered
adviser. |
|
|
Fund: |
a
portion of Global
Diversified Income (one of the sub-advisors for the publicly-listed
infrastructure strategy) |
The SAI provides additional
information about each portfolio manager’s compensation, other accounts managed
by the portfolio manager, and the portfolio manager’s ownership of securities in
the Fund.
Cash Management
Program
For each Fund, PGI may invest
uninvested cash in money market funds, including the Government Money Market
Fund, or lend it to other Funds pursuant to the Funds' interfund lending
facility.
Fees Paid to
PGI
Each Fund pays PGI a fee for its
services, which includes the fee PGI pays to Sub-Advisors, as applicable.
The fee each Fund paid (as a
percentage of the average daily net assets) for the fiscal year ended
October 31, 2017 was:
|
|
|
|
Global Diversified Income
Fund |
0.72% |
|
High Yield Fund |
0.51% |
|
Short-Term Income
Fund |
0.41% |
|
Availability of the discussions
regarding the basis for the Board of Directors approval of various management
and sub-advisory agreements is as follows:
|
|
|
|
|
Annual
Report
to
Shareholders
for the
period ending
October 31,
2017 |
Fund |
Management
Agreement |
Sub-Advisory
Agreement |
All Funds |
X |
X |
Manager of
Managers
The Fund operates as a Manager of
Managers. Under the conditions of an order previously received from the SEC (the
"unaffiliated order"), the Fund and PGI may enter into and materially amend
agreements with Sub-Advisors, other than those affiliated with PGI, without
obtaining shareholder approval. PGI may, without obtaining shareholder
approval:
|
|
• |
hire one or more Sub-Advisors;
|
|
|
• |
change Sub-Advisors; and
|
|
|
• |
reallocate management fees
between itself and Sub-Advisors. |
The SEC has granted an amended
exemptive order that expands the relief of the unaffiliated order to allow PGI
to enter into and materially amend agreements with wholly-owned affiliated
sub-advisors (affiliated sub-advisors which are at least 95% owned, directly or
indirectly, by PGI or an affiliated person of PGI) (the "wholly-owned order").
Further, the Fund has applied to the
SEC for another amended exemptive order, which if granted would allow PGI to
also enter into and materially amend agreements with majority-owned affiliated
sub-advisors (affiliated sub-advisors which are at least 50% owned, directly or
indirectly, by PGI or an affiliated person of PGI) (the "majority-owned order").
There is no assurance, however, that the SEC will grant the majority-owned
order.
PGI has ultimate responsibility for
the investment performance of each Fund that utilizes a Sub-Advisor due to its
responsibility to oversee Sub-Advisors and recommend their hiring, termination,
and replacement. No Fund will rely on the unaffiliated order, the wholly-owned
order, the majority-owned order, or any future order until it receives approval
from its shareholders (or, in the case of a new Fund, the Fund’s sole initial
shareholder before the Fund is available to the other purchasers).
The shareholders of the following
Fund have approved reliance on the wholly-owned order, as well as the
majority-owned order (should the SEC grant that relief in the future: Global
Diversified Income. The remaining Funds have approved the Fund's reliance on the
unaffiliated order.
PRICING OF
FUND SHARES
Each Fund’s shares are bought and
sold at the current share price. The share price of each class of each Fund is
calculated each day the New York Stock Exchange (“NYSE”) is open (share prices
are not calculated on the days on which the NYSE is closed for trading,
generally New Year’s Day, Martin Luther King, Jr. Day, Washington’s
Birthday/ Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day, and Christmas). The share price is determined as of the
close of business of the NYSE (normally 3:00 p.m. Central Time). When
an order to buy or sell shares is received, the share price used to fill the
order is the next price we calculate after we receive the order (in proper form)
at our transaction processing center in Canton, Massachusetts. To process your
transaction (purchase or redemption) on the day we receive it, we must receive
the order (with complete information):
|
|
• |
on a day that the NYSE is open
and |
|
|
• |
before the close of trading on
the NYSE (normally 3:00 p.m. Central
Time). |
Orders received after the close of
the NYSE or on days that the NYSE is not open will be processed on the next day
that the NYSE is open for normal trading. The Funds will not treat an intraday
unscheduled disruption in NYSE trading as a closure of the NYSE and will price
its shares as of 3:00 p.m. Central Time, if the particular disruption directly
affects only the NYSE.
For all Funds the share price is
calculated by:
|
|
• |
taking the current market
value of the total assets of the Fund |
|
|
• |
subtracting liabilities of the
Fund |
|
|
• |
dividing the remainder
proportionately into the classes of the
Fund |
|
|
• |
subtracting the liability of
each class |
|
|
• |
dividing the remainder by the
total number of shares outstanding for that class.
|
With respect to any portion of a
Fund’s assets invested in other registered investment companies, that portion of
the Fund's NAV is calculated based on the price (NAV or market, as applicable)
of such other registered investment companies.
Notes:
|
|
• |
If market quotations are not
readily available for a security owned by a Fund, its fair value is
determined using a policy adopted by the Directors. Fair valuation pricing
is subjective and creates the possibility that the fair value determined
for a security may differ materially from the value that could be realized
upon the sale of the security. |
|
|
• |
A Fund’s securities may be
traded on foreign securities markets that generally complete trading at
various times during the day before the close of the NYSE. Foreign
securities and currencies are converted to U.S. dollars using the exchange
rate in effect at the close of the NYSE. Securities traded outside of the
Western Hemisphere are valued using a fair value policy adopted by the
Fund. These fair valuation procedures are intended to discourage
shareholders from investing in the Fund for the purpose of engaging in
market timing or arbitrage transactions. |
|
|
• |
The trading of foreign
securities generally or in a particular country or countries may not take
place on all days the NYSE is open, or may trade on days the NYSE is
closed. Thus, the value of the foreign securities held by the Fund may
change on days when shareholders are unable to purchase or redeem
shares. |
|
|
• |
Certain securities issued by
companies in emerging market countries may have more than one quoted
valuation at any point in time. These may be referred to as local price
and premium price. The premium price is often a negotiated price that may
not consistently represent a price at which a specific transaction can be
effected. The Fund has a policy to value such securities at a price at
which the Advisor expects the securities may be sold.
|
CONTACT PRINCIPAL
FUNDS, INC.
Contact information for Principal
Funds, Inc. (“Principal Funds”) is as follows:
Mailing Addresses:
|
|
|
Regular Mail |
Overnight
Mail |
Principal
Funds |
Principal
Funds |
P.O. Box 8024 |
30 Dan Road |
Boston, MA
02266-8024 |
Canton, MA
02021-2809 |
You may speak with a Client
Relations Specialist by calling 1-800-222-5852, between 7:00 a.m. and
7:00 p.m. Central Time on any day that the NYSE is open.
Please contact your intermediary or
financial professional with any account specific questions.
For additional information about
Principal Funds, Inc., go to www.principalfunds.com.
PURCHASE OF FUND
SHARES
Principal Funds, Inc. offers funds
in multiple share classes: A, C, J, Institutional, R-1, R-2, R-3, R-4, R-5, R-6,
S, and T. Funds available in multiple share classes have the same investments,
but differing expenses. Class T shares are available in this prospectus.
