PRINCIPAL FUNDS, INC. (“PFI” or the "Fund")
Statement of Additional Information
dated December 31, 2014 as amended and restated March 10, 2015 and June 15, 2015
This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Fund's prospectus. This prospectus, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund’s prospectus dated December 31, 2014 for the A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6, and S share classes; March 10, 2015 for the Institutional Class Shares of the Opportunistic Municipal Fund; and June 15, 2015 for the Institutional Class Shares of the EDGE MidCap Fund and Class P Shares of the Real Estate Debt Income Fund.
Incorporation by Reference: The audited financial statements, schedules of investments and auditor's report included in the Fund's Annual Report to Shareholders, for the fiscal year ended August 31, 2014, and the unaudited financial statements and schedules of investments included in the Fund's Semiannual Report to Shareholders, for the period ended February 28, 2015, are hereby incorporated by reference into and are legally a part of this SAI.
For a free copy of the current prospectus, semiannual or annual report, call 1-800-222-5852 or write:
Principal Funds
P.O. Box 8024
Boston, MA 02266-8024
The prospectus may be viewed at www.principalfunds.com/prospectus.
 
Ticker Symbols by Share Class
Fund
A
C
J
P
Inst.
R-1
R-2
R-3
R-4
R-5
R-6
S
Blue Chip
PBLAX
PBLCX
 
PBLPX
PBCKX
 
 
 
 
 
 
 
Bond Market Index
 
 
PBIJX
 
PNIIX
PBIMX
PBINX
PBOIX
PBIPX
PBIQX
 
 
Capital Securities
 
 
 
 
 
 
 
 
 
 
 
PCSFX
Credit Opportunities Explorer
PCEAX
 
 
 
PCOIX
 
 
 
 
 
 
 
Diversified Real Asset
PRDAX
PRDCX
 
PRDPX
PDRDX
 
 
 
 
 
PDARX
 
Dynamic High Yield Explorer
PDYAX
 
 
 
PDYIX
 
 
 
 
 
 
 
EDGE MidCap Fund
 
 
 
 
PEDGX
 
 
 
 
 
 
 
Global Multi-Strategy
PMSAX
PMSCX
 
PMSPX
PSMIX
 
 
 
 
 
 
 
Global Opportunities
PGLAX
PGOCX
 
PGXPX
PGOIX
 
 
 
 
 
 
 
International Equity Index
 
 
 
 
PIDIX
PILIX
PINEX
PIIOX
PIIPX
PIIQX
 
 
International Small Company
PICAX
 
 
PCOPX
PISMX
 
 
 
 
 
 
 
Opportunistic Municipal
PMOAX
PMODX
 
PMOQX
POMFX
 
 
 
 
 
 
 
Origin Emerging Markets
POEYX
 
 
 
POEIX
 
 
 
 
 
POEFX
 
Preferred Securities
PPSAX
PRFCX
PPSJX
PPSPX
PPSIX
PUSAX
PPRSX
PNARX
PQARX
PPARX
 
 
Real Estate Allocation
PAEDX
 
 
 
PADDX
 
 
 
 
 
 
 
Real Estate Debt Income
PRDYX
 
 
PDIFX
PRDIX
 
 
 
 
 
 
 
Small-MidCap Dividend Income
PMDAX
PMDDX
 
PMDPX
PMDIX
 
 
 
 
 
 
 



TABLE OF CONTENTS
APPENDIX A


2


FUND HISTORY
Principal Funds, Inc. (“PFI” or the "Fund") was organized as Principal Special Markets Fund, Inc. on January 28, 1993 as a Maryland corporation. The Fund changed its name to Principal Investors Fund, Inc. effective September 14, 2000. The Fund changed its name to Principal Funds, Inc. effective June 13, 2008.
On January 12, 2007, the Fund acquired WM Trust I, WM Trust II, and WM Strategic Asset Management Portfolios, LLC.
Classes offered by each Fund are shown in the following table.
 
Share Class
Fund
A
C
J
P
Institutional
R-1
R-2
R-3
R-4
R-5
R-6
S
Blue Chip
X
X
 
X
X
 
 
 
 
 
 
 
Bond Market Index
 
 
X
 
X
X
X
X
X
X
 
 
Capital Securities
 
 
 
 
 
 
 
 
 
 
 
X
Credit Opportunities Explorer
X
 
 
 
X
 
 
 
 
 
 
 
Diversified Real Asset
X
X
 
X
X
 
 
 
 
 
X
 
Dynamic High Yield Explorer
X
 
 
 
X
 
 
 
 
 
 
 
EDGE MidCap
 
 
 
 
X
 
 
 
 
 
 
 
Global Multi-Strategy
X
X
 
X
X
 
 
 
 
 
 
 
Global Opportunities
X
X
 
X
X
 
 
 
 
 
 
 
International Equity Index
 
 
 
 
X
X
X
X
X
X
 
 
International Small Company
X
 
 
X
X
 
 
 
 
 
 
 
Opportunistic Municipal
X
X
 
X
X
 
 
 
 
 
 
 
Origin Emerging Markets
X
 
 
 
X
 
 
 
 
 
X
 
Preferred Securities
X
X
X
X
X
X
X
X
X
X
 
 
Real Estate Allocation
X
 
 
 
X
 
 
 
 
 
 
 
Real Estate Debt Income
X
 
 
X
X
 
 
 
 
 
 
 
Small-MidCap Dividend Income
X
X
 
X
X
 
 
 
 
 
 
 
Each class has different expenses. Because of these different expenses, the investment performance of the classes will vary. For more information, including your eligibility to purchase certain classes of shares, call Principal Funds at 1-800-222-5852.
Principal Management Corporation ("PMC" or “Principal” or the "Manager") may recommend to the Board, and the Board may elect, to close certain funds to new investors or close certain funds to new and existing investors. Principal may make such a recommendation when a fund approaches a size where additional investments in the fund have the potential to adversely impact fund performance and make it increasingly difficult to keep the fund fully invested in a manner consistent with its investment objective. Principal may also recommend to the Board, and the Board may elect, to close certain share classes to new or new and existing investors.
MULTIPLE CLASS STRUCTURE
The Board of Directors has adopted a multiple class plan (the Multiple Class Plan) pursuant to SEC Rule 18f-3. The share classes that are offered by each Fund are identified in the chart included under the heading "Fund History." The share classes offered under the plan include: Classes A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6, and S.
Class A shares are generally sold with a sales charge that is a variable percentage based on the amount of the purchase, as described in the prospectus. Certain redemptions of Class A shares within 12 months of purchase may be subject to a contingent deferred sales charge ("CDSC"), as described in the prospectus.
Class C shares are not subject to a sales charge at the time of purchase but are subject to a 1% CDSC on shares redeemed within 12 months of purchase, as described in the prospectus.
The Class J shares are sold without any front-end sales charge. A CDSC of 1% is imposed if Class J shares are redeemed within 18 months of purchase, as described in the prospectus.

3


For Classes A, C, and J shares, the CDSC is waived on shares:
•
redeemed within 90 days after an account is re-registered due to a shareholder's death;
•
redeemed to pay surrender fees;
•
redeemed to pay retirement plan fees;
•
redeemed involuntarily from accounts with small balances;
•
redeemed due to the shareholder's disability (as defined by the Internal Revenue Code) provided the shares were purchased prior to the disability;
•
redeemed from retirement plans to satisfy minimum distribution rules under the Internal Revenue Code;
•
redeemed from a retirement plan to assure the plan complies with the Internal Revenue Code;
•
redeemed from retirement plans qualified under Section 401(a) of the Internal Revenue Code due to the plan participant's death, disability, retirement, or separation from service after attaining age 55;
•
redeemed from retirement plans to satisfy excess contribution rules under the Internal Revenue Code; or
•
redeemed using a systematic withdrawal plan (up to 1% per month (measured cumulatively with respect to non-monthly plans) of the value of the fund account at the time, and beginning on the date, the systematic withdrawal plan begins). (The free withdrawal privilege not used in a calendar year is not added to the free withdrawal privileges for any following year.)
For Class J shares, the CDSC also is waived on shares:
•
redeemed that were purchased pursuant to the Small Amount Force Out program (SAFO); or
•
of the Money Market Fund redeemed within 30 days of the initial purchase if the redemption proceeds are transferred to another Principal IRA, defined as either a fixed or variable annuity issued by Principal Life Insurance Company to fund an IRA, a Principal Bank IRA product, or a WRAP account IRA sponsored by Princor Financial Services Corporation.
The P, Institutional, R-1, R-2, R-3, R-4, R-5, and R-6 Classes are available without any front-end sales charge or contingent deferred sales charge. Class P shares are generally available through mutual fund wrap programs or fee based advisory programs which may charge fees in addition to those charged by the Funds. The R-1, R-2, R-3, R-4, and R-5 Classes are available through employer-sponsored retirement plans. Such plans may impose fees in addition to those charged by the Funds. The R-1, R-2, R-3, R-4, and R-5 share classes are subject to asset based charges (described below). Class R-6 shares are generally available through the defined contribution investment only channel.
Principal receives a fee for providing investment advisory and certain corporate administrative services under the terms of the Management Agreement. In addition to the management fee, the Fund's R-1, R-2, R-3, R-4, and R-5 Class shares pay Principal a service fee and an administrative services fee under the terms of a Service Agreement and an Administrative Services Agreement.
Service Agreement (R-1, R-2, R-3, R-4, and R-5 Classes only)
The Service Agreement provides for Principal to provide certain personal services to shareholders (plan sponsors) and beneficial owners (plan members) of those classes. These personal services include:
•
responding to plan sponsor and plan member inquiries;
•
providing information regarding plan sponsor and plan member investments; and
•
providing other similar personal services or services related to the maintenance of shareholder accounts as contemplated by National Association of Securities Dealers (NASD) Rule 2830 (or any successor thereto).
As compensation for these services, the Fund will pay Principal service fees equal to 0.25% of the average daily net assets attributable to each of the R-1, R-2, R-3, R-4 and R-5 Classes. The service fees are calculated and accrued daily and paid monthly to Principal (or at such other intervals as the Fund and Principal may agree).

4


Administrative Service Agreement (R-1, R-2, R-3, R-4, and R-5 Classes only)
The Administrative Service Agreement provides for Principal to provide services to beneficial owners of Fund shares. Such services include:
•
receiving, aggregating, and processing purchase, exchange, and redemption requests from plan shareholders;
•
providing plan shareholders with a service that invests the assets of their accounts in shares pursuant to pre-authorized instructions submitted by plan members;
•
processing dividend payments from the Funds on behalf of plan shareholders and changing shareholder account designations;
•
acting as shareholder of record and nominee for plans;
•
maintaining account records for shareholders and/or other beneficial owners;
•
providing notification to plan shareholders of transactions affecting their accounts;
•
forwarding prospectuses, financial reports, tax information and other communications from the Fund to beneficial owners;
•
distributing, receiving, tabulating and transmitting proxy ballots of plan shareholders; and
•
other similar administrative services.
As compensation for these services, the Fund will pay Principal service fees equal to 0.28% of the average daily net assets attributable to the R-1 Class, 0.20% of the average daily net assets of the R-2 Class, 0.07% of the average daily net assets of the R-3 Class, 0.03% of the average daily net assets of the R-4 Class and 0.01% of the average daily net assets of the R-5 Class. The service fees are calculated and accrued daily and paid monthly to Principal (or at such other intervals as the Fund and Principal may agree).
Principal will generally, at its discretion appoint (and may at any time remove), other parties, including companies affiliated with Principal, as its agent to carry out the provisions of the Service Agreement and/or the Administrative Service Agreement. However, the appointment of an agent shall not relieve Principal of any of its responsibilities or liabilities under those Agreements. Any fees paid to agents under these Agreements shall be the sole responsibility of Principal.
Class S: Class S shares are available without any front-end sales charge or contingent deferred sales charge. Eligibility to invest in the Capital Securities Fund is limited to certain wrap-fee program accounts. Only wrap-fee program accounts as to which Spectrum and/or Principal Global Investors, LLC (PGI) have an agreement with the wrap-fee program's sponsor ("Sponsor") or the wrap account owner to provide investment advisory or sub-advisory services (either directly or by providing a model investment portfolio created and maintained by Spectrum and/or PGI to the Sponsor or one or more Sponsor-designated investment managers) (Eligible Wrap Accounts) are eligible to purchase shares of the Fund. References to Wrap Fee Adviser shall mean Spectrum and/or PGI in their role providing such services to Eligible Wrap Accounts.
A client agreement with the Sponsor to open an account in the Sponsor's wrap-fee program typically may be obtained by contacting the Sponsor or your financial advisor. Purchase and sale decisions regarding Fund shares for your wrap account ordinarily will be made by the Wrap Fee Adviser, the Sponsor or a Sponsor-designated investment manager, depending on the particular wrap-fee program in which your wrap account participates. If your wrap-fee account's use of the Wrap Fee Adviser's investment style is terminated by you, the Sponsor or the Wrap Fee Adviser, your wrap account will cease to be an Eligible Wrap Account and you will be required to redeem all your shares of the Capital Securities Fund. Each Eligible Wrap Account, by purchasing shares, agrees to any such redemption.
Rule 12b-1 Fees / Distribution Plans and Agreements
The Distributor for the Funds is Principal Funds Distributor, Inc. ("PFD"). The address for PFD is as follows: 620 Coolidge Drive, Suite 300, Folsom, CA 95630.
In addition to the management and service fees, certain of the Fund's share classes are subject to a Rule 12b-1 Distribution Plan and Agreement (a “Plan”). The Board of Directors and initial shareholders of the A, C, J, R-1, R-2, R-3, and R-4 Classes of shares have approved and entered into a Plan. In adopting the Plans, the Board of Directors (including a majority of directors who are not interested persons of the Fund (as defined in the 1940 Act)) determined that there was a reasonable likelihood that the Plans would benefit the Funds and the shareholders of the affected classes. Among the possible benefits of the Plans include the potential for building and retaining Fund assets as well as the ability to offer an incentive for registered representatives to provide ongoing servicing to shareholders.

5


The Plans provide that each Fund makes payments to the Fund's Distributor from assets of each share class that has a Plan to compensate the Distributor and other selling dealers, various banks, broker-dealers and other financial intermediaries, for providing certain services to the Fund. Such services may include, but are not limited to:
•
formulation and implementation of marketing and promotional activities;
•
preparation, printing, and distribution of sales literature;
•
preparation, printing, and distribution of prospectuses and the Fund reports to other than existing shareholders;
•
obtaining such information with respect to marketing and promotional activities as the Distributor deems advisable;
•
making payments to dealers and others engaged in the sale of shares or who engage in shareholder support services; and
•
providing training, marketing, and support with respect to the sale of shares.
The Fund pays the Distributor a fee after the end of each month at an annual rate as a percentage of the daily net asset value of the assets attributable to each share class as follows:

Share Class
Maximum Annualized
12b-1 Fee
A (1)
0.25%
C (1)
1.00%
J (1)
0.25%
R-1
0.35%
R-2
0.30%
R-3
0.25%
R-4
0.10%
(1) The Distributor also receives the proceeds of any CDSC imposed on the redemption of Class A, C, or J shares.
Effective December 30, 2013, Principal Funds Distributor, Inc. ("the Distributor") has contractually agreed to limit the Distribution Fees attributable to Class J through December 30, 2015. The waiver will reduce the Fund's Distribution Fees by 0.01%. It is expected that the fee waiver will continue through the period disclosed; however, Principal Funds, Inc. and the Distributor, the parties to the agreement, may agree to terminate the fee waiver prior to
the end of the period.
The Distributor may remit on a continuous basis all of these sums to its investment representatives and other financial intermediaries as a trail fee in recognition of their services and assistance.
Currently, the Distributor makes payments to dealers on accounts for which such dealer is designated dealer of record. Payments are based on the average net asset value of the accounts invested in Classes A, C, J, R-1, R-2 , R-3, or R-4 shares.
Under the Plans, the Funds have no legal obligation to pay any amount that exceeds the compensation limit. The Funds do not pay, directly or indirectly, interest, carrying charges, or other financing costs in association with these Plans. All fees paid under a Fund's Rule 12b-1 Plan are paid to the Distributor, which is entitled to retain such fees paid by the Fund without regard to the expenses which it incurs.
The Funds made the following Distribution/12b-1 payments for the year ended August 31, 2014:

Fund
Distribution/12b-1 Payments
(amounts in thousands)
Blue Chip
 
$
26

 
Bond Market Index
 
133

 
Capital Securities
 
N/A

 
Diversified Real Asset
 
890

 
Global Multi-Strategy
 
627

 
Global Opportunities
 
17

 
International Equity Index
 
44

 
International Small Company
 
2

 
Opportunistic Municipal
 
118

 
Preferred Securities
 
10,952

 
Small-MidCap Dividend Income
 
1,126

 

6


Transfer Agency Agreement (Classes A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6, and S shares)
The Transfer Agency Agreement provides for Principal Shareholder Services, Inc. (“PSS”) (620 Coolidge Drive, Suite 300, Folsom, CA 95630), a wholly owned subsidiary of Principal, to act as transfer and shareholder servicing agent for the Classes A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6, and S shares.
•
For Classes A, C, P and Institutional shares, the Fund pays PSS a fee for the services provided pursuant to the Transfer Agency Agreement in an amount equal to the costs incurred by PSS for providing such services.
•
For Class J shares, the Fund pays PSS a fee for the services provided pursuant to the Transfer Agency Agreement in an amount that includes profit.
The Fund pays PSS for the following services for Classes A, C, J, P, and Institutional shares:
•
issuance, transfer, conversion, cancellation, and registry of ownership of Fund shares, and maintenance of open account system;
•
preparation and distribution of dividend and capital gain payments to shareholders;
•
delivery, redemption and repurchase of shares, and remittances to shareholders;
•
the tabulation of proxy ballots and the preparation and distribution to shareholders of notices, proxy statements and proxies, reports, confirmation of transactions, prospectuses and tax information;
•
communication with shareholders concerning the above items; and
•
use of its best efforts to qualify the Capital Stock of the Fund for sale in states and jurisdictions as directed by the Fund.
The Fund does not pay for these services for Classes R-1, R-2, R-3, R-4, R-5, and R-6 shares. PSS will pay operating expenses attributable to R-1, R-2, R-3, R-4, and R-5 share classes related to (a) the cost of meetings of shareholders and (b) the costs of initial and ongoing qualification of the capital stock of the Fund for sale in states and jurisdictions.
DESCRIPTION OF THE FUNDS’ INVESTMENTS AND RISKS
The Fund is a registered, open-end management investment company, commonly called a mutual fund. The Fund consists of multiple investment portfolios which are referred to as “Funds.” Each portfolio operates for many purposes as if it were an independent mutual fund. Each portfolio has its own investment objective, strategy, and management team. Each of the Funds is diversified except the Global Multi-Strategy and Real Estate Debt Income Funds, which are non-diversified.
Fund Policies
The investment objectives, investment strategies and the principal risks of each Fund are described in the Prospectus. This Statement of Additional Information contains supplemental information about those strategies and risks and the types of securities the Sub-Advisor can select for each Fund. Additional information is also provided about the strategies that the Fund may use to try to achieve its objective.
The composition of each Fund and the techniques and strategies that the Sub-Advisor may use in selecting securities will vary over time. A Fund is not required to use all of the investment techniques and strategies available to it in seeking its goals.
Unless otherwise indicated, with the exception of the percentage limitations on borrowing, the restrictions apply at the time transactions are entered into. Accordingly, any later increase or decrease beyond the specified limitation, resulting from market fluctuations or in a rating by a rating service, does not require elimination of any security from the portfolio.
The investment objective of each Fund and, except as described below as "Fundamental Restrictions," the investment strategies described in this Statement of Additional Information and the prospectuses are not fundamental and may be changed by the Board of Directors without shareholder approval. The Fundamental Restrictions may not be changed without a vote of a majority of the outstanding voting securities of the affected Fund. The Investment Company Act of 1940, as amended, ("1940 Act") provides that "a vote of a majority of the outstanding voting securities" of a Fund means the affirmative vote of the lesser of 1) more than 50% of the outstanding shares or 2) 67% or more of the shares present at a meeting if more than 50% of the outstanding Fund shares are represented at the meeting in person or by proxy. Each share has one vote, with fractional shares voting proportionately. Shares of all classes of a Fund will vote together as a single class except when otherwise required by law or as determined by the Board of Directors.
With the exception of the diversification test required by the Internal Revenue Code, the Funds will not consider collateral held in connection with securities lending activities when applying any of the following fundamental restrictions or any other investment restriction set forth in each Fund's prospectus or Statement of Additional Information.

7


Blue Chip, Bond Market Index, Capital Securities, Credit Opportunities Explorer, Diversified Real Asset, Dynamic High Yield Explorer, EDGE MidCap, Global Multi-Strategy, Global Opportunities, International Equity Index, International Small Company, Opportunistic Municipal, Origin Emerging Markets, Preferred Securities, Real Estate Debt Income, and Small-MidCap Dividend Income Funds.
Fundamental Restrictions
Each of the following numbered restrictions for the above-listed Funds is a matter of fundamental policy and may not be changed without shareholder approval. Each:
1)
Fund may not issue senior securities, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
2)
Fund may not purchase or sell commodities, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
3)
Fund may not purchase or sell real estate, which term does not include securities of companies which deal in real estate or mortgages or investments secured by real estate or interests therein, except that each Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund’s ownership of securities.
4)
Fund may not borrow money, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
5)
Fund may not make loans except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
6)
Fund, except the Global Multi-Strategy and Real Estate Debt Income Funds, has elected to be treated as a “diversified” investment company, as that term is used in the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
7)
Fund may not concentrate, as that term is used in the 1940 Act, its investments in a particular industry, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time. This restriction does not apply to the Capital Securities, Diversified Real Asset, Preferred Securities, or Real Estate Debt Income Funds (the restriction applies to the Bond Market Index and International Equity Index Funds except to the extent that the related Index is also so concentrated).
The Capital Securities, Diversified Real Asset, Preferred Securities, and Real Estate Debt Income Funds will concentrate their investments in a particular industry or group of industries as described in the prospectus.
8)
Fund may not act as an underwriter of securities, except to the extent that the Fund may be deemed to be an underwriter in connection with the sale of securities held in its portfolio.
Non-Fundamental Restrictions
Each of these Funds has also adopted the following restrictions that are not fundamental policies and may be changed without shareholder approval. It is contrary to each Fund's present policy to:
1)
Invest more than 15% of its net assets in illiquid securities and in repurchase agreements maturing in more than seven days except to the extent permitted by applicable law.
2)
Pledge, mortgage, or hypothecate its assets, except to secure permitted borrowings. The deposit of underlying securities and other assets in escrow and other collateral arrangements in connection with transactions in put or call options, futures contracts, options on futures contracts, and over-the-counter swap contracts are not deemed to be pledges or other encumbrances.
3)
Invest in companies for the purpose of exercising control or management.
4)
Invest more than 25% (45% for Preferred Securities Fund) of its assets in foreign securities, except that the Capital Securities, Credit Opportunities Explorer, Dynamic High Yield Explorer, International Equity Index, International Small Company, Diversified Real Asset, Global Multi-Strategy, Global Opportunities, and Origin Emerging Markets Funds may invest up to 100% of their assets in foreign securities; the Bond Market Index Fund may invest in foreign securities to the extent that the relevant index is so invested; and the Opportunistic Municipal Fund may not invest in foreign securities.
5)
Invest more than 5% of its total assets in real estate limited partnership interests (except the Diversified Real Asset, Global Multi-Strategy, and Real Estate Debt Income Funds).

8


6)
Acquire securities of other investment companies in reliance on Section 12(d)(1)(F) or (G) of the 1940 Act, invest more than 10% of its total assets in securities of other investment companies, invest more than 5% of its total assets in the securities of any one investment company, or acquire more than 3% of the outstanding voting securities of any one investment company except in connection with a merger, consolidation, or plan of reorganization and except as permitted by the 1940 Act, SEC rules adopted under the 1940 Act or exemptions granted by the Securities and Exchange Commission. The Fund may purchase securities of closed-end investment companies in the open market where no underwriter or dealer’s commission or profit, other than a customary broker’s commission, is involved.
Each Fund (except the Diversified Real Asset Fund, Global Multi-Strategy Fund, and Global Opportunities Fund) has also adopted the non-fundamental policy (except the Opportunistic Municipal Fund, which has adopted a fundamental policy), pursuant to SEC Rule 35d-1, which requires it, under normal circumstances, to invest at least 80% of its net assets, plus any borrowings for investment purposes, in the type of securities, industry or geographic region (as described in the prospectus) as suggested by the name of the Fund. For purposes of testing the 80% requirement for the Dynamic High Yield Explorer Fund, the Fund will count all investments in an exchange traded-fund (“ETF”) toward the requirement as long as 80% of the value of the ETF’s holdings focus on the particular type of investment suggested by the Fund name. This policy applies at the time of purchase. The Fund will provide 60 days’ notice to shareholders prior to implementing a change in this policy for the Fund. For purposes of this non-fundamental restriction, the Fund tests market capitalization ranges monthly.
Real Estate Allocation Fund
Fundamental Restrictions
Each of the following numbered restrictions for the above-listed Fund is a matter of fundamental policy and may not be changed without shareholder approval. The Fund:
1)
May not issue senior securities, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
2)
May not purchase or sell commodities, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
3)
May not purchase or sell real estate, which term does not include securities of companies which deal in real estate or mortgages or investments secured by real estate or interests therein, except that each Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund’s ownership of securities.
4)
May not borrow money, except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
5)
May not make loans except as permitted under the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
6)
Has elected to be treated as a “diversified” investment company, as that term is used in the 1940 Act, as amended, and as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time.
7)
Will concentrate, as that term is used in the 1940 Act, its investments in a particular industry or group of industries described in the prospectus.
8)
May not act as an underwriter of securities, except to the extent that the Fund may be deemed to be an underwriter in connection with the sale of securities held in its portfolio.
Non-Fundamental Restrictions
The above-listed Fund has also adopted the following restrictions that are not fundamental policies and may be changed without shareholder approval. It is contrary to the Fund's present policy to:
1)
Pledge, mortgage, or hypothecate its assets, except to secure permitted borrowings. For the purpose of this restriction, collateral arrangements with respect to the writing of options by the underlying funds and collateral arrangements with respect to initial or variation margin for futures by the underlying funds are not deemed to be pledges of assets.
2)
Invest in companies for the purpose of exercising control or management.
This Fund has also adopted the non-fundamental policy, pursuant to SEC Rule 35d-1, which requires it, under normal circumstances, to invest at least 80% of its net assets, plus any borrowings for investment purposes, in the

9


type of securities, industry or geographic region (as described in the prospectus) as suggested by the name of the Fund. This policy applies at the time of purchase. The Fund will provide 60 days’ notice to shareholders prior to implementing a change in this policy for the Fund.
Investment Strategies and Risks
Senior Securities
Under the 1940 Act, a fund that borrows money is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund’s total assets made for temporary or emergency purposes. Pursuant to SEC staff interpretations of the Act, a fund that purchases securities or makes other investments that have a leveraging effect on the fund (for example, reverse repurchase agreements) must segregate assets to render them not available for sale or other disposition in an amount equal to the amount the fund owes pursuant to the terms of the security or other investment.
Commodities
Under the 1940 Act, a fund's registration statement must recite the fund's policy with regard to investing in commodities. Pursuant to a claim for exclusion filed with the Commodity Futures Trading Commission (“CFTC”) on behalf of the Funds, neither PFI nor any of its individual Funds is deemed to be a “commodity pool” or “commodity pool operator” under the Commodity Exchange Act (“CEA”), and they are therefore not subject to registration or regulation under the CEA. The Commodity Futures Trading Commission recently amended rule 4.5 “Exclusion for certain otherwise regulated persons from the definition of the term “commodity pool operator.” Rule 4.5 provides that a mutual fund does not meet the definition of “commodity pool operator” if its use of futures contracts, options on futures contracts and swaps is sufficiently limited that the fund can fall within one of two exclusions set out in rule 4.5. The Funds intend to limit their use of futures contracts, options on futures contracts and swaps to the degree necessary to fall within one of the two exclusions. If any Fund is unable to do so, it may incur expenses that are necessary to comply with the Commodity Exchange Act and rules the Commodity Futures Trading Commission has adopted under it.
On or about July 2015, delete the preceding Commodities section and replace with the following:
Commodities - All Funds Except the Diversified Real Asset Fund and the Global Multi-Strategy Fund
Pursuant to a claim for exclusion filed with the Commodity Futures Trading Commission (“CFTC”) on behalf of the Funds under Rule 4.5, the Funds are not deemed to be “commodity pools” or “commodity pool operators” under the Commodity Exchange Act (“CEA”). The Funds are therefore not subject to registration under the CEA. The CFTC recently amended Rule 4.5 “Exclusion for certain otherwise regulated persons from the definition of the term ‘commodity pool operator.’” Rule 4.5 provides that a mutual fund does not meet the definition of “commodity pool” or “commodity pool operator” if its use of futures contracts, options on futures contracts and swaps is sufficiently limited that the fund can fall within one of two exclusions set out in Rule 4.5. The Funds intend to limit their use of futures contracts, options on futures contracts and swaps to the degree necessary to fall within one of the two exclusions. If any of the Funds is unable to do so, it may incur expenses to comply with the CEA and rules the CFTC has adopted under it.
Commodities - Diversified Real Asset Fund and Global Multi-Strategy Fund
Based on their respective current investment strategies, the Global Multi-Strategy Fund and the Diversified Real Asset Fund are each deemed to be a “commodity pool” under the CEA, and Principal is considered a “commodity pool operator” with respect to each such Fund. Principal is therefore subject to dual regulation by the SEC and the CFTC. The CFTC or the SEC could alter the regulatory requirements governing the use of commodity futures (which include futures on broad-based securities indexes and interest rate futures and currency futures) or options on commodity futures or swaps transactions by investment companies, including these Funds.
Borrowing
If a Fund invests the proceeds of borrowing, borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund’s portfolio. If a Fund invests the proceeds of borrowing, money borrowed will be subject to interest costs that may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
The 1940 Act limits a fund’s ability to borrow money. For example, a fund may borrow for temporary purposes so long as the amount borrowed does not exceed 5% of the fund's total assets.

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Industry Concentration
“Concentration” means a fund invests more than 25% of its net assets in a particular industry or group of industries. To monitor compliance with the policy regarding industry concentration, the Funds may use the industry classifications provided by Bloomberg, L.P., the Morgan Stanley Capital International/Standard & Poor's Global Industry Classification Standard (GICS), the Directory of Companies Filing Annual Reports with the Securities and Exchange Commission or any other reasonable industry classification system. The Funds, except the Real Estate Allocation Fund, interpret their policy with respect to concentration in a particular industry to apply only to direct investments in the securities of issuers in a particular industry. The Real Estate Allocation Fund invests in shares of mutual funds, which do not constitute an industry; however, its underlying funds are concentrated in the real estate industry. For purposes of this restriction, government securities such as treasury securities or mortgage-backed securities that are issued or guaranteed by the U.S. government, its agencies or instrumentalities are not subject to the Funds' industry concentration restrictions. The Funds view their investments in privately issued mortgage-related securities, asset-backed securities or tax-exempt municipal securities as not representing interests in any particular industry or group of industries. For information about municipal securities, see the Municipal Obligations section.
Restricted and Illiquid Securities
A Fund may experience difficulty in valuing and selling illiquid securities and, in some cases, may be unable to value or sell certain illiquid securities for an indefinite period of time. Illiquid securities may include a wide variety of investments, such as (1) repurchase agreements maturing in more than seven days (unless the agreements have demand/redemption features), (2) OTC options contracts and certain other derivatives (including certain swap agreements), (3) fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), (4) loan interests and other direct debt instruments, (5) certain municipal lease obligations, (6) commercial paper issued pursuant to Section 4(2) of the 1933 Act, (7) thinly-traded securities, and (8) securities whose resale is restricted under the federal securities laws or contractual provisions (including restricted, privately placed securities that, under the federal securities laws, generally may be resold only to qualified institutional buyers). Generally, restricted securities may be sold only in a public offering for which a registration statement has been filed and declared effective or in a transaction that is exempt from the registration requirements of the Securities Act of 1933. When registration is required, a Fund that owns restricted securities may be obligated to pay all or part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Fund may be permitted to sell a restricted security. If adverse market conditions were to develop during such a period, the Fund might obtain a less favorable price than existed when it decided to sell.
Illiquid and restricted securities are priced at fair value as determined in good faith by or under the direction of the Directors. Each of the Funds has adopted investment restrictions that limit its investments in illiquid securities to no more than 15% of its net assets. The Directors have adopted procedures to determine the liquidity of Rule 4(2) short-term paper and of restricted securities that may be resold under Rule 144A. Securities determined to be liquid under these procedures are excluded from the preceding investment restriction.
Foreign Securities
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 a Fund's assets is not invested and is 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 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 nationalization, expropriation, or 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.