The Fund reserves the right to
refuse or cancel any purchase orders for any reason. For example, the Fund does
not intend to permit market timing because short-term or other excessive trading
into and out of the Funds may harm performance by disrupting portfolio
management strategies and by increasing expenses. Accordingly, the Fund may
reject any purchase orders from market timers or investors that, in PGI’s
opinion, may be disruptive to the Fund. For these purposes, PGI may consider an
investor’s trading history in the Fund or other Funds sponsored by Principal
Life and accounts under common ownership or control.
PGI may recommend to the Board, and
the Board may elect, to close certain funds or share classes to new investors or
to close certain funds or share classes to new and existing
investors.
Principal Funds will not issue
certificates for shares.
No salesperson, broker-dealer or
other person is authorized to give information or make representations about a
Fund other than those contained in this Prospectus. Information or
representations not contained in this prospectus may not be relied upon as
having been provided or made by Principal Funds, a Fund, PGI, any Sub-Advisor,
or Principal Funds Distributor, Inc.
Procedures for
Opening an Account
Shares of the Funds are purchased
through Financial Professionals according to their procedures. An investment in
the Fund may be held in various types of accounts, including individual, joint
ownership, trust, and business accounts. The Fund may also be purchased within a
range of custodial accounts for those who wish to invest for retirement and/or
education expenses. Prospective shareholders should consult with their Financial
Professional before making decisions about the account and type of investment
that are appropriate for them.
Verification of
Identity
To help the government fight the
funding of terrorism and money laundering activities, Federal law requires
financial institutions to obtain, verify, and record information that identifies
each person who opens an account. When you open an account, we (or your
Financial Professional) may ask for your name, address, date of birth, and other
information that will allow us (or your Financial Professional) to verify your
identity. We (or your Financial Professional) may also ask to see your driver’s
license or other identifying documents.
If concerns arise with verification
of your identity, no transactions, other than redemptions, will be permitted
while we attempt to reconcile the concerns. If we are unable to verify your
identity on a timely basis, we may close your account or take such other action
as we deem appropriate.
Principal Funds will not establish
accounts with foreign addresses. If an existing shareholder with a
U.S. address moves to a foreign location and updates the address on the
shareholder’s account, we are unable to process any purchases on that account.
Principal Funds will not establish accounts that are for the benefit of a
business/organization that is illegal under Federal and/or state law (such as a
marijuana clinic) or a person who owns or receives income from such an entity or
whose source of funds is illegal.
Eligible
Purchasers
Shares are sold, and your account
must be held, only through financial intermediaries that have an agreement with
the Distributor to sell Class T shares. Your broker, dealer or other
intermediary may establish higher minimum investment requirements than the Fund
and may also independently charge you transaction fees and additional amounts
(which may vary) in return for its services, which will reduce your return.
Shares you purchase through your Financial Professional, broker, dealer, or
other intermediary will normally be held in your account with that
firm.
Minimum
Investments
Principal Funds has a minimum
initial investment amount of $1,000 and a minimum subsequent investment amount
of $100. Initial and subsequent investment minimums apply on a per-fund basis
for each Fund or Portfolio in which a shareholder invests.
Shareholders must meet the minimum
initial investment amount of $1,000 unless an Automatic Investment Plan ("AIP")
is established. With an AIP, the minimum initial investment is $100.
Minimum initial and subsequent
investments may be waived on accounts set up for: certain employee benefit
plans; retirement plans qualified under Internal Revenue Code
Section 401(a); payroll deduction plans submitting contributions in an
electronic format devised and/or approved by the Fund; and purchases through an
omnibus account with a broker-dealer, investment advisor, or other financial
institution.
Payment
Payments are generally to be made
through your intermediary or Financial Professional. We reserve the right to
refuse any payment that we feel presents a fraud or money laundering risk.
REDEMPTION OF
FUND SHARES
You may redeem your shares of the
Fund through your intermediary or Financial Professional. There is no charge for
the redemption. The Fund Board of Directors has determined that it is not
necessary to impose a fee upon the redemption of fund shares.
Shares are redeemed at the NAV per
share next computed after the request is received by the Fund in proper and
complete form.
Principal Funds typically sends the
sales proceeds on the next business day (a day when the NYSE is open for normal
business) after the sale order is received. Under unusual circumstances,
Principal Funds may suspend redemptions, or postpone payment for more than seven
days, as permitted by federal securities law.
Under normal circumstances, the
Funds expect to meet redemption requests through holdings of cash or the sale of
investments held in cash equivalents. Funds that are included in the cash
management program (as described under MANAGEMENT OF THE FUNDS-Cash Management
Program) may also meet such requests by selling liquid index futures. In
situations in which investment holdings in cash, cash equivalents, or, with
respect to funds in the cash management program, index futures are not
sufficient to meet redemption requests, a Fund will typically borrow money
through the Fund’s interfund lending facility or through a bank line-of-credit.
Funds may also choose to sell portfolio assets for the purpose of meeting such
requests. Each Fund further reserves the right to distribute “in kind”
securities from the Fund’s portfolio in lieu (in whole or in part) of cash under
certain circumstances, including under stressed market conditions.
Selling shares may create a gain or
a loss for federal (and state) income tax purposes. You should maintain accurate
records for use in preparing your income tax returns.
Distributions in
Kind
The Funds may determine that it
would be detrimental to the remaining shareholders of a Fund to make payment of
a redemption order wholly or partly in cash. Under certain circumstances,
therefore, each of the Funds may pay the redemption proceeds in whole or in part
by a distribution of “in kind” of securities from the Fund’s portfolio in lieu
of cash. If a Fund pays the redemption proceeds in kind, the redeeming
shareholder might incur brokerage or other costs in selling the securities for
cash. Each Fund will value securities used to pay redemptions in kind using the
same method the Fund uses to value its portfolio securities as described in this
prospectus.
EXCHANGE OF FUND
SHARES
Exchanging Class T Shares of one
Fund for Class T Shares of another Fund will result in the imposition of an
additional sales charge.
DIVIDENDS AND
DISTRIBUTIONS
Dividends are based on estimates of
income, expenses, and shareholder activity for the Fund. Actual income,
expenses, and shareholder activity may differ from estimates; consequently,
differences, if any, will be included in the calculation of subsequent
dividends. The Funds pay their net investment income to record date
shareholders; this record date is the business day before the payment date. The
payment schedule is as follows:
|
|
• |
The High Yield and Short-Term
Income Funds declare dividends of their daily net investment income each
day their shares are priced. The Funds pay out their accumulated declared
dividends monthly. |
|
|
• |
The Global Diversified Income
Fund pays its net investment income
monthly. |
For more details on the payment
schedule, go to: www.principalfunds.com/taxcenter.
Net realized capital gains, if any,
are distributed annually in December. Payments are made to shareholders of
record on the business day before the payable date. Capital gains may be taxable
at different rates, depending on the length of time that the Fund holds its
assets.