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Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial relative to the actual market values and may be unfavorable to a Fund's investors.
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 Funds intend 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 negatively impact 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.
Investments in companies of developing (also called “emerging”) 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 volume of trading that results in a lack of liquidity and in 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 the 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 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.
Depositary Receipts
Depositary Receipts are generally subject to the same sort of risks as direct investments in a foreign country, such as, currency risk, political and economic risk, and market risk, because their values depend on the performance of a foreign security denominated in its home currency.
The Funds that may invest in foreign securities may invest in:
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American Depositary Receipts ("ADRs") - receipts issued by an American bank or trust company evidencing ownership of underlying securities issued by a foreign issuer. They are designed for use in U.S. securities markets.
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European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") - receipts typically issued by a foreign financial institution to evidence an arrangement similar to that of ADRs.
Depositary Receipts may be issued by sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities traded in the form of Depositary Receipts. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program. Accordingly, there may be less information available regarding issuers of securities of underlying unsponsored programs, and there may not be a correlation between the availability of such information and the market value of the Depositary Receipts.

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Securities of Smaller Companies
The Funds may invest in securities of companies with small- or mid-sized market capitalizations. Market capitalization is defined as total current market value of a company's outstanding common stock. Investments in companies with smaller market capitalizations may involve greater risks and price volatility (wide, rapid fluctuations) than investments in larger, more mature companies. Smaller companies may be less mature than older 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. Small companies also may be less significant within their industries and may be at a competitive disadvantage relative to their larger competitors. While smaller companies may be subject to these additional risks, they may also realize more substantial growth than larger or more established companies. Small company stocks may decline in price as large company stocks rise, or rise in price while larger company stocks decline. Investors should therefore expect the net asset value of the Fund that invests a substantial portion of its assets in small company stocks may be more volatile than the shares of a Fund that invests solely in larger company stocks.
Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers are companies with a record of less than three years continuous operation, including the operation of predecessors and parents. Unseasoned issuers by their nature have only a limited operating history that can be used for evaluating the companies' growth prospects. As a result, investment decisions for 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. In addition, many unseasoned issuers also may be small companies and involve the risks and price volatility associated with smaller companies.
Convertible Securities
A convertible security is a bond, debenture, note, preferred stock, or other security that entitles the holder to acquire common stock or other equity securities of the same or a different issuer. A convertible security generally entitles the holder to receive interest paid or accrued until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to non-convertible debt or preferred securities, as applicable. Convertible securities rank senior to common stock in a corporation’s capital structure and, therefore, generally entail less risk than the corporation’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. Convertible securities are subordinate in rank to any senior debt obligations of the issuer, and, therefore, an issuer’s convertible securities entail more risk than its debt obligations. Convertible securities generally offer lower interest or dividend yields than non-convertible debt securities of similar credit quality because of the potential for capital appreciation. In addition, convertible securities are often lower-rated securities.
Because of the conversion feature, the price of the convertible security will normally fluctuate in some proportion to changes in the price of the underlying asset, and as such is subject to risks relating to the activities of the issuer and/or general market and economic conditions. The income component of a convertible security may tend to cushion the security against declines in the price of the underlying asset. However, the income component of convertible securities causes fluctuations based upon changes in interest rates and the credit quality of the issuer.
If the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding an income-producing security.
A convertible security may be subject to redemption at the option of the issuer at a predetermined price. If a convertible security held by a fund is called for redemption, the fund would be required to permit the issuer to redeem the security and convert it to underlying common stock, or would sell the convertible security to a third party, which may have an adverse effect on the fund’s ability to achieve its investment objective.
Synthetic Convertibles
A “synthetic” convertible security may be created by combining separate securities that possess the two principal characteristics of a traditional convertible security, i.e., an income-producing security (“income-producing component”) and the right to acquire an equity security (“convertible component”). The income-producing component is achieved by investing in non-convertible, income-producing securities such as bonds, preferred stocks and money market instruments, which may be represented by derivative instruments. The convertible component is achieved by investing in securities or instruments such as warrants or options to buy common stock at a certain exercise price, or options on a stock index. Unlike a traditional convertible security, which is a single security having a single market value, a synthetic convertible comprises two or more separate securities, each with its own market value. Therefore,

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the “market value” of a synthetic convertible security is the sum of the values of its income-producing component and its convertible component. For this reason, the values of a synthetic convertible security and a traditional convertible security may respond differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible security than in the purchase of a convertible security. Although synthetic convertible securities may be selected where the two components are issued by a single issuer, thus making the synthetic convertible security similar to the traditional convertible security, the character of a synthetic convertible security allows the combination of components representing distinct issuers, when such a combination may better achieve a fund’s investment objective. A synthetic convertible security also is a more flexible investment in that its two components may be purchased separately. For example, a fund may purchase a warrant for inclusion in a synthetic convertible security but temporarily hold short-term investments while postponing the purchase of a corresponding bond pending development of more favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in the price of the security or the level of the index involved in the convertible component, causing a decline in the value of the security or instrument, such as a call option or warrant, purchased to create the synthetic convertible security. Should the price of the stock fall below the exercise price and remain there throughout the exercise period, the entire amount paid for the call option or warrant would be lost. Because a synthetic convertible security includes the income-producing component as well, the holder of a synthetic convertible security also faces the risk that interest rates will rise, causing a decline in the value of the income-producing instrument.
A fund also may purchase synthetic convertible securities created by other parties, including convertible structured notes. Convertible structured notes are income-producing debentures linked to equity, and are typically issued by investment banks. Convertible structured notes have the attributes of a convertible security; however, the investment bank that issues the convertible note, rather than the issuer of the underlying common stock into which the note is convertible, assumes credit risk associated with the underlying investment, and the fund in turn assumes credit risk associated with the convertible note.
Spread Transactions, Options on Securities and Securities Indices, and Futures Contracts and Options on Futures Contracts
The Funds (except the Real Estate Allocation Fund) may each engage in the practices described under this heading.
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Spread Transactions. Each Fund may engage in spread trades, which typically represent a simultaneous purchase and sale of two different contracts designed to capture the change in the relationship in price between the two contracts. Spread transactions are typically accompanied by lower margin requirements and lower volatility than an outright purchase. Each Fund may purchase spread options. The purchase of a covered spread option gives the Fund the right to put, or sell, a security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that the Fund does not own, but which is used as a benchmark. The risk to the Fund in purchasing covered spread options is the cost of the premium paid for the spread option and any transaction costs. In addition, there is no assurance that closing transactions will be available. The security covering the spread option is maintained in segregated accounts either with the Fund's custodian or on the Fund's records. The Funds do not consider a security covered by a spread option to be "pledged" as that term is used in the Fund's policy limiting the pledging or mortgaging of assets. The purchase of spread options can be used to protect each Fund against adverse changes in prevailing credit quality spreads, i.e., the yield spread between high quality and lower quality securities.
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Options on Securities and Securities Indices. Each Fund may write (sell) and purchase call and put options on securities in which it invests and on securities indices based on securities in which the Fund invests. The Funds may engage in these transactions to hedge against a decline in the value of securities owned or an increase in the price of securities which the Fund plans to purchase, or to generate additional revenue.
The Funds may purchase or write both exchange-traded and over-the-counter (“OTC”) options. OTC options differ from exchange-traded options in that they are two-party contracts, with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options. An OTC option (an option not traded on an established exchange) may be closed out only by agreement with the other party to the original option transaction. With OTC options, a Fund is at risk that the other party to the transaction will default on its obligations or will not permit the Fund to terminate the transaction before its scheduled maturity. While a Fund will seek to enter into OTC options only with dealers who agree to or are expected to be capable of entering into closing transactions with a Fund, there can be no assurance that a Fund will be able to liquidate an OTC option at a favorable price at any time prior to its expiration. OTC options are not subject to the protections afforded purchasers of listed options by the Options Clearing Corporation or other clearing organizations. An exchange-traded option may be closed out only on an exchange that generally provides a liquid secondary market for an option of the same series. If a liquid secondary market for an

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exchange-traded option does not exist, it might not be possible to effect a closing transaction with respect to a particular option, with the result that a Fund would have to exercise the option in order to consummate the transaction.
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Writing Covered Call and Put Options. When a Fund writes a call option, it gives the purchaser of the option the right to buy a specific security at a specified price at any time before the option expires. When a Fund writes a put option, it gives the purchaser of the option the right to sell to the Fund a specific security at a specified price at any time before the option expires. In both situations, the Fund receives a premium from the purchaser of the option.
The premium received by a Fund reflects, among other factors, the current market price of the underlying security, the relationship of the exercise price to the market price, the time period until the expiration of the option and interest rates. The premium generates additional income for the Fund if the option expires unexercised or is closed out at a profit. By writing a call, a Fund limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option, but it retains the risk of loss if the price of the security should decline. By writing a put, a Fund assumes the risk that it may have to purchase the underlying security at a price that may be higher than its market value at time of exercise.
The Funds write only covered options that comply with applicable regulatory and exchange cover requirements. The Funds usually own the underlying security covered by any outstanding call option. With respect to an outstanding put option, each Fund deposits and maintains with its custodian or segregates on the Fund's records, cash, or other liquid assets with a value at least equal to the market value of the option that was written.
Once a Fund has written an option, it may terminate its obligation before the option is exercised. The Fund executes a closing transaction by purchasing an option of the same series as the option previously written. The Fund has a gain or loss depending on whether the premium received when the option was written exceeds the closing purchase price plus related transaction costs.
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Purchasing Call and Put Options. When a Fund purchases a call option, it receives, in return for the premium it pays, the right to buy from the writer of the option the underlying security at a specified price at any time before the option expires. A Fund purchases call options in anticipation of an increase in the market value of securities that it intends ultimately to buy. During the life of the call option, the Fund is able to buy the underlying security at the exercise price regardless of any increase in the market price of the underlying security. In order for a call option to result in a gain, the market price of the underlying security must exceed the sum of the exercise price, the premium paid, and transaction costs.
When a Fund purchases a put option, it receives, in return for the premium it pays, the right to sell to the writer of the option the underlying security at a specified price at any time before the option expires. A Fund purchases put options in anticipation of a decline in the market value of the underlying security. During the life of the put option, the Fund is able to sell the underlying security at the exercise price regardless of any decline in the market price of the underlying security. In order for a put option to result in a gain, the market price of the underlying security must decline, during the option period, below the exercise price enough to cover the premium and transaction costs.
Once a Fund purchases an option, it may close out its position by selling an option of the same series as the option previously purchased. The Fund has a gain or loss depending on whether the closing sale price exceeds the initial purchase price plus related transaction costs.
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Options on Securities Indices. Each Fund may purchase and sell put and call options on any securities index based on securities in which the Fund may invest. Securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. The Funds engage in transactions in put and call options on securities indices for the same purposes as they engage in transactions in options on securities. When a Fund writes call options on securities indices, it holds in its portfolio underlying securities which, in the judgment of the Sub-Advisor, correlate closely with the securities index and which have a value at least equal to the aggregate amount of the securities index options.
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Index Warrants. Funds may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices (“index warrants”). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the

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underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant; if the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at a time when, in the case of a call warrant, the exercise price is more than the value of the underlying index, or in the case of a put warrant, the exercise price is less than the value of the underlying index. If a Fund were not to exercise an index warrant prior to its expiration, then a Fund would lose the amount of the purchase price paid by it for the warrant. A Fund will normally use index warrants in a manner similar to its use of options on securities indices.
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Risks Associated with Option Transactions. An option position may be closed out only on an exchange that provides a secondary market for an option of the same series. The Funds generally purchase or write only those options for which there appears to be an active secondary market. However, there is no assurance that a liquid secondary market on an exchange exists for any particular option, or at any particular time. If a Fund is unable to effect closing sale transactions in options it has purchased, it has to exercise its options in order to realize any profit and may incur transaction costs upon the purchase or sale of underlying securities. If a Fund is unable to effect a closing purchase transaction for a covered option that it has written, it is not able to sell the underlying securities, or dispose of the assets held in a segregated account, until the option expires or is exercised. A Fund's ability to terminate option positions established in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that broker-dealers participating in such transactions might fail to meet their obligations.
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Futures Contracts and Options on Futures Contracts. Each Fund may purchase and sell futures contracts of many types, including for example, futures contracts covering indexes, financial instruments, and foreign currencies. Each Fund may purchase and sell financial futures contracts and options on those contracts. Financial futures contracts are commodities contracts based on financial instruments such as U.S. Treasury bonds or bills or on securities indices such as the S&P 500 Index. Futures contracts, options on futures contracts, and the commodity exchanges on which they are traded are regulated by the Commodity Futures Trading Commission. Through the purchase and sale of futures contracts and related options, a Fund may seek to hedge against a decline in the value of securities owned by the Fund or an increase in the price of securities that the Fund plans to purchase. Each Fund may also purchase and sell futures contracts and related options to maintain cash reserves while simulating full investment in securities and to keep substantially all of its assets exposed to the market. Each Fund may enter into futures contracts and related options transactions both for hedging and non-hedging purposes.
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Futures Contracts. A Fund may purchase or sell a futures contract to gain exposure to a particular market asset without directly purchasing that asset. When a Fund sells a futures contract based on a financial instrument, the Fund is obligated to deliver that kind of instrument at a specified future time for a specified price. When a Fund purchases that kind of contract, it is obligated to take delivery of the instrument at a specified time and to pay the specified price. In most instances, these contracts are closed out by entering into an offsetting transaction before the settlement date. The Fund realizes a gain or loss depending on whether the price of an offsetting purchase plus transaction costs are less or more than the price of the initial sale or on whether the price of an offsetting sale is more or less than the price of the initial purchase plus transaction costs. Although the Funds usually liquidate futures contracts on financial instruments, by entering into an offsetting transaction before the settlement date, they may make or take delivery of the underlying securities when it appears economically advantageous to do so.
A futures contract based on a securities index provides for the purchase or sale of a group of securities at a specified future time for a specified price. These contracts do not require actual delivery of securities but result in a cash settlement. The amount of the settlement is based on the difference in value of the index between the time the contract was entered into and the time it is liquidated (at its expiration or earlier if it is closed out by entering into an offsetting transaction).
When a Fund purchases or sells a futures contract, it pays a commission to the futures commission merchant through which the Fund executes the transaction. When entering into a futures transaction, the Fund does not pay the execution price, as it does when it purchases a security, or a premium, as it does when it purchases an option. Instead, the Fund deposits an amount of cash or other liquid assets (generally about 5% of the futures contract amount) with its futures commission merchant. This amount is known as "initial margin." In contrast to the use of margin account to purchase securities, the Fund's deposit of initial margin does not constitute the borrowing of money to finance the transaction in the futures contract. The initial margin represents a good faith

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deposit that helps assure the Fund's performance of the transaction. The futures commission merchant returns the initial margin to the Fund upon termination of the futures contract if the Fund has satisfied all its contractual obligations.
Subsequent payments to and from the futures commission merchant, known as "variation margin," are required to be made on a daily basis as the price of the futures contract fluctuates, a process known as "marking to market." The fluctuations make the long or short positions in the futures contract more or less valuable. If the position is closed out by taking an opposite position prior to the settlement date of the futures contract, a final determination of variation margin is made. Any additional cash is required to be paid to or released by the broker and the Fund realizes a loss or gain.
In using futures contracts, the Fund may seek to establish with more certainty than would otherwise be possible the effective price of or rate of return on portfolio securities or securities that the Fund proposes to acquire. A Fund, for example, sells futures contracts in anticipation of a rise in interest rates that would cause a decline in the value of its debt investments. When this kind of hedging is successful, the futures contract increases in value when the Fund's debt securities decline in value and thereby keeps the Fund's net asset value from declining as much as it otherwise would. A Fund may also sell futures contracts on securities indices in anticipation of or during a stock market decline in an endeavor to offset a decrease in the market value of its equity investments. When a Fund is not fully invested and anticipates an increase in the cost of securities it intends to purchase, it may purchase financial futures contracts. When increases in the prices of equities are expected, a Fund may purchase futures contracts on securities indices in order to gain rapid market exposure that may partially or entirely offset increases in the cost of the equity securities it intends to purchase.
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Options on Futures Contracts. The Funds may also purchase and write call and put options on futures contracts. A call option on a futures contract gives the purchaser the right, in return for the premium paid, to purchase a futures contract (assume a long position) at a specified exercise price at any time before the option expires. A put option gives the purchaser the right, in return for the premium paid, to sell a futures contract (assume a short position), for a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to sell the futures contract (to deliver a long position to the option holder) at the option exercise price, which will presumably be lower than the current market price of the contract in the futures market. Upon exercise of a put, the writer of the option is obligated to purchase the futures contract (deliver a short position to the option holder) at the option exercise price, which will presumably be higher than the current market price of the contract in the futures market. However, as with the trading of futures, most options are closed out prior to their expiration by the purchase or sale of an offsetting option at a market price that reflects an increase or a decrease from the premium originally paid. Options on futures can be used to hedge substantially the same risks addressed by the direct purchase or sale of the underlying futures contracts. For example, if a Fund anticipates a rise in interest rates and a decline in the market value of the debt securities in its portfolio, it might purchase put options or write call options on futures contracts instead of selling futures contracts.
If a Fund purchases an option on a futures contract, it may obtain benefits similar to those that would result if it held the futures position itself. But in contrast to a futures transaction, the purchase of an option involves the payment of a premium in addition to transaction costs. In the event of an adverse market movement, however, the Fund is not subject to a risk of loss on the option transaction beyond the price of the premium it paid plus its transaction costs.
When a Fund writes an option on a futures contract, the premium paid by the purchaser is deposited with the Fund's custodian. The Fund must maintain with its futures commission merchant all or a portion of the initial margin requirement on the underlying futures contract. It assumes a risk of adverse movement in the price of the underlying futures contract comparable to that involved in holding a futures position. Subsequent payments to and from the futures commission merchant, similar to variation margin payments, are made as the premium and the initial margin requirements are marked to market daily. The premium may partially offset an unfavorable change in the value of portfolio securities, if the option is not exercised, or it may reduce the amount of any loss incurred by the Fund if the option is exercised.
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Risks Associated with Futures Transactions. There are a number of risks associated with transactions in futures contracts and related options. The value of the assets that are the subject of the futures contract may not move in the anticipated direction. A Fund's successful use of futures contracts is subject to the ability of the Sub-Advisor to predict correctly the factors affecting the market values of the Fund's portfolio securities. For example, if a Fund is hedged against the possibility of an increase in interest rates which would adversely affect debt securities held by the Fund and the prices of those debt securities instead increases, the Fund loses part or all of

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the benefit of the increased value of its securities it hedged because it has offsetting losses in its futures positions. Other risks include imperfect correlation between price movements in the financial instrument or securities index underlying the futures contract, on the one hand, and the price movements of either the futures contract itself or the securities held by the Fund, on the other hand. If the prices do not move in the same direction or to the same extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated only by entering into a closing purchase or sale transaction. This requires a secondary market on the relevant contract market. The Fund enters into a futures contract or related option only if there appears to be a liquid secondary market. There can be no assurance, however, that such a liquid secondary market exists for any particular futures contract or related option at any specific time. Thus, it may not be possible to close out a futures position once it has been established. Under such circumstances, the Fund continues to be required to make daily cash payments of variation margin in the event of adverse price movements. In such situations, if the Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Fund may be required to perform under the terms of the futures contracts it holds. The inability to close out futures positions also could have an adverse impact on the Fund's ability effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
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Limitations on the Use of Futures, Options on Futures Contracts, and Swaps. Each Fund that utilizes futures contracts, options on futures contracts or swaps has claimed an exclusion from the definition of a “commodity pool operator” under the Commodity Exchange Act and is not subject to registration or regulation as a commodity pool operator under the Commodity Exchange Act. The Commodity Futures Trading Commission recently amended rule 4.5 “Exclusion for certain otherwise regulated persons from the definition of the term
“commodity pool operator.” Rule 4.5 provides that a mutual fund does not meet the definition of “commodity pool operator” if its use of futures contracts, options on futures contracts and swaps is sufficiently limited that the fund can fall within one of two exclusions set out in rule 4.5. The Funds intend to limit their use of futures
contracts, options on futures contracts and swaps to the degree necessary to fall within one of the two exclusions. If any Fund is unable to do so, it may incur expenses that are necessary to comply with the Commodity Exchange Act and rules the Commodity Futures Trading Commission has adopted under it.
Each Fund may enter into futures contracts and related options transactions, for hedging purposes and for other appropriate risk management purposes, and to modify the Fund's exposure to various currency, equity, or fixed-income markets. Each Fund may engage in speculative futures trading. When using futures contracts and options on futures contracts for hedging or risk management purposes, each Fund determines that the price fluctuations in the contracts and options are substantially related to price fluctuations in securities held by the Fund or which it expects to purchase. In pursuing traditional hedging activities, each Fund may sell futures contracts or acquire puts to protect against a decline in the price of securities that the Fund owns. Each Fund may purchase futures contracts or calls on futures contracts to protect the Fund against an increase in the price of securities the Fund intends to purchase before it is in a position to do so.
When a Fund purchases a futures contract, or writes a call option on a futures contract, it segregates liquid assets that, when added to the value of assets deposited with the futures commission merchant as margin, are equal to the market value of the contract.
On or about July 2015, delete the preceding "Limitations on the Use of Futures, Options on Futures Contracts, and Swaps" section and replace with the following:
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Permissible Uses of Futures and Options on Futures Contracts. Each Fund may enter into futures contracts and related options transactions, for hedging purposes and for other appropriate risk management purposes, and to modify the Fund's exposure to various currency, equity, or fixed-income markets. Each Fund may engage in speculative futures trading. When using futures contracts and options on futures contracts for hedging or risk management purposes, each Fund determines that the price fluctuations in the contracts and options are

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substantially related to price fluctuations in securities held by the Fund or which it expects to purchase. In pursuing traditional hedging activities, each Fund may sell futures contracts or acquire puts to protect against a decline in the price of securities that the Fund owns. Each Fund may purchase futures contracts or calls on futures contracts to protect the Fund against an increase in the price of securities the Fund intends to purchase before it is in a position to do so. When a Fund purchases a futures contract, or writes a call option on a futures contract, it segregates liquid assets that, when added to the value of assets deposited with the futures commission merchant as margin, are equal to the market value of the contract.
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Limitations on the Use of Futures, Options on Futures Contracts, and Swaps (All Funds except the Diversified Real Asset Fund and the Global Multi-Strategy Fund). Pursuant to a claim for exclusion filed with the Commodity Futures Trading Commission (“CFTC”) on behalf of the Funds under Rule 4.5, the Funds are not deemed to be “commodity pools” or “commodity pool operators” under the Commodity Exchange Act (“CEA”). The Funds are therefore not subject to registration under the CEA. Rule 4.5 provides that a mutual fund does not meet the definition of “commodity pool” or “commodity pool operator” if its use of futures contracts, options on futures contracts and swaps is sufficiently limited that the fund can fall within one of two exclusions set out in Rule 4.5. The Funds intend to limit their use of futures contracts, options on futures contracts and swaps to the degree necessary to fall within one of the two exclusions.
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Limitations on the Use of Futures, Options on Futures Contracts, and Swaps (Diversified Real Asset Fund and Global Multi-Strategy Fund).The Global Multi-Strategy Fund and the Diversified Real Asset Fund are each deemed to be regulated “commodity pools” under the CEA and as a result may invest in futures contracts, options on futures contracts and swaps in excess of the limitations imposed by the CFTC under Rule 4.5.
High Yield Bonds ("Junk Bonds")
Some funds invest a portion of their assets in bonds that are rated below investment grade (sometimes called “high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1 or lower by Moody's and BB+ or lower by S&P (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, the Sub-Advisor will determine whether the bond is of a quality comparable to those rated below investment grade). Lower rated bonds involve a higher degree of credit risk, which is the risk that the issuer will not make interest or principal payments when due. In the event of an unanticipated default, a fund would experience a reduction in its income and could expect a decline in the market value of the bonds so affected. Issuers of high yield securities may be involved in restructurings or bankruptcy proceedings that may not be successful.  If an issuer defaults, it may not be able to pay all or a portion of interest and principal owed to the fund, it may exchange the high yield securities owned by the fund for other securities, including equities, and/or the fund may incur additional expenses while seeking recovery of its investment. Some funds may also invest in unrated bonds of foreign and domestic issuers. Unrated bonds, while not necessarily of lower quality than rated bonds, may not have as broad a market. Because of the size and perceived demand of the issue, among other factors, certain municipalities may not incur the expense of obtaining a rating. The Sub-Advisor will analyze the creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the bond, in determining whether to purchase unrated bonds. Unrated bonds will be included in the limitation each fund has with regard to high yield bonds unless the Sub-Advisor deems such securities to be the equivalent of investment grade bonds. Some of the high yield securities consist of Rule 144A securities. High yield securities may contain any type of interest rate payment or reset terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred, payment-in-kind and those with auction rate features.
Mortgage- and Asset-Backed Securities
The yield characteristics of the mortgage- and asset-backed securities in which the Funds may invest differ from those of traditional debt securities. Among the major differences are that the interest and principal payments are made more frequently on mortgage- and asset-backed securities (usually monthly) and that principal may be prepaid at any time because the underlying mortgage loans or other assets generally may be prepaid at any time. As a result, if the Fund purchases those securities at a premium, a prepayment rate that is faster than expected will reduce their yield, while a prepayment rate that is slower than expected will have the opposite effect of increasing yield. If the Fund purchases these securities at a discount, faster than expected prepayments will increase their yield, while slower than expected prepayments will reduce their yield. Amounts available for reinvestment by the Fund are likely to be greater during a period of declining interest rates and, as a result, are likely to be reinvested at lower interest rates than during a period of rising interest rates.
In general, the prepayment rate for mortgage-backed securities decreases as interest rates rise and increases as interest rates fall. However, rising interest rates will tend to decrease the value of these securities. In addition, an increase in interest rates may affect the volatility of these securities by effectively changing a security that was

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considered a short-term security at the time of purchase into a long-term security. Long-term securities generally fluctuate more widely in response to changes in interest rates than short- or medium-term securities.
The market for privately issued mortgage- and asset-backed securities is smaller and less liquid than the market for U.S. government mortgage-backed securities. A collateralized mortgage obligation (“CMO”) may be structured in a manner that provides a wide variety of investment characteristics (yield, effective maturity, and interest rate sensitivity). As market conditions change, and especially during periods of rapid market interest rate changes, the ability of a CMO to provide the anticipated investment characteristics may be greatly diminished. Increased market volatility and/or reduced liquidity may result.
The Funds may invest in each of collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), other collateralized debt obligations (“CDOs”) and other similarly structured securities. CBOs, CLOs and other CDOs are types of asset-backed securities. A CBO is a trust which is often backed by a diversified pool of high risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities such as high yield debt, residential privately issued mortgage-related securities, commercial privately issued mortgage-related securities, trust preferred securities and emerging market debt. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Other CDOs are trusts backed by other types of assets representing obligations of various parties. CBOs, CLOs and other CDOs may charge management fees and administrative expenses.
Inflation-Indexed Bonds
The Funds may invest in inflation-indexed bonds or inflation protected debt securities, which are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index accruals as part of a semi-annual coupon. Inflation-indexed securities issued by the U.S. Treasury (Treasury Inflation Protected Securities or TIPS) have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation-adjusted principal amount. If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond's inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that government. Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Real Estate Investment Trusts (“REITs”)
REITs are pooled investment vehicles that invest in income producing real estate, real estate related loans, or other types of real estate interests. U.S. REITs are allowed to eliminate corporate level federal tax so long as they meet certain requirements of the Internal Revenue Code. Foreign REITs ("REIT-like") entities may have similar tax treatment in their respective countries. Equity real estate investment trusts own real estate properties, while mortgage real estate investment trusts make and/or invests in construction, development, and long-term mortgage loans. Their value may be affected by changes in the underlying property of the trusts, the creditworthiness of the issuer, property taxes, interest rates, and tax and regulatory requirements, such as those relating to the environment. Both types of trusts are not diversified, are dependent upon management skill, are subject to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the possibility of failing to qualify for tax-free status of income under the Internal Revenue Code and failing to maintain exemption from the 1940 Act. In addition, foreign REIT-like entities will be subject to foreign securities risks. (See "Foreign Securities")

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Zero-Coupon Securities
The Funds may invest in zero-coupon securities. Zero-coupon securities have no stated interest rate and pay only the principal portion at a stated date in the future. They usually trade at a substantial discount from their face (par) value. Zero-coupon securities are subject to greater market value fluctuations in response to changing interest rates than debt obligations of comparable maturities that make distributions of interest in cash.
Master Limited Partnerships (“MLPs”)
An MLP is an entity that is generally taxed as a partnership for federal income tax purposes and that derives each year at least 90% of its gross income from "Qualifying Income". Qualifying Income includes interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from commodities or commodity futures, and income and gain from mineral or natural resources activities that generate Qualifying Income. MLP interests (known as units) are traded on securities exchanges or over-the-counter. An MLP's organization as a partnership and compliance with the Qualifying Income rules generally eliminates federal tax at the entity level.
An MLP has one or more general partners (who may be individuals, corporations, or other partnerships) which manage the partnership, and limited partners, which provide capital to the partnership but have no role in its management. Typically, the general partner is owned by company management or another publicly traded sponsoring corporation. When an investor buys units in an MLP, the investor becomes a limited partner. Holders of MLP units have limited control and voting rights on matters affecting the partnership and are exposed to a remote possibility of liability for all of the obligations of that MLP in the event that a court determines that the rights of the holders of MLP units to vote to remove or replace the general partner of that MLP, to approve amendments to that MLP’s partnership agreement, or to take other action under the partnership agreement of that MLP would constitute “control” of the business of that MLP, or a court or governmental agency determines that the MLP is conducting business in a state without complying with the partnership statute of that state. Holders of MLP units are also exposed to the risk that they will be required to repay amounts to the MLP that are wrongfully distributed to them.
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. Pipeline MLPs have indirect commodity exposure to oil and gas price volatility because, although they do not own the underlying energy commodity, the general level of commodity prices may affect the volume of the commodity the MLP delivers to its customers and the cost of providing services such as distributing natural gas liquids. The costs of natural gas pipeline MLPs to perform services may exceed the negotiated rates under “negotiated rate” contracts. Processing MLPs may be directly affected by energy commodity prices. Propane MLPs own the underlying energy commodity, and therefore have direct exposure to energy commodity prices. The MLP industry in general could be hurt by market perception that MLP's performance and valuation are directly tied to commodity prices.
Pipeline MLPs are common carrier transporters of natural gas, natural gas liquids (primarily propane, ethane, butane and natural gasoline), crude oil or refined petroleum products (gasoline, diesel fuel and jet fuel). Pipeline MLPs also may operate ancillary businesses such as storage and marketing of such products. Pipeline MLPs derive revenue from capacity and transportation fees. Historically, pipeline output has been less exposed to cyclical economic forces due to its low cost structure and government-regulated nature. In addition, most pipeline MLPs have limited direct commodity price exposure because they do not own the product being shipped.
Processing MLPs are gatherers and processors of natural gas as well as providers of transportation, fractionation and storage of natural gas liquids ("NGLs"). Processing MLPs derive revenue from providing services to natural gas producers, which require treatment or processing before their natural gas commodity can be marketed to utilities and other end user markets. Revenue for the processor is fee based, although it is not uncommon to have some participation in the prices of the natural gas and NGL commodities for a portion of revenue.
Propane MLPs are distributors of propane to homeowners for space and water heating. Propane MLPs derive revenue from the resale of the commodity on a margin over wholesale cost. The ability to maintain margin is a key to profitability. Propane serves approximately 3% of the household energy needs in the United States, largely for homes beyond the geographic reach of natural gas distribution pipelines. Approximately 70% of annual cash flow is earned during the winter heating season (October through March). Accordingly, volumes are weather dependent, but have utility type functions similar to electricity and natural gas.
MLPs operating interstate pipelines and storage facilities are subject to substantial regulation by the Federal Energy Regulatory Commission ("FERC"), which regulates interstate transportation rates, services and other matters regarding natural gas pipelines including: the establishment of rates for service; regulation of pipeline storage and liquified natural gas facility construction; issuing certificates of need for companies intending to provide energy services or constructing and operating interstate pipeline and storage facilities; and certain other matters. FERC also

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regulates the interstate transportation of crude oil, including: regulation of rates and practices of oil pipeline companies; establishing equal service conditions to provide shippers with equal access to pipeline transportation; and establishment of reasonable rates for transporting petroleum and petroleum products by pipeline.
MLPs are 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. These laws and regulations address: health and safety standards for the operation of facilities, transportation systems and the handling of materials; air and water pollution requirements and standards; solid waste disposal requirements; land reclamation requirements; and requirements relating to the handling and disposition of hazardous materials. MLPs are subject to the costs of compliance with such laws applicable to them, and changes in such laws and regulations may adversely affect their results of operations.
MLPs may be subject to liability relating to the release of substances into the environment, including liability under federal “Superfund” and similar state laws for investigation and remediation of releases and threatened releases of hazardous materials, as well as liability for injury and property damage for accidental events, such as explosions or discharges of materials causing personal injury and damage to property. Such potential liabilities could have a material adverse effect upon the financial condition and results of operations of MLPs.
MLPs are subject to numerous business related risks, including: deterioration of business fundamentals reducing profitability due to development of alternative energy sources, consumer sentiment with respect to global warming, changing demographics in the markets served, unexpectedly prolonged and precipitous changes in commodity prices and increased competition that reduces the MLP’s market share; the lack of growth of markets requiring growth through acquisitions; disruptions in transportation systems; the dependence of certain MLPs upon the energy exploration and development activities of unrelated third parties; availability of capital for expansion and construction of needed facilities; a significant decrease in natural gas production due to depressed commodity prices or otherwise; the inability of MLPs to successfully integrate recent or future acquisitions; and the general level of the economy.
Securities Lending
All Funds may lend their portfolio securities. None of the Funds will lend its portfolio securities if as a result the aggregate of such loans made by the Fund would exceed the limits established by the 1940 Act (in general, a fund may not lend more than 33 1/3% of total fund assets). Portfolio securities may be lent to unaffiliated broker-dealers and other unaffiliated qualified financial institutions provided that such loans are callable at any time on not more than five business days' notice and that cash or other liquid assets equal to at least 102% of the market value of the securities loaned, determined daily, is deposited by the borrower with the Fund and is maintained each business day. While such securities are on loan, the borrower pays the Fund any income accruing thereon. The Fund may invest any cash collateral, thereby earning additional income, and may receive an agreed-upon fee from the borrower. Borrowed securities must be returned when the loan terminates. Any gain or loss in the market value of the borrowed securities that occurs during the term of the loan belongs to the Fund and its shareholders. A Fund pays reasonable administrative, custodial, and other fees in connection with such loans and may pay a negotiated portion of the interest earned on the cash or government securities pledged as collateral to the borrower or placing broker. A Fund does not normally retain voting rights attendant to securities it has lent, but it may call a loan of securities in anticipation of an important vote.
Short Sales
A short sale involves the sale by the fund of a security that it does not own with the expectation of covering settlement by purchasing the same security at a later date at a lower price. The fund may also enter into a short position by using a derivative instrument, such as a future, forward, or swap agreement. If the price of the security or derivative increases prior to the time the fund is required to replace the borrowed security, then the fund will incur a loss equal to the increase in price from the time that the short sale was entered into plus any premiums and interest paid to the broker. Therefore, short sales involve the risk that losses may be exaggerated, potentially losing more money than the value of the investment.
A “short sale against the box” is a technique that involves selling either a security owned by the fund, or a security equivalent in kind and amount to the security sold short that the fund has the right to obtain, at no additional cost, for delivery at a specified date in the future. A fund may enter into a short sale against the box to hedge against anticipated declines in the market price of portfolio securities. If the value of the securities sold short against the box increases prior to the scheduled delivery date, a fund will lose money.