Dividend and capital gains will be
reinvested, without a sales charge, in shares of the Fund from which the
distribution is paid; however you may authorize the distributions to be paid in
cash.
Generally, for federal income tax
purposes, Fund distributions are taxable as ordinary income, except that any
distributions of long-term capital gains will be taxed as such, regardless of
how long Fund shares have been held. Special tax rules apply to Fund
distributions to Individual Retirement Accounts and other retirement plans. A
tax advisor should be consulted to determine the suitability of the Fund as an
investment by such a plan and the tax treatment of distributions by the Fund. A
tax advisor can also provide information on the potential impact of possible
foreign, state, and local taxes. A Fund’s investments in foreign securities may
be subject to foreign withholding taxes. In that case, the Fund’s yield on those
securities would be decreased.
To the extent that distributions the
Fund pays are derived from a source other than net income (such as a return of
capital), you will receive a notice disclosing the source of such distributions.
Furthermore, such notice will be posted monthly on our website at
www.principalfunds.com/sources-of-distribution. You may request a copy of all
such notices, free of charge, by telephoning 1-800-222-5852. The amounts and
sources of distributions included in such notices are estimates only and you
should not rely upon them for purposes of reporting income taxes. The Fund will
send shareholders a Form 1099-DIV for the calendar year that will tell
shareholders how to report these distributions for federal income tax
purposes.
A Fund’s payment of income dividends
and capital gains has the effect of reducing the share price by the amount of
the payment. Distributions from a Fund, whether received in cash or reinvested
in additional shares, may be subject to federal (and state) income tax. For
these reasons, buying shares of a Fund shortly before it makes a distribution
may be disadvantageous to you.
FREQUENT
PURCHASES AND REDEMPTIONS
The Funds are not designed for, and
do not knowingly accommodate, frequent purchases and redemptions of fund shares.
If you intend to trade frequently and/or use market timing investment
strategies, you should not purchase these Funds.
Frequent purchases and redemptions
pose a risk to the Funds because they may:
|
|
• |
Disrupt the management of the
Funds by: |
|
|
• |
forcing the Funds to hold
short-term (liquid) assets rather than investing for long-term growth,
which results in lost investment opportunities for the Funds
and |
|
|
• |
causing unplanned portfolio
turnover; |
|
|
• |
Hurt the portfolio performance
of the Funds; and |
|
|
• |
Increase expenses of the Funds
due to: |
|
|
• |
increased broker-dealer
commissions and |
|
|
• |
increased recordkeeping and
related costs. |
Certain Funds may be at greater risk
of harm due to frequent purchases and redemptions. For example, those Funds that
invest in foreign securities may appeal to investors attempting to take
advantage of time-zone arbitrage. The Funds have adopted procedures to “fair
value” foreign securities owned by the Funds each day to discourage these market
timing transactions in shares of the Funds.
The Board of Directors of the Fund
has also adopted policies and procedures with respect to frequent purchases and
redemptions of shares of the Funds. The Funds monitor shareholder trading
activity to identify and take action against abuses. When we do identify abusive
trading, we will apply our policies and procedures in a fair and uniform manner.
While our policies and procedures are designed to identify and protect against
abusive trading practices, there can be no certainty that we will identify and
prevent abusive trading in all instances. If we are not able to identify such
excessive trading practices, the Funds and their shareholders may be harmed. The
harm of undetected excessive trading in shares of the underlying funds in which
the funds of funds invest could flow through to the funds of funds as they would
for any fund shareholder.
If we, or a Fund, deem abusive
trading practices to be occurring, we will take action that may include, but is
not limited to:
|
|
• |
Rejecting purchase
instructions from the shareholder or other person authorized by the
shareholder to direct purchases; |
|
|
• |
Limiting the number of
purchases during a year; and |
|
|
• |
Taking such other action as
directed by the Fund. |
The Funds have reserved the right to
accept or reject, without prior written notice, any purchase requests. In some
instances, a purchase may be completed before a determination of abusive
trading. In those instances, we will reverse the purchase and return the account
holdings to the positions held before the purchase.
TAX
CONSIDERATIONS
It is a policy of the Funds to make
distributions of substantially all of their respective investment income and any
net realized capital gains. Shareholders are responsible for federal income tax
(and any other taxes, including state and local income taxes, if applicable) on
dividends and capital gains distributions whether such dividends or
distributions are paid in cash or are reinvested in additional shares. Special
tax rules apply to distributions from IRAs and other retirement accounts. You
should consult a tax advisor to determine the suitability of the Fund as an
investment by such a plan and the tax treatment of Fund
distributions.
Generally, dividends paid by the
Funds from interest, dividends, or net short-term capital gains will be taxed as
ordinary income. Distributions properly designated by the Fund as deriving from
net gains on securities held for more than one year are taxable as such
(generally at a 15% tax rate for individuals and taxable trusts, some
individuals and taxable trusts will be subject to a 20% tax rate), regardless of
how long you have held your shares. Distributions of investment income properly
designated by the Fund as derived from “qualified dividend
income” will be taxed at the rates
applicable to long-term capital gains. Some high-income individuals and taxable
trusts will be subject to a Medicare 3.8% tax on unearned net investment income.
A shareholder recognizes gain or
loss on the sale or redemption of shares of the Fund in an amount equal to the
difference between the proceeds of the sales or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the Fund within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of
the Fund is considered capital gain or loss (long-term capital gain or loss if
the shares were held for longer than one year). However, any capital loss
arising from the sales or redemption of shares held for six months or less is
disallowed to the extent of the amount of exempt-interest dividends received on
such shares and (to the extent not disallowed) is treated as a long-term capital
loss to the extent of the amount of capital gain dividends received on such
shares. Capital losses in any year are deductible only to the extent of capital
gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income
under current rules.
If a shareholder incurs a sales
charge in acquiring shares of the Fund, disposes of such shares less than 91
days after they are acquired, and subsequently acquires shares of the Fund or
another fund at a reduced sales charge pursuant to a right to reinvest at such
reduced sales charge acquired in connection with the acquisition of the shares
disposed of, then the sales charge on the shares disposed of (to the extent of
the reduction in the sales charge on the shares subsequently acquired) shall not
be taken into account in determining gain or loss on the shares disposed of but
shall be treated as incurred on the acquisition of the shares subsequently
acquired.
Any gain resulting from the
redemption of your shares will generally also be subject to tax. The cost basis
method used on your account could significantly affect your taxes due and should
be carefully considered. You should consult your tax advisor for more
information on your own tax situation, including possible foreign, state, and
local taxes.
Investments by a Fund in certain
debt instruments or derivatives may cause the Fund to recognize taxable income
in excess of the cash generated by such instruments. As a result, the Fund could
be required at times to liquidate other investments to satisfy its distribution
requirements under the Internal Revenue Code. The Fund’s use of derivatives will also
affect the amount, timing, and character of the Fund’s distributions.
A dividend or distribution made
shortly after the purchase of shares of a Fund by a shareholder, although in
effect a return of capital to that shareholder, would be taxable to that
shareholder as described above, subject to a holding period requirement for
dividends designated as qualified dividend income.
The information contained in this
prospectus is not a complete description of the federal, state, local, or
foreign tax consequences of investing in the Fund. You should consult your tax
advisor before investing in the Fund.
Funds Investing
in Securities Generating Tax-Exempt Income
Distributions designated as
“exempt-interest
dividends” by Funds investing in securities
generating tax-exempt income are generally not subject to federal income tax.
However, if you receive Social Security or railroad retirement benefits, you
should consult your tax advisor to determine what effect, if any, an investment
in such Funds may have on the federal taxation of your benefits. Some Funds
invest in “AMT-subject bonds,” which are municipal obligations
issued to finance certain “private activities,” such as bonds used to finance
airports, housing projects, student loan programs, and water and sewer projects.
Interest on AMT-subject bonds is an item of tax preference for purposes of the
federal individual alternative minimum tax (“AMT”). A portion of such Funds'
distributions may, therefore, be subject to federal income taxes or to the
federal alternative minimum tax. Some Funds may invest a portion of their assets
in securities that generate income that is not exempt from federal (or state and
local) income tax. Income exempt from federal tax may be subject to state and
local income tax. In addition, any capital gains distributed by such Funds will
be taxable as described in this section. A portion of the dividends paid by such
Funds may be exempt from California State personal income tax, but not from
California State franchise tax or California State corporate income tax.
Corporate taxpayers should consult their tax advisor concerning the California
state tax treatment of investments in such Funds.
THE COSTS OF
INVESTING
The following sections describe the
fees and expenses you may pay if you invest in a Fund. You may pay both one-time
fees and ongoing fees. Fees and expenses are important because they lower your
earnings. Before investing, you should be sure you understand the nature of
different costs. Your Financial Professional can help you with this process and
can help you choose the share class and Fund or Funds that are appropriate for
you based upon your investment objective, risk tolerance and other factors.
Financial Professionals may receive different compensation depending upon which
class of shares you purchase.
Fees and Expenses
of the Funds
Class T includes a sales charge.
There is no sales charge on shares of the Funds purchased with reinvested
dividends or other distributions. You may obtain more information about sales
charge reductions from your Financial Professional.
In some cases, the sales charge may
be reduced. To receive a reduction in the sales charge, your purchase must be at
least $250,000 per fund. Please see the table below in "Sales Charge" for more
information.
Sales
Charge
The offering price for Class T
shares is the NAV next calculated after receipt of an investor’s order in proper
form by the Fund or its servicing agent, plus any applicable sales charge as
shown in the table below. The right-hand column in the table indicates what
portion of the sales charge is paid to Financial Professionals and their
brokerage firms (“dealers”) for selling Class T shares. For more
information regarding compensation paid to dealers, see “Distribution Plans and
Intermediary Compensation.”
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|
Sales Charge
as % of: |
Amount of
Purchase |
Offering
Price |
Amount
Invested |
Less than
$250,000 |
2.50% |
2.56% |
$250,000 but less than
$500,000 |
2.00% |
2.04% |
$500,000 but less than
$1,000,000 |
1.50% |
1.52% |
$1,000,000 or
more |
1.00% |
1.01% |
The sales charge applicable to Class
T shares may not be reduced by establishing a Statement of Intent. Rights of
Accumulation are not available for Class T shares.
Ongoing
Fees
The ongoing fees are the operating
expenses of a Fund, which are described in the “Annual Fund Operating Expenses”
table included in the Summary for each Fund. These expenses reduce the value of
each share you own. Because they are ongoing, they increase the cost of
investing in the Funds.
Each Fund pays ongoing fees to PGI
and others who provide services to the Fund. These fees include:
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|
• |
Management Fee – Through the
Management Agreement with the Fund, PGI has agreed to provide investment
advisory services and corporate administrative services to the
Fund. |
|
|
• |
Distribution Fee - Each
Fund has adopted a distribution plan under Rule 12b-1 of the
Investment Company Act of 1940. These fees outlined in the plan pay
distribution and other expenses for the sale of Fund shares and for
services provided to shareholders. Because they are ongoing fees, over
time, these fees may exceed other types of sales
charges. |
|
|
• |
Other Expenses - A portion of
expenses that are allocated to all classes of the Fund. Other expenses
include interest expense, expenses related to fund investments and index
licensing fees. Additional examples of other expenses
include: |
|
|
• |
Transfer Agent Fee -
Principal Shareholder Services, Inc. (“PSS”) has entered into a Transfer
Agency Agreement with the Fund under which PSS provides transfer agent
services to this class. |
|
|
• |
Certain Operating Expenses -
Expenses of registering and qualifying shares for sale, the cost of
producing and distributing reports and prospectuses to shareholders of
these classes, the cost of shareholder meetings held solely for
shareholders of these classes, and other operating expenses of the
Fund. |
|
|
• |
Acquired Fund Fees and
Expenses – fees and expenses charged by other investment companies in
which a Fund invests a portion of its
assets. |
DISTRIBUTION
PLANS AND INTERMEDIARY COMPENSATION
Distribution
and/or Service (12b-1) Fees
Principal Funds Distributor, Inc.
("PFD" or the "Distributor") is the distributor for the shares of Principal
Funds, Inc. PFD is an affiliate of Principal Life Insurance Company and with it
is a subsidiary of Principal Financial Group, Inc. and member of
Principal®.
Principal Funds has adopted a
distribution plan pursuant to Rule 12b-1 under the Investment Company Act for
Class T shares of Principal Funds. Under the 12b-1 Plans, each Fund makes
payments from its assets attributable to the particular share class to the
Fund's Distributor for distribution-related expenses and for providing services
to shareholders of that share class. Payments under the 12b-1 Plans are made by
the Funds to the Distributor pursuant to the 12b-1 Plans regardless of the
expenses incurred by the Distributor. When the Distributor receives Rule 12b-1
fees, it may pay some or all of them to intermediaries whose customers are
shareholders of the Funds for sales support services and for providing services
to shareholders of that share class. Intermediaries may include, among others,
broker-dealers, registered investment advisors, banks, trust companies, pension
plan consultants, retirement plan administrators, and insurance companies. These
intermediaries include Principal Securities, Inc., a broker-dealer affiliated
with PGI. Because Rule 12b-1 fees are paid out of Fund assets and are ongoing
fees, over time they will increase the cost of your investment in the Funds and
may cost you more than other types of sales charges.
The maximum annual Rule 12b-1 fee
for distribution related expenses and/or for providing services to shareholders
under each 12b-1 Plan (as a percentage of average daily net assets) is 0.25% for
each Fund.
The Distributor generally uses Rule
12b-1 fees to finance any activity that is primarily intended to result in the
sale of shares and for providing services to shareholders of the share class,
and the activities vary depending on the share class. In addition to shareholder
services, examples of such sales or distribution related expenses include, but
are not limited to:
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|
• |
Compensation to salespeople
and selected dealers, including ongoing commission
payments. |
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|
• |
Printing of prospectuses and
statements of additional information and reports for other than existing
shareholders, and preparing and conducting sales
seminars. |
Examples of services to shareholders
include furnishing information as to the status of shareholder accounts,
responding to telephone and written inquiries of shareholders, and assisting
shareholders with tax information.