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Foreign Currency Transactions
Funds may engage in foreign currency transactions for both hedging and investment purposes. In addition, 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. The value of these 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. The funds may also use foreign currency transactions to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another.
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.
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Options on Foreign Currencies. In addition, a Fund may buy and write options on foreign currencies in a manner similar to that in which futures or forward contracts on foreign currencies will be utilized. A Fund may use options on foreign currencies to hedge against adverse changes in foreign currency conversion rates. For example, a decline in the U.S. dollar value of a foreign currency in which portfolio securities are denominated will reduce the U.S. dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against such diminutions in the value of the portfolio securities, a Fund may buy put options on the foreign currency. If the value of the currency declines, a Fund will have the right to sell such currency for a fixed amount in U.S. dollars, thereby offsetting, in whole or in part, the adverse effect on its portfolio. Conversely, when a rise in the U.S. dollar value of a currency in which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, a Fund may buy call options on the foreign currency. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange rates. As in the case of other types of options, however, the benefit to a Fund from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition, if currency exchange rates do not move in the direction or to the extent desired, a Fund could sustain losses or lesser gains on transactions in foreign currency options that would require a Fund to forgo a portion or all of the benefits of advantageous changes in those rates.
A Fund also may write options on foreign currencies. For example, to hedge against a potential decline in the U.S. dollar due to adverse fluctuations in exchange rates, a Fund could, instead of purchasing a put option, write a call option on the relevant currency. If the decline expected by a Fund occurs, the option will most likely not be exercised and the diminution in value of portfolio securities will be offset at least in part by the amount of the premium received. Similarly, instead of purchasing a call option to hedge against a potential increase in the U.S. dollar cost of securities to be acquired, a Fund could write a put option on the relevant currency which, if rates move in the manner projected by a Fund, will expire unexercised and allow a Fund to hedge the increased cost up to the amount of the premium. If exchange rates do not move in the expected direction, the option may be exercised and a Fund would be required to buy or sell the underlying currency at a loss, which may not be fully offset by the amount of the premium. Through the writing of options on foreign currencies, a Fund also may lose all or a portion of the benefits that might otherwise have been obtained from favorable movements in exchange rates.
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. Transactions in non-U.S. currencies are also subject to many of the risks of investing in non-U.S. securities. Because a Fund may invest in foreign securities and foreign currencies, changes in foreign economies and political climates are more likely to affect a Fund than a mutual fund that invests exclusively in U.S. companies. There also may be less government supervision of foreign markets, resulting in non-uniform accounting practices and less publicly available information. 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 a Fund than a fund that is not over-weighted in that region.

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Futures on Currency. A foreign currency future provides for the future sale by one party and purchase by another party of a specified quantity of foreign currency at a specified price and time. A public market exists in futures contracts covering a number of foreign currencies. Currency futures contracts are exchange-traded and change in value to reflect movements of a currency or a basket of currencies. Settlement must be made in a designated currency.
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Forward Foreign Currency Exchange Contracts. The Funds may, but are not obligated to, enter into forward foreign currency exchange contracts. Currency transactions include forward currency contracts and exchange listed or over-the-counter options on currencies. A forward currency contract involves a privately negotiated obligation to purchase or sell a specific currency at a specified future date at a price set at the time of the contract.
The typical use of a forward contract is to "lock in" the price of a security in U.S. dollars or some other foreign currency which a Fund is holding in its portfolio. By entering into a forward contract for the purchase or sale, for a fixed amount of dollars or other currency, of the amount of foreign currency involved in the underlying security transactions, a Fund may be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or other currency which is being used for the security purchase and the foreign currency in which the security is denominated in or exposed to during the period between the date on which the security is purchased or sold and the date on which payment is made or received.
The Sub-Advisor also may from time to time utilize forward contracts for other purposes. For example, they may be used to hedge a foreign security held in the portfolio or a security which pays out principal tied to an exchange rate between the U.S. dollar and a foreign currency, against a decline in value of the applicable foreign currency. They also may be used to lock in the current exchange rate of the currency in which those securities anticipated to be purchased are denominated in or exposed to. At times, a Fund may enter into "cross-currency" hedging transactions involving currencies other than those in which securities are held or proposed to be purchased are denominated.
A Fund segregates liquid assets in an amount equal to (1) at least its daily marked-to-market (net) obligation (i.e., its daily net liability, if any) with respect to forward currency contracts that are cash settled and (2) the net notional value with respect to forward currency contracts that are not cash settled. It should be noted that the use of forward foreign currency exchange contracts does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange between the currencies that can be achieved at some future point in time. Additionally, although such contracts tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain that might result if the value of the currency increases.
Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to a Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that a Fund is engaging in currency hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. 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. Currency exchange rates may also fluctuate based on factors extrinsic to a country's economy. Buyers and sellers of currency forward contracts are subject to the same risks that apply to the use of forward contracts generally. Further, 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.
Moreover, a Fund bears the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a forward counterparty.
Repurchase and Reverse Repurchase Agreements, Mortgage Dollar Rolls and Sale-Buybacks
The Funds may invest in repurchase and reverse repurchase agreements. In a repurchase agreement, a Fund purchases a security and simultaneously commits to resell that security to the seller at an agreed upon price on an agreed upon date within a number of days (usually not more than seven) from the date of purchase. The resale price

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consists of the purchase price plus an amount that is unrelated to the coupon rate or maturity of the purchased security. A repurchase agreement involves the obligation of the seller to pay the agreed upon price, which obligation is in effect secured by the value (at least equal to the amount of the agreed upon resale price and marked-to-market daily) of the underlying security or "collateral." A risk associated with repurchase agreements is the failure of the seller to repurchase the securities as agreed, which may cause a Fund to suffer a loss if the market value of such securities declines before they can be liquidated on the open market. In the event of bankruptcy or insolvency of the seller, a Fund may encounter delays and incur costs in liquidating the underlying security. Repurchase agreements that mature in more than seven days are subject to each Fund's limit on illiquid investments. While it is not possible to eliminate all risks from these transactions, it is the policy of the Fund to limit repurchase agreements to those parties whose creditworthiness has been reviewed and found satisfactory by the Sub-Advisor.
A Fund may use reverse repurchase agreements, mortgage dollar rolls, and economically similar transactions to obtain cash to satisfy unusually heavy redemption requests or for other temporary or emergency purposes without the necessity of selling portfolio securities, or to earn additional income on portfolio securities, such as Treasury bills or notes. In a reverse repurchase agreement, a Fund sells a portfolio security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a reverse repurchase agreement is outstanding, a Fund will maintain cash or appropriate liquid assets to cover its obligation under the agreement. The Fund will enter into reverse repurchase agreements only with parties that the Sub-Advisor deems creditworthy. Using reverse repurchase agreements to earn additional income involves the risk that the interest earned on the invested proceeds is less than the expense of the reverse repurchase agreement transaction. This technique may also have a leveraging effect on the Fund, although the Fund's intent to segregate assets in the amount of the reverse repurchase obligation minimizes this effect.
A “mortgage dollar roll” is similar to a reverse repurchase agreement in certain respects. In a “dollar roll” transaction a Fund sells a mortgage-related security, such as a security issued by the Government National Mortgage Association, to a dealer and simultaneously agrees to repurchase a similar security (but not the same security) in the future at a pre-determined price. A dollar roll can be viewed, like a reverse repurchase agreement, as a collateralized borrowing in which a Fund pledges a mortgage-related security to a dealer to obtain cash. Unlike in the case of reverse repurchase agreements, the dealer with which a Fund enters into a dollar roll transaction is not obligated to return the same securities as those originally sold by the Fund, but only securities which are “substantially identical.” To be considered “substantially identical,” the securities returned to a Fund generally must: 1) be collateralized by the same types of underlying mortgages; 2) be issued by the same agency and be part of the same program; 3) have a similar original stated maturity; 4) have identical net coupon rates; 5) have similar market yields (and therefore price); and 6) satisfy “good delivery” requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within 0.01% of the initial amount delivered.
A Fund's obligations under a dollar roll agreement must be covered by segregated liquid assets equal in value to the securities subject to repurchase by the Fund.
A Fund also may effect simultaneous purchase and sale transactions that are known as “sale-buybacks.” A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of the Fund's repurchase of the underlying security. A Fund's obligations under a sale-buyback typically would be offset by liquid assets equal in value to the amount of the Fund's forward commitment to repurchase the subject security.
Structured Notes
Funds may invest in a broad category of instruments known as “structured notes.” These instruments are debt obligations issued by industrial corporations, financial institutions or governmental or international agencies. Traditional debt obligations typically obligate the issuer to repay the principal plus a specified rate of interest. Structured notes, by contrast, obligate the issuer to pay amounts of principal or interest that are determined by reference to changes in some external factor or factors, or the principal and interest rate may vary from the stated rate because of changes in these factors. For example, the issuer’s obligations could be determined by reference to changes in the value of a foreign currency, an index of securities (such as the S&P 500 Index) or an interest rate (such as the U.S. Treasury bill rate). In some cases, the issuer’s obligations are determined by reference to changes over time in the difference (or “spread”) between two or more external factors (such as the U.S. prime lending rate and the total return of the stock market in a particular country, as measured by a stock index). In some cases, the issuer’s obligations may fluctuate inversely with changes in an external factor or factors (for example, if the U.S. prime lending rate goes up, the issuer’s interest payment obligations are reduced). In some cases, the issuer’s obligations may be determined by some multiple of the change in an external factor or factors (for example, three times the change in the U.S. Treasury bill rate). In some cases, the issuer’s obligations remain fixed (as with a

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traditional debt instrument) so long as an external factor or factors do not change by more than the specified amount (for example, if the value of a stock index does not exceed some specified maximum), but if the external factor or factors change by more than the specified amount, the issuer’s obligations may be sharply reduced.
Structured notes can serve many different purposes in the management of a fund. For example, they can be used to increase a fund’s exposure to changes in the value of assets that a fund would not ordinarily purchase directly (such as stocks traded in a market that is not open to U.S. investors). They also can be used to hedge the risks associated with other investments a fund holds. For example, if a structured note has an interest rate that fluctuates inversely with general changes in a country’s stock market index, the value of the structured note would generally move in the opposite direction to the value of holdings of stocks in that market, thus moderating the effect of stock market movements on the value of a fund’s portfolio as a whole. The cash flow on the underlying instruments may be apportioned among the newly issued structured notes to create securities with different investment characteristics such as varying maturities, payment priorities or interest rate provisions; the extent of the payments made with respect to structured notes is dependent on the extent of the cash flow on the underlying instruments. 
Structured notes involve special risks. As with any debt obligation, structured notes involve the risk that the issuer will become insolvent or otherwise default on its payment obligations. This risk is in addition to the risk that the issuer’s obligations (and thus the value of a fund’s investment) will be reduced because of adverse changes in the external factor or factors to which the obligations are linked. The value of structured notes will in many cases be more volatile (that is, will change more rapidly or severely) than the value of traditional debt instruments. Volatility will be especially high if the issuer’s obligations are determined by reference to some multiple of the change in the external factor or factors. Structured notes also may be more difficult to accurately price than less complex securities and instruments or more traditional debt securities. Many structured notes have limited or no liquidity, so that a fund would be unable to dispose of the investment prior to maturity. As with all investments, successful use of structured notes depends in significant part on the accuracy of the Sub-Advisor’s analysis of the issuer’s creditworthiness and financial prospects, and of the Sub-Advisor’s forecast as to changes in relevant economic and financial market conditions and factors. In instances where the issuer of a structured note is a foreign entity, the usual risks associated with investments in foreign securities apply. Structured notes may be considered derivative securities.
Debt-Linked and Equity-Linked Securities
The Funds may invest in debt-linked and equity-linked securities. The investment results of such instruments are intended to correspond generally to the performance of one or more specified equity or debt securities, or of a specific index or analogous “basket” of equity or debt securities. Therefore, investing in these instruments involves risks similar to the risks of investing in the underlying stocks or bonds directly. In addition, a Fund bears the risk that the issuer of an equity- or debt-linked security may default on its obligations under the instrument. Equity- and debt-linked securities are often used for many of the same purposes as, and share many of the same risks with, other derivative instruments as well as structured notes. Like many derivatives and structured notes, equity- and debt-linked securities may be considered illiquid, potentially limiting a Fund’s ability to dispose of them.
Commodity Index-Linked Notes
A commodity index-linked note is a type of structured note that is a derivative instrument. The prices of commodity-linked derivative instruments such as commodity index-linked notes may move in different directions than investments in traditional equity and debt securities when the value of those traditional securities is declining due to adverse economic conditions. As an example, during periods of rising inflation, debt securities have historically tended to decline in value. Conversely, during those same periods of rising inflation, the prices of certain commodities, such as oil and metals, have historically tended to increase. There can be no assurance, however, that derivative instruments will perform in that manner in the future, and, at certain times in the past, the price movements of commodity-linked investments have been parallel to debt and equity securities.
During the period 1970 through 2001, the correlation between the quarterly investment returns of commodities and the quarterly investment returns of traditional financial assets such as stocks and bonds generally was negative. This inverse relationship occurred generally because commodities have historically tended to increase and decrease in value during different parts of the business cycle than have financial assets. Nevertheless, at various times, commodities prices may move in tandem with the prices of financial assets and thus may not provide overall portfolio diversification benefits.
The reverse may be true during "bull markets," when the value of traditional securities such as stocks and bonds is increasing. Under such favorable economic conditions, a fund's investments in commodity index-linked notes may be expected not to perform as well as an investment in traditional securities. Over the long term, the returns on a fund's investments in commodity index-linked notes are expected to exhibit low or negative correlation with stocks and bonds.

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Hybrid Instruments
A hybrid instrument is a type of derivative that combines a traditional stock or bond with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. An example of a hybrid could be a bond issued by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a hybrid instrument would be economically similar to a combination of a bond and a call option on oil.
Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the NAV of a Fund.
Certain hybrid instruments may provide exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment features similar to commodity futures contracts, commodity options or similar instruments. Commodity-linked hybrid instruments may be either equity or debt securities, leveraged or unleveraged, and are considered hybrid instruments because they have both security and commodity-like characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index or other economic variable and therefore are subject to many of the same risks as investments in those underlying securities, instruments or commodities.
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investments in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Swap Agreements and Options on Swap Agreements
Each Fund may engage in swap transactions, including, but not limited to, swap agreements on interest rates, security or commodity indexes, specific securities and commodities, and credit and event-linked swaps, to the extent permitted by its investment restrictions. To the extent a Fund may invest in foreign currency-denominated securities, it may also invest in currency swap agreements and currency exchange rate swap agreements. A Fund may also enter into options on swap agreements (“swap options”).
A Fund may enter into swap transactions for any legal purpose consistent with its investment objectives and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets; to protect against currency fluctuations; as a duration management technique; to protect against any increase in the price of securities a Fund anticipates purchasing at a later date; to gain exposure to one or more securities, currencies, or interest rates; to take advantage of perceived mispricing in the securities markets; or to gain exposure to certain markets in the most economical way possible.
Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a "basket" of securities or commodities representing a particular index.
Interest rate swaps involve the exchange by a Fund with another party of their respective commitments to pay or receive interest (for example, an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal). Forms of swap agreements also include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to

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the extent that interest rates fall below a specified rate, or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. A currency swap is an agreement to exchange cash flows on a notional amount based on changes in the relative values of the specified currencies. An index swap is an agreement to make or receive payments based on the different returns that would be achieved if a notional amount were invested in a specified basket of securities (such as the S&P 500 Index) or in some other investment (such as U.S. Treasury Securities). A total return swap is an agreement to make payments of the total return from a specified asset or instrument (or a basket of such instruments) during the specified period, in return for payments equal to a fixed or floating rate of interest or the total return from another specified asset or instrument. Alternatively, a total return swap can be structured so that one party will make payments to the other party if the value of the relevant asset or instrument increases, but receive payments from the other party if the value of that asset or instrument decreases. Consistent with a Fund's investment objectives and general investment policies, certain of the Funds may invest in commodity swap agreements. For example, an investment in a commodity swap agreement may involve the exchange of floating-rate interest payments for the total return on a commodity index. In a total return commodity swap, a Fund will receive the price appreciation of a commodity index, a portion of the index, or a single commodity in exchange for paying an agreed-upon fee. If the commodity swap is for one period, a Fund may pay a fixed fee, established at the outset of the swap. However, if the term of the commodity swap is for more than one period, with interim swap payments, a Fund may pay an adjustable or floating fee. With a "floating" rate, the fee may be pegged to a base rate, such as the London Interbank Offered Rate, and is adjusted each period. Therefore, if interest rates increase over the term of the swap contract, a Fund may be required to pay a higher fee at each swap reset date.
A Fund may enter into credit default swap agreements. The "buyer" in a credit default contract is obligated to pay the "seller" a periodic stream of payments over the term of the contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller must pay the buyer the full notional value, or "par value," of the reference obligation in exchange for the reference obligation. A Fund may be either the buyer or seller in a credit default swap transaction. If a Fund is a buyer and no event of default occurs, the Fund will lose its investment and recover nothing. However, if an event of default occurs, the Fund (if the buyer) will receive the full notional value of the reference obligation that may have little or no value. As a seller, a Fund receives a fixed rate of income throughout the term of the contract, which typically is between six months and five years, provided that there is no default event. If an event of default occurs, the seller must pay the buyer the full notional value of the reference obligation. In addition, collateral posting requirements are individually negotiated and there is no regulatory requirement that a counterparty post collateral to secure its obligations or a specified amount of cash, depending upon the terms of the swap, under a credit default swap. Furthermore, there is no requirement that a party be informed in advance when a credit default swap agreement is sold. Accordingly, a Fund may have difficulty identifying the party responsible for payment of its claims. The notional value of credit default swaps with respect to a particular investment is often larger than the total par value of such investment outstanding and, in event of a default, there may be difficulties in making the required deliveries of the reference investments, possibly delaying payments.
The Funds may invest in derivative instruments that provide exposure to one or more credit default swaps. For example, a Fund may invest in a derivative instrument known as the Loan-Only Credit Default Swap Index (“LCDX”), a tradable index with 100 equally-weighted underlying single-name loan-only credit default swaps (“LCDS”). Each underlying LCDS references an issuer whose loans trade in the secondary leveraged loan market. A Fund can either buy the index (take on credit exposure) or sell the index (pass credit exposure to a counterparty). While investing in these types of derivatives will increase the universe of debt securities to which a Fund is exposed, such investments entail additional risks that are not typically associated with investments in other debt securities. Credit default swaps and other derivative instruments related to loans are subject to the risks associated with loans generally, as well as the risks of derivative transactions.
The Funds may invest in publicly or privately issued interests in investment pools whose underlying assets are credit default, credit-linked, interest rate, currency exchange, equity-linked or other types of swap contracts and related underlying securities or securities loan agreements. The pools’ investment results may be designed to correspond generally to the performance of a specified securities index or “basket” of securities, or sometimes a single security. These types of pools are often used to gain exposure to multiple securities with a smaller investment than would be required to invest directly in the individual securities. They also may be used to gain exposure to foreign securities markets without investing in the foreign securities themselves and/or the relevant foreign market. To the extent that a Fund invests in pools of swaps and related underlying securities or securities loan agreements whose return corresponds to the performance of a foreign securities index or one or more foreign securities, investing in such pools will involve risks similar to the risks of investing in foreign securities. In addition to the risks associated with investing in swaps generally, a Fund bears the risks and costs generally associated with investing in pooled investment vehicles, such as paying the fees and expenses of the pool and the risk that the pool or the operator of

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the pool may default on its obligations to the holder of interests in the pool, such as a Fund. Interests in privately offered investment pools of swaps may be considered illiquid.
The Funds may enter into contracts for differences. “Contracts for differences” are swap arrangements in which a Fund may agree with a counterparty that its return (or loss) will be based on the relative performance of two different groups or “baskets” of securities. For example, as to one of the baskets, a Fund’s return is based on theoretical long futures positions in the securities comprising that basket, and as to the other basket, a Fund’s return is based on theoretical short futures positions in the securities comprising that other basket. The notional sizes of the baskets will not necessarily be the same, which can give rise to investment leverage. A Fund may also use actual long and short futures positions to achieve the market exposure(s) as contracts for differences. A Fund may enter into swaps and contracts for differences for investment return, hedging, risk management and for investment leverage.
A swap option (also known as “swaptions”) is a contract that gives a counterparty the right (but not the obligation) in return for payment of a premium, to enter into a new swap agreement or to shorten, extend, cancel, or otherwise modify an existing swap agreement, at some designated future time on specified terms. The buyer and seller of the swap option agree on the strike price, length of the option period, the term of the swap, notional amount, amortization and frequency of settlement. A Fund may engage in swap options for hedging purposes or in an attempt to manage and mitigate credit and interest rate risk. Each Fund may write (sell) and purchase put and call swap options. The use of swap options involves risks, including, among others, imperfect correlation between movements of the price of the swap options and the price of the securities, indices or other assets serving as reference instruments for the swap option, reducing the effectiveness of the instrument for hedging or investment purposes.
The swap agreements the Funds enter into settle in cash and, therefore, provide for calculation of the obligations of the parties to the agreement on a “net basis.” Consequently, a Fund's current obligations (or rights) under such a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). A Fund's current obligations under such a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by the Manager or Sub-Advisor in accordance with procedures established by the Board of Directors, to avoid any potential leveraging of the Fund's portfolio. Obligations under swap agreements for which the Fund segregates assets will not be construed to be “senior securities” for purposes of the Fund's investment restriction concerning senior securities.
Swaps can be highly volatile and may have a considerable impact on a Fund’s performance, as the potential gain or loss on any swap transaction is not subject to any fixed limit. Whether a Fund's use of swap agreements or swap options will be successful in furthering its investment objective of total return will depend on the ability of the Fund's Manager or Sub-Advisor to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Funds will enter into swap agreements only with counterparties that present minimal credit risks, as determined by the Fund's Manager or Sub-Advisor. Certain restrictions imposed on the Funds by the Internal Revenue Code may limit the Funds' ability to use swap agreements.
Depending on the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a swap option than it will incur when it purchases a swap option. When a Fund purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swap option, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
Liquidity. Some swap markets have grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, these swap markets have become relatively liquid.
The liquidity of swap agreements will be determined by the Manager or Sub-Advisor based on various factors, including:
•
the frequency of trades and quotations,
•
the number of dealers and prospective purchasers in the marketplace,
•
dealer undertakings to make a market,
•
the nature of the security (including any demand or tender features), and
•
the nature of the marketplace for trades (including the ability to assign or offset a portfolio's rights and obligations relating to the investment).

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Such determination will govern whether a swap will be deemed to be within each Fund's restriction on investments in illiquid securities.
For purposes of applying the funds’ investment policies and restrictions (as stated in the Prospectuses and this Statement of Additional Information) swap agreements are generally valued by the funds at market value. In the case of a credit default swap, however, in applying certain of the funds’ investment policies and restrictions the fund will value the credit default swap at its notional value or its full exposure value (i.e., the sum of the notional amount for the contract plus the market value), but may value the credit default swap at market value for purposes of applying certain of the funds’ other investment policies and restrictions. For example, a fund may value credit default swaps at full exposure value for purposes of the fund’s credit quality guidelines because such value reflects the fund’s actual economic exposure during the term of the credit default swap agreement. In this context, both the notional amount and the market value may be positive or negative depending on whether the fund is selling or buying protection through the credit default swap. The manner in which certain securities or other instruments are valued by the funds for purposes of applying investment policies and restrictions may differ from the manner in which those investments are valued by other types of investors.
When-Issued, Delayed Delivery, and Forward Commitment Transactions
Each of the Funds may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. When such purchases are outstanding, the Fund will segregate until the settlement date assets determined to be liquid by the Sub-Advisor in accordance with procedures established by the Board of Directors, in an amount sufficient to meet the purchase price. Typically, no income accrues on securities a Fund has committed to purchase prior to the time delivery of the securities is made, although a Fund may earn income on securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Fund is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Fund's other investments. If the Fund remains substantially fully invested at a time when when-issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Fund could miss a favorable price or yield opportunity or could suffer a loss. A Fund may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued, delayed delivery, or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which the Funds may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.
Money Market Instruments/Temporary Defensive Position
All of the Funds may make money market investments (cash equivalents), without limit, pending other investment or settlement, for liquidity, or in adverse market conditions. Following are descriptions of the types of money market instruments that the Funds may purchase:
•
U.S. Government Securities - Securities issued or guaranteed by the U.S. government, including treasury bills, notes, and bonds.
•
U.S. Government Agency Securities - Obligations issued or guaranteed by agencies or instrumentalities of the U.S. government.
•
U.S. agency obligations include, but are not limited to, the Bank for Cooperatives, Federal Home Loan Banks, and Federal Intermediate Credit Banks.
•
U.S. instrumentality obligations include, but are not limited to, the Export-Import Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association.
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities are supported by the full faith and credit of the U.S. Treasury. Others, such as those issued by the Federal National Mortgage Association, are supported by discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality. Still others, such as those issued by the Student Loan Marketing Association, are supported only by the credit of the agency or instrumentality.
•
Bank Obligations - Certificates of deposit, time deposits and bankers' acceptances of U.S. commercial banks having total assets of at least one billion dollars and overseas branches of U.S. commercial banks and foreign banks, which in the opinion of the Sub-Advisor, are of comparable quality. The Fund may acquire obligations of U.S. banks that are not members of the Federal Reserve System or of the Federal Deposit Insurance Corporation.

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Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party, although there is no market for such deposits.
Obligations of foreign banks and obligations of overseas branches of U.S. banks are subject to somewhat different regulations and risks than those of U.S. domestic banks. For example, an issuing bank may be able to maintain that the liability for an investment is solely that of the overseas branch which could expose a Fund to a greater risk of loss. In addition, obligations of foreign banks or of overseas branches of U.S. banks may be affected by governmental action in the country of domicile of the branch or parent bank. Examples of adverse foreign governmental actions include the imposition of currency controls, the imposition of withholding taxes on interest income payable on such obligations, interest limitations, seizure or nationalization of assets, or the declaration of a moratorium. Deposits in foreign banks or foreign branches of U.S. banks are not covered by the Federal Deposit Insurance Corporation and that the selection of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from those applicable to United States banks. Foreign banks are not generally subject to examination by any United States Government agency or instrumentality. A Fund only buys short-term instruments where the risks of adverse governmental action are believed by the Sub-Advisor to be minimal. A Fund considers these factors, along with other appropriate factors, in making an investment decision to acquire such obligations. It only acquires those which, in the opinion of management, are of an investment quality comparable to other debt securities bought by the Fund.
A certificate of deposit is issued against funds deposited in a bank or savings and loan association for a definite period of time, at a specified rate of return. Normally they are negotiable. However, a Fund occasionally may invest in certificates of deposit which are not negotiable. Such certificates may provide for interest penalties in the event of withdrawal prior to their maturity. A bankers' acceptance is a short-term credit instrument issued by corporations to finance the import, export, transfer, or storage of goods. They are termed "accepted" when a bank guarantees their payment at maturity and reflect the obligation of both the bank and drawer to pay the face amount of the instrument at maturity.
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Commercial Paper - Short-term promissory notes issued by U.S. or foreign corporations.
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Short-term Corporate Debt - Corporate notes, bonds, and debentures that at the time of purchase have 397 days or less remaining to maturity.
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Repurchase Agreements - Instruments under which securities are purchased from a bank or securities dealer with an agreement by the seller to repurchase the securities at the same price plus interest at a specified rate.
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Taxable Municipal Obligations - Short-term obligations issued or guaranteed by state and municipal issuers which generate taxable income.
The ratings of nationally recognized statistical rating organization ("NRSRO"), such as Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's ("S&P"), which are described in Appendix B, represent their opinions as to the quality of the money market instruments which they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. These ratings, including ratings of NRSROs other than Moody's and S&P, are the initial criteria for selection of portfolio investments, but the Sub-Advisor further evaluates these securities.
Funding Agreements
Funds may invest in Guaranteed Investment Contracts (“GICs”) and similar funding agreements. In connection with these investments, a Fund makes cash contributions to a deposit fund of an insurance company’s general account. The insurance company then credits to a Fund on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The funding agreements provide that this guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes part of the general assets of the insurance company. GICs are considered illiquid securities and will be subject to any limitations on such investments, unless there is an active and substantial secondary market for the particular instrument and market quotations are readily

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available. Generally, funding agreements are not assignable or transferable without the permission of the issuing company, and an active secondary market in some funding agreements does not currently exist. Investments in GICs are subject to the risks associated with fixed-income instruments generally, and are specifically subject to the credit risk associated with an investment in the issuing insurance company.
Municipal Obligations
Municipal Obligations are obligations issued by or on behalf of states, territories, and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, including municipal utilities, or multi-state agencies or authorities. The interest on Municipal Obligations is exempt from federal income tax in the opinion of bond counsel to the issuer. Three major classifications of Municipal Obligations are: Municipal Bonds, that generally have a maturity at the time of issue of one year or more; Municipal Notes, that generally have a maturity at the time of issue of six months to three years; and Municipal Commercial Paper, that generally has a maturity at the time of issue of 30 to 270 days.
The term "Municipal Obligations" includes debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets, water and sewer works, and electric utilities. Other public purposes for which Municipal Obligations are issued include refunding outstanding obligations, obtaining funds for general operating expenses, and lending such funds to other public institutions and facilities. To the extent that a fund invests a significant portion of its assets in municipal obligations issued in connection with a single project, the fund likely will be affected by the economic, business or political environment of the project.
AMT-Subject Bonds. Industrial development bonds are issued by or on behalf of public authorities to obtain funds to provide for the construction, equipment, repair or improvement of privately operated housing facilities, sports facilities, convention or trade show facilities, airport, mass transit, industrial, port or parking facilities, air or water pollution control facilities, and certain local facilities for water supply, gas, electricity, or sewage or solid waste disposal. They are considered to be Municipal Obligations if the interest paid thereon qualifies as exempt from federal income tax in the opinion of bond counsel to the issuer, even though the interest may be subject to the federal alternative minimum tax.
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Municipal Bonds. Municipal Bonds may be either "general obligation" or "revenue" issues. General obligation bonds are secured by the issuer's pledge of its faith, credit, and taxing power for the payment of principal and interest. Revenue bonds are payable from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source (e.g., the user of the facilities being financed), but not from the general taxing power. Industrial development bonds and pollution control bonds in most cases are revenue bonds and generally do not carry the pledge of the credit of the issuing municipality. The payment of the principal and interest on industrial revenue bonds depends solely on the ability of the user of the facilities financed by the bonds to meet its financial obligations and the pledge, if any, of real and personal property so financed as security for such payment. Funds may also invest in "moral obligation" bonds that are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of the bonds becomes a moral commitment but not a legal obligation of the state or municipality in question.
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Municipal Notes. Municipal Notes usually are general obligations of the issuer and are sold in anticipation of a bond sale, collection of taxes, or receipt of other revenues. Payment of these notes is primarily dependent upon the issuer's receipt of the anticipated revenues. Other notes include "Construction Loan Notes" issued to provide construction financing for specific projects, and "Bank Notes" issued by local governmental bodies and agencies to commercial banks as evidence of borrowings. Some notes ("Project Notes") are issued by local agencies under a program administered by the U.S. Department of Housing and Urban Development. Project Notes are secured by the full faith and credit of the United States.
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Bond Anticipation Notes ("BANs") are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuer's access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
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Tax Anticipation Notes ("TANs") are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuer's capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies, could adversely affect the issuer's ability to meet its obligations on outstanding TANs.

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Revenue Anticipation Notes ("RANs") are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuer's ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
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Construction Loan Notes are issued to provide construction financing for specific projects. Permanent financing, the proceeds of which are applied to the payment of construction loan notes, is sometimes provided by a commitment by the Government National Mortgage Association ("GNMA") to purchase the loan, accompanied by a commitment by the Federal Housing Administration to insure mortgage advances thereunder. In other instances, permanent financing is provided by commitments of banks to purchase the loan. The Opportunistic Municipal Fund will only purchase construction loan notes that are subject to GNMA or bank purchase commitments.
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Bank Notes are notes issued by local governmental bodies and agencies such as those described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working-capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
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Municipal Commercial Paper. Municipal Commercial Paper refers to short-term obligations of municipalities that may be issued at a discount and may be referred to as Short-Term Discount Notes. Municipal Commercial Paper is likely to be used to meet seasonal working capital needs of a municipality or interim construction financing. Generally they are repaid from general revenues of the municipality or refinanced with long-term debt. In most cases Municipal Commercial Paper is backed by letters of credit, lending agreements, note repurchase agreements or other credit facility agreements offered by banks or other institutions.
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Variable and Floating Rate Obligations. Certain Municipal Obligations, obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, and debt instruments issued by domestic banks or corporations may carry variable or floating rates of interest. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market index. Variable rate notes are adjusted to current interest rate levels at certain specified times, such as every 30 days. A floating rate note adjusts automatically whenever there is a change in its base interest rate adjustor, e.g., a change in the prime lending rate or specified interest rate indices. Typically such instruments carry demand features permitting the fund to redeem at par.
The fund's right to obtain payment at par on a demand instrument upon demand could be affected by events occurring between the date the fund elects to redeem the instrument and the date redemption proceeds are due which affects the ability of the issuer to pay the instrument at par value. The Sub-Advisor monitors on an ongoing basis the pricing, quality, and liquidity of such instruments and similarly monitors the ability of an issuer of a demand instrument, including those supported by bank letters of credit or guarantees, to pay principal and interest on demand. Although the ultimate maturity of such variable rate obligations may exceed one year, the fund treats the maturity of each variable rate demand obligation as the longer of a) the notice period required before the fund is entitled to payment of the principal amount through demand or b) the period remaining until the next interest rate adjustment. Floating rate instruments with demand features are deemed to have a maturity equal to the period remaining until the principal amount can be recovered through demand.
Funds may purchase participation interests in variable rate Municipal Obligations (such as industrial development bonds). A participation interest gives the purchaser an undivided interest in the Municipal Obligation in the proportion that its participation interest bears to the total principal amount of the Municipal Obligation. A fund has the right to demand payment on seven days' notice, for all or any part of the fund's participation interest in the Municipal Obligation, plus accrued interest. Each participation interest is backed by an irrevocable letter of credit or guarantee of a bank. Banks will retain a service and letter of credit fee and a fee for issuing repurchase commitments in an amount equal to the excess of the interest paid on the Municipal Obligations over the negotiated yield at which the instruments were purchased by the fund.
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Stand-By Commitments. Funds may acquire stand-by commitments with respect to municipal obligations held in their respective portfolios. Under a stand-by commitment, a broker-dealer, dealer, or bank would agree to purchase, at the relevant funds' option, a specified municipal security at a specified price. Thus, a

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stand-by commitment may be viewed as the equivalent of a put option acquired by a fund with respect to a particular municipal security held in the fund's portfolio.
The amount payable to a fund upon its exercise of a stand-by commitment normally would be 1) the acquisition cost of the municipal security (excluding any accrued interest that the fund paid on the acquisition), less any amortized market premium or plus any amortized market or original issue discount during the period the fund owned the security, plus, 2) all interest accrued on the security since the last interest payment date during the period the security was owned by the fund. Absent unusual circumstances, the fund would value the underlying municipal security at amortized cost. As a result, the amount payable by the broker-dealer, dealer or bank during the time a stand-by commitment is exercisable would be substantially the same as the value of the underlying municipal obligation.
A fund's right to exercise a stand-by commitment would be unconditional and unqualified. Although a fund could not transfer a stand-by commitment, it could sell the underlying municipal security to a third party at any time. It is expected that stand-by commitments generally will be available to the funds without the payment of any direct or indirect consideration. The funds may, however, pay for stand-by commitments if such action is deemed necessary. In any event, the total amount paid for outstanding stand-by commitments held in a fund's portfolio would not exceed 0.50% of the value of a fund's total assets calculated immediately after each stand-by commitment is acquired.
The funds intend to enter into stand-by commitments only with broker-dealers, dealers, or banks that their Sub-Advisors believe present minimum credit risks. A fund's ability to exercise a stand-by commitment will depend upon the ability of the issuing institution to pay for the underlying securities at the time the stand-by commitment is exercised. The credit of each institution issuing a stand-by commitment to a fund will be evaluated on an ongoing basis by the Sub-Advisor.
A fund intends to acquire stand-by commitments solely to facilitate portfolio liquidity and does not intend to exercise its right thereunder for trading purposes. The acquisition of a stand-by commitment would not affect the valuation of the underlying municipal security. Each stand-by commitment will be valued at zero in determining net asset value. Should a fund pay directly or indirectly for a stand-by commitment, its costs will be reflected in realized gain or loss when the commitment is exercised or expires. The maturity of a municipal security purchased by a fund will not be considered shortened by any stand-by commitment to which the obligation is subject. Thus, stand-by commitments will not affect the dollar-weighted average maturity of a fund's portfolio.
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Other Municipal Obligations. Other kinds of Municipal Obligations are occasionally available in the marketplace, and the fund may invest in such other kinds of obligations to the extent consistent with its investment objective and limitations. Such obligations may be issued for different purposes and with different security than those mentioned above.
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Risks of Municipal Obligations. The yields on Municipal Obligations are dependent on a variety of factors, including general economic and monetary conditions, money market factors, conditions in the Municipal Obligations market, size of a particular offering, maturity of the obligation, and rating of the issue. The fund's ability to achieve its investment objective also depends on the continuing ability of the issuers of the Municipal Obligations in which it invests to meet their obligation for the payment of interest and principal when due.
Municipal Obligations are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors, such as the Federal Bankruptcy Act. They are also subject to federal or state laws, if any, which extend the time for payment of principal or interest, or both, or impose other constraints upon enforcement of such obligations or upon municipalities to levy taxes. The power or ability of issuers to pay, when due, principal of and interest on Municipal Obligations may also be materially affected by the results of litigation or other conditions.
From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on Municipal Obligations. It may be expected that similar proposals will be introduced in the future. If such a proposal was enacted, the ability of the fund to pay "exempt interest" dividends may be adversely affected. The fund would reevaluate its investment objective and policies and consider changes in its structure.

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Special Considerations Relating to California Municipal Obligations
The Opportunistic Municipal Fund invests in California municipal obligations, and therefore may be significantly impacted by political, economic, or regulatory developments that affect issuers in California and their ability to pay principal and interest on their obligations. The ability of issuers to pay interest on, and repay principal of, California municipal obligations may be affected by 1) amendments to the California Constitution and related statutes that limit the taxing and spending authority of California government entities, 2) voter initiatives, 3) a wide variety of California laws and regulations, including laws related to the operation of health care institutions and laws related to secured interests in real property, and 4) the general financial condition of the State of California and the California economy.
Insurance
The insured municipal obligations in which the Opportunistic Municipal Fund may invest are insured under insurance policies that relate to the specific municipal obligation in question. This insurance is generally non-cancelable and will continue in force so long as the municipal obligations are outstanding and the insurer remains in business.
The insured municipal obligations are generally insured as to the scheduled payment of all installments of principal and interest as they fall due. The insurance covers only credit risk and therefore does not guarantee the market value of the obligations in a Fund's investment portfolio or a Fund's NAV. The Fund's NAV will continue to fluctuate in response to fluctuations in interest rates. A Fund's investment policy requiring investment in insured municipal
obligations will not affect the Fund's ability to hold its assets in cash or to invest in escrow-secured and defeased bonds or in certain short-term tax-exempt obligations, or affect its ability to invest in uninsured taxable obligations for temporary or liquidity purposes or on a defensive basis.
Taxable Investments of the Municipal Funds
The Opportunistic Municipal Fund may invest a portion of its assets, as described in the prospectus, in taxable short-term investments consisting of: Obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities, domestic bank certificates of deposit and bankers' acceptances, short-term corporate debt securities such as commercial paper, and repurchase agreements ("Taxable Investments"). These investments must have a stated maturity of one year or less at the time of purchase and must meet the following standards: banks must have assets of at least $1 billion; commercial paper must be rated at least "A" by S&P or "Prime" by Moody's or, if not rated, must be issued by companies having an outstanding debt issue rated at least "A" by S&P or Moody's; corporate bonds and debentures must be rated at least "A" by S&P or Moody's. Interest earned from Taxable Investments is taxable to investors. When, in the opinion of the Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the Opportunistic Municipal Fund may invest without limitation in Taxable Investments. At other times, Taxable Investments, Municipal Obligations that do not meet the quality standards required for the 80% portion of the portfolio and Municipal Obligations the interest on which is treated as a tax preference item for purposes of the federal alternative minimum tax will not exceed 20% of the Fund's total assets.
Other Investment Companies
Each Fund may invest in the securities of investment companies, subject to its fundamental and non-fundamental investment restrictions. 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.
As a shareholder in an investment company, a Fund would bear its ratable share of that entity's expenses, 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.
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 typically secured by specific collateral, and have a claim on the assets and/or stock of the Borrower that is senior to that held by unsecured subordinated debtholders and stockholders of the Borrower. Bank loans are typically structured and administered by a financial institution that acts as the agent of the lenders participating in the bank loan. Bank loans are typically rated below-investment-grade, which means they are more likely to default than

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investment-grade loans (they could also be unrated but of comparable quality). 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.
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 the fund to be unable to realize full value and thus cause a material decline in the 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 for the purpose of remaining 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 United States banks.
Bank loans generally are subject to mandatory and/or optional prepayment. Because of these mandatory prepayment conditions and because there may be significant economic incentives for the Borrower to repay, prepayments of senior floating rate interests may occur.
Variable and Floating Rate Instruments
The Funds may purchase variable and floating rate instruments. These instruments may include variable amount master demand notes that permit the indebtedness thereunder to vary in addition to providing for periodic adjustments in the interest rate. These instruments may also include leveraged inverse floating rate debt instruments, or “inverse floaters”. The interest rate of an inverse floater resets in the opposite direction from the market rate of interest on a security or interest to which it is related. An inverse floater may be considered to be leveraged to the extent that its interest rate varies by a magnitude that exceeds the magnitude of the change in the index rate of interest, and is subject to many of the same risks as derivatives. The higher degree of leverage inherent in inverse floaters is associated with greater volatility in their market values. Certain of these investments may be illiquid. The absence of an active secondary market with respect to these investments could make it difficult for a Fund to dispose of a variable or floating rate note if the issuer defaulted on its payment obligation or during periods that a Fund is not entitled to exercise its demand rights, and a Fund could, for these or other reasons, suffer a loss with respect to such instruments.
Warrants and Rights
The Funds may invest in warrants and rights. A warrant is an instrument that gives the holder a right to purchase a given number of shares of a particular security at a specified price until a stated expiration date. Buying a warrant generally can provide a greater potential for profit or loss than an investment of equivalent amounts in the underlying common stock. The market value of a warrant does not necessarily move with the value of the underlying securities. If a holder does not sell the warrant, it risks the loss of its entire investment if the market price of the underlying security does not, before the expiration date, exceed the exercise price of the warrant. Investment in warrants is a speculative activity. Warrants pay no dividends and confer no rights (other than the right to purchase the underlying securities) with respect to the assets of the issuer. A right is a privilege granted to existing shareholders of a corporation to subscribe for shares of a new issue of common stock before it is issued. Rights normally have a short life, usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price.
Pay-in-Kind Securities
The Funds may invest in pay-in-kind securities. Pay-in-kind securities pay dividends or interest in the form of additional securities of the issuer, rather than in cash. These securities are usually issued and traded at a discount from their face amounts. The amount of the discount varies depending on various factors, such as the time remaining until maturity of the securities, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. The market prices of pay-in-kind securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than are other types of securities having similar maturities and credit quality.

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Preferred Securities
There are two basic types of preferred securities, traditional preferred securities and hybrid or trust preferred securities.
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Traditional Preferred Securities. Traditional preferred securities may be issued by an entity taxable as a corporation and pay fixed or floating rate dividends. However, these claims are subordinated to more senior creditors, including senior debt holders. “Preference” means that a company must pay dividends on its preferred securities before paying any dividends on its common stock, and the claims of preferred securities holders are 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. Preferred securities share many investment characteristics with both common stock and bonds.
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Hybrid or Trust Preferred Securities. Hybrid-preferred securities are debt instruments that have characteristics similar to those of traditional preferred securities (characteristics of both subordinated debt and preferred stock). Hybrid preferred securities may be issued by corporations, generally in the form of interest-bearing instruments with preferred securities characteristics, or by an affiliated trust or partnership of the corporation, generally in the form of preferred interests in subordinated business trusts or similarly structured securities. The hybrid-preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates. Hybrid preferred holders generally have claims to assets in a corporate liquidation that are senior to those of traditional preferred securities but subordinate to those of senior debt holders. Certain subordinated debt and senior debt issues that have preferred characteristics are also considered to be part of the broader preferred securities market.
Preferred securities may be issued by trusts (likely one that is wholly-owned by a financial institution or other corporate entity, typically a bank holding company) or other special purpose entities established by operating companies, and are therefore not direct obligations of operating companies. The financial institution creates the trust and owns the trust’s common securities. The trust uses the sale proceeds of its preferred securities to purchase, for example, subordinated debt issued by the financial institution. The financial institution uses the proceeds from the subordinated debt sale to increase its capital while the trust receives periodic interest payments from the financial institution for holding the subordinated debt. The trust uses the funds received to make dividend payments to the holders of the trust preferred securities. The primary advantage of this structure may be that the trust preferred securities are treated by the financial institution as debt securities for tax purposes and as equity for the calculation of capital requirements.
Trust preferred securities typically bear a market rate coupon comparable to interest rates available on debt of a similarly rated issuer. Typical characteristics include long-term maturities, early redemption by the issuer, periodic fixed or variable interest payments, and maturities at face value. Holders of trust preferred securities have limited voting rights to control the activities of the trust and no voting rights with respect to the financial institution. The market value of trust preferred securities may be more volatile than those of conventional debt securities. Trust preferred securities may be issued in reliance on Rule 144A under the 1933 Act and subject to restrictions on resale. There can be no assurance as to the liquidity of trust preferred securities and the ability of holders, such as a fund, to sell their holdings. The condition of the financial institution can be looked to identify the risks of trust preferred securities as the trust typically has no business operations other than to issue the trust preferred securities. If the financial institution defaults on interest payments to the trust, the trust will not be able to make dividend payments to holders of its securities, such as a fund.
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Preferred Securities - Generally. Preferred securities include: traditional preferred securities, hybrid-preferred securities, $25 par hybrid preferred securities, U.S. dividend received deduction (“DRD”) preferred stock, fixed rate and floating rate adjustable preferred securities, step-up preferred securities, public and 144A $1000 par capital securities including U.S. agency subordinated debt issues, tier 2 fixed and floating rate capital securities, alternative tier 1 securities, contingent capital notes ("CoCos"), contingent convertible instruments, trust originated preferred securities, monthly income preferred securities, quarterly income bond securities, quarterly income debt securities, quarterly income preferred securities, corporate trust securities, public income notes, and other trust preferred securities.
Floating rate preferred securities provide for a periodic adjustment in the interest rate paid on the securities. The terms of such securities provide that interest rates are adjusted periodically based upon an interest rate adjustment index. The adjustment intervals may be regular, and range from daily up to annually, or may be event-based, such as a change in the short-term interest rate. Because of the interest rate reset feature, floating rate securities provide the Fund with a certain degree of protection against rising interest rates, although the interest rates of floating rate securities will participate in any declines in interest rates as well.

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If a portion of a fund’s income consists of dividends paid by U.S. corporations, a portion of the dividends paid by the fund may be eligible for the corporate dividends-received deduction for corporate shareholders. In addition, distributions reported by a fund as derived from qualified dividend income (“QDI”) will be taxed in the hands of individuals at the reduced rates applicable to net capital gains, provided certain holding period and other requirements are met by both the shareholder and the fund. Dividend income that a fund receives from REITs, if any, will generally not be treated as QDI and will not qualify for the corporate dividends-received deduction. It is unclear the extent to which distributions a fund receives from investments in certain preferred securities will be eligible for treatment as QDI or for the corporate dividends-received deduction. A fund cannot predict at this time what portion, if any, of its dividends will qualify for the corporate dividends-received deduction or be eligible for the reduced rates of taxation applicable to QDI.
Corporate Reorganizations
Funds may invest in securities for which a tender or exchange offer has been made or announced and in securities of companies for which a merger, consolidation, liquidation or reorganization proposal has been announced if, in the judgment of the Sub-Advisor, there is a reasonable prospect of capital appreciation significantly greater than the brokerage and other transaction expenses involved. The primary risk of such investments is that if the contemplated transaction is abandoned, revised, delayed or becomes subject to unanticipated uncertainties, the market price of the securities may decline below the purchase price paid by a fund.
In general, securities which are the subject of such an offer or proposal sell at a premium to their historic market price immediately prior to the announcement of the offer or proposal. However, the increased market price of such securities may discount what the stated or appraised value of the security would be if the contemplated transaction were approved or consummated. Such investments may be advantageous when the discount significantly overstates the risk of the contingencies involved; significantly undervalues the securities, assets or cash to be received by shareholders of the prospective company as a result of the contemplated transaction; or fails adequately to recognize the possibility that the offer or proposal may be replaced or superseded by an offer or proposal of greater value. The evaluation of such contingencies requires unusually broad knowledge and experience on the part of the Sub-Advisor, which must appraise not only the value of the issuer and its component businesses, but also the financial resources and business motivation of the offer or proposal as well as the dynamics of the business climate when the offer or proposal is in process.
Step-Coupon Securities
The Funds may invest in step-coupon securities. Step-coupon securities trade at a discount from their face value and pay coupon interest. The coupon rate is low for an initial period and then increases to a higher coupon rate thereafter. Market values of these types of securities generally fluctuate in response to changes in interest rates to a greater degree than conventional interest-paying securities of comparable term and quality. Under many market conditions, investments in such securities may be illiquid, making it difficult for a Fund to dispose of them or determine their current value.
"Stripped" Securities
The Funds may invest in stripped securities, which are usually structured with two or more classes that receive different proportions of the interest and principal distribution on a pool of U.S. government or foreign government securities or mortgage assets. In some cases, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). Stripped securities commonly have greater market volatility than other types of fixed-income securities. In the case of stripped mortgage securities, if the underlying mortgage assets experience greater than anticipated payments of principal, a Fund may fail to recoup fully its investments in IOs. Stripped securities may be illiquid. Stripped securities may be considered derivative securities.
Supranational Entities
The Funds may invest in obligations of supranational entities. A supranational entity is an entity designated or supported by national governments to promote economic reconstruction, development or trade amongst nations. Examples of supranational entities include the International Bank for Reconstruction and Development (also known as the World Bank) and the European Investment Bank. Obligations of supranational entities are subject to the risk that the governments on whose support the entity depends for its financial backing or repayment may be unable or unwilling to provide that support. Obligations of a supranational entity that are denominated in foreign currencies will also be subject to the risks associated with investments in foreign currencies.

38


Synthetic Securities
Incidental to other transactions in fixed income securities and/or for investment purposes, a Fund also may combine options on securities with cash, cash equivalent investments or other fixed income securities in order to create “synthetic” securities which approximate desired risk and return profiles. This may be done where a “non-synthetic” security having the desired risk/return profile either is unavailable (e.g., short-term securities of certain non-U.S. governments) or possesses undesirable characteristics (e.g., interest payments on the security would be subject to non-U.S. withholding taxes). A Fund also may purchase forward non-U.S. exchange contracts in conjunction with U.S. dollar-denominated securities in order to create a synthetic non-U.S. currency denominated security which approximates desired risk and return characteristics where the non-synthetic securities either are not available in non-U.S. markets or possess undesirable characteristics. The use of synthetic bonds and other synthetic securities may involve risks different from, or potentially greater than, risks associated with direct investments in securities and other assets. Synthetic securities may increase other Fund risks, including market risk, liquidity risk, and credit risk, and their value may or may not correlate with the value of the relevant underlying asset.
Interfund Lending and Borrowing
The SEC has granted an exemption permitting Principal Funds to borrow money from and lend money to each other for temporary or emergency purposes. The loans are subject to a number of conditions designed to ensure fair and equitable treatment of all participating funds, including the following: (1) no fund may borrow money through the program unless it receives a more favorable interest rate than a rate approximating the lowest interest rate at which bank loans would be available to any of the participating funds under a loan agreement; and (2) no fund may lend money through the program unless it receives a more favorable return than that available from an investment in overnight repurchase agreements. In addition, a fund may participate in the program only if and to the extent that such participation is consistent with a fund's investment objectives and policies. Interfund loans and borrowings have a maximum duration of seven days.
Loans may be called on one day's notice. A fund may have to borrow from a bank at a higher interest rate if an interfund loan is called or not renewed. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional costs. The Board is responsible for overseeing and periodically reviewing the interfund lending program.
Cyber Security Issues
The Fund and its service providers may be subject to cyber security risks. Those risks include, among others, theft, misuse or corruption of data maintained online or digitally; denial of service attacks on websites; the loss or unauthorized release of confidential and proprietary information; operational disruption; or various other forms of cyber security breaches. Cyber-attacks against or security breakdowns of a Fund or its service providers may harm the Fund and its shareholders, potentially resulting in, among other things, financial losses, the inability of Fund shareholders to transact business, inability to calculate a fund’s NAV, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and/or additional compliance and remediation costs. Cyber security risks may also affect issuers of securities in which a fund invests, potentially causing the fund’s investment in such issuers to lose value. Despite risk management processes, there can be no guarantee that a fund will avoid losses relating to cyber security risks or other information security breaches.
On or about July 2015, add the following:
Cayman Subsidiary
The Diversified Real Asset Fund and the Global Multi-Strategy Fund may each invest up to 25% of its total assets in its respective wholly-owned subsidiary organized under the laws of the Cayman Islands (a “Cayman Subsidiary”). Each Cayman Subsidiary is overseen by its own board of directors consisting of three directors. The directors for each Cayman Subsidiary are Nora M. Everett and Michael J. Beer (both interested directors of the Fund) and Tracy Bollin (Chief Financial Officer of the Fund). The Diversified Real Asset Fund and the Global Multi-Strategy Fund are the sole shareholders of their respective Cayman Subsidiary, and shares of the Cayman Subsidiaries will not be sold or offered to other investors.
Each Cayman Subsidiary has entered into a separate management agreement with Principal whereby Principal provides advisory and accounting agency services to the Cayman Subsidiary. Further, Principal, on behalf of the Cayman Subsidiary owned by the Global Diversified Real Asset Fund, has entered into a subadvisory agreement with Credit Suisse (a current sub-advisor of the Diversified Real Asset Fund). Principal, on behalf of the Cayman Subsidiary owned by the Global Multi-Strategy Fund, has entered into separate subadvisory agreements with AQR and Graham (each current sub-advisors of the Global Multi-Strategy Fund).

39


The Cayman Subsidiaries invest in commodity-linked derivatives, including commodity-linked swaps, commodity futures contracts and options on commodities. Each Cayman Subsidiary may invest in other instruments, including fixed income securities, cash and cash equivalents and U.S. government securities, either as investments or to serve as margin or collateral for the Cayman Subsidiary's derivatives positions. To the extent that a Fund invests in its respective subsidiary, it will be subject to the particular risks associated with the Cayman Subsidiary’s investments, which are discussed in the applicable Prospectus and this SAI.
The principal purpose of investing in the Cayman Subsidiaries is to allow each Fund to gain exposure to the commodity markets within the limitations of federal tax laws applicable to regulated investment companies. To qualify as a regulated investment company (“RIC”) under the Internal Revenue Code, a fund must meet certain requirements regarding the source of its income, the diversification of its assets and the distribution of its income. If a fund fails to qualify as a RIC, it could be subject to federal income tax on its net income at regular corporate rates (without reduction for distributions to shareholders). When distributed, that income would also be taxable to shareholders as an ordinary dividend to the extent attributable to a fund’s earnings and profits. Shareholders of that fund would therefore be subject to diminished returns. Although certain regulated investment companies have received private letter rulings from the Internal Revenue Service (the “IRS”) confirming that income derived from its subsidiary will constitute qualifying income to the fund for RIC purposes, the IRS is no longer issuing private letter rulings to that effect, and is reportedly reexamining its position with respect to structures of this kind. The Funds have not obtained such a private letter ruling.
The Cayman Subsidiaries are not investment companies registered under the 1940 Act and are not subject to all of the investor protections of the 1940 Act and other U.S. regulations. Changes in the laws of the United States (such as those described above) and/or the Cayman Islands could result in the inability of the Funds and/or the Cayman Subsidiaries to operate as described in the applicable Prospectus and this SAI and could negatively affect the Funds and their shareholders. For example, the Cayman Islands currently does not impose any income, corporate or capital gains tax, or withholding tax, on the Cayman Subsidiaries. If the laws of the Cayman Islands were changed and a Cayman Subsidiary was required to pay Cayman Islands taxes, this may impact a fund’s returns based upon the percentage of assets allocated to commodities at that time.
Portfolio Turnover
Portfolio turnover is a measure of how frequently a portfolio's securities are bought and sold. The portfolio turnover rate is generally calculated as the dollar value of the lesser of a portfolio's purchases or sales of shares of securities during a given year, divided by the monthly average value of the portfolio securities during that year (excluding securities whose maturity or expiration at the time of acquisition were less than one year). For example, a portfolio reporting a 100% portfolio turnover rate would have purchased and sold securities worth as much as the monthly average value of its portfolio securities during the year.
It is not possible to predict future turnover rates with accuracy. Many variable factors are outside the control of a portfolio manager. The investment outlook for the securities in which a portfolio may invest may change as a result of unexpected developments in securities markets, economic or monetary policies, or political relationships. High market volatility may result in a portfolio manager using a more active trading strategy than might otherwise be employed. Each portfolio manager considers the economic effects of portfolio turnover but generally does not treat the portfolio turnover rate as a limiting factor in making investment decisions.
Sale of shares by investors may require the liquidation of portfolio securities to meet cash flow needs. In addition, changes in a particular portfolio's holdings may be made whenever the portfolio manager considers that a security is no longer appropriate for the portfolio or that another security represents a relatively greater opportunity. Such changes may be made without regard to the length of time that a security has been held.
Higher portfolio turnover rates generally increase transaction costs that are expenses of the Account. Active trading may generate short-term gains (losses) for taxable shareholders.
The following Fund had significant variation in portfolio turnover rates over the two most recently completed fiscal years:
Fund
2014
Turnover
2013
Turnover
Comments
Blue Chip Fund
34.4%
1.3%
The portfolio management team for the Blue Chip Fund reduced the number of holdings in 2014 which resulted in a higher turnover than in 2013.

40


LEADERSHIP STRUCTURE AND BOARD OF DIRECTORS
Overall responsibility for directing the business and affairs of PFI rests with the Board of Directors, who are elected by PFI's shareholders. In addition to serving on the Board of PFI, each Director serves on the Board of Principal Variable Contracts Funds, Inc. (“PVC”) and as a Trustee on the Board of Principal Exchange-Traded Funds (the "Trust"). The Board is responsible for overseeing the operations of PFI in accordance with the provisions of the 1940 Act, other applicable laws and PFI's charter. The Board elects the officers of PFI to supervise its day-to-day operations. The Board meets in regularly scheduled meetings eight times throughout the year. Board meetings may occur in-person or by telephone. In addition, the Board holds special in-person or telephonic meetings or informal conference calls to discuss specific matters that may arise or require action between regular meetings. Board members who are Independent Directors meet annually to consider renewal of PFI's advisory contracts.  The Board is currently composed of eleven members, nine of whom are Independent Directors. Each Director has significant prior senior management and/or board experience.
The Chairman of the Board is an interested person of PFI. The Independent Directors of PFI have appointed a lead Independent Director whose role is to review and approve, with the Chairman, the agenda for each Board meeting and facilitate communication among PFI's Independent Directors as well as communication among the Independent Directors, management of PFI and the full Board. PFI has determined that the Board's leadership structure is appropriate given the characteristics and circumstances of PFI, including such items as the number of series or portfolios that comprise PFI, the variety of asset classes those series reflect, the net assets of PFI, the committee structure of the Board and the distribution arrangements of PFI. The appropriateness of this structure is enhanced by PFI’s Board Committees, which are described below, and the allocation of responsibilities among them.
The Directors were selected to serve and continue on the Board based upon their skills, experience, judgment, analytical ability, diligence and ability to work effectively with other Board members, a commitment to the interests of shareholders and, for each Independent Director, a demonstrated willingness to take an independent and questioning view of management. In addition to these general qualifications, the Board seeks members who will build upon the diversity of the Board. In addition to those qualifications, the following is a brief discussion of the specific education, experience, qualifications, or skills that led to the conclusion that each person identified below should serve as a Director for PFI. As required by rules the SEC has adopted under the 1940 Act, PFI's Independent Directors select and nominate all candidates for Independent Director positions.
Independent Directors
Elizabeth Ballantine. Ms. Ballantine has served as a Director of PFI and PVC since 2004 and as a Trustee of the Trust since 2014. Through her professional training and experience as an attorney and her experience as a director of Principal Funds, investment consultant and a director, Ms. Ballantine is experienced in financial, investment and regulatory matters.
Leroy T. Barnes, Jr. Mr. Barnes has served as a Director of PFI and PVC since 2012 and as a Trustee of the Trust since 2014. From 2001-2005, Mr. Barnes served as Vice President and Treasurer of PG&E Corporation. From 1997-2001, Mr. Barnes served as Vice President and Treasurer of Gap, Inc. Through his education and employment experience and experience as a director, Mr. Barnes is experienced with financial, accounting, regulatory and investment matters.
Craig Damos. Mr. Damos has served as a Director of PFI and PVC since 2008 and as a Trustee of the Trust since 2014. Since 2011, Mr. Damos has served as the President of The Damos Company (consulting services). Mr. Damos served as President and Chief Executive Officer of Weitz Company from 2006-2010 and Vertical Growth Officer from 2004-2006. From 2000-2004, he served as the Chief Financial Officer of Weitz Company. From 2005-2008, Mr. Damos served as a director of West Bank. Through his education, experience as a director of Principal Funds and employment experience, Mr. Damos is experienced with financial, accounting, regulatory and investment matters.
Mark A. Grimmett. Mr. Grimmett has served as a Director of PFI and PVC since 2004 and as a Trustee of the Trust since 2014. He is a Certified Public Accountant. From 1996-2015 , Mr. Grimmett served as the Chief Financial Officer for Merle Norman Cosmetics, Inc. Through his service as a director of Principal Funds, his education and his employment experience, Mr. Grimmett is experienced with financial, accounting, regulatory and investment matters.
Fritz Hirsch. Mr. Hirsch has served as a Director of PFI and PVC since 2005 and as a Trustee of the Trust since 2014. From 1983-1985, he served as Chief Financial Officer of Sassy, Inc. From 1986-2009, Mr. Hirsch served as President and Chief Executive Officer of Sassy, Inc. Since 2011, Mr. Hirsch serves as CEO of MAM USA. Through his experience as a director of the Principal Funds and employment experience, Mr. Hirsch is experienced with financial, accounting, regulatory and investment matters.