Payments under the 12b-1 plans will
not automatically terminate for Funds that are closed to new investors or to
additional purchases by existing shareholders. The Fund Board will determine
whether to terminate, modify, or leave unchanged the 12b-1 plans when the Board
directs the implementation of the closure of a Fund.
Generally, to receive 12b-1 fees
from the Distributor, dealers or other intermediaries must be the dealer of
record for shares with average daily net assets of at least $100,000.
Commissions and
Ongoing Payments
See "The Costs of Investing" for
more details.
All or a portion of the initial
sales charge that you pay may be paid by the Distributor to intermediaries
selling Class T shares. Additionally, the Distributor generally makes ongoing
12b-1 fee payments to your intermediary as noted above under “Distribution
and/or Service (12b-1) Fees."
Additional
Payments to Intermediaries
Shares of the Funds are sold
primarily through intermediaries, such as brokers, dealers, investment advisors,
banks, trust companies, pension plan consultants, retirement plan
administrators, and insurance companies.
In addition to payments pursuant to
12b-1 plans, sales charges, commissions and finder’s fees, including
compensation for referrals, PGI or its affiliates enter into agreements with
some intermediaries pursuant to which the intermediaries receive payments for
providing services relating to Fund shares. Examples of such services are
administrative, networking, recordkeeping, sub-transfer agency and shareholder
services. In some situations, the Fund will reimburse PGI or its affiliates for
making such payments; in others, the Fund may make such additional payments
directly to intermediaries.
PGI or its affiliates may also pay,
without reimbursement from the Fund, compensation from their own resources to
certain intermediaries that support the distribution of shares of the Fund or
provide services to Fund shareholders.
Such additional payments may vary,
but generally do not exceed: (a) 0.25% of the current year's sales of Fund
shares by that intermediary and/or (b) 0.25% of average net asset value of Fund
shares held by clients of such intermediary.
The Distributor and its affiliates
may pay a bonus or other consideration or incentive to intermediaries if an
employee covered under an employer sponsored benefit program purchases a product
from an affiliate of Distributor with the assistance of a registered
representative of an affiliate of Distributor, if the intermediary sold the
funding vehicle the employer sponsored benefit program utilizes or if the
intermediary subsequently became the broker of record with regard to the
employer sponsored benefit program.
The amounts paid to intermediaries
vary by share class and by Fund.
In some cases, the Distributor and
its affiliates will provide payments or reimbursements in connection with the
costs of conferences, educational seminars, training and marketing efforts
related to the Funds. Such activities may be sponsored by intermediaries or the
Distributor. The costs associated with such activities may include travel,
lodging, entertainment, and meals. In some cases, the Distributor will also
provide payment or reimbursement for expenses associated with transactions
("ticket") charges and general marketing expenses.
For more information, see the
Statement of Additional Information (SAI).
The payments described in this
prospectus may create a conflict of interest by influencing your Financial
Professional or your intermediary to recommend the Fund over another investment,
or to recommend one share class of the Fund over another share class. Ask your
Financial Professional or visit your intermediary's website for more information
about the total amounts paid to them by PGI and its affiliates, and by sponsors
of other investment companies your Financial Professional may recommend to
you.
Your intermediary may charge you
additional fees other than those disclosed in this prospectus. Ask your
Financial Professional about any fees and commissions they charge.
FUND ACCOUNT
INFORMATION
Statements
You will receive account statements
from your intermediary on a periodic basis.
Orders Placed by
Intermediaries
Principal Funds may have an
agreement with your intermediary, such as a broker-dealer, third party
administrator, or trust company, that permits the intermediary to receive orders
on behalf of the Fund until 3 p.m. Central Time. The agreement may include
authorization for your intermediary to designate other intermediaries
(“sub-designees”) to receive orders on behalf of the Fund on the same terms that
apply to the intermediary. In such cases, if your intermediary or a sub-designee
receives your order in correct form by 3 p.m. Central Time, transmits it to the
Fund, and pays for it in accordance with the agreement, the Fund will price the
order at the next net asset value per share it computes after your intermediary
or sub-designee received your order.
The time at which the Fund prices
orders and the time until which the Fund or your intermediary or sub-designee
will accept orders may change in the case of an emergency or if the NYSE closes
at a time other than 3 p.m. Central Time.
Transactions
through Financial Institutions/Professionals
Financial institutions and dealers
may charge their customers a processing or service fee in connection with the
purchase or redemption of Fund shares. The amount and applicability of such a
fee is determined and disclosed to its customers by each individual financial
institution or dealer. Processing or service fees typically are fixed, nominal
dollar amounts and are in addition to the sales and other charges described in
this prospectus and the SAI.
Your financial institution or dealer
will provide you with specific information about any processing or service fees
you will be charged.
Reservation of
Rights
Principal Funds reserves the right
to amend or terminate the special plans described in this prospectus.
Shareholders will be notified of any such action to the extent required by
law.
Such plans include, for example,
automatic investment, systematic withdrawal, waiver of Fund minimums for certain
accounts and waiver or reduction of the sales charge or contingent deferred
sales charge for certain purchasers.
Minimum Account
Balance
Each Fund has a minimum required
account balance of $1,000. The Fund reserves the right to redeem all shares in
your account if the value of your account falls below $1,000. An involuntary
redemption of a small account will not be triggered by market conditions alone.
The Funds reserve the right to increase the required minimum.
Multiple
Translations
This prospectus may be translated
into other languages. In the event of any inconsistencies or ambiguity as to the
meaning of any word or phrase in a translation, the English text will
prevail.
Financial
Statements
Shareholders will receive annual
financial statements for the Funds, audited by the Funds’ independent registered
public accounting firm. Shareholders will also receive a semiannual financial
statement that is unaudited.
FINANCIAL
HIGHLIGHTS
The following financial highlights
tables are intended to help you understand the Fund’s financial performance for
the periods shown. Certain information reflects returns for a single Fund share.
The total returns in each table represent the rate that an investor would have
earned or lost each period on an investment in the Fund (assuming reinvestment
of all distributions). This information has been audited by Ernst & Young
LLP, Independent Registered Public Accounting Firm, whose report, along with
each Fund’s financial statements, is included in Principal Funds, Inc. Annual
Report to Shareholders for the fiscal year ended October 31, 2017, which is
available upon request, and incorporated by reference into the SAI.
To request a free copy of the latest
annual or semiannual report for the Fund, you may telephone
1-800-222-5852.
This page left blank
intentionally.