41


Tao Huang. Mr. Huang has served as a Director of PFI and PVC since 2012 and as a Trustee of the Trust since 2014. From 1996-2000, Mr. Huang served as Chief Technology Officer of Morningstar, Inc. and from 1998-2000 as President of the International Division of Morningstar. From 2000-2011, Mr. Huang served as Chief Operating Officer of Morningstar. Through his education and employment experience, Mr. Huang is experienced with technology, financial, regulatory and investment matters.
William C. Kimball. Mr. Kimball has served as a Director of PFI and PVC since 2000 and as a Trustee of the Trust since 2014. From 1998-2004, Mr. Kimball served as Chairman and CEO of Medicap Pharmacies, Inc. Prior to 1998, he served as President and CEO of Medicap. Since 2004, Mr. Kimball has served as director of Casey's General Stores, Inc. Through his experience as a director of the Principal Funds and his employment experience, Mr. Kimball is experienced with financial, regulatory and investment matters.
Karen (“Karrie”) McMillan. Ms. McMillan has served as a Director of PFI and PVC, and as a Trustee of the Trust, since 2014. From 2007-2014, Ms. McMillan served as general counsel to the Investment Company Institute. Prior to that (from 1999-2007), she worked as an attorney in private practice, specializing in the mutual fund industry. From 1991-1999, she served in various roles as counsel at the Securities and Exchange Commission, Division of Investment Management, including as Assistant Chief Counsel. Through her professional education and experience as an attorney, she is experienced in financial, investment and regulatory matters.
Daniel Pavelich. Mr. Pavelich has served as a Director of PFI and PVC since 2007 and as a Trustee of the Trust since 2014. From 1998-2007, Mr. Pavelich served as a Trustee of the WM Group of Funds. From 1996-1999, he served as Chairman and CEO of BDO and as its Chairman from 1994-1996. Through his education, experience as a director of mutual funds and his employment experience, Mr. Pavelich is experienced with financial, accounting, regulatory and investment matters.
Interested Directors
Michael J. Beer. Mr. Beer has served as a Director of PFI and PVC since 2012 and as a Trustee of the Trust since 2013, and has served as Chief Executive Officer and President of PFI and PVC since 2015. From 2001-2015, Mr. Beer served as Executive Vice President of PFI and PVC. Mr. Beer also served as Executive Vice President (2008-2015), Chief Operating Officer (2008-2015) and director of PMC. Mr. Beer has also served as the President and a director of Princor and PSS. Prior to working for Principal, Mr. Beer worked for Wells Fargo and Deloitte Touche. Through his education and employment experience, Mr. Beer is experienced with financial, accounting, regulatory and investment matters.
Nora M. Everett. Ms. Everett has served as a Director of PFI and PVC since 2008 and as a Trustee of the Trust since 2014. From 2004-2008, Ms. Everett was Senior Vice President and Deputy General Counsel at Principal Financial Group, Inc. From 2001-2004, she was Vice President and Counsel at Principal Financial Group. Through her professional training, experience as an attorney, her service as a director of Principal Funds and her employment experience, Ms. Everett is experienced with financial, regulatory and investment matters.
Risk oversight forms part of the Board's general oversight of PFI and is addressed as part of various Board and Committee activities. As part of its regular oversight of PFI, the Board, directly or through a Committee, interacts with and reviews reports from, among others, Fund management, sub-advisors, PFI's Chief Compliance Officer, the independent registered public accounting firm for PFI, and internal auditors for PMC or its affiliates, as appropriate, regarding risks faced by PFI. The Board, with the assistance of Fund management and PMC, reviews investment policies and risks in connection with its review of PFI's performance. The Board has appointed a Chief Compliance Officer who oversees the implementation and testing of PFI's compliance program and reports to the Board regarding compliance matters for PFI and its principal service providers. In addition, as part of the Board's periodic review of PFI's advisory, sub-advisory and other service provider agreements, the Board may consider risk management aspects of their operations and the functions for which they are responsible. With respect to valuation, the Board oversees a PMC valuation committee comprised of PFI officers and officers of PMC and has approved and periodically reviews valuation policies applicable to valuing PFI's shares.
The Board has established the following committees and the membership of each committee to assist in its oversight functions, including its oversight of the risks PFI faces.
Committee membership is identified on the following pages. Each committee must report its activities to the Board on a regular basis. As used in this SAI, the “Fund Complex” refers to all series of Principal Funds, Inc. (including those not contained in this SAI), Principal Variable Contracts Funds, Inc., and Principal Exchange-Traded Funds.

42


15(c) Committee
The Committee’s primary purpose is to assist the Board in performing the annual review of the Fund’s advisory and sub-advisory agreements pursuant to Section 15(c) of the 1940 Act. The Committee responsibilities include requesting and reviewing materials. The 15(c) committee held two meetings during the last fiscal year.
Audit Committee
The primary purpose of the Committee is to assist the Board in fulfilling certain of its responsibilities. The Audit Committee serves as an independent and objective party to monitor the Fund Complex's accounting policies, financial reporting and internal control system, as well as the work of the independent registered public accountants. The Audit Committee assists Board oversight of 1) the integrity of the Fund Complex's financial statements; 2) the Fund Complex's compliance with certain legal and regulatory requirements; 3) the independent registered public accountants' qualifications and independence; and 4) the performance of the Fund Complex's independent registered public accountants. The Audit Committee also provides an open avenue of communication among the independent registered public accountants, the Manager's internal auditors, Fund Complex management, and the Board. The Audit Committee held seven meetings during the last fiscal year.
Executive Committee
The Committee's primary purpose is to exercise certain powers of the Board when the Board is not in session. When the Board is not in session, the Committee may exercise all powers of the Board in the management of the business of the Fund Complex except the power to 1) authorize dividends or distributions on stock; 2) issue stock, except as permitted by law 3) recommend to the stockholders any action which requires stockholder approval; 4) amend the bylaws; or 5) approve any merger or share exchange which does not require stockholder approval. The Executive Committee held no meetings during the last fiscal year.
Nominating and Governance Committee
The Committee's primary purpose is to oversee the structure and efficiency of the Board and the committees established by the Board. The Committee responsibilities include evaluating Board membership and functions, committee membership and functions, insurance coverage, and legal matters.
The nominating functions of the Nominating and Governance Committee include selecting and nominating all candidates who are not "interested persons" of the Fund Complex for election to the Board. Generally, the Committee requests director nominee suggestions from the committee members and management. In addition, the Committee will consider Director candidates recommended by shareholders of the Fund Complex. Recommendations should be submitted in writing to Principal Funds, Inc. at 655 9th Street, Des Moines, IA 50392. When evaluating a person as a potential nominee to serve as an Independent Director, the Committee will generally consider, among other factors: age; education; relevant business experience; geographical factors; whether the person is "independent" and otherwise qualified under applicable laws and regulations to serve as a director; and whether the person is willing to serve, and willing and able to commit the time necessary for attendance at meetings and the performance of the duties of an independent director. The Committee also meets personally with the nominees and conducts a reference check. The final decision is based on a combination of factors, including the strengths and the experience an individual may bring to the Board. The Committee believes the Board generally benefits from diversity of background, experience and views among its members, and considers these factors in evaluating the composition of the Board. The Board does not use regularly the services of any professional search firms to identify or evaluate or assist in identifying or evaluating potential candidates or nominees. The Nominating and Governance Committee held eight meetings during the last fiscal year.
Operations Committee
The Committee's primary purpose is to oversee the provision of administrative and distribution services to the Fund Complex, communications with the Fund Complex's shareholders, and review and oversight of the Fund Complex's operations. The Operations Committee held four meetings during the last fiscal year.
Management Information
The following table presents certain information regarding the Directors of PFI, including their principal occupations which, unless specific dates are shown, are of more than five years duration. In addition, the table includes information concerning other directorships held by each Director in reporting companies under the Securities Exchange Act of 1934 or registered investment companies under the 1940 Act. Information is listed separately for those Directors who are “interested persons” (as defined in the 1940 Act) of PFI (the “Interested Directors”) and those Directors who are Independent Directors. All Directors serve as directors for each of the investment companies sponsored by Principal Life Insurance Company (“Principal Life”): PFI, Principal Variable Contracts Funds, Inc., and Principal Exchange-Traded Funds.

43


The following directors are considered to be Independent Directors.




Name, Address,
and Year of Birth




Position(s) Held
with Fund


Length
of Time
Served as
Director




Principal Occupation(s)
During Past 5 Years
Number of
Portfolios
in Fund
Complex
Overseen
by Director



Other Directorships
Held by Director During Past 5 Years
Elizabeth Ballantine
655 9th Street
Des Moines, IA 50392
1948
Director
Member Nominating and Governance Committee
Since 2004
Principal, EBA Associates
(consulting and investments)
115
Durango Herald, Inc.;
McClatchy Newspapers, Inc.
Leroy T. Barnes, Jr.
655 9th Street
Des Moines, IA 50392
1951
Director
Member Audit Committee
Since 2012
Retired
115
McClatchy Newspapers, Inc.; Herbalife Ltd.; Frontier Communications, Inc.
Craig Damos
655 9th Street
Des Moines, IA 50392
1954
Director
Member 15(c) Committee
Member Audit Committee

Since 2008
President, The Damos Company (consulting services). Formerly Chairman/CEO/ President and Vertical Growth Officer, and The Weitz Company (general construction)
115
Hardin Construction
Mark A. Grimmett
655 9th Street
Des Moines, IA 50392
1960
Director
Member 15(c) Committee
Member Executive Committee
Member Nominating and Governance Committee
Since 2004
Formerly, Executive Vice President and CFO, Merle Norman Cosmetics, Inc. (cosmetics manufacturing)
115
None
Fritz S. Hirsch
655 9th Street
Des Moines, IA 50392
1951
Director
Member 15(c) Committee
Member Operations Committee
Since 2005
CEO, MAM USA (manufacturer of infant and juvenile products). Formerly President, Sassy, Inc.
(manufacturer of infant and juvenile products)
115
Focus Products Group (housewares)
Tao Huang
655 9th Street
Des Moines, IA 50392
1962
Director
Member 15(c) Committee
Member Operations Committee
Since 2012
Formerly, Chief Operating Officer, Morningstar, Inc. (investment research)
115
Armstrong World Industries, Inc. (manufacturing)
William C. Kimball
655 9th Street
Des Moines, IA 50392
1947
Director
Member Nominating and Governance Committee
Since 2000
Partner, Kimball – Porter Investments L.L.C.
115
Casey's General Stores
Karen ("Karrie”) McMillan
655 9th Street
Des Moines, IA 50392
1961
Director
Member Operations Committee
Since 2014
Managing Director, Patomak Global Partners, LLC. Formerly, General Counsel, Investment Company Institute*
115
None
Daniel Pavelich
655 9th Street
Des Moines, IA 50392
1944
Director
Member Audit Committee
Since 2007
Retired
115
None
* Ms. McMillan served as an officer of the Investment Company Institute, a national association of U.S. investment companies. Appendix A provides information about the members of the Investment Company Institute’s Board of Governors who are affiliates of the Funds’ investment advisors.


44


The following directors are considered to be Interested Directors because they are affiliated persons of Principal Management Corporation ("PMC", "Principal" or the "Manager"), Principal Funds Distributor, Inc. ("PFD" or the "Distributor") and/or the Fund’s principal underwriter, or Princor Financial Services Corporation ("Princor"), the Fund’s former principal underwriter.




Name, Address,
and Year of Birth



Position(s)
Held
with Fund



Length of
Time
Served

Positions with the Manager
and its affiliates;
Principal Occupation(s)
During Past 5 Years**
(unless noted otherwise)
Number of
Portfolios
in Fund
Complex
Overseen
by Director
Other
Directorships
Held by
Director During Past
5 Years
Michael J. Beer
Des Moines, IA 50392
1961
Chief Executive Officer
President
Director
Member Executive Committee
Since 2015
Since 2015
Since 2012
Since 2001
Executive Vice President, PFD
Director, PFD (since 2015)
VP/Mutual Funds & Broker Dealer, PLIC
President & Chief Executive Officer, PMC (since 2015)
EVP/Chief Operating Officer, PMC (2008-2015)
Chair, PMC (since 2015)
Director, PMC (2006-2015)
Director, Princor (2007-2015)
President, Princor (2005-2015)
Chairman, PSS (since 2015)
Director, PSS (2011-2015)
President, PSS (since 2011)
115
None
Nora M. Everett
Des Moines, IA 50392
1959
Chair
Director
Member Executive
Committee
Since 2012
Since 2008
Director, Edge (2008-2011)
Director, Finisterre (since 2011)
Director, Origin (since 2011)
Chairman, PFA (2010-2015)
Chairman, PFD (2011-2015)
President/RIS, PLIC (since 2015)
Senior Vice President/RIS, PLIC (2008-2015)
Chairman, PMC (2011-2015)
President, PMC (2008-2015)
Director, Princor (since 2015)
Chief Executive Officer, Princor (since 2015)
Chairman, Princor (2011-2015)
Chairman, PSS (2011-2015)
115
None
**   Abbreviations used:
      •     Edge Asset Management, Inc. (Edge)
      •     Finisterre Capital LLP (Finisterre)
      •     Origin Asset Management LLP (Origin)
•     Principal Financial Advisors, Inc. (PFA)
      •     Princor Financial Services Corporation (Princor)
      •     Principal Funds Distributor, Inc. (PFD)
      •     Principal Life Insurance Company (PLIC)
      •     Principal Management Corporation (PMC)
      •     Principal Shareholder Services, Inc. (PSS)

45


Officers of the Fund
The following table presents certain information regarding the officers of the Fund, including their principal occupations which, unless specific dates are shown, are of more than five years duration. Officers serve at the pleasure of the Board of Directors. Each officer of the Fund has the same position with Principal Variable Contracts Funds, Inc. and Principal Exchange-Traded Funds.

Name, Address
and Year of Birth
Position(s) Held
with Fund and
Length of Time Served
Positions with the Manager and its Affiliates;
Principal Occupations During Past 5 Years**
(unless noted otherwise)
Michael J. Beer
Des Moines, IA 50392
1961
Chief Executive Officer (since 2015)
President (since 2015)
Director (since 2012)
Member Executive Committee
Executive Vice President, PFD
Director, PFD (since 2015)
VP/Mutual Funds & Broker Dealer, PLIC
President & Chief Executive Officer, PMC (since 2015)
EVP/Chief Operating Officer, PMC (2008-2015)
Chair, PMC (since 2015)
Director, PMC (2006-2015)
Director, Princor (2007-2015)
President, Princor (2005-2015)
Chairman, PSS (since 2015)
Director, PSS (2011-2015)
President, PSS (since 2011)
Randy L. Bergstrom
Des Moines, IA 50392
1955
Assistant Tax Counsel
(since 2005)
Counsel, PGI
Counsel, PLIC
Tracy Bollin
Des Moines, IA 50392
1970
Chief Financial Officer
(since 2014)
Chief Financial Officer, PFA (since 2010)
Assistant Controller, PFD (2007-2010)
Senior Vice President, PFD (since 2015)
Chief Financial Officer, PFD (2010-2015)
Senior Vice President, PMC (since 2015)
Chief Financial Officer, PMC (2010-2015)
Director, PMC (since 2015)
Financial Controller, PMC (2008-2010)
Chief Financial Officer, Princor (since 2010)
Assistant Controller, Princor (2009-2010)
Director, PSS (since 2015)
Assistant Controller, PSS (2007-2010)
Chief Financial Officer, PSS (since 2010)
David J. Brown
Des Moines, IA 50392
1960
Chief Compliance Officer
(since 2004)
Senior Vice President, PFD
Vice President/Compliance, PLIC
Senior Vice President, PMC
Senior Vice President, Princor
Senior Vice President, PSS
Teresa M. Button
Des Moines, IA 50392
1963
Treasurer
(since 2011)
Vice President/Treasurer, Edge (since 2011)
Vice President/Treasurer, PFA (since 2011)
Vice President/Treasurer, PFD (since 2011)
Vice President/Treasurer, PGI (since 2011)
Vice President/Treasurer, PLIC (since 2011)
Vice President/Treasurer, PMC (since 2011)
Treasurer, Post (since 2011)
Vice President, Post (2011-2014)
Vice President/Treasurer, Principal-REI (since 2011)
Vice President/Treasurer, Princor (since 2011)
Vice President/Treasurer, PSS (since 2011)
Treasurer, Spectrum (since 2011)
Nora M. Everett
Des Moines, IA 50392
1959
Chair (since 2012)
Director (since 2008)
Member Executive
Committee
Director, Edge (2008-2011)
Director, Finisterre (since 2011)
Director, Origin (since 2011)
Chairman, PFA (2010-2015)
Chairman, PFD (2011-2015)
President/RIS, PLIC (since 2015)
Senior Vice President/RIS, PLIC (2008-2015)
Chairman, PMC (since 2011)
President, PMC (2008-2015)
Chairman, Princor (since 2011)
Chief Executive Officer, Princor (since 2015)
Chairman, PSS (2011-2015)

46



Name, Address
and Year of Birth
Position(s) Held
with Fund and
Length of Time Served
Positions with the Manager and its Affiliates;
Principal Occupations During Past 5 Years**
(unless noted otherwise)
Ernest H. Gillum
Des Moines, IA 50392
1955
Vice President (since 2000)
Assistant Secretary
(since 1993)
Vice President/Chief Compliance Officer, PMC
Vice President/Chief Compliance Officer, PSS
Carolyn F. Kolks
Des Moines, IA 50392
1962
Assistant Tax Counsel
(since 2005)
Counsel, PGI
Counsel, PLIC
Jennifer A. Mills
Des Moines, IA 50392
1973
Assistant Counsel
(since 2010)
Counsel, PFD (2009-2013)
Counsel, PLIC
Counsel, PMC (2009-2013, 2014-present)
Counsel, Princor (2009-2013)
Counsel, PSS (2009-2013)
Layne A. Rasmussen
Des Moines, IA 50392
1958
Chief Financial Officer (2008-2014)
Vice President (since 2005)
Controller (since 2000)
Vice President/Controller-Principal Funds, PMC
Greg Reymann
Des Moines, IA 50392
1958
Assistant Counsel
(since 2014)
Assistant General Counsel, PLIC (since 2014)
VP, Chief Compliance Officer and Chief Risk Officer, TAM (2010-2012)
Assistant General Counsel, TAMG (2013-2014)
Vice President/CFTC Principal, TAM (2013-2014)
Britney L. Schnathorst
Des Moines, IA 50392
1981
Assistant Counsel
(since 2014)
Counsel, PLIC (since 2013)
Prior thereto, Attorney in Private Practice
Adam U. Shaikh
Des Moines, IA 50392
1972
Assistant Counsel
(since 2006)
Counsel, PFD (2006-2013)
Counsel, PLIC
Counsel, PMC (2007-2013, 2014-present)
Counsel, Princor (2007-2013)
Counsel, PSS (2007-2013)
Dan L. Westholm
Des Moines, IA 50392
1966
Assistant Treasurer
(since 2006)
Assistant Vice President/Treasury, PFA (since 2013)
Director-Treasury, PFA (2011-2013)
Assistant Vice President/Treasury, PFD (since 2013)
Director-Treasury, PFD (2011-2013)
Assistant Vice President/Treasury, PLIC
Assistant Vice President/Treasury, PMC
Assistant Vice President/Treasury, Princor (since 2013)
Director-Treasury, Princor (2008-2009, 2011-2013)
Assistant Vice President/Treasury, PSS
Beth C. Wilson
Des Moines, IA 50392
1956
Vice President and Secretary
(since 2007)
Vice President, PMC (2007-2013)
Vice President, Princor (2007-2009)
Clint Woods
Des Moines, IA 50392
1961
Counsel (since 2015)
Assistant Counsel (2014-2015)
Associate General Counsel, AEGON (2003-2012)
Vice President, Associate General Counsel and Governance Officer, PLIC (since 2015)
Asst General Counsel, Asst Corp Secretary, Governance Officer, PLIC (2013-2015)
**  Abbreviations used:
•AEGON USA Investment Management, LLC (AEGON)
•Edge Asset Management, Inc. (Edge)
•Finisterre Capital LLP (Finisterre)
•Origin Asset Management LLP (Origin)
•Post Advisory Group, LLC (Post)
•Principal Financial Advisors, Inc. (PFA)
•Princor Financial Services Corporation (Princor)
•Principal Funds Distributor, Inc. (PFD)
•Principal Global Investors, LLC (PGI)
•Principal Life Insurance Company (PLIC)
•Principal Management Corporation (PMC)
•Principal Real Estate Investors, LLC (Principal-REI)
•Principal Shareholder Services, Inc. (PSS)
•Spectrum Asset Management, Inc. (Spectrum)
•Transamerica Asset Management, Inc. (TAM)
•Transamerica Asset Management Group (TAMG)

47


The following tables set forth the aggregate dollar range of the equity securities of the mutual funds within the Fund Complex which were beneficially owned by the Directors as of December 31, 2014. As of that date, Directors did not own shares of Funds not listed.
For the purpose of these tables, beneficial ownership means a direct or indirect pecuniary interest. Only the Directors who are “interested persons” are eligible to participate in an employee benefit program which invests in Principal Funds, Inc. Directors who beneficially owned shares of the series of the Principal Variable Contracts Funds, Inc. did so through variable life insurance and variable annuity contracts. Please note that exact dollar amounts of securities held are not listed. Rather, ownership is listed based on the following dollar ranges:
A    $0
B    $1 up to and including $10,000
C    $10,001 up to and including $50,000
D    $50,001 up to and including $100,000
E    $100,001 or more
Independent Directors (not Considered to be "Interested Persons")
Fund
Ballantine
Barnes
Damos
Grimmett
Hirsch
Huang
Kimball
McMillan
Pavelich
Diversified Real Asset
A
A
C
E
D
A
D
A
A
Global Multi-Strategy
A
A
A
A
A
A
D
A
A
Preferred Securities
A
A
C
A
C
A
E
A
A
Total Fund Complex
E
E
E
E
E
E
E
A
E
Directors Considered to be "Interested Persons"
 
Beer
Everett
Global Multi-Strategy
C
A
Total Fund Complex
E
E
Compensation. The Fund does not pay any remuneration to its Directors who are employed by the Manager or its affiliates or to its officers who are furnished to the Fund by the Manager and its affiliates pursuant to the Management Agreement. Each Director who is not an “interested person” received compensation for service as a member of the Boards of all investment companies sponsored by Principal Life based on a schedule that takes into account an annual retainer amount, the number of meetings attended, and expenses incurred. Director compensation and related expenses are allocated to each of the Funds based on the net assets of each relative to combined net assets of all of the investment companies sponsored by Principal Life.
The following table provides information regarding the compensation received by the Independent Directors from the Funds included in this SAI and from the Fund Complex during the fiscal year ended August 31, 2014. On that date, there were 2 Funds (with a total of 104 portfolios in the Fund Complex). The Fund does not provide retirement benefits to any of the Directors.
Director
Funds in
this SAI*
Fund Complex
Elizabeth Ballantine
$16,801
$204,000
Leroy T. Barnes, Jr.
17,683
214,750
Craig Damos
18,340
222,750
Mark A. Grimmett
20,093
244,125
Fritz Hirsch
18,616
226,125
Tao Huang
17,482
212,375
William C. Kimball
17,334
210,500
Karen ("Karrie") McMillan**
0
0
Daniel Pavelich
19,374
235,375
*
Some of the Funds in this SAI have not completed a full fiscal year of operation. The Capital Securities Fund has not completed a full fiscal year of operation. The Credit Opportunities Explorer, Dynamic High Yield Explorer, EDGE MidCap, International Small Company, Origin Emerging Markets, Real Estate Allocation, and Real Estate Debt Income Funds are new since August 31, 2014.
**
Director’s appointment effective September 10, 2014.

48


INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisors
The Manager of the Fund is Principal Management Corporation (“Principal”), a wholly owned subsidiary of Principal Financial Services, Inc. Principal is an affiliate of Principal Life. The address of Principal is 655 9th Street, Des Moines, IA 50392. Principal was organized on January 10, 1969, and since that time has managed various mutual funds sponsored by Principal Life.
The following Fund has adopted a special cash management program, which is executed by Principal: Origin Emerging Markets.
Each Fund in the cash management program invests its cash in money market investments and in stock index futures contracts reflecting the Fund’s market capitalization to gain exposure to the market.
Principal has executed agreements with various Sub-Advisors. Under those Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of Principal to provide investment advisory services for a specific Fund. For these services, Principal pays each Sub-Advisor a fee (except on the Capital Securities and Real Estate Allocation Funds).
Sub-Advisor:
AQR Capital Management, LLC ("AQR") is a Delaware limited liability company formed in 1998. AQR is a wholly-owned subsidiary of AQR Capital Management Holdings, LLC (“AQR Holdings”), which has no activities other than holding the interests of AQR. AQR Holdings is a subsidiary of AQR Capital Management Group, L.P. (“AQR LP”) which has no activities other than holding the interests of AQR Holdings. Clifford S. Asness, Ph.D., M.B.A., may be deemed to control AQR indirectly through his significant ownership of AQR LP.
Fund(s):
a portion of the assets of Global Multi-Strategy
Sub-Advisor:
BlackRock Financial Management, Inc. (“BlackRock”) is a wholly owned subsidiary of BlackRock Holdco 2, Inc., which is a wholly owned subsidiary of BlackRock, Inc. BlackRock and its affiliates manage investment company and other portfolio assets.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Brookfield Investment Management Inc. ("Brookfield") is a wholly-owned subsidiary of Brookfield Asset Management Inc., a global asset manager that focuses on property, renewable power, and infrastructure assets.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Cliffwater LLC (“Cliffwater”), is a Delaware limited liability company. Stephen Nesbitt and Kathleen Barchick each own more than 25% of the voting securities of Cliffwater.
Fund(s):
Global Multi-Strategy
Sub-Advisor:
CNH Partners, LLC (“CNH”) is a Delaware limited liability company which was created in 2001 as a joint venture by AQR Capital Management, LLC and RAIM Corp. (“RAIM”). AQR and RAIM each own 50% of CNH. RAIM was formed by Mark Mitchell and Todd Pulvino and has no business activities other than owning CNH.
Fund(s):
a portion of the assets of Global Multi-Strategy
Sub-Advisor:
Credit Suisse Asset Management, LLC ("Credit Suisse") is part of the asset management business of Credit Suisse Group AG. Credit Suisse Group AG provides its clients with investment banking, private banking, and asset management services worldwide.
Fund(s):
a portion of the assets of Diversified Real Asset

49


Sub-Advisor:
Edge Asset Management, Inc. ("Edge") is an affiliate of Principal and a member of the Principal Financial Group.
Fund(s):
EDGE MidCap and Small-MidCap Dividend Income
Sub-Advisor:
Finisterre Capital LLP (“Finisterre”) is an indirect subsidiary of Principal Life Insurance Company, an affiliate of Principal and a member of the Principal Financial Group.
Fund(s):
a portion of the assets of Global Multi-Strategy
On or about July 1, 2015, add the following:
Sub-Advisor:
Fischer Francis Trees & Watts, Inc. (“FFTW”), is indirectly wholly-owned by BNP Paribas S.A., a publicly owned bank organized in France, engaged in global financial activities.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Graham Capital Management, L.P. ("Graham") is majority-owned by KGT Investment Partners, LLC, which is ultimately owned by Graham’s founder, Kenneth Tropin, and members of Mr. Tropin’s family.
Fund(s):
a portion of the assets of the Global Multi-Strategy Fund.
Sub-Advisor:
Jennison Associates LLC ("Jennison") is a Delaware single member limited liability company whose sole member is Prudential Investment Management, Inc., which is a direct, wholly-owned subsidiary of Prudential Asset Management Holding Company LLC, which is a direct, wholly-owned subsidiary of Prudential Financial, Inc. Prudential Financial, Inc. directly and indirectly through its numerous affiliates, engages in many different financial and other activities.
Fund(s):
a portion of the assets of Diversified Real Asset
On or about July 1, 2015, add the following:
Sub-Advisor:
KLS Diversified Asset Management LP (“KLS”), principally owned by KLS Partners LLC, provides discretionary investment advisory services for private investment funds and separately managed accounts.
Fund(s):
a portion of the assets of Global Multi-Strategy
Sub-Advisor:
Loomis, Sayles & Company, L.P. (“Loomis Sayles”) is an indirect subsidiary of Natixis Global Asset Management, L.P. which is a subsidiary of Natixis Global Asset Management (“NGAM”), an international asset management group based in Paris, France.
Fund(s):
a portion of the assets of Global Multi-Strategy
Sub-Advisor:
Los Angeles Capital Management and Equity Research, Inc. ("Los Angeles Capital") is a California corporation wholly-owned by its working principals. Thomas D. Stevens, Chairman and President, and Hal W. Reynolds, Chief Investment Officer, hold the controlling equity interest in the firm.
Fund(s):
a portion of the assets of Global Multi-Strategy
Sub-Advisor:
Macquarie Capital Investment Management LLC is an indirectly wholly owned subsidiary of Macquarie Group Limited and operates as part of Macquarie Asset Management, the asset management division of Macquarie Group Limited.
Fund(s):
a portion of the assets of Diversified Real Asset

50


Sub-Advisor:
Mellon Capital Management Corporation (“Mellon Capital”) is a wholly owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”).
Fund(s):
Bond Market Index
Sub-Advisor:
Origin Asset Management LLP (“Origin”) is an indirect majority-owned subsidiary of Principal Life, an affiliate of Principal, and a member of the Principal Financial Group.
Fund(s):
Origin Emerging Markets
Sub-Advisor:
Pictet Asset Management SA (“Pictet”) is the asset management arm of the Pictet Group which is owned by eight managing partners.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Principal Global Investors, LLC (“PGI”) is an indirect wholly owned subsidiary of Principal Life Insurance Company, an affiliate of Principal, and a member of the Principal Financial Group.
Fund(s):
Blue Chip, Credit Opportunities Explorer, Dynamic High Yield Explorer, Global Opportunities, International Equity Index, International Small Company, and Opportunistic Municipal
Sub-Advisor:
Principal Real Estate Investors, LLC ("Principal - REI") is an indirect wholly owned subsidiary of Principal Life, an affiliate of Principal, and a member of the Principal Financial Group.
Fund(s):
Real Estate Allocation, Real Estate Debt Income and a portion of the assets of Diversified Real Asset
Sub-Advisor:
Spectrum Asset Management, Inc. ("Spectrum") is an indirect subsidiary of Principal Life, an affiliate of PGI and a member of the Principal Financial Group.
Fund(s):
Capital Securities and Preferred Securities
Sub-Advisor:
Symphony Asset Management LLC ("Symphony") is an indirect subsidiary of Nuveen Investments, Inc., a global investment services firm. Nuveen Investments, Inc. is an indirect subsidiary of Teachers Insurance and Annuity Association of America, a national financial services organization.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Tortoise Capital Advisors, L.L.C. ("Tortoise"), is wholly-owned by Tortoise Holdings, LLC. Montage Investments, LLC (“Montage”), a registered investment adviser, owns a majority interest in Tortoise Holdings, LLC. Montage is wholly-owned by Mariner Holdings, LLC, a global financial services firm with affiliates focused on wealth and asset management. The remaining interests in Tortoise Holdings, LLC are held by certain Tortoise employees, including all managing directors.
Fund(s):
a portion of the assets of Diversified Real Asset
Sub-Advisor:
Wellington Management Company LLP (“Wellington Management”) is owned by the partners of Wellington Management Group LLP, a Massachusetts limited liability partnership.
Fund(s):
a portion of the assets of Global Multi-Strategy

51


Sub-Advisor:
York Registered Holdings, L.P. (“York”) is controlled by its sole general partner, York Capital Management Global Advisors, LLC (“YGA”). James G. Dinan, founder, is the Chairman, CEO and controlling person of YGA. Mr. Dinan and various other individual partners of the firm collectively own the majority equity interest in YGA and its affiliates.
Fund(s):
a portion of the assets of Global Multi-Strategy
Affiliated Persons of the Fund Who are Affiliated Persons of the Advisor
For information about affiliated persons of the Fund who are also affiliated persons of Principal or affiliated advisors, see the Interested Director and Officer tables in the “Leadership Structure and Board of Directors” section.
Codes of Ethics
The Fund, Principal, each of the Sub-Advisors, and PFD have adopted Codes of Ethics (“Codes”) under Rule 17j-1 of the 1940 Act. Principal and each Sub-Advisor has also adopted such a Code under Rule 204A-1 of the Investment Advisers Act of 1940. These Codes are designed to prevent, among other things, persons with access to information regarding the portfolio trading activity of a Fund from using that information for their personal benefit. In certain circumstances, the Codes permit personnel subject to the Codes to invest in securities, including securities that may be purchased or held by the Funds. The Fund's Board of Directors reviews reports at least annually regarding the operation of the Code of Ethics of the Fund, Principal, PFD, and each of the Sub-Advisors. The Codes are on file with, and available from, the SEC. A copy of the Fund's Code will also be provided upon request, which may be made by contacting the Fund.
Management Agreement
For providing the investment advisory services, and specified other services, Principal, under the terms of the Management Agreement for the Fund, is entitled to receive a fee computed and accrued daily and payable monthly, at the following annual rates. The management fee schedules for the Funds are as follows (expressed as a percentage of average net assets):
Net Asset Value of Fund
Fund
All Assets
Bond Market Index
0.25
%
 
Capital Securities
0.00
%
(1) 
International Equity Index
0.25
%
 
Real Estate Allocation
0.00
%
 
(1) 
The table reflects that Principal Management Corporation ("Principal"), the investment advisor, is absorbing all expenses of the Fund. You should be aware, however, that the Fund is an integral part of "wrap-fee" programs, including those sponsored by registered investment advisors and broker-dealers unaffiliated with the Fund. Participants in these programs pay a “wrap” fee to the wrap-free program's sponsor ("Sponsor").  You should read carefully the wrap-fee brochure provided to you by your Sponsor or your financial advisor. The brochure is required to include information about the fees charged to you by the Sponsor and the fees the Sponsor pays to your financial advisor.
Net Asset Value of Fund

Fund
First
$500 Million
Next
$500 Million
Next
$500 Million
Assets Over
$1.5 Billion
Blue Chip
0.70%
0.68%
0.66%
0.65%
Credit Opportunities Explorer
0.60%
0.58%
0.56%
0.55%
Dynamic High Yield Explorer
0.65%
0.63%
0.61%
0.60%
EDGE MidCap
0.75%
0.73%
0.71%
0.70%
Global Multi-Strategy
1.60%
1.58%
1.56%
1.55%
Global Opportunities
0.85%
0.83%
0.81%
0.80%
International Small Company
1.05%
1.03%
1.01%
1.00%
Opportunistic Municipal
0.50%
0.48%
0.46%
0.45%
Origin Emerging Markets
1.20%
1.18%
1.16%
1.15%
Real Estate Debt Income
0.55%
0.53%
0.51%
0.50%
Small-MidCap Dividend Income
0.80%
0.78%
0.76%
0.75%

52


Net Asset Value of Fund

Fund
First
$500 Million
Next
$500 Million
Next
$500 Million
Next
$500 Million
Next
$1 Billion
Over
$3 Billion
Preferred Securities
0.75%
0.73%
0.71%
0.70%
0.69%
0.68%
Diversified Real Asset
0.85%
0.83%
0.81%
0.80%
0.79%
0.78%
Each Fund pays all of its operating expenses. Under the terms of the Management Agreement, Principal is responsible for paying the expenses associated with the organization of each Fund, including the expenses incurred in the initial registration of the Funds with the SEC, compensation of personnel, officers and directors who are also affiliated with Principal, and expenses and compensation associated with furnishing office space and all necessary office facilities and equipment and personnel necessary to perform the general corporate functions of the Fund. Accounting services customarily required by investment companies are provided to each Fund by Principal, under the terms of the Management Agreement. Principal Shareholder Services, Inc., a wholly owned subsidiary of Principal, provides transfer agent services for Classes A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6 and S shares, including qualifying shares of the Fund for sale in states and other jurisdictions. Principal is also responsible for providing certain shareholder and administrative services to the R-1, R-2, R-3, R-4 and R-5 share classes pursuant to a Service Agreement and an Administrative Services Agreement.
Principal has contractually agreed to limit the Fund's expenses (excluding interest expense, expenses related to fund investments, acquired fund fees and expenses, and other extraordinary expenses) on certain share classes of certain of the Funds. The reductions and reimbursements are in amounts that maintain total operating expenses at or below certain limits. The limits are expressed as a percentage of average daily net assets attributable to each respective class on an annualized basis. The expenses borne by Principal are subject to reimbursement by the Funds through the fiscal year end, provided no reimbursement will be made if it would result in the Funds’ exceeding the total operating expense limits. The operating expense limits and the agreement terms are as follows:
Contractual Limits on Total Annual Fund Operating Expenses
Fund
A
C
J
Inst.
R-1
R-2
R-3
R-4
R-5
R-6
 
Expiration
Blue Chip
1.35%
2.10%
N/A
0.75%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Bond Market Index
N/A
N/A
0.78%
0.23%
1.11%
0.98%
0.80%
0.61%
0.49%
N/A
 
12/30/2015
Credit Opportunities Explorer
1.10%
N/A
N/A
0.70%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Diversified Real Asset
1.25%
2.00%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.88%
 
12/30/2015
Dynamic High Yield Explorer
1.10%
N/A
N/A
0.75%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
EDGE MidCap Fund
N/A
N/A
N/A
0.90%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2016
Global Multi-Strategy
2.00%
2.75%
N/A
1.65%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Global Opportunities
1.50%
2.25%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
International Equity Index
N/A
N/A
N/A
0.35%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
International Small Company
1.60%
N/A
N/A
1.20%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Opportunistic Municipal
0.90%
1.65%
N/A
0.65%*
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Origin Emerging Markets
1.75%
N/A
N/A
1.35%
N/A
N/A
N/A
N/A
N/A
1.26%
 
12/30/2015
Real Estate Allocation
0.50%
N/A
N/A
0.15%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Real Estate Debt Income
1.00%
N/A
N/A
0.70%
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
Small-MidCap Dividend Income
N/A
2.15%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
 
12/30/2015
* Expires December 30, 2016.
In addition, Principal has contractually agreed to limit the expenses identified as “Other Expenses” related to certain share classes of certain of the Funds 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 "Other Expenses" (expressed as a percent of average net assets on an annualized basis) at or below certain limits. The Other Expenses limits and the agreement terms are as follows:

53


Contractual Limits on Other Expenses
Fund
P
Expiration
Blue Chip
0.20%
12/30/2015
Diversified Real Asset
0.20%
12/30/2015
Global Multi-Strategy
0.20%
12/30/2015
Global Opportunities
0.20%
12/30/2015
International Small Company
0.20%
12/30/2015
Opportunistic Municipal
0.20%
12/30/2015
Preferred Securities
0.20%
12/30/2015
Real Estate Debt Income
0.20%
12/30/2016
Small-MidCap Dividend Income
0.20%
12/30/2015
In addition, for the Capital Securities Fund, Principal has contractually agreed to limit the Fund's expenses attributable to Class S shares by paying 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 0.00%. It is expected that the expense limit will continue permanently; however, Principal Funds, Inc. and Principal, the parties to the agreement, may agree to terminate the expense limit.
Principal has contractually agreed to limit certain of the Funds' management fees. The expense limit will reduce the Fund's Management Fees by the amounts listed below:
Contractual Fee Waivers
Fund
Waiver
Expiration
Bond Market Index Fund
0.03
%
 
12/30/2015
Fees paid for investment management services during the periods indicated were as follows:
Management Fees for Periods Ended August 31
(amounts in thousands)
Fund
2014
2013
2012
Blue Chip
$
2,756

 
$
140


$
8

(1) 
Bond Market Index
3,674

 
4,214

 
3,458

 
Diversified Real Asset
18,476

 
12,964

 
8,512

 
Global Multi-Strategy
21,715

 
10,515


5189

(2) 
Global Opportunities
10,689


3,525

(3) 
 
 
International Equity Index
1,542

 
1,816

 
1,590

 
International Small Company Fund
17

(4) 
 
 
 
 
Opportunistic Municipal
113

 
107


16

 
Preferred Securities
31,939

 
35,594

 
25,980

(5) 
Small-MidCap Dividend Income
7,051

 
3,099

 
2010

 
(1) 
Period from June 13, 2012, date operations commenced, through August 31, 2012.
 
(2) 
Period from October 24, 2011, date operations commenced, through August 31, 2012.
 
(3) 
Period from December 28, 2012, date operations commenced, through August 31, 2013.
 
(4) 
Period from June 11, 2014, date operations commenced, through August 31, 2014.
 
(5) 
Period from June 13, 2012, date operations commenced, through August 31, 2012.
 

54


Sub-Advisory Agreements for the Funds
Funds for which Edge Asset Management, Inc. ("Edge") serves as Sub-Advisor. Edge is Sub-Advisor for the Fund identified in the table below. Principal pays Edge a fee, computed and paid monthly, at an annual rate as shown below.
In calculating the fee for the fund included in Table A, assets of any unregistered separate account of Principal Life Insurance Company and any investment company sponsored by Principal Life Insurance Company to which Sub-Advisor provides investment advisory services and which have the same investment mandate (e.g. Small-MidCap Dividend Income) as the fund for which the fee is calculated, will be combined with the assets of the fund to arrive at net assets.
Table A
 
Net Asset Value of Fund

Fund
First
$100 million
Next
$150 million
Over
$250 million
Small-MidCap Dividend Income
0.35%
0.28%
0.22%
Table B
 
Net Asset Value of Fund

Fund
First
$100 million
Next
$150 million
Over
$250 million
EDGE MidCap
0.35%
0.28%
0.22%
Funds for which Finisterre Capital LLP ("Finisterre") serves as Sub-Advisor. Finisterre is a Sub-Advisor for the Fund identified in the table below. Principal pays Finisterre a fee, computed and paid monthly, at an annual rate as shown below.
In calculating the fee for the fund included in the table, assets of any unregistered separate account of Principal Life Insurance Company and any investment company sponsored by Principal Life Insurance Company to which Finisterre provides investment advisory services and which have the same investment mandate as the series for which the fee is calculated, will be combined with the assets of the series to arrive at net assets.
 
Net Asset Value of Fund

Fund
First
$100 million
Assets Over
$100 million
Global Multi-Strategy
0.85%
0.65%
Funds for which Origin Asset Management, LLP (“Origin”) serves as Sub-Advisor. Origin is Sub-Advisor for the Fund identified in the table below. Principal pays Origin a fee, paid monthly, at an annual rate as shown below.
In calculating the fee for the fund included in the table below, assets of any unregistered separate account of Principal Life Insurance Company and any investment company sponsored by Principal Life Insurance Company to which Origin provides investment advisory services and which have the same investment mandate (e.g., emerging market securities) as the fund for which the fee is calculated, will be combined with the assets of the fund to arrive at net assets.
 
Net Asset Value of Fund
Fund
All Assets
Origin Emerging Markets
0.50%
Funds for which Principal Global Investors, LLC (“PGI”) serves as Sub-Advisor. PGI is Sub-Advisor for each Fund identified in the tables below. Principal pays PGI a fee, computed and paid monthly, at an annual rate as shown below.
 
Net Asset Value of Fund
Fund
All Assets
Credit Opportunities Explorer
0.2100%
Dynamic High Yield Explorer
0.2643%
International Small Company
0.4895%
Opportunistic Municipal
0.1500%

55


 
Net Asset Value of Fund

Fund
First
$500 million
Over
$500 million
Blue Chip
0.25%
0.15%
Global Opportunities
0.34%
0.27%
International Equity Index
0.05%
0.03%
Funds for which Principal Real Estate Investors, LLC (“Principal-REI”) serves as Sub-Advisor. Principal-REI is Sub-Advisor for each Fund identified in the tables below. Principal pays Principal-REI a fee, paid monthly, at an annual rate as shown below.
In calculating the fee for the funds included in the tables below, assets of any unregistered separate account of Principal Life Insurance Company and any investment company sponsored by Principal Life Insurance Company to which Principal-REI provides investment advisory services and which have the same investment mandate (e.g., global real estate) as the fund for which the fee is calculated, will be combined with the assets of the funds to arrive at net assets.
 
Net Asset Value of Fund

Fund
First
$1 billion
Next
$500 million
Over
$1.5 billion
Diversified Real Asset (REIT portion)
0.54%
0.48%
0.44%
Net Asset Value of Fund
Fund
All Assets
Real Estate Allocation
0.00%
 
Net Asset Value of Fund

Fund
First
$200 million
Over
$200 million
Real Estate Debt Income
0.25%
0.20%
Funds for which Spectrum Asset Management, Inc. (“Spectrum”) serves as Sub-Advisor. Spectrum is Sub-Advisor for each Fund identified in the table below. Principal pays Spectrum a fee, paid monthly, at an annual rate as shown below.
In calculating the fee for funds included in the tables below, assets of any unregistered separate account of Principal Life Insurance Company and any investment company sponsored by Principal Life Insurance Company to which Spectrum provides investment advisory services and which have the same investment mandate (e.g., preferred securities) as the fund for which the fee is calculated, will be combined with the assets of the fund to arrive at net assets. The assets of the Capital Securities Fund will not be combined with assets of other series for purposes of calculating the fee.
 
Net Asset Value of Fund

Fund
First
$100 million
Next
$150 million
Over
$250 million
Preferred Securities
0.3427%
0.2937%
0.1958%
Net Asset Value of Fund
Fund
All Assets
Capital Securities
0.00% (1)
(1) 
This sub-advisory fee schedule recognizes that the Wrap Fee Adviser will receive a fee through the wrap fee program that takes into account the value of any shares of the Fund held by Eligible Wrap Accounts.
Funds with Other Sub-Advisors
In calculating the fee for each Fund, each Sub-Advisor, except Loomis Sayles, has agreed that, assets of any existing registered investment company sponsored by Principal Life Insurance Company to which the Sub-Advisor provides investment advisory services and which have the same investment mandate as the Fund for which the fee is being calculated, will be combined (together, the “Aggregated Assets”). The fee charged for the assets in a Fund shall be determined by calculating a fee on the value of the Aggregated Assets using the fee schedules described in the tables below and multiplying the aggregate fee by a fraction, the numerator of which is the amount of assets in the Fund and the denominator of which is the amount of the Aggregated Assets.

56


 
Net Asset Value of Fund

Fund
First
$200 million
Next
$300 million
Next
$500 million
Over
$1 billion
Bond Market Index (Mellon Capital)
0.08%
0.06%
0.05%
0.04%
 
Net Asset Value of Fund
Fund
All Net Assets
Diversified Real Asset (inflation-indexed bonds portion) (BlackRock)
0.08%
 
Net Asset Value of Fund

Fund
First
$150 million
Next
$150 million
Over
$300 million
Diversified Real Asset
0.45%
0.40%
0.35%
(global infrastructure portion) (Brookfield)
 
 
Net Asset Value of Fund

Fund
First
$50 million
Next
$100 million
Over
$150 million
Diversified Real Asset
0.40%
0.35%
0.30%
(commodity index-linked notes portion) (Credit Suisse)
 
 

On or about July 1, 2015 add the following:
 
Net Asset Value of Fund
Fund
First
$100 million
Next
$100 million
Next
$100 million
Over
$300 million
Diversified Real Asset (FFTW)
0.30%
0.25%
0.20%
0.15%
 
Net Asset Value of Fund

Fund
First
$100 million
Over
$100 million*
Diversified Real Asset
0.55%
0.50%
(natural resources portion) (Jennison)
* During any period when the Fund's Average Daily Net Assets equal or exceed $100 million, Jennison's fee as a percentage of average daily net assets shall be 0.50% on all assets.
 
Net Asset Value of Fund

Fund
First
$150 million
Next
$150 million
Next
$200 million
Over
$500 million
Diversified Real Asset
0.45%
0.40%
0.35%
0.30%
(global infrastructure portion) (Macquarie)
 
 
 
Net Asset Value of Fund
Fund
First
$150 million
Over
$150 million
Diversified Real Asset (global agribusiness) (Pictet)
0.45%
0.40%
 
Net Asset Value of Fund
Fund
First
$200 million
Over
$200 million
Diversified Real Asset (global timber) (Pictet)
0.50%
0.45%
 
Net Asset Value of Fund

Fund
First
$300 million
Over
$300 million
Diversified Real Asset
(floating rate debt portion) (Symphony)
0.40%
0.30%

57


 
Net Asset Value of Fund


Fund

First
$25 million

Next
$25 million

Next
$25 million

Next
$25 million*
Assets of
$100 million
or more**
Diversified Real Asset
(MLP portion) (Tortoise)
1.00%
0.85%
0.75%
0.75%
0.625%
* During any period when the Fund’s Average Daily Net Assets equal or exceed $75 million, but are less than $100 million, Tortoise’s fee as a percentage of average daily net assets shall be 0.75% on all assets.
** During any period when the Fund’s Average Daily Net Assets equal or exceed $100 million, Tortoise’s fee as a percentage of average daily net assets shall be 0.625% on all assets.
 
Net Asset Value of Fund

Fund
First
$250 million
Over
$250 million
Global Multi-Strategy (AQR & CNH)
1.00%
0.95%
 
Net Asset Value of Fund

Fund
First
$500 million
Next
$500 million
Next
$1 billion
Next
$3 billion
Assets Over
$5 billion
Global Multi-Strategy (Cliffwater)
0.25%
0.20%
0.15%
0.10%
0.05%
 
Net Asset Value of Fund
Fund
First
$125 million
Next
$125 million*
Over
$250 million**
Global Multi-Strategy (Graham)
0.90%
0.85%
0.83%
* During any period when the Fund’s Average Daily Net Assets equal or exceed $125 million, but are less than $250 million, Graham’s fee as a percentage of average daily net assets shall be 0.85% on all assets.
** During any period when the Fund’s Average Daily Net Assets equal or exceed $250 million, Graham’s fee as a percentage of average daily net assets shall be 0.83% on all assets.

On or about July 1, 2015, add the following:
 
Net Asset Value of Fund
Fund
First
$250 million
Over
$250 million
Global Multi-Strategy (KLS)
1.00%
0.90%
 
Net Asset Value of Fund
Fund
First
$250 million
Over
$250 million
Global Multi-Strategy (Los Angeles Capital)
1.00%
0.90%

On or about July 1, 2015, delete the preceding table and replace with the following:
 
Net Asset Value of Fund
Fund
First
$250 million
Next
$100 million
Next
$100 million
Over
$450 million
Global Multi-Strategy (Los Angeles Capital)
1.00%
0.90%
0.75%
0.65%
 
Net Asset Value of Fund
Fund
First
$500 million
Over
$500 million
Global Multi-Strategy (Loomis Sayles)
0.40%
0.37%
 
Net Asset Value of Fund

Fund
First
$500 million
Over
$500 million
Global Multi-Strategy (Wellington Management)
0.75%
0.65%

58


 
Net Asset Value of Fund
Fund
All Assets
Global Multi-Strategy (York)
1.00%
Fees paid for Sub-Advisory services during the periods indicated were as follows:
Sub-Advisor Fees for Periods Ended August 31
 
Fund
2014
2013
2012
Blue Chip
$
954,181

 
$
33,949

 
$
1,695

(1) 
Bond Market Index
642,690

 
799,302

 
729,087

 
Diversified Real Asset
8,552,014

 
5,783,765

 
3,627,532

 
Global Multi-Strategy
13,267,348

 
5,905,802

 
2,992,103

(2) 
Global Opportunities
3,774,831

 
1,193,182

(3) 
 
 
International Equity Index
280,865

 
319,020

 
288,136

 
International Small Company
8,987

(4) 
 
 
 
 
Opportunistic Municipal
33,842

 
31,773

 
2,996

(5) 
Preferred Securities
9,215,010

 
10,190,377

 
7,360,508

 
Small-MidCap Dividend Income
2,120,282

 
1,052,524

 
757,841

 
(1) 
The Blue Chip Fund commenced operations on June 13, 2012.
(2) 
The Global Multi-Strategy Fund commenced operations on October 14, 2011.
(3) 
The Global Opportunities Fund commenced operations on December 28, 2012.
(4) 
The International Small Company Fund commenced operations on June 11, 2014.
(5) 
The Opportunistic Municipal Fund commenced operations on June 13, 2012.
Underwriting Fees for Periods Ended August 31
(amounts in thousands)
Fund
2014
 
2013
 
2012
 
Blue Chip Fund
$
60

 
$
—

 
$
—

(1) 
Bond Market Index
1

 
3

 
4

 
Diversified Real Asset
64

 
84

 
118

 
Global Multi-Strategy
70

 
46

 
24

(2) 
Global Opportunities Fund
15

 
—

(3) 
—

 
International Small Company
1

(4) 
—

 
—

 
Opportunistic Municipal
15

 
15

 
1

(5) 
Preferred Securities
384

 
837

 
820

 
Small-MidCap Dividend Income
352

 
123

 
41

 
(1) The Blue Chip Fund commenced operations on June 13, 2012.
 
(2) The Global Multi-Strategy Fund commenced operations on October 14, 2011.
 
(3) The Global Opportunities Fund commenced operations on December 28, 2012.
 
(4) The International Small Company Fund commenced operations on June 11, 2014.
 
(5) The Opportunistic Municipal Fund commenced operations on June 13, 2012.
 
Custodian
The custodian of the portfolio securities and cash assets of the Funds is Bank of New York Mellon, One Wall Street, New York, NY 10286. The custodian performs no managerial or policy-making functions for the Funds.
INTERMEDIARY COMPENSATION
Additional Payments to Intermediaries.
Shares of the Fund 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, Principal 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/or shareholder

59


services. In some situations the Fund will reimburse Principal or its affiliates for making such payments; in others the Fund may make such payments directly to intermediaries.
For Classes R-1, R-2, R-3, R-4 and R-5 shares, such compensation is generally paid out of the Service Fees and Administrative Service Fees that are disclosed in the prospectus as Other Expenses. Such compensation is generally based on the average asset value of fund shares for the relevant share class held by clients of the intermediary.
In addition, Principal or its affiliates may 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.
The amounts paid to intermediaries may vary, and may vary by share class and by fund.
Principal Life Insurance Company is one such intermediary that provides services relating to Fund shares held in retirement plans, and it is typically paid some or all of the Service Fees and Administrative Service Fees pertaining to such plans.
Plan recordkeepers, who may have affiliated financial intermediaries that sell shares of the funds, may be paid additional amounts. In addition, financial intermediaries may be affiliates of entities that receive compensation from the Distributor for maintaining retirement plan platforms that facilitate trading by affiliated and non-affiliated financial intermediaries and recordkeeping for retirement plans.
A number of factors may be considered in determining the amount of these additional payments, including each financial intermediary's Fund sales and assets, as well as the willingness and ability of the financial intermediary to give the Distributor access to its Financial Professionals for educational and marketing purposes. In some cases, intermediaries will include the Funds on a preferred list. The Distributor's goals include making the Financial Professionals who interact with current and prospective investors and shareholders more knowledgeable about the Funds so that they can provide suitable information and advice about the Funds and related investor services. The amounts paid to intermediaries vary by fund and by share class.
The payments described above are not made for Class R-6 or Class S shares.
Additionally, 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. Other compensation may be paid to the extent not prohibited by applicable laws, regulations or the rules of any self-regulatory agency, such as FINRA.
The payments described in this SAI 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 Principal and its affiliates, and by sponsors of other mutual funds your Financial Professional may recommend to you.
Your intermediary may charge you additional fees other than those disclosed in the prospectus. Ask your Financial Professional about any fees and commissions they charge.
Although a Fund may use brokers who sell shares of the Funds to effect portfolio transactions, the sale of shares is not considered as a factor by the Fund's Sub-Advisors when selecting brokers to effect portfolio transactions.
As of December 19, 2014, the Distributor anticipates that the firms that will receive additional payments as described in the Additional Payments to Intermediaries section above (other than sales charges, Rule 12b-1 fees and Expense Reimbursement) include, but are not necessarily limited to, the following:
401(k) Advisors, Inc.
Massachusetts Mutual
ACS HR Solutions LLC
Mercer HR Services
Access Financial Group, Inc.
Merrill Lynch
ADP Retirement Services
Meridien Financial Group Inc.
AFA Financial Group LLC
Mesirow Financial Inc.
AIG Advisor Group
MetLife Securities, Inc.
AIG SunAmerica Life
MHA Insurance Agency Inc.

60


American Century Investments
MidAtlantic Capital Corporation
American General Life Insurance
Middlegate Securities LTD
American Investors Co
MML Investors Services Inc.
American Portfolios Financial Services
Morgan Keegan & Co.
Ameriprise Financial Services
Morgan Stanley
Ameritas Investments Corp
MSCS Financial Services
ASAE Services, Inc.
Multi-Financial Securities Corp.
Ascensus
Mutual Securities, Inc.
AssetMark Trust Company
Mutual Service Corporation
AXA Advisors, LLC
National Financial Services
Bedminster Financial Group Ltd.
National Planning Corp.
Benefit Plan Administrators
National Planning Holdings
Benefit Solutions
Nationwide Investment Services Corp
Blue Prairie Group
NBC Securities Inc.
Cadaret, Grant & Company, Inc
New England Securities
Cambridge Investment Research Inc.
New York Life
Cammack Larhette Brokerage Inc.
New York State Deferred Compensation Plan
Cantella & Co. Inc.
Newport Group, The
Capital Investment Brokerage, Inc.
Newport Retirement Plan Services
Capital Management Services, Inc.
Next Financial Group
CBIZ Financial Solutions, Inc.
NFP Advisor Services, LLC
Centaurus Financial Inc.
NFP Securities, Inc.
CEROS Financial Services, Inc.
NGC Financial, LLC
Cetera Advisor Networks LLC
NHA Insurance Agency, Inc.
Cetera Advisors LLC
Northwestern Mutual Investment Services
Cetera Financial Group
NRP Financial, Inc.
Cetera Financial Specialists LLC
NYLife Distributors LLC
Cetera Investment Services LLC
OneAmerica Securities, Inc.
Charles Schwab & Co.
Ogilvie Security Advisors Corp.
Charles Schwab Trust Company
Packerland Brokerage Services, Inc.
Chase Investment Services Corp.
Park Avenue Securities
Citibank, Inc.
Pershing
Citigroup Global Markets Inc.
Plan Administrators, Inc.
Colony Park Financial Services, Inc.
Plexus Financial Services, LLC
Comerica Retirement Services
PRIMEVEST Financial Services, Inc.
Comerica Securities Inc.
Principal Life Insurance Company
Commonwealth Financial Network
Princor Financial Services Corp
Comprehensive Asset Management and Servicing Inc.
ProEquities, Inc.
Compusys (Texas)
Prudential Investment Management Services
Cornerstone Wealth Management
Prudential Retirement Services
CPI Qualified Consultants
Putnam Investors Services
Credit Suisse Securities (USA) LLC
Quest Capital Strategies Inc.
CV Brokerage Inc.
Questar Capital Corporation
D.A. Davidson & Co.
Raymond James & Associates, Inc.
Daily Access Corporation
Raymond James Financial Services, Inc.
Digital Retirement Solutions
RBC Capital Markets Corp.
Edward Jones
Reliance Trust Company
Elliott Davis Brokerage Services LLC
Robert W. Baird & Co.
ePlan Services, Inc.
RolloverSystems, LLC
Equity Services Inc.
Royal Alliance Associates, Inc.
Evolve Securities Inc.
Royal Securities Co.
Executive Wealth Management
SagePoint Financial, Inc.
Expert Plan
Scott & Stringfellow Inc.
Farmers Financial Solutions
Scottrade
Federated Securities, Inc.
Searle & Co.
Fidelity Brokerage Services
Securian Financial Services
Fidelity Investment Institutional Operations Co.
Securities America, Inc.
Financial Data Services
Securities Service Network, Inc.

61


Financial Network Investment Corp.
Security Benefit
Financial Telesis Inc.
Sentinel Securities Inc.
Fintrust Brokerage Services LLC
Sigma Financial Corp
First Allied Securities
Signator Investors, Inc.,
First Clearing LLC
SII Investments, Inc.
First Heartland Capital Inc.
Soltis Investment Advisors, Inc.
Foothill Securities, Inc
Southeast Investments N.C., Inc.
Fortune Securities Inc.
Southwest Securities
FSC Securities Corporation
Standard Insurance Company
G.A. Repple & Company
Standard Retirement Services
Genesis Employee Benefit
Stifel Nicolaus & Company, Inc.
Geneos Wealth Management, Inc.
Stock Yards Bank & Trust Company
Genworth Financial Securities Corp.
Summit Brokerage Services, Inc.
Girard Securities, Inc
Sunset Financial Services Inc.
Great-West Financial Retirement Plan Services, LLC
Support Services Financial Advisors Inc.
GWFS Equities, Inc.
Symetra Investment Services Inc.
H Beck Inc.
T. Rowe Price Retirement Plan Services
Harbor Financial Services LLC
TD Ameritrade Inc.
Hartford Securities
TD Ameritrade Trust Company
Hewitt Financial Services, LLC
Ten Capital Investment Advisors
HighTower Securities, LLC
TIAA-CREF
Huntington Investment Company, The
Transamerica Financial Advisors, Inc.
ICMA-Retirement Corp.
Triad Advisors, Inc.
ING Financial Partners Inc.
Truenorth Securities Inc.
Intersecurities Inc.
Trust Company of America
Invest Financial Corp.
TruSource
Investacorp Inc.
Trustcore Investments Inc.
Investment Center, The
UBS Financial Services, Inc.
Investment Centers of America, Inc.
United Planners Financial Services of America
Investors Capital Corp
US Bancorp Investments
Janney Montgomery Scott
USA Financial Securities Corp.
JJB Hilliard WL Lyons, Inc.
USI Securities Inc.
JP Morgan Chase, NA
UVEST Financial Services
JP Morgan Clearing
VALIC Retirement Services Company
J.P. Morgan Securities, Inc.
Valmark Securities Inc.
JP Turner & Company
Vanguard Brokerage Services
KMS Financial Services Inc.
Vanguard Group, The
Leaders Group, Inc., The
Voya Financial Advisors, Inc.
Legend Equities Corporation
Voya Institutional Plan Services, LLC
Leumi Investment Services Inc.
VSR Financial Services, Inc.
Lincoln Financial Advisors
Wayne Hummer Investments LLC
Lincoln Financial Securities
Wells Fargo Advisors
Lincoln Investment Planning
Wells Fargo Bank, N.A.
Lincoln Retirement Services Co.
Wilmington Trust
Lockton Financial Advisors LLC
Wilmington Trust Retirement & Institutional Services
LPL Financial Corp. - UVEST
Woodbury Financial Services
LPL Financial Corporation
Xerox (ACS) HR Solutions
M Holdings Securities Inc.
Young, Stovall & Co.
To obtain a current list of such firms, call 1-800-222-5852.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Brokerage on Purchases and Sales of Securities
All orders for the purchase or sale of portfolio securities are placed on behalf of a Fund by Principal, or by the Fund's Sub-Advisor pursuant to the terms of the applicable sub-advisory agreement. In distributing brokerage business arising out of the placement of orders for the purchase and sale of securities for any Fund, the objective of Principal and of each Fund's Sub-Advisor is to obtain the best overall terms. In pursuing this objective, Principal or the Sub-Advisor considers all matters it deems relevant, including the breadth of the market in the security, the price of the

62


security, the financial condition and executing capability of the broker or dealer, confidentiality, including trade anonymity, and the reasonableness of the commission, if any (for the specific transaction and on a continuing basis). This may mean in some instances that Principal or a Sub-Advisor will pay a broker commissions that are in excess of the amount of commissions another broker might have charged for executing the same transaction when Principal or the Sub-Advisor believes that such commissions are reasonable in light of a) the size and difficulty of the transaction, b) the quality of the execution provided, and c) the level of commissions paid relative to commissions paid by other institutional investors. Such factors are viewed both in terms of that particular transaction and in terms of all transactions that broker executes for accounts over which Principal or the Sub-Advisor exercises investment discretion. The Board has also adopted a policy and procedure designed to prevent the Funds from compensating a broker/dealer for promoting or selling Fund shares by directing brokerage transactions to that broker/dealer for the purpose of compensating the broker/dealer for promoting or selling Fund shares. Therefore, Principal or the Sub-Advisor may not compensate a broker/dealer for promoting or selling Fund shares by directing brokerage transactions to that broker/dealer for the purpose of compensating the broker/dealer for promoting or selling Fund shares. Principal or a Sub-Advisor may purchase securities in the over-the-counter market, utilizing the services of principal market makers unless better terms can be obtained by purchases through brokers or dealers, and may purchase securities listed on the NYSE from non-Exchange members in transactions off the Exchange.
Principal or a Sub-Advisor may give consideration in the allocation of business to services performed by a broker (e.g., the furnishing of statistical data and research generally consisting of, but not limited to, information of the following types: analyses and reports concerning issuers, industries, economic factors and trends, portfolio strategy, performance of client accounts, and access to research analysts, corporate management personnel, and industry experts). If any such allocation is made, the primary criteria used will be to obtain the best overall terms for such transactions or terms that are reasonable in relation to the research or brokerage services provided by the broker or dealer when viewed in terms of either a particular transaction or the sub-advisor’s overall responsibilities to the accounts under its management. Principal or a Sub-Advisor generally pays additional commission amounts for such research services. Statistical data and research information received from brokers or dealers as described above may be useful in varying degrees and Principal or a Sub-Advisor may use it in servicing some or all of the accounts it manages. Principal and the Sub-Advisors allocated portfolio transactions for the Funds indicated in the following table to certain brokers for the year ended August 31, 2014 due to research services provided by such brokers. The table also indicates the commissions paid to such brokers as a result of these portfolio transactions.