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FINANCIAL
HIGHLIGHTS |
PRINCIPAL
FUNDS, INC. |
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Selected
data for a share of Capital Stock outstanding throughout each year ended
October 31 (except as noted): |
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|
Net Asset Value, Beginning of
Period |
Net Investment Income
(Loss)(a) |
Net Realized and Unrealized
Gain (Loss) on Investments |
Total From Investment
Operations |
Dividends from Net Investment
Income |
Distributions from Realized
Gains |
Total Dividends and
Distributions |
Net Asset Value, End of
Period |
GLOBAL
DIVERSIFIED INCOME FUND |
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|
Class
T shares |
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|
2017(c) |
$13.93 |
$0.24 |
$0.23 |
$0.47 |
$(0.23) |
$– |
$(0.23) |
$14.17 |
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FINANCIAL
HIGHLIGHTS (CONTINUED) |
PRINCIPAL
FUNDS, INC. |
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Total Return(b) |
Net Assets, End of Period (in
thousands) |
Ratio of Expenses to Average
Net Assets |
Ratio of Expenses to Average
Net Assets (Excluding Dividends and Interest Expense on Short Sales, Short
Sale Fees and Reverse Repurchase Agreement Expense) |
Ratio of Net Investment Income
to Average Net Assets |
Portfolio Turnover
Rate |
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3.44 %(d),(e) |
$10 |
1.12 %(f) |
1.09 %(f) |
4.46 %(f) |
120.1 %(f) |
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(a) |
Calculated based on average
shares outstanding during the period. |
(b) |
Total return is calculated
without the front-end sales charge or contingent deferred sales charge, if
applicable. |
(c) |
Period from June 12, 2017, date
shares first offered, through October 31, 2017. |
(d) |
Total return amounts have not
been annualized. |
(e) |
During 2017, the Class
experienced a significant one time gain of approximately $0.14/share as a
result of a particular set of shareholder activity and the impact of the
dividend reinvestment. If such gain had not been recognized, the total
return amounts expressed herein would have been lower. |
(f) |
Computed on an annualized
basis. |
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FINANCIAL
HIGHLIGHTS |
PRINCIPAL
FUNDS, INC. |
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|
Selected
data for a share of Capital Stock outstanding throughout each year ended
October 31 (except as noted): |
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|
Net Asset Value, Beginning of
Period |
Net Investment Income
(Loss)(a) |
Net Realized and Unrealized
Gain (Loss) on Investments |
Total From Investment
Operations |
Dividends from Net Investment
Income |
Distributions from Realized
Gains |
Total Dividends and
Distributions |
Net Asset Value, End of
Period |
HIGH
YIELD FUND |
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Class
T Shares |
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|
2017 (c) |
$7.44 |
$0.14 |
$0.05 |
$0.19 |
$(0.13) |
$– |
$(0.13) |
$7.50 |
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FINANCIAL
HIGHLIGHTS (CONTINUED) |
|
PRINCIPAL
FUNDS, INC. |
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Total Return(b) |
Net Assets, End of Period (in
thousands) |
Ratio of Expenses to Average
Net Assets |
Ratio of Net Investment Income
to Average Net Assets |
Portfolio Turnover
Rate |
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2.61% (d) |
$10 |
0.90 %(e) |
5.01 %(e) |
51.2 %(e) |
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(a) |
Calculated based on average
shares outstanding during the period. |
(b) |
Total return is calculated
without the front-end sales charge or contingent deferred sales charge, if
applicable. |
(c) |
Period from June 12, 2017, date
shares first offered, through October 31, 2017. |
(d) |
Total return amounts have not
been annualized. |
(e) |
Computed on an annualized
basis. |
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FINANCIAL
HIGHLIGHTS |
PRINCIPAL
FUNDS, INC. |
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|
Selected
data for a share of Capital Stock outstanding throughout each year ended
October 31 (except as noted): |
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|
Net Asset Value, Beginning of
Period |
Net Investment Income
(Loss)(a) |
Net Realized and Unrealized
Gain (Loss) on Investments |
Total From Investment
Operations |
Dividends from Net Investment
Income |
Distributions from Realized
Gains |
Total Dividends and
Distributions |
Net Asset Value, End of
Period |
SHORT-TERM
INCOME FUND |
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|
Class
T Shares |
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|
2017(c) |
$12.20 |
$0.07 |
$– |
$0.07 |
$(0.07) |
$– |
$(0.07) |
$12.20 |
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FINANCIAL
HIGHLIGHTS (CONTINUED) |
PRINCIPAL
FUNDS, INC. |
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Total Return(b) |
Net Assets, End of Period (in
thousands) |
Ratio of Expenses to Average
Net Assets |
Ratio of Net Investment Income
to Average Net Assets |
Portfolio Turnover
Rate |
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|
0.61 %(d) |
$10 |
0.79 %(e) |
1.59 %(e) |
59.5 %(e) |
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|
(a) |
Calculated based on average
shares outstanding during the period. |
(b) |
Total return is calculated
without the front-end sales charge or contingent deferred sales charge, if
applicable. |
(c) |
Period from June 12, 2017, date
shares first offered, through October 31, 2017. |
(d) |
Total return amounts have not
been annualized. |
(e) |
Computed on an annualized
basis. |
APPENDIX A –
DESCRIPTION OF BOND RATINGS
Moody's
Investors Service, Inc. Rating Definitions:
Long-Term Obligation
Ratings
Ratings assigned on Moody's global
long-term obligation rating scales are forward-looking opinions of the relative
credit risk of financial obligations issued by non-financial corporates,
financial institutions, structured finance vehicles, project finance vehicles,
and public sector entities. Long-term ratings are assigned to issuers or
obligations with an original maturity of one year or more and reflect both on
the likelihood of default on contractually promised payments and the expected
financial loss suffered in the event of default.1
1
For certain
structured finance, preferred stock and hybrid securities in which payment
default events are either not defined or do not match investor’s expectations
for timely payment, the ratings
reflect the likelihood of impairment and the expected financial loss in the
event of impairment.
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Aaa: |
Obligations rated Aaa are
judged to be of the highest quality, subject to the lowest level of credit
risk. |
|
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Aa: |
Obligations rated Aa are
judged to be of high quality and are subject to very low credit
risk. |
|
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A: |
Obligations rated A are
considered upper-medium grade and are subject to low credit
risk. |
|
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Baa: |
Obligations rated Baa are
subject to moderate credit risk. They are considered medium-grade and as
such may possess certain speculative
characteristics. |
|
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Ba: |
Obligations rated Ba are
judged to be speculative and are subject to substantial credit
risk. |
|
|
B: |
Obligations rated B are
considered speculative and are subject to high credit
risk. |
|
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Caa: |
Obligations rated Caa are
judged to be speculative of poor standing and are subject to very high
credit risk. |
|
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Ca: |
Obligations rated Ca are
highly speculative and are likely in, or very near, default, with some
prospect of recovery of principal and
interest. |
|
|
C: |
Obligations rated C are the
lowest rated class of bonds and are typically in default, with little
prospect for recovery of principal or
interest. |
NOTE: Moody's appends numerical
modifiers, 1, 2, and 3 to each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings of hybrid
securities issued by banks, issuers, financial companies, and securities
firms.*
* By their
terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together the
hybrid indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that
security.
SHORT-TERM NOTES: Short-term ratings
are assigned to obligations with an original maturity of thirteen months or less
and reflect both on the likelihood of a default on contractually promised
payments and the expected financial loss suffered in the event of default.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or related
supporting institutions) have a superior ability to repay short-term debt
obligations.