Fund
Amount of Transactions
because of
Research Services Provided

Related
Commissions Paid
Blue Chip
$
59,412,790

 
$
10,445

 
Diversified Real Asset
 
172,108,167

 
 
137,537

 
Global Multi Strategy
 
1,050,563,976

 
 
395,540

 
Global Opportunities
 
861,759,281

 
 
482,433

 
International Equity Index
 
20,544,078

 
 
3,168

 
International Small Company
 
387,811

 
 
347

 
Small-MidCap Dividend Income
 
761,045,001

 
 
950,378

 
Subject to the rules promulgated by the SEC, as well as other regulatory requirements, the Board has approved procedures whereby a Fund may purchase securities that are offered in underwritings in which an affiliate of a Sub-Advisor, or Principal, participates. These procedures prohibit a Fund from directly or indirectly benefiting a Sub-Advisor affiliate or a Manager affiliate in connection with such underwritings. In addition, for underwritings where a Sub-Advisor affiliate or a Manager participates as a principal underwriter, certain restrictions may apply that could, among other things, limit the amount of securities that the Fund could purchase in the underwritings. The Sub-Advisor shall determine the amounts and proportions of orders allocated to the Sub-Advisor or affiliate. The Directors of the Fund will receive quarterly reports on these transactions.
The Board has approved procedures that permit a Fund to effect a purchase or sale transaction between the Fund and any other affiliated mutual fund or between the Fund and affiliated persons of the Fund under limited circumstances prescribed by SEC rules. Any such transaction must be effected without any payment other than a cash payment for the securities, for which a market quotation is readily available, at the current market price; no brokerage commission or fee (except for customary transfer fees), or other remuneration may be paid in connection with the transaction. The Board receives quarterly reports of all such transactions.
The Board has also approved procedures that permit a Fund's Sub-Advisor(s) to place portfolio trades with an affiliated broker under circumstances prescribed by SEC Rules 17e-1 and 17a-10. The procedures require that total

63


commissions, fees, or other remuneration received or to be received by an affiliated broker must be reasonable and fair compared to the commissions, fees or other remuneration received by other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable time period. The Board receives quarterly reports of all transactions completed pursuant to the Fund's procedures.
Purchases and sales of debt securities and money market instruments usually are principal transactions; portfolio securities are normally purchased directly from the issuer or from an underwriter or marketmakers for the securities. Such transactions are usually conducted on a net basis with the Fund paying no brokerage commissions. Purchases from underwriters include a commission or concession paid by the issuer to the underwriter, and the purchases from dealers serving as marketmakers include the spread between the bid and asked prices.
The Board has approved procedures whereby a Fund may participate in a commission recapture program. Commission recapture is a form of institutional discount brokerage that returns commission dollars directly to a Fund. It provides a way to gain control over the commission expenses incurred by a Fund's Manager and/or Sub-Advisor, which can be significant over time, and thereby reduces expenses, improves cash flow and conserves assets. A Fund can derive commission recapture dollars from both equity trading commissions and fixed-income (commission equivalent) spreads. The Funds may participate in a program through a relationship with Russell Implementation Services, Inc. From time to time, the Board reviews whether participation in the recapture program is in the best interest of the Funds.
The following table shows the brokerage commissions paid during the periods indicated.
Total Brokerage Commissions Paid for Periods Ended August 31
Fund
2014
2013
2012
Blue Chip
$
191,736

 
$
42,007

 
$
2,401

(1) 
Bond Market Index
17

 
0

 
0

 
Capital Securities
0

(2) 
 
 
 
 
Diversified Real Asset
1,257,924

 
836,262

 
858,129

 
Global Multi-Strategy
1,089,764

 
692,129

 
388,588

(3) 
Global Opportunities
2,723,625

 
2,008,144

(4) 
 
 
International Equity Index
219,205

 
335,975

 
320,757

 
International Small Company
7,875

(5) 
 
 
 
 
Opportunistic Municipal
640

 
616

 
405

(1) 
Preferred Securities
193,912

 
342,470

 
256,660

 
Small Mid-Cap Dividend Income
1,047,772

 
499,660

 
222,461

 
(1) 
Period from June 13, 2012, date operations commenced, through August 31, 2012
(2) 
Period from March 14, 2014, date operations commenced, through August 31, 2014
(3) 
Period from October 24, 2011, date operations commenced, through August 31, 2012
(4) 
Period from December 28, 2012, date operations commenced, through August 31, 2013
(5) 
Period from June 11, 2014, date operations commenced, through August 31, 2014
The primary reasons for changes in several Funds' brokerage commissions for the three years were changes in Fund size; changes in market conditions; and changes in money managers of certain Funds, which required substantial portfolio restructurings, resulting in increased securities transactions and brokerage commissions.

64


Brokerage commissions from the portfolio transactions effected for the Funds were paid to brokers affiliated with Principal or its Sub-Advisors for the fiscal years ended August 31 as follows:
Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2014
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Blue Chip
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
14,554

7.59
%
11.65
%
 
Credit Suisse Asset Management , LLC
Credit Suisse, Inc.
1,579

0.82
%
1.00
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
604

0.31
%
1.17
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
1,765

0.92
%
0.88
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
2,755

1.44
%
0.68
%
 
Baird Investment Management
Robert W. Baird & Co.
982

0.51
%
0.41
%
 
Alliance Bernstein L.P.
Sanford C. Bernstein & Co., LLC
6,817

3.56
%
3.23
%
 
William Blair & Company, L.L.C.
William Blair & Company, L.L.C.
7,450

3.89
%
2.55
%
Total
36,507

19.04
%
21.57
%
Diversified Real Asset
 
American Century Investment Management, Inc.
CIBC World Markets Corp
61

0.00
%
0.01
%
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
2,327

0.18
%
0.20
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
50,525

4.02
%
3.79
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
284

0.02
%
0.04
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
59,233

4.71
%
3.77
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
1,649

0.13
%
0.17
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
64,466

5.12
%
9.68
%
 
Pictet Asset Management SA
Pictet Overseas Inc.
7,789

0.62
%
0.33
%
 
Baird Investment Management
Robert W. Baird & Co.
4,215

0.34
%
0.23
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
2,269

0.18
%
0.14
%
Total
192,817

15.33
%
18.36
%
Global Multi-Strategy
 
American Century Investment Management, Inc.
CIBC World Markets Corp
1,296

0.12
%
0.02
%
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
3,062

0.28
%
0.17
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
41,718

3.83
%
3.52
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
431

0.04
%
0.00
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
66,011

6.06
%
9.99
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
1,076

0.10
%
0.05
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
48,294

4.43
%
9.09
%
 
Baird Investment Management
Robert W. Baird & Co.
4,807

0.44
%
0.19
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
14,607

1.34
%
1.14
%
 
William Blair & Company, L.L.C.
William Blair & Company, L.L.C.
1,452

0.13
%
0.08
%
Total
182,754

16.77
%
24.25
%
Global Opportunities
 
American Century Investment Management, Inc.
CIBC World Markets Corp
11,184

0.41
%
0.63
%
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
150,513

5.53
%
12.50
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
169,514

6.22
%
6.71
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
3,713

0.14
%
0.55
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
101,851

3.74
%
3.91
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
164,041

6.02
%
5.55
%
 
Baird Investment Management
Robert W. Baird & Co.
1,336

0.05
%
0.10
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
17,811

0.65
%
1.77
%
Total
619,962

22.76
%
31.73
%

65


Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2014
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
International Equity Index
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
6,123

2.79
%
2.65
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
66,527

30.35
%
29.01
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
86

0.04
%
0.02
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
25,345

11.56
%
10.99
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
3,930

1.79
%
1.71
%
Total
102,010

46.54
%
44.38
%
International Small Company
 
American Century Investment Management, Inc.
CIBC World Markets Corp
1,205

15.30
%
9.88
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
90

1.15
%
0.97
%
 
Goldman Sachs Asset Management, L.P.
Goldman Sachs & Co.
38

0.49
%
0.44
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
262

3.32
%
2.65
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
14

0.18
%
0.31
%
Total
1,609

20.43
%
14.25
%
Preferred Securities
 
Columbus Circle Investors
Edge Asset Management, Inc.
Principal Global Investors, LLC
Principal Real Estate Investors, LLC
Spectrum Asset Management, Inc.
Spectrum Asset Management
193,912

100.00
%
100.00
%
Total
193,912

100.00
%
100.00
%
Small-MidCap Dividend Income
 
American Century Investment Management, Inc.
CIBC World Markets Corp
16,945

1.62
%
0.41
%
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
105,183

10.04
%
11.34
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
407

0.04
%
0.04
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities LLC
68,616

6.55
%
4.69
%
 
Baird Investment Management
Robert W. Baird & Co.
33,370

3.18
%
3.45
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
17,316

1.65
%
0.79
%
Total
241,837

23.08
%
20.74
%
Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2013
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Blue Chip
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
661

1.57
%
1.19
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
120

0.29
%
0.04
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
40

0.10
%
0.16
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
468

1.11
%
1.27
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
455

1.08
%
0.74
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
213

0.51
%
0.35
%
Total
1,957

4.66
%
3.75
%

66


Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2013
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Diversified Real Asset
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
8,846

1.06
%
1.48
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
1,324

0.16
%
0.05
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
42,905

5.13
%
4.56
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
256

0.03
%
0.11
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
19,373

2.32
%
4.81
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
520

0.06
%
0.04
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
49,567

5.93
%
3.81
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
2,301

0.28
%
0.31
%
Total
125,092

14.97
%
15.17
%
Global Multi-Strategy
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
2,981

0.43
%
0.35
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
340

0.05
%
0.02
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
16,976

2.45
%
1.67
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
37,520

5.42
%
5.29
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
1,238

0.18
%
0.08
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
20,269

2.93
%
9.84
%
 
Vaughan Nelson Investment Management
Natixis Securities Americas, LLC
123

0.02
%
0.01
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
10,733

1.55
%
1.07
%
Total
90,180

13.03
%
18.33
%
Global Opportunities
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
43,026

2.14
%
3.90
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
8,210

0.41
%
0.54
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
184,854

9.21
%
9.94
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
147,088

7.32
%
4.82
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
126,109

6.28
%
4.35
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
39,841

1.98
%
3.75
%
Total
549,128

27.34
%
27.30
%
International Equity Index
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
3,351

1.00
%
0.90
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
47,697

14.20
%
13.42
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
52,670

15.68
%
15.60
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
830

0.25
%
0.17
%
Total
104,548

31.13
%
30.09
%
Preferred Securities
 
Columbus Circle Investors
Edge Asset Management, Inc.
Principal Global Investors, LLC
Principal Real Estate Investors, LLC
Spectrum Asset Management, Inc.
Spectrum Asset Management, Inc.
342,470

100.00
%
100.00
%
Total
342,470

100.00
%
100.00
%

67


Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2013
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Small-MidCap Dividend Income
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
60,323

12.07
%
19.21
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
17,519

3.51
%
1.17
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
101

0.02
%
0.04
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
7,021

1.41
%
1.58
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
29,185

5.84
%
3.97
%
Total
114,149

22.85
%
25.97
%
Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2012
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Blue Chip
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
13

0.54
%
0.73
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
7

0.29
%
0.32
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
4

0.15
%
0.20
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
1,841

76.70
%
87.76
%
Total
1,865

77.68
%
89.01
%
Diversified Real Asset
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
22,159

2.58
%
2.87
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
1,588

0.19
%
0.03
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
43,825

5.11
%
4.97
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
1,043

0.12
%
0.43
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
15,189

1.77
%
1.85
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
54

0.01
%
0.01
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
34,741

4.05
%
3.21
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
3,396

0.40
%
0.38
%
Total
121,995

14.23
%
13.75
%
Global Multi-Strategy
 
American Century Investment Management, Inc.
Canadian Imperial Bank of Commerce
54

0.01
%
0.05
%
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
444

0.11
%
0.06
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
181

0.05
%
0.01
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
10,982

2.83
%
0.99
%
 
Pyramis Global Advisors, LLC
Fidelity Brokerage Services LLC
227

0.06
%
0.02
%
 
Goldman Sachs Asset Management LP
Goldman Sachs & Co.
17,603

4.53
%
3.57
%
 
Guggenheim Partners Investment Management, LLC
Guggenheim Securities, LLC
96

0.02
%
0.00
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
12,900

3.32
%
16.46
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
4,938

1.27
%
1.00
%
Total
47,425

12.20
%
22.16
%
International Equity Index
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
7,038

2.19
%
1.81
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
20,757

6.47
%
6.97
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
19,383

6.04
%
7.22
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
3,212

1.00
%
0.62
%
Total
50,390

15.70
%
16.62
%

68


Fund
Sub-Advisor Employed by
the Fund Complex
Affiliated Broker
2012
Fund's Total
Commissions
Paid


% of Fund's Total
Commissions
% of Dollar Amount of Fund's Commissionable Transactions
Preferred Securities
 
Columbus Circle Investors
Edge Asset Management, Inc.
Principal Global Investors, LLC
Principal Real Estate Investors, LLC
Spectrum Asset Management, Inc.
Spectrum Asset Management, Inc.
256,660

100.00
%
100.00
%
Total
256,660

100.00
%
100.00
%
Small-MidCap Dividend Income
 
Mellon Capital Management Corporation
ConvergEx Execution Solutions, LLC
8,178

3.68
%
3.12
%
 
American Century Investment Management, Inc.
CIBC World Markets Corp
14,553

6.54
%
2.22
%
 
Credit Suisse Asset Management, LLC
Credit Suisse, Inc.
2,620

1.18
%
1.75
%
 
J.P. Morgan Investment Management, Inc.
J.P. Morgan Securities, Inc.
13,784

6.20
%
5.55
%
 
AllianceBernstein L.P.
Sanford C. Bernstein & Co., LLC
6,649

2.99
%
2.40
%
Total
45,784

20.59
%
15.04
%
Material differences, if any, between the percentage of a Fund's brokerage commissions paid to a broker and the percentage of transactions effected through that broker reflect the commissions rates the Sub-Advisor has negotiated with the broker. Commission rates a Sub-Advisor pays to brokers may vary and reflect such factors as the trading volume placed with a broker, the type of security, the market in which a security is traded and the trading volume of that security, the types of services provided by the broker (i.e. execution services only or additional research services) and the quality of a broker's execution.

69


The following table indicates the value of each Fund’s aggregate holdings, in thousands, of the securities of its regular brokers or dealers for the fiscal year ended August 31, 2014.
Holdings of Securities of Principal Funds, Inc. Regular Brokers and Dealers
Blue Chip Fund
Goldman Sachs Group Inc
396

Bond Market Index Fund
Bank of America
5,997

 
Bank of New York Mellon Corp
903

 
Citigroup Inc
5,212

 
Deutsche Bank AG
806

 
Goldman Sachs Group Inc
257,455

 
Morgan Stanley
6,812

 
Nomura Holdings Inc.
402

 
UBS AG
3,181

Capital Securities Fund
Goldman Sachs Group Inc
1,032

 
Morgan Stanley
1,526

 
UBS AG
1,305

Diversified Real Asset Fund
Deutsche Bank AG
15,013

 
Nomura Holdings Inc.
3,735

 
UBS AG
17,985

Global Multi-Strategy Fund
Bank of America
7,130

 
Bank of New York Mellon Corp
6,937

 
Citigroup Inc
6,372

 
Deutsche Bank AG
60,755

 
Goldman Sachs Group Inc
1,826

 
Morgan Stanley
7,398

 
UBS AG
(412
)
Global Opportunities Fund
Morgan Stanley
11,935

International Equity Index Fund
Deutsche Bank AG
2,551

 
Morgan Stanley
7,393

 
Nomura Holdings Inc.
1,378

 
UBS AG
3,534

International Small Company Fund
Goldman Sachs Group Inc
139

Preferred Securities Fund
Bank of America
30,109

 
Bank of New York Mellon Corp
3,808

 
Citigroup Inc
34,821

 
Deutsche Bank AG
83,464

 
Goldman Sachs Group Inc
61,486

 
Morgan Stanley
60,427

Allocation of Trades
By the Manager ("Principal"). Principal shares a common trading platform and personnel that perform trade-related functions with Principal Global Investors ("PGI") and, where applicable, Principal and PGI coordinate trading activities on behalf of their respective clients. Such transactions are executed in accordance with the firms' trading policies and procedures, including, but not limited to trade allocations and order aggregation, purchase of new issues, and directed brokerage. Principal acts as discretionary investment adviser for registered investment companies and PGI acts as investment adviser for a variety of individual accounts, ERISA accounts, mutual funds, insurance company separate accounts, and public employee retirement plans and places orders to trade portfolio securities for each of these accounts. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Each has adopted and implemented policies and procedures that it believes address the potential conflicts associated with managing accounts for multiple clients and are designed to ensure that all clients are treated fairly and equitably. These procedures include allocation policies and procedures and internal review processes.
If, in carrying out the investment objectives of their respective clients, occasions arise in which Principal and PGI deem it advisable to purchase or sell the same equity securities for two or more client accounts at the same or approximately the same time, Principal and PGI may submit the orders to purchase or sell to a broker/dealer for execution on an aggregate or "bunched" basis. Principal and PGI will not aggregate orders unless it believes that aggregation is consistent with (1) its duty to seek best execution and (2) the terms of its investment advisory agreements. In distributing the securities purchased or the proceeds of sale to the client accounts participating in a bunched trade, no advisory account will be favored over any other account and each account that participates in an aggregated order will participate at the average share price for all transactions of Principal and PGI relating to that

70


aggregated order on a given business day, with all transaction costs relating to that aggregated order shared on a pro rata basis.
Principal provides investment advice to the Principal LifeTime Funds, and PGI assists Principal in managing the Principal LifeTime Funds. Principal provides investment advice for other funds of funds, too (for example the Principal LifeTime Hybrid Funds). Conflicts may arise in connection with the services Principal provides to funds of funds with respect to asset class and target weights for each asset class and investments made in underlying mutual funds. Principal also provides investment advisory services to Funds that have multiple investment advisers (“Multi-Managed Funds”). These services include determining the portion of a Multi-Managed Fund's portfolio to be allocated to an adviser. Conflicts may arise in connection with the services Principal and PGI provide to the Principal LifeTime Funds, in connection with the services Principal provides to other funds of funds and Multi-Managed Funds, for the following reasons:
•
Principal serves as the investment adviser to the underlying mutual funds in which the funds of funds invest, and PGI or an affiliated investment adviser may serve as sub-adviser to the mutual funds in which Principal LifeTime Funds may invest. This raises a potential conflict because Principal's or an affiliated company's profit margin may vary depending upon the underlying fund in which the funds of funds invest;
•
Principal or an affiliated person may serve as investment adviser to a portion of a Multi-Managed Fund. This raises a potential conflict because Principal's or an affiliated investment adviser's profit margin may vary depending on the extent to which a Multi-Managed Fund's assets are managed by Principal or allocated to an affiliated adviser.
•
A sub-advisor may determine that the asset class PFI has hired it to manage (for example, small capitalization growth stocks) can be managed effectively only by limiting the amount of money devoted to the purchase of securities in the asset class. In such a case, a sub-advisor may impose a limit on the amount of money PFI may place with the sub-advisor for management. When a sub-advisor for two or more PFI Funds imposes such a limit, Principal and/or the sub-advisor may need to determine which Fund will be required to limit its investment in the asset class and the degree to which the Fund will be so limited. Principal and the sub-advisor may face a conflict of interest in making its determination.
In order to limit the appearance of conflicts of interest and the opportunity for events that could trigger an actual
conflict of interest, Principal and /or PGI does the following:
•
Maintains a documented, systematic methodology for determining into which mutual funds the Principal LifeTime Funds and other funds of funds invest that does not give undue consideration to the impact to Principal, PGI, or affiliates.
•
Maintains a documented, systematic methodology for determining the portions of a Multi-Managed Fund to be allocated to a sub-adviser that does not give undue consideration to the impact to Principal or its affiliates;
•
Reminds its investment personnel who provide services to the Principal LifeTime Funds, other funds of funds, or Multi-Managed Funds of Principal's inherent conflicts of interest, and Principal's duties of loyalty and care as a fiduciary, and obtains a quarterly written affirmation from each portfolio manager that he/she has employed the applicable methodology in good faith in making investment decisions during the preceding quarter; and
•
Principal's Investment Oversight and Risk Committee monitors the services provided to the Principal LifeTime Funds, other funds of funds, and Multi-Managed Funds to ensure such services conform to the applicable investment methodology, that undue consideration is not given to Principal or its affiliates, and that such services reflect Principal's duties of loyalty and care as a fiduciary.
By the Sub-Advisors. The portfolio managers of each Sub-Advisor manage a number of accounts other than the Fund's portfolios, including in some instances proprietary or personal accounts. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies, allocating time and attention to account management, allocation of investment opportunities, knowledge of and timing of fund trades, selection of brokers and dealers, and compensation for the account. Each has adopted and implemented policies and procedures that it believes address the potential conflicts associated with managing accounts for multiple clients and personal accounts and are designed to ensure that all clients and client accounts are treated fairly and equitably. These procedures include allocation policies and procedures, personal trading policies and procedures, internal review processes and, in some cases, review by independent third parties.
Investments the Sub-Advisor deems appropriate for the Fund's portfolio may also be deemed appropriate by it for other accounts. Therefore, the same security may be purchased or sold at or about the same time for both the Fund's portfolio and other accounts. In such circumstances, the Sub-Advisor may determine that orders for the purchase or sale of the same security for the Fund's portfolio and one or more other accounts should be combined. In this event the transactions will be priced and allocated in a manner deemed by the Sub-Advisor to be equitable

71


and in the best interests of the Fund’s portfolio and such other accounts. While in some instances combined orders could adversely affect the price or volume of a security, the Fund believes that its participation in such transactions on balance will produce better overall results for the Fund.
Edge Asset Management, Inc. ("Edge") is the Sub-Advisor to the SAM (Strategic Asset Management) Portfolios. Edge or an affiliate of Edge also serves as Sub-Advisor to some of the funds underlying the SAM Portfolios. Edge may, therefore, face conflicts of interest in fulfilling its responsibilities to the SAM Portfolios and underlying funds because Edge's profit margin may vary depending on the underlying funds in which the SAM Portfolios invest. Principal and Edge are committed to minimizing the potential conflict of interest.
PURCHASE AND REDEMPTION OF SHARES
Purchase of Shares
Participating insurance companies and certain other designated organizations are authorized to receive purchase orders on the Funds' behalf and those organizations are authorized to designate their agents and affiliates as intermediaries to receive purchase orders. Purchase orders are deemed received by a Fund when authorized organizations, their agents or affiliates receive the order. The Funds are not responsible for the failure of any designated organization or its agents or affiliates to carry out its obligations to its customers. Class A shares of the Funds are purchased at their public offering price and other share classes of the Funds are purchased at the net asset value ("NAV") per share, as determined at the close of the regular trading session of the NYSE next occurring after a purchase order is received and accepted by an authorized agent of a Fund. In order to receive a day's price, an order must be received in good order by the close of the regular trading session of the NYSE as described below in "Pricing of Fund Shares."
All income dividend and capital gains distributions, if any, on a Fund's Class S shares are paid out in cash. All income dividends and capital gains distributions, if any, on a Fund's Classes Institutional, R-1, R-2, R-3, R-4, R-5, and R-6 shares are reinvested automatically in additional shares of the same class of the same Fund. Dividends and capital gains distributions, if any, on a Fund's Classes A, C, J, and P shares are reinvested automatically in additional shares of the same Class of shares of the same Fund unless the shareholder elects to take dividends in cash. The reinvestment will be made at the NAV determined on the first business day following the record date.
The Fund, at its discretion, may permit the purchase of shares using securities as consideration (a purchase in-kind) in accordance with procedures approved by the Fund’s Board of Directors.
For information related to Class S shares, see the section in this SAI entitled "Multiple Class Structure."
Sales of Shares
Payment for shares tendered for redemption is ordinarily made in cash. The Fund may determine, however, that it would be detrimental to the remaining shareholders to make payment of a redemption order wholly or partly in cash. The Fund may, therefore, pay the redemption proceeds in whole or in part by a distribution "in kind" of securities from the Fund's portfolio in lieu of cash. If the Fund pays the redemption proceeds in kind, the redeeming shareholder might incur brokerage or other costs in selling the securities for cash. The Fund will value securities used to pay redemptions in kind using the same method the Fund uses to value its portfolio securities as described below in "Pricing of Fund Shares."
The right to require the Funds to redeem their shares may be suspended, or the date of payment may be postponed, whenever: 1) trading on the NYSE is restricted, as determined by the SEC, or the NYSE is closed except for holidays and weekends; 2) the SEC permits such suspension and so orders; or 3) an emergency exists as determined by the SEC so that disposal of securities or determination of NAV is not reasonably practicable.
Certain designated organizations are authorized to receive sell orders on the Fund's behalf and those organizations are authorized to designate their agents and affiliates as intermediaries to receive redemption orders. Redemption orders are deemed received by the Fund when authorized organizations, their agents or affiliates receive the order. The Fund is not responsible for the failure of any designated organization or its agents or affiliates to carry out its obligations to its customers.
For information related to Class S shares, see the section in this SAI entitled "Multiple Class Structure."

72


Exchanges Between Classes of Shares
Class S shares of the Capital Securities Fund are not subject to exchange.
Through your financial intermediary, in certain limited circumstances, you may become eligible to exchange shares of a Fund you own for shares of a different class of the same Fund, if you become eligible to purchase shares of such different class of the same Fund through your account with your financial intermediary. The following shows the permitted exchanges, subject to the conditions described herein:
Exchange From
Exchange To
Class A
Class P, Institutional
Class C
Class A, P, Institutional
Class P
Class A, C, Institutional
Class Institutional
Class A, C, P, R-6
Such same Fund exchanges between share classes are permitted subject to conditions including, but not limited to, the following:
•
You or your retirement plan sponsor must be eligible to purchase shares of the class into which the exchange is to occur;
•
Your financial intermediary or the retirement plan sponsor's financial intermediary must have an agreement with the underwriter or transfer agent of Principal Funds allowing the purchase of such share class for you;
•
The Fund must offer shares of such class of such Fund in your state or the state of the retirement plan sponsor;
•
In order to exchange into Class A shares, you must be eligible to purchase Class A shares with no initial sales charge;
•
Depending on the circumstances, for exchanges from Classes A and C shares there may be a contingent deferred sales charge in connection with the exchange; and
•
Any such exchange must be requested by your financial intermediary or retirement plan sponsor (with approval by the Distributor) and, except as otherwise approved by the Distributor, must result from either (i) the financial intermediary seeking to have shares of the Funds on their platform held in a particular share class, (ii) the share class becoming available to your financial intermediary or financial professional through a new relationship, or (iii) your retirement plan sponsor electing to have shares of the Funds offered as part of the plan investment options held in a particular share class.
If after purchasing Class P or Institutional shares you become ineligible to invest in Class P or Institutional shares, you may be permitted to exchange from Class P or Institutional shares into other share classes issued by the same Fund if your financial intermediary determines you qualify for such an exchange.
You should check with your financial intermediary to see if the exchange you wish to complete will satisfy the conditions. Your ability to exchange between share classes of the same Fund may be limited by the operational limitations of your financial intermediary. Please consult your financial professional for more information.
While such an exchange may not be considered a taxable event for income tax purposes, you should consult with your tax adviser regarding possible federal, state, local and foreign tax consequences.
PRICING OF FUND SHARES
Each Fund's shares are bought and sold at the current net asset value ("NAV") per share. Each Fund's NAV for each class is calculated each day the New York Stock Exchange ("NYSE") is open, as of the close of business of the Exchange (normally 3:00 p.m. Central Time). The NAV of Fund shares is not determined on days the NYSE is closed (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). When an order to buy or sell shares is received, the share price used to fill the order is the next price calculated after the order is received in proper form.
For these 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 owned in that class.