Issuers rated Prime-2 (or related
supporting institutions) have a strong ability to repay short-term debt
obligations.
Issuers rated Prime-3 (or related
supporting institutions) have an acceptable ability to repay short-term
promissory obligations.
Issuers rated Not Prime do not fall
within any of the Prime rating categories.
US MUNICIPAL SHORT-TERM DEBT: The
Municipal Investment Grade (MIG) scale is used to rate US municipal bonds of up
to three years maturity. MIG ratings are divided into three levels - MIG 1
through MIG 3 - while speculative grade short-term obligations are designated
SG.
MIG 1 denotes superior credit
quality, afforded excellent protection from highly reliable liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2 denotes strong credit quality
with ample margins of protection, although not as large as in the preceding
group.
MIG 3 notes are of acceptable credit
quality. Liquidity and cash-flow protection may be narrow and market access for
refinancing is likely to be less well-established.
SG denotes speculative-grade credit
quality and may lack sufficient margins of protection.
Description
of S&P Global Ratings' Credit Rating Definitions:
S&P Global's credit rating, both
long-term and short-term, is a forward-looking opinion of the creditworthiness
of an obligor with respect to a specific obligation. This assessment takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The credit rating is not a
recommendation to purchase, sell or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular
investor.
The ratings are statements of
opinion as of the date they are expressed furnished by the issuer or obtained by
S&P Global from other sources S&P Global considers reliable. S&P
Global does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying
degrees, on the following considerations:
|
|
• |
Likelihood of payment -
capacity and willingness of the obligor to meet its financial commitment
on an obligation in accordance with the terms of the
obligation; |
|
|
• |
Nature of and provisions of
the obligation; |
|
|
• |
Protection afforded by, and
relative position of, the obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditor's rights. |
LONG-TERM CREDIT
RATINGS:
|
|
AAA: |
Obligations rated ‘AAA’ have
the highest rating assigned by S&P Global. The obligor’s capacity to
meet its financial commitment on the obligation is extremely
strong. |
|
|
AA: |
Obligations rated ‘AA’ differ
from the highest-rated issues only in small degree. The obligor’s capacity
to meet its financial commitment on the obligation is very
strong. |
|
|
A: |
Obligations rated ‘A’ have a
strong capacity to meet financial commitment on the obligation although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated
categories. |
|
|
BBB: |
Obligations rated ‘BBB’
exhibit adequate protection parameters; however, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to meet financial commitment on the
obligation. |
|
|
BB, B, CCC, |
Obligations rated ‘BB’, ‘B’,
‘CCC’, ‘CC’, and ‘C’ are regarded, on balance, as having
significant |
|
|
CC, and C: |
speculative characteristics.
‘BB’ indicates the lowest degree of speculation and ‘C’ the highest degree
of speculation. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major risk exposures to adverse
conditions. |
|
|
BB: |
Obligations rated ‘BB’ are
less vulnerable to nonpayment than other speculative issues. However it
faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the
obligation. |
|
|
B: |
Obligations rated ‘B’ are more
vulnerable to nonpayment than ‘BB’ but the obligor currently has the
capacity to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair this
capacity. |
|
|
CCC: |
Obligations rated ‘CCC’ are
currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. If adverse business, financial, or
economic conditions occur, the obligor is not likely to have the capacity
to meet its financial commitment on the
obligation. |
|
|
CC: |
Obligations rated ‘CC’ are
currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a
default has not yet occurred but S&P Global expects default to be a
virtual certainty, regardless of anticipated time to
default. |
|
|
C: |
The rating ‘C’ is highly
vulnerable to nonpayment, the obligation is expected to have lower
relative seniority or lower ultimate recovery compared to higher rated
obligations. |
|
|
D: |
Obligations rated ‘D’ are in
default, or in breach of an imputed promise. For non-hybrid capital
instruments, the ‘D’ rating category is used when payments on an
obligation are not made on the date due, unless S&P Global believes
that such payments will be made within five business days in the absence
of a stated grace period or within the earlier of the stated grace period
or 30 calendar days. The rating will also be used upon filing for
bankruptcy petition or the taking of similar action and where default is a
virtual certainty. If an obligation is subject to a distressed exchange
offer the rating is lowered to ‘D’. |
Plus (+) or Minus (-): The ratings
from ‘AA’ to ‘CCC’ may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
|
|
NR: |
Indicates that no rating has
been requested, that there is insufficient information on which to base a
rating or that S&P Global does not rate a particular type of
obligation as a matter of policy. |
SHORT-TERM CREDIT RATINGS: Ratings
are graded into four categories, ranging from ‘A-1’ for the highest quality
obligations to ‘D’ for the lowest.
|
|
A-1: |
This is the highest category.
The obligor’s capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely
strong. |
|
|
A-2: |
Issues carrying this
designation are somewhat more susceptible to the adverse effects of the
changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is
satisfactory. |
|
|
A-3: |
Issues carrying this
designation exhibit adequate capacity to meet their financial obligations.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet it financial
commitment on the obligation. |
|
|
B: |
Issues rated ‘B’ are regarded
as vulnerable and have significant speculative characteristics. The
obligor has capacity to meet financial commitments; however, it faces
major ongoing uncertainties which could lead to obligor’s inadequate
capacity to meet its financial
obligations. |
|
|
C: |
This rating is assigned to
short-term debt obligations that are currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions to meet its financial commitment on the
obligation. |
|
|
D: |
This rating indicates that the
issue is either in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category is used when
payments on an obligation are not made on the date due, unless S&P
Global believes that such payments will be made within five business days
in the absence of a stated grace period or within the earlier of the
stated grace period or 30 calendar days. The rating will also be used upon
filing for bankruptcy petition or the taking of similar action and where
default is a virtual certainty. If an obligation is subject to a
distressed exchange offer the rating is lowered to
‘D’. |
MUNICIPAL SHORT-TERM NOTE RATINGS:
S&P Global rates U.S. municipal notes with a maturity of less than three
years as follows:
|
|
SP-1: |
A strong capacity to pay
principal and interest. Issues that possess a very strong capacity to pay
debt service is given a "+" designation. |
|
|
SP-2: |
A satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the terms of the
notes. |
|
|
SP-3: |
A speculative capacity to pay
principal and interest. |
Fitch,
Inc. Rating Definitions:
Fitch’s credit ratings are forward
looking and typically attempt to assess the likelihood of repayment by the
obligor at “ultimate/final maturity” and thus material changes in economic
conditions and expectations (for a particular issuer) may result in a rating
change. Credit ratings are opinions on relative credit quality and not a
predictive measure of specific default probability.
Investment Grade
|
|
AAA: |
Highest credit quality. ‘AAA’
ratings denote the lowest expectation of credit risk. They are assigned
only in case of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events. |
|
|
AA: |
Very high credit quality. ‘AA’
ratings denote expectations of very low credit risk. They indicate very
strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable
events. |
|
|
A: |
High credit quality. ‘A’
ratings denote low expectation of credit risk. The capacity for timely
payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher
ratings. |
|
|
BBB: |
Good credit quality. ‘BBB’
ratings indicate that expectations of credit risk are currently low. The
capacity for payment of financial commitments is considered adequate, but
adverse business or economic conditions are more likely to impair this
capacity. |
Speculative Grade
|
|
BB: |
Speculative. ‘BB’ ratings
indicate an elevated vulnerability to credit risk, particularly in the
event of adverse changes in business or economic conditions over time;
however, business or financial alternatives may be available to allow
financial commitments to be met. |
|
|
B: |
Highly speculative. ‘B’
ratings indicate that material credit risk is
present. |
|
|
CCC: |
Substantial credit risk. ‘CCC’
ratings indicate that substantial credit risk is
present. |
|
|
CC: |
Very high levels of credit
risk. ‘CC’ ratings indicate very high levels of credit
risk. |
|
|
C: |
Exceptionally high levels of
credit risk. ‘C’ indicates exceptionally high levels of credit
risk. |
|
|
D: |
Default. ‘D’ ratings indicate
an issuer has entered into bankruptcy filings, administration,
receivership, liquidation or which has otherwise ceased
business. |
Note: The
modifiers “+” or “-“ may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
obligation rating category, or to corporate finance obligation ratings in the
categories below ‘B’.
Short-Term Credit
Ratings
A short-term issuer or obligation
rating is based in all cases on the short-term vulnerability to default of the
rated entity or security stream, and relates to the capacity to meet financial
obligations in accordance with the documentation governing the relevant
obligation. Short-Term Ratings are assigned to obligations whose initial
maturity is viewed as “short term” based on market convention. Typically, this
means up to 13 months for corporate, structured and sovereign obligations, and
up to 36 months for obligations in US public finance markets.
|
|
F1: |
Highest short-term credit
quality. Indicates the strongest intrinsic capacity for timely payment of
financial commitments; may have an added “+” to denote any exceptionally
strong credit feature. |
|
|
F2: |
Good short-term credit
quality. Good intrinsic capacity for timely payment of financial
commitments. |
|
|
F3: |
Fair short-term credit
quality. The intrinsic capacity for timely payment of financial
commitments is adequate. |
|
|
B: |
Speculative short-term credit
quality. Minimal capacity for timely payment of financial commitments,
plus heightened vulnerability to near term adverse changes in financial
and economic conditions. |
|
|
C: |
High short-term default risk.
Default is a real possibility. |
|
|
RD: |
Restricted default. Indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically
applicable to entity ratings only. |
|
|
D: |
Default. Indicates a
broad-based default event for an entity, or the default of a specific
short-term obligation. |
Recovery Ratings
Recovery Ratings are assigned to
selected individual securities and obligations, most frequently for individual
obligations of corporate issuers with speculative grade ratings.
Among the factors that affect
recovery rates for securities are the collateral, the seniority relative to
other obligations in the capital structure (where appropriate), and the expected
value of the company or underlying collateral in distress.
The Recovery Rating scale is based
upon the expected relative recovery characteristics of an obligation upon the
curing of a default, emergence from insolvency or following the liquidation or
termination of the obligor or its associated collateral. Recovery Ratings are an
ordinal scale and do not attempt to precisely predict a given level of recovery.
As a guideline in developing the rating assessments, the agency employs broad
theoretical recovery bands in its ratings approach based on historical averages
and analytical judgment, but actual recoveries for a given security may deviate
materially from historical averages.
|
|
RR1: |
Outstanding recovery prospects
given default. ‘RR1’ rated securities have characteristics consistent with
securities historically recovering 91%-100% of current principal and
related interest. |
|
|
RR2: |
Superior recovery prospects
given default. ‘RR2’ rated securities have characteristics consistent with
securities historically recovering 71%-90% of current principal and
related interest. |
|
|
RR3: |
Good recovery prospects given
default. ‘RR3’ rated securities have characteristics consistent with
securities historically recovering 51%-70% of current principal and
related interest. |
|
|
RR4: |
Average recovery prospects
given default. ‘RR4’ rated securities have characteristics consistent with
securities historically recovering 31%-50% of current principal and
related interest. |
|
|
RR5: |
Below average recovery
prospects given default. ‘RR5’ rated securities have characteristics
consistent with securities historically recovering 11%-30% of current
principal and related interest. |
|
|
RR6: |
Poor recovery prospects given
default. ‘RR6’ rated securities have characteristics consistent with
securities historically recovering 0%-10% of current principal and related
interest. |
ADDITIONAL
INFORMATION
Additional information about the
Fund is available in the Statement of Additional Information dated March 1,
2018, which is incorporated by reference into this prospectus. Additional
information about the Funds’ investments is available in the Fund’s annual and
semiannual reports to shareholders. In the Fund’s annual report, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds’ performance during the last fiscal year. The Statement of
Additional Information and the Fund’s annual and semiannual reports can be
obtained free of charge by writing Principal Funds, P.O. Box 8024,
Boston, MA 02266-8024. In addition, the Fund makes its Statement of Additional
Information and annual and semiannual reports available, free of charge, on our
website www.principalfunds.com/prospectuses. To request this and other
information about the Fund and to make shareholder inquiries, telephone
1-800-222-5852.
Information about the Fund
(including the Statement of Additional Information) can be reviewed and copied
at the Securities and Exchange Commission’s Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling the Commission at 1-202-551-8090. Reports and other
information about the Fund are available on the EDGAR Database on the
Commission’s internet site at www.sec.gov. Copies of this information may be
obtained, upon payment of a duplicating fee, by electronic request at the
following e-mail address: [email protected], or by writing the Commission’s
Public Reference Section, 100 F Street, N.E., Washington, D.C.
20549-1520.
PFI has entered into a management
agreement with Principal Global Investors, LLC (“PGI”). PFI and/or PGI, on
behalf of the Funds, enter into contractual arrangements with various parties,
including, among others, the Funds’ sub-advisors, distributor, transfer agent
and custodian, who provide services to the Funds. These arrangements are between
PFI and/or PGI and the applicable service provider. Shareholders are not parties
to, or intended to be third-party beneficiaries of, any of these arrangements.
Such arrangements are not intended to create in any individual shareholder or
group of shareholders any right, including the right to enforce such
arrangements against the service providers or to seek any remedy thereunder
against PGI or any other service provider, either directly or on behalf of PFI
or any Fund.
This prospectus provides information
that you should consider in determining whether to purchase shares of a Fund.
This prospectus, the Statement of Additional Information, or the contracts that
are exhibits to PFI’s registration statement are not intended to give rise to
any agreement or contract between PFI and/or any Fund and any investor, or give
rise to any contract or other rights in any individual shareholder, group of
shareholders or other person other than any rights conferred explicitly by
federal or state securities laws that may not be waived.
The U.S. government does not insure
or guarantee an investment in any of the Funds.
Shares of the Funds are not deposits
or obligations of, or guaranteed or endorsed by, Principal Bank or any other
financial institution, nor are shares of the Funds federally insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency.
Principal Funds, Inc. SEC File
811-07572