73


In determining NAV, securities listed on an Exchange, the NASDAQ National Market and any foreign markets within the Western Hemisphere are valued at the closing prices on such markets, or if such price is lacking for the trading period immediately preceding the time of determination, such securities are valued at their current bid price.
Municipal securities held by the Funds are traded primarily in the over-the-counter market. Valuations of such securities are furnished by one or more pricing services employed by the Funds and are based upon appraisals obtained by a pricing service, in reliance upon information concerning market transactions and quotations from recognized municipal securities dealers.
Other securities that are traded on the over-the-counter market are valued at their closing bid prices. Each Fund will determine the market value of individual securities held by it, by using prices provided by one or more professional pricing services which may provide market prices to other funds, or, as needed, by obtaining market quotations from independent broker-dealers. Commercial paper maturing within 60 days are valued on an amortized cost basis. Securities for which quotations are not readily available, and other assets, are valued at fair value determined in good faith under procedures established by and under the supervision of the Board of Directors.
A Fund’s securities may be traded on foreign securities markets that close each day prior to the time the NYSE closes. In addition, foreign securities trading generally or in a particular country or countries may not take place on all business days in New York. The Fund has adopted policies and procedures to “fair value” some or all securities held by a 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 values of foreign securities used in computing share price are determined at the time the foreign market closes. Foreign securities and currencies are converted to U.S. dollars using the exchange rate in effect at the close of the NYSE. Occasionally, events affecting the value of foreign securities occur when the foreign market is closed and the NYSE is open. The NAV of a Fund investing in foreign securities may change on days when shareholders are unable to purchase or redeem shares. If the Sub-Advisor believes that the market value is materially affected, the share price will be calculated using the policy adopted by the Fund.
Certain securities issued by companies in emerging market countries may have more than one quoted valuation at any point in time, sometimes referred to as a "local" price and a "premium" price. The premium price is often a negotiated price which may not consistently represent a price at which a specific transaction can be effected. It is the policy of the Funds to value such securities at prices at which it is expected those shares may be sold, and Principal or any Sub-Advisor is authorized to make such determinations subject to the oversight of the Board of Directors as may from time to time be necessary.
TAX CONSIDERATIONS
Qualification as a Regulated Investment Company
The Funds intend to qualify annually to be treated as regulated investment companies (RICs) under the Internal Revenue Code of 1986, as amended, (the IRC) by satisfying certain requirements prescribed by Subchapter M of the IRC. To qualify as RICs, the Funds must invest in assets which produce types of income specified in the IRC (Qualifying Income). Whether the income from derivatives, swaps, commodity-linked derivatives and other commodity/natural resource-related securities is Qualifying Income is unclear under current law. Accordingly, the Funds’ ability to invest in certain derivatives, swaps, commodity-linked derivatives and other commodity/natural resource-related securities may be restricted. Further, if the Funds do invest in these types of securities and the income is not determined to be Qualifying Income, it may cause such Fund to fail to qualify as a RIC under the IRC for a given year. If a Fund fails to qualify as a regulated investment company for a particular year, it will be liable for taxes, significantly reducing its distributions to shareholders and eliminating shareholders' ability to treat distributions (as long or short-term capital gains or qualifying dividends) of the Fund in the manner they were received by the Fund.
Futures Contracts and Options
As previously discussed, some of the Funds invest in futures contracts or options thereon, index options, or options traded on qualified exchanges. For federal income tax purposes, capital gains and losses on futures contracts or options thereon, index options or options traded on qualified exchanges are generally treated as 60% long-term and 40% short-term. In addition, the Funds must recognize any unrealized gains and losses on such positions held at the end of the fiscal year. A Fund may elect out of such tax treatment, however, for a futures or options position that is part of an "identified mixed straddle" such as a put option purchased with respect to a portfolio security. Gains and losses on futures and options included in an identified mixed straddle are considered 100% short-term and unrealized gains or losses on such positions are not realized at year-end. The straddle provisions of the Code may require the deferral of realized losses to the extent that a Fund has unrealized gains in certain offsetting positions at

74


the end of the fiscal year. The Code may also require recharacterization of all or a part of losses on certain offsetting positions from short-term to long-term, as well as adjustment of the holding periods of straddle positions.
International Funds
Some foreign securities purchased by the Funds may be subject to foreign withholding taxes that could reduce the yield on such securities. The amount of such foreign taxes is expected to be insignificant. Shareholders of the Funds that invest in foreign securities may be entitled to claim a credit or deduction with respect to foreign taxes. The Funds may from year to year make an election to pass through such taxes to shareholders. If such election is not made, any foreign taxes paid or accrued will represent an expense to each affected Fund that will reduce its investment company taxable income. Certain Funds may purchase securities of certain foreign corporations considered to be passive foreign investment companies by the Internal Revenue Service. In order to avoid taxes and interest that must be paid by the Funds if these instruments appreciate in value, the Funds may make various elections permitted by the tax laws. However, these elections could require that the Funds recognize additional taxable income, which in turn must be distributed. In addition, the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition of ordinary income and may affect the timing or amount of the Fund’s distributions.
Under the Foreign Account Tax Compliance Act (FATCA), a Fund will be required to withhold a 30% tax on (a) income dividends paid by the Fund after June 30, 2014, and (b) certain capital gain distributions and the proceeds arising from the sale of Fund shares paid by the Fund after Dec. 31, 2016, to certain foreign entities, referred to as foreign financial institutions or non-financial foreign entities, that fail to comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. A Fund may disclose the information that it receives from its shareholders to the IRS, non-U.S. taxing authorities or other parties as necessary to comply with FATCA. Withholding also may be required if a foreign entity that is a shareholder of a Fund fails to provide the Fund with appropriate certifications or other documentation concerning its status under FATCA.
Special Tax Considerations for the Opportunistic Municipal Fund (the “Municipal Fund”)
The Municipal Fund also intends to qualify to pay "exempt-interest dividends" to its shareholders. An exempt-interest dividend is that part of dividend distributions made by the Fund which consist of interest received by that Fund on tax-exempt municipal obligations. Shareholders incur no federal income taxes on exempt-interest dividends. However, these exempt-interest dividends may be taxable under state or local law. Fund shareholders that are corporations must include exempt-interest dividends in determining whether they are subject to the corporate alternative minimum tax. Exempt-interest dividends that derive from certain private activity bonds must be included by individuals as a preference item in determining whether they are subject to the alternative minimum tax. The Fund may also pay ordinary income dividends and distribute capital gains from time to time. Ordinary income dividends and distributions of capital gains, if any, are taxable for federal purposes.
If a shareholder receives an exempt-interest dividend with respect to shares of the Fund held for six months or less, then any loss on the sale or exchange of such shares, to the extent of the amount of such dividend, is disallowed. If a shareholder receives a capital gain dividend with respect to shares held for six months or less, then any loss on the sale or exchange of such shares is treated as a long term capital loss to the extent the loss exceeds any exempt-interest dividend received with respect to such shares, and is disallowed to the extent of such exempt-interest dividend.
Interest on indebtedness incurred or continued by a shareholder to purchase or carry shares of this Fund is not deductible. Furthermore, entities or persons who are "substantial users" (or related persons) under Section 147(a) of the Internal Revenue Code of facilities financed by private activity bonds should consult their tax advisors before purchasing shares of the Fund.
From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on municipal obligations. If legislation is enacted that eliminates or significantly reduces the availability of municipal obligations, it could adversely affect the ability of the Fund to continue to pursue its investment objectives and policies. In such event, the Fund would reevaluate its investment objectives and policies.
PORTFOLIO HOLDINGS DISCLOSURE
The portfolio holdings of the Real Estate Allocation Fund, and any other fund that is a fund of funds, are shares of underlying mutual funds; holdings of any fund of funds may be made available upon request. In addition, the Fund may publish month-end portfolio holdings information for each Fund’s portfolio on the www.principal.com website and on the www.principalfunds.com website on the thirteenth business day of the following month. The Funds may also occasionally publish information on the website relating to specific events, such as the impact of a natural disaster,

75


corporate debt default or similar events on portfolio holdings. The Funds may also occasionally publish information on the websites concerning the removal, addition or change in weightings of Underlying Funds in which the Real Estate Allocation, or other funds of funds invest. It is the Fund's policy to disclose only public information regarding portfolio holdings (i.e. information published on the website or filed with the SEC), except as described below.
Non-Specific Information. Under the Portfolio Holdings Disclosure Policy, the Funds may distribute non-specific information about the Funds and/or summary information about the Funds as requested. Such information will not identify any specific portfolio holding, but may reflect, among other things, the quality, character, or sector distribution of a Fund's holdings. This information may be made available at any time (or without delay).
Policy. The Fund and Principal have adopted a policy of disclosing non-public portfolio holdings information to third parties only to the extent required by federal law, and to the following third parties, so long as such third party has agreed, or is legally obligated, to maintain the confidentiality of the information and to refrain from using such information to engage in securities transactions:
1)
Daily to the Fund's portfolio pricing services, Interactive Data Corporation, J.J. Kenny, Standard & Poor’s Securities Evaluations, Inc., Markit Partners, and J.P. Morgan PricingDirect, Inc. to obtain prices for portfolio securities;
2)
Upon proper request to government regulatory agencies or to self-regulatory organizations;
3)
As needed to Ernst & Young LLP, the independent registered public accounting firm, in connection with the performance of the services provided by Ernst & Young LLP to the Fund;
4)
To the sub-advisers' proxy service providers (Automatic Data Processing, Glass Lewis & Co., and Institutional Shareholder Services (ISS)) to facilitate voting of proxies; and
5)
To the Fund's custodian, and tax service provider, The Bank of New York Mellon, in connection with the tax and custodial services it provides to the Fund.
The Fund is also permitted to enter into arrangements to disclose portfolio holdings to other third parties in connection with the performance of a legitimate business purpose if such third party agrees in writing to maintain the confidentiality of the information prior to the information being disclosed. Any such written agreement must be approved by an officer of the Fund, Principal or the Fund's sub-advisor. Approval must be based on a reasonable belief that disclosure to such other third party is in the best interests of the Fund's shareholders. If a conflict of interest is identified in connection with disclosure to any such third party, the Fund's or Principal's Chief Compliance Officer ("CCO") must approve such disclosure, in writing before it occurs. The Fund currently has disclosure agreements with the following:

76


Abel Noser
Infinit Outsourcing
Advent
Investment Company Institute (ICI)
Advent Custodial Data (ACD)
Iron Mountain
Barclays Capital
ITG
Barra
JPMorgan Worldwide Securities Services
Black Mountain Systems
LexisNexis
Bloomberg
Lipper
BNY/Mellon Analytical Solutions
Market WSO Services
Broadridge Financial Solutions, Inc.
Mathias & Carr
Brown Brothers Harriman
Misys International Banking Systems, Inc.
Charles River Development
Morningstar, Inc.
Charles River Systems, Inc.
Omgeo LLC
Citigroup Global Transaction Services
Principal Global Investors, LLC
Compliance Science
RR Donnelley and Sons
Confidential Shredding
Russell Implementation Services
Confluence Technologies
Security APL
Cortland Capital Market Services LLC
SEI Global Services, Inc.
Credit Suisse
State Street Bank & Trust
Diversified Information Technologies, Inc.
State Street Investment Management Solutions
Eagle Investment Systems Corp.
SunGard Investment Management Systems
Electra Information Systems
SunGard Personal Trading System
Electra Securities & Reconciliation System
SunGard/Protogent PTA
Eze Castle Software LLC
Syntel Inc.
FactSet Research Systems Inc.
TriOptima
Financial Recovery Technologies (FRT)
Wilshire
Financial Tracking Technologies LLC
Wolters Kluwer
Global Link - GTSS
Yield Book
Global Trading Analytics
Zeno Consulting Group
INDATA
 
Any agreement by which any Fund or any party acting on behalf of the Fund agrees to provide Fund portfolio information to a third party, other than a third party identified in the policy described above, must be approved prior to information being provided to the third party, unless the third party is a regulator or has a duty to maintain the confidentiality of such information and to refrain from using such information to engage in securities transactions. A written record of approval will be made by the person granting approval.
The Fund may also disclose to Edge, non-public portfolio holdings information relating to the underlying funds in which the SAM Portfolios may invest to facilitate Edge's management of the SAM Portfolios. Edge may use underlying fund portfolio holdings information of funds managed by unaffiliated advisory firms solely for the purpose of managing the SAM Portfolios.
The Fund may also disclose to PGI, non-public portfolio holdings information relating to the underlying funds in which the Principal LifeTime Funds may invest to facilitate PGI’s management of the Principal LifeTime Funds. PGI may use underlying fund portfolio holdings information of funds managed by unaffiliated advisory firms solely for the purpose of managing the Principal LifeTime Funds.
The Fund's non-public portfolio holdings information policy applies without variation to individual investors, institutional investors, intermediaries that distribute the Fund's shares, third party service providers, rating and ranking organizations, and affiliated persons of the Fund. Neither the Fund nor Principal nor any other party receive compensation in connection with the disclosure of Fund portfolio information. The Fund's CCO will periodically, but no less frequently than annually, review the Fund's portfolio holdings disclosure policy and recommend changes the CCO believes are appropriate, if any, to the Fund's Board of Directors. In addition, the Fund's Board of Directors must approve any change in the Fund's portfolio holdings disclosure policy that would expand the distribution of such information.
PROXY VOTING POLICIES AND PROCEDURES
The Board of Directors has delegated responsibility for decisions regarding proxy voting for securities held by each Fund to Principal or to that Fund's Sub-Advisor, as appropriate. Principal and each Sub-Advisor will vote such proxies in accordance with its proxy policies and procedures, which have been reviewed by the Board of Directors,

77


and which are found in Appendix C. Any material changes to the proxy policies and procedures will be submitted to the Board of Directors for approval.
The Real Estate Allocation Fund invests in shares of other Funds. Principal is authorized to vote proxies related to the underlying funds. If an underlying fund holds a shareholder meeting, in order to avoid any potential conflict of interest, Principal will vote shares of such fund on any proposal submitted to the funds' shareholders in the same proportion as the votes of other shareholders of the underlying fund.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30, 2014, is available, without charge, upon request, by calling 1-800-222-5852 or on the SEC website at http://www.sec.gov.
FINANCIAL STATEMENTS
The financial statements of the Fund at August 31, 2014, are incorporated herein by reference to the Fund’s most recent Annual Report to Shareholders filed with the SEC on Form N-CSR. The unaudited financial statements of the Fund at February 28, 2015 are also incorporated herein by reference from the Fund's most recent Semiannual Report to Shareholders filed with the SEC on Form N-CSR.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP (220 South Sixth Street, Suite 1400, Minneapolis, MN 55402), independent registered public accounting firm, is the independent registered public accounting firm for the Fund Complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The following list identifies shareholders who own more than 25% of the voting securities of the Fund as of June 4, 2015. It is presumed that a person who owns more than 25% of the voting securities of a fund controls the fund. A control person could control the outcome of proposals presented to shareholders for approval. The information is listed in alphabetical order by fund.
Fund
Percent
of
Ownership
Shareholder Name and Address
Jurisdiction
Under Which
Control Person is Organized
(when control
person is a
company)
Parent of Control
Person (when control
Person is a company)
BOND MARKET INDEX
27.79%
LIFETIME 2020 FUND
MARYLAND
PRINCIPAL FUNDS, INC.
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
 
 
711 HIGH ST
 
 
 
 
DES MOINES IA 50392-0001
 
 
CAPITAL SECURITIES
63.02%
FIRST CLEARING LLC
CALIFORNIA
WELLS FARGO &
 
 
SPECIAL CUSTODY ACCT FOR THE
 
COMPANY
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
 
 
2801 MARKET ST
 
 
 
 
SAINT LOUIS MO 63103-2523
 
 
CAPITAL SECURITIES
27.94%
MORGAN STANLEY SMITH BARNEY
DELAWARE
MORGAN STANLEY
 
 
HARBOR FINANCIAL CENTER
 
 
 
 
PLAZA 2 3RD FLOOR
 
 
 
 
JERSEY CITY NJ 07311
 
 
CREDIT OPPORTUNITIES
48.01%
PRINCIPAL LIFE INSURANCE CO CUST
IOWA
PRINCIPAL FINANCIAL
EXPLORER
 
IRA MICHAEL A HAAPALA
 
SERVICES, INC.(1)
 
 
11248 UTICA AVE S
 
 
 
 
MINNEAPOLIS MN 55437-3336
 
 

78


Fund
Percent
of
Ownership
Shareholder Name and Address
Jurisdiction
Under Which
Control Person is Organized
(when control
person is a
company)
Parent of Control
Person (when control
Person is a company)
CREDIT OPPORTUNITIES
25.37%
PRINCIPAL LIFE INSURANCE CO CUST
IOWA
PRINCIPAL FINANCIAL
EXPLORER
 
IRA MARY E MCTIE
 
SERVICES, INC.(1)
 
 
1282 119TH LN NW
 
 
 
 
MINNEAPOLIS MN 55448-2090
 
 
DYNAMIC HIGH YIELD
83.75%
NATIONAL FINANCIAL SERVICES LLC
DELAWARE
FIDELITY GLOBAL
EXPLORER
 
FOR THE EXCL BENE OF OUR
 
BROKERAGE GROUP, INC.
 
 
CUSTOMERS
 
a wholly owned subsidiary of
 
 
499 WASHINGTON BLVD
 
FMR, LLC
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
 
 
JERSEY CITY NJ 07310-2010
 
 
INTERNATIONAL EQUITY
37.09%
DIVERSIFIED GROWTH ACCOUNT
MARYLAND
PRINCIPAL FUNDS, INC.
INDEX
 
ATTN MUTUAL FUND ACCOUNTING H221
 
 
 
 
711 HIGH ST
 
 
 
 
DES MOINES IA 50392-0001
 
 
INTERNATIONAL EQUITY
34.14%
PRINCIPAL LIFE INSURANCE CO CUST
IOWA
PRINCIPAL FINANCIAL
INDEX
 
FBO PRINCIPAL FINANCIAL GROUP
 
SERVICES, INC.(1)
 
 
OMNIBUS WRAPPED
 
 
 
 
ATTN NPIO TRADE DESK
 
 
 
 
711 HIGH STREET G-012-S41
 
 
 
 
DES MOINES IA 50392-9992
 
 
INTERNATIONAL SMALL
48.61%
TD AMERITRADE INC FOR THE
NEBRASKA
TD AMERITRADE HOLDING
COMPANY
 
EXCLUSIVE BENEFIT OF OUR CLIENTS
 
CORPORATION
 
 
PO BOX 2226
 
 
 
 
OMAHA NE 68103-2226
 
 
OPPORTUNISTIC
64.13%
PERSHING LLC
NEW YORK
THE BANK OF NEW YORK
MUNICIPAL
 
1 PERSHING PLZ
 
MELLON
 
 
JERSEY CITY NJ 07399-0001
 
 
ORIGIN EMERGING
48.43%
DCGT AS TTEE AND/OR CUST
DELAWARE
DELAWARE CHARTER
MARKETS
 
FBO CHS CUSTOM TARGET DATE FUND
 
GUARANTEE AND TRUST
 
 
OF FUNDS SEP ACCTS
 
 
 
 
ATTN NPIO TRADE DESK
 
 
 
 
711 HIGH ST
 
 
 
 
DES MOINES IA 50392-0001
 
 
PREFERRED SECURITIES
26.60%
MLPF&S FOR THE SOLE BENEFIT OF ITS
DELAWARE
BANK OF AMERICA
 
 
CUSTOMERS
 
CORPORATION
 
 
ATTN FUND ADMINISTRATION
 
 
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
 
 
JACKSONVILLE FL 32246-6484
 
 
REAL ESTATE
34.95%
PERSHING LLC
NEW YORK
THE BANK OF NEW YORK
ALLOCATION
 
1 PERSHING PLZ
 
MELLON
 
 
JERSEY CITY NJ 07399-0001
 
 

79


Fund
Percent
of
Ownership
Shareholder Name and Address
Jurisdiction
Under Which
Control Person is Organized
(when control
person is a
company)
Parent of Control
Person (when control
Person is a company)
REAL ESTATE DEBT
46.95%
PRINCIPAL GLOBAL INVESTORS LLC
IOWA
PRINCIPAL FINANCIAL
INCOME
 
ATTN LAUREL RUETER G-016-N20
 
SERVICES, INC.(1)
 
 
801 GRAND AVE
 
 
 
 
DES MOINES IA 50309-8000
 
 
REAL ESTATE DEBT
27.51%
REAL ESTATE ALLOCATION FUND
MARYLAND
PRINCIPAL FUNDS, INC.
INCOME
 
ATTN MUTUAL FUND ACCOUNTING H221
 
 
 
 
711 HIGH ST
 
 
 
 
DES MOINES IA 50392-0001
 
 
(1) Principal Financial Group, Inc. is the parent of Principal Financial Services, Inc.; Principal Financial Services, Inc. is the parent of Principal Life Insurance Company and Principal Management Corporation; Principal Life Insurance Company is the parent of Principal Holding Company, LLC.
The Directors and Officers of the Fund, member companies of the Principal Financial Group, and certain other persons may purchase shares of the Funds without the payment of any sales charge. The sales charge is waived on these transactions because there are either no distribution costs or only minimal distribution costs associated with the transactions. For a description of the persons entitled to a waiver of sales charge in connection with their purchase of shares of the Funds, see the discussion of the waiver of sales charges under the caption "Choosing a Share Class and the Costs of Investing" in the prospectus for Classes A, C, J, P, Institutional, R-1, R-2, R-3, R-4, R-5, R-6, and S shares.
The Principal LifeTime Funds, SAM Portfolios, or Principal Life Insurance Company will vote in the same proportion as shares of the Funds owned by other shareholders. Therefore, neither the Principal LifeTime Funds, SAM Portfolios nor Principal Life Insurance Company exercise voting discretion.
The By-laws of the Fund sets the quorum requirement (a quorum must be present at a meeting of shareholders for business to be transacted). The By-laws of the Fund states that a quorum is "The presence in person or by proxy of one-third of the shares of each Fund outstanding at the close of business on the Record Date constitutes a quorum for a meeting of that Fund."
Certain proposals presented to shareholders for approval require the vote of a "majority of the outstanding voting securities," which is a term defined in the 1940 Act to mean, with respect to a Fund, the affirmative vote of the lesser of 1) 67% or more of the voting securities of the Fund present at the meeting of that Fund, if the holders of more than 50% of the outstanding voting securities of the Fund are present in person or by proxy, or 2) more than 50% of the outstanding voting securities of the Fund (a "Majority of the Outstanding Voting Securities").

80


Principal Holders of Securities
The Fund is unaware of any persons who own beneficially (but are not shareholders of record) more than 5% of the Fund's outstanding shares. The following list identifies the shareholders of record who own 5% or more of any class of the Fund's outstanding shares as June 4, 2015. The list is presented in alphabetical order by fund.
Fund/Class
Percentage of Ownership
Name and Address of Owner
BLUE CHIP (A)
47.70%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
BLUE CHIP (C)
56.71%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
BLUE CHIP (C)
5.37%
STIFEL NICOLAUS & CO INC
 
 
EXCLUSIVE BENEFIT OF CUSTOMERS
 
 
501 N BROADWAY
 
 
SAINT LOUIS MO 63102-2188
BLUE CHIP (I)
20.75%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BLUE CHIP (I)
21.31%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BLUE CHIP (I)
17.63%
SAM BALANCED PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BLUE CHIP (I)
14.94%
SAM CONS GROWTH PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BLUE CHIP (I)
6.22%
LIFETIME 2025 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BLUE CHIP (P)
34.77%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
BLUE CHIP (P)
36.48%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
BLUE CHIP (P)
19.59%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523

81


Fund/Class
Percentage of Ownership
Name and Address of Owner
BOND MARKET INDEX (I)
8.98%
LIFETIME 2010 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
30.14%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
8.76%
LIFETIME 2040 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
6.09%
LIFETIME STRATEGIC INCOME FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
22.82%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
5.05%
LIFETIME 2015 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (I)
6.79%
LIFETIME 2025 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (R1)
10.37%
MG TRUST COMPANY CUST FBO
 
 
SPECIAL DISTRICTS ASSOCIATION 401(K
 
 
717 17TH STREET, SUITE 1300
 
 
DENVER CO 80202-3304
BOND MARKET INDEX (R1)
84.55%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (R2)
99.28%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

82


Fund/Class
Percentage of Ownership
Name and Address of Owner
BOND MARKET INDEX (R3)
86.51%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (R4)
69.21%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (R4)
16.11%
DELAWARE CHARTER GUAR & TRUST CO
 
 
FBO PRINCIPAL TRUST CO RETIREE
 
 
HEALTH BENEFIT PLAN OFTHE RESEARCH
 
 
ORGANIZATIONS RETIREE MEDICAL TR
 
 
1013 CENTRE RD
 
 
WILMINGTON DE 19805-1298
BOND MARKET INDEX (R4)
10.94%
DELAWARE CHARTER GUAR & TRUST CO
 
 
FBO PRINCIPAL TRUST COMPANY
 
 
SPARTAN SHOPS INC RETIREE HEALTH
 
 
BENEFIT PLAN VEBA
 
 
1013 CENTRE RD
 
 
WILMINGTON DE 19805-1298
BOND MARKET INDEX (R5)
37.65%
DCGT AS TTEE AND/OR CUST
 
 
FBO SUPERIOR OFFICERS COUNCIL CUST INV FOF
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
BOND MARKET INDEX (R5)
49.81%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
CAPITAL SECURITIES (S)
27.94%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
CAPITAL SECURITIES (S)
63.02%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
CAPITAL SECURITIES (S)
9.03%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484

83


Fund/Class
Percentage of Ownership
Name and Address of Owner
CREDIT OPPORTUNITIES EXPLORER
7.14%
PRINCIPAL LIFE INS CO CUST ROTH IRA
(A)
 
PAUL MAHLER
 
 
88 OBRE RD
 
 
COLTS NECK NJ 07722-1811
CREDIT OPPORTUNITIES EXPLORER
7.14%
PRINCIPAL LIFE INS CO CUST ROTH IRA
(A)
 
ELS-MARI MAHLER
 
 
88 OBRE RD
 
 
COLTS NECK NJ 07722-1811
CREDIT OPPORTUNITIES EXPLORER
48.01%
PRINCIPAL LIFE INSURANCE CO CUST
(A)
 
IRA MICHAEL A HAAPALA
 
 
11248 UTICA AVE S
 
 
MINNEAPOLIS MN 55437-3336
CREDIT OPPORTUNITIES EXPLORER
25.37%
PRINCIPAL LIFE INSURANCE CO CUST
(A)
 
IRA MARY E MCTIE
 
 
1282 119TH LN NW
 
 
MINNEAPOLIS MN 55448-2090
DIVERSIFIED REAL ASSET (A)
16.06%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
DIVERSIFIED REAL ASSET (A)
14.90%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
DIVERSIFIED REAL ASSET (A)
16.89%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
DIVERSIFIED REAL ASSET (A)
10.13%
CHARLES SCHWAB & CO INC
 
 
SPECIAL CUSTODY A/C FBO CUSTOMERS
 
 
ATTN MUTUAL FUNDS
 
 
101 MONTGOMERY ST
 
 
SAN FRANCISCO CA 94104-4151
DIVERSIFIED REAL ASSET (A)
5.12%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484
DIVERSIFIED REAL ASSET (C)
6.05%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
DIVERSIFIED REAL ASSET (C)
8.64%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010

84


Fund/Class
Percentage of Ownership
Name and Address of Owner
DIVERSIFIED REAL ASSET (C)
15.55%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
DIVERSIFIED REAL ASSET (C)
10.96%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
DIVERSIFIED REAL ASSET (C)
14.48%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
DIVERSIFIED REAL ASSET (C)
17.70%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484
DIVERSIFIED REAL ASSET (I)
8.58%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
DIVERSIFIED REAL ASSET (I)
8.55%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
DIVERSIFIED REAL ASSET (I)
13.84%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
FBO PRINCIPAL FINANCIAL GROUP
 
 
OMNIBUS WRAPPED
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH STREET G-012-S41
 
 
DES MOINES IA 50392-9992
DIVERSIFIED REAL ASSET (I)
12.77%
CHARLES SCHWAB & CO INC
 
 
SPECIAL CUSTODY A/C FOR THE
 
 
BENEFIT OF CUSTOMERS
 
 
ATTN MUTUAL FUNDS
 
 
101 MONTGOMERY ST
 
 
SAN FRANCISCO CA 94104-4151
DIVERSIFIED REAL ASSET (P)
65.79%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
DIVERSIFIED REAL ASSET (P)
9.82%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523

85


Fund/Class
Percentage of Ownership
Name and Address of Owner
DIVERSIFIED REAL ASSET (P)
5.82%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
DIVERSIFIED REAL ASSET (P)
9.70%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484
DIVERSIFIED REAL ASSET (R6)
100.00%
PRINCIPAL MANAGEMENT CORPORATION
 
 
PRINCIPAL FINANCIAL GROUP
 
 
ATTN: SUBSIDIARY ACCOUNT N002-E020
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-9992
DYNAMIC HIGH YIELD EXPLORER (A)
83.75%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
GLOBAL MULTI-STRATEGY (A)
47.63%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
GLOBAL MULTI-STRATEGY (A)
9.17%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
GLOBAL MULTI-STRATEGY (A)
8.06%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
GLOBAL MULTI-STRATEGY (A)
5.32%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
GLOBAL MULTI-STRATEGY (A)
5.16%
RBC CAPITAL MARKETS LLC
 
 
MUTUAL FUND OMNIBUS PROCESSING OMNIBUS
 
 
ATTN MUTUAL FUND OPS MANAGER
 
 
510 MARQUETTE AVE S
 
 
MINNEAPOLIS MN 55402-1110
GLOBAL MULTI-STRATEGY (C)
9.19%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311

86


Fund/Class
Percentage of Ownership
Name and Address of Owner
GLOBAL MULTI-STRATEGY (C)
5.43%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
GLOBAL MULTI-STRATEGY (C)
13.23%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
GLOBAL MULTI-STRATEGY (C)
20.53%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
GLOBAL MULTI-STRATEGY (C)
12.68%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
GLOBAL MULTI-STRATEGY (C)
12.35%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484
GLOBAL MULTI-STRATEGY (I)
7.60%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL MULTI-STRATEGY (I)
7.68%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL MULTI-STRATEGY (I)
14.13%
SAM BALANCED PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL MULTI-STRATEGY (I)
12.24%
SAM CONS GROWTH PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL MULTI-STRATEGY (I)
5.99%
SAM STRATEGIC GROWTH PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

87


Fund/Class
Percentage of Ownership
Name and Address of Owner
GLOBAL MULTI-STRATEGY (P)
11.04%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
GLOBAL MULTI-STRATEGY (P)
5.43%
STIFEL NICOLAUS & CO INC
 
 
EXCLUSIVE BENEFIT OF CUSTOMERS
 
 
501 N BROADWAY
 
 
SAINT LOUIS MO 63102-2188
GLOBAL MULTI-STRATEGY (P)
34.24%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
GLOBAL MULTI-STRATEGY (P)
7.45%
RBC CAPITAL MARKETS LLC
 
 
MUTUAL FUND OMNIBUS PROCESSING OMNIBUS
 
 
ATTN MUTUAL FUND OPS MANAGER
 
 
510 MARQUETTE AVE S
 
 
MINNEAPOLIS MN 55402-1110
GLOBAL MULTI-STRATEGY (P)
6.09%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
GLOBAL MULTI-STRATEGY (P)
27.77%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484
GLOBAL OPPORTUNITIES (A)
32.46%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
GLOBAL OPPORTUNITIES (C)
48.72%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
GLOBAL OPPORTUNITIES (C)
25.66%
STIFEL NICOLAUS & CO INC
 
 
EXCLUSIVE BENEFIT OF CUSTOMERS
 
 
501 N BROADWAY
 
 
SAINT LOUIS MO 63102-2188
GLOBAL OPPORTUNITIES (I)
24.08%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

88


Fund/Class
Percentage of Ownership
Name and Address of Owner
GLOBAL OPPORTUNITIES (I)
18.49%
LIFETIME 2040 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL OPPORTUNITIES (I)
10.97%
LIFETIME 2050 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL OPPORTUNITIES (I)
24.52%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL OPPORTUNITIES (I)
5.32%
LIFETIME 2025 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
GLOBAL OPPORTUNITIES (P)
90.70%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
INTERNATIONAL EQUITY INDEX (I)
37.29%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
FBO PRINCIPAL FINANCIAL GROUP
 
 
OMNIBUS WRAPPED
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH STREET G-012-S41
 
 
DES MOINES IA 50392-9992
INTERNATIONAL EQUITY INDEX (I)
5.71%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (I)
40.51%
DIVERSIFIED GROWTH ACCOUNT
 
 
ATTN MUTUAL FUND ACCOUNTING H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (I)
9.54%
DIVERSIFIED BALANCED ACCOUNT
 
 
ATTN MUTUAL FUND ACCOUNTING H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (R1)
57.85%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

89


Fund/Class
Percentage of Ownership
Name and Address of Owner
INTERNATIONAL EQUITY INDEX (R1)
19.50%
STATE STREET BANK TTEE CUST
 
 
FBO ACCESS ADP 401(K) PLAN
 
 
1 LINCOLN ST
 
 
BOSTON MA 02111-2900
INTERNATIONAL EQUITY INDEX (R2)
15.40%
MID ATLANTIC TRUST COMPANY FBO
 
 
RAPHAELSON AND LEVINE LAW FIRM
 
 
401(K) PROFIT SHARING PLAN & TRUST
 
 
1251 WATERFRONT PLACE SUITE 525
 
 
PITTSBURGH PA 15222-4228
INTERNATIONAL EQUITY INDEX (R2)
83.92%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (R3)
78.25%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (R4)
78.29%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
INTERNATIONAL EQUITY INDEX (R4)
7.74%
WACHOVIA BANK NATIONAL ASSOCIATION
 
 
FBO DEF COMP PLAN OF CED INC (PS DEF)
 
 
ATTN SHELLEY ANDERSON
 
 
ONE WEST FOURTH STREET
 
 
WINSTON SALEM NC 27101-3818
INTERNATIONAL EQUITY INDEX (R5)
6.79%
NFS LLC FEBO
 
 
BANKERS TRUST COMPANY
 
 
PO BOX 897
 
 
DES MOINES IA 50306-0897
INTERNATIONAL EQUITY INDEX (R5)
16.12%
JPMORGAN CHASE AS TRUSTEE FBO
 
 
GLOBAL BRASS AND COPPER INC RETIR
 
 
SAVINGS PLAN
 
 
11500 OUTLOOK ST
 
 
OVERLAND PARK KS 66211-1804
INTERNATIONAL EQUITY INDEX (R5)
72.45%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

90


Fund/Class
Percentage of Ownership
Name and Address of Owner
INTERNATIONAL SMALL COMPANY (A)
16.89%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
INTERNATIONAL SMALL COMPANY (A)
8.42%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA JAMES R ADAMEC
 
 
82 WOODSTONE DR
 
 
MARION NC 28752-7315
INTERNATIONAL SMALL COMPANY (A)
10.20%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA JOHN H FORLANO
 
 
23 HILLTOP LN
 
 
MANORVILLE NY 11949-2935
INTERNATIONAL SMALL COMPANY (I)
11.44%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
INTERNATIONAL SMALL COMPANY (I)
81.50%
TD AMERITRADE INC FOR THE
 
 
EXCLUSIVE BENEFIT OF OUR CLIENTS
 
 
PO BOX 2226
 
 
OMAHA NE 68103-2226
INTERNATIONAL SMALL COMPANY (I)
6.42%
PRINCIPAL GLOBAL INVESTORS LLC
 
 
ATTN LAUREL RUETER G-016-N20
 
 
801 GRAND AVE
 
 
DES MOINES IA 50309-8000
INTERNATIONAL SMALL COMPANY (P)
99.42%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
OPPORTUNISTIC MUNICIPAL (A)
65.18%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
OPPORTUNISTIC MUNICIPAL (C)
15.41%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
OPPORTUNISTIC MUNICIPAL (C)
37.53%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
OPPORTUNISTIC MUNICIPAL (C)
7.31%
U S BANCORP INVESTMENTS INC
 
 
FBO 101034221
 
 
60 LIVINGSTON AVENUE
 
 
ST PAUL MN 55107-2292

91


Fund/Class
Percentage of Ownership
Name and Address of Owner
OPPORTUNISTIC MUNICIPAL (C)
9.49%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
OPPORTUNISTIC MUNICIPAL (I)
100.00%
PRINCIPAL MANAGEMENT CORPORATION
 
 
PRINCIPAL FINANCIAL GROUP
 
 
ATTN: SUBSIDIARY ACCOUNT N002-E020
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-9992
OPPORTUNISTIC MUNICIPAL (P)
10.32%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
OPPORTUNISTIC MUNICIPAL (P)
72.79%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
OPPORTUNISTIC MUNICIPAL (P)
9.82%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
OPPORTUNISTIC MUNICIPAL (P)
6.54%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
ORIGIN EMERGING MARKETS (A)
8.21%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
SEP IRA JAMES C GANTHER JR
 
 
2930 7TH ST
 
 
EAU CLAIRE WI 54703-1523
ORIGIN EMERGING MARKETS (A)
6.56%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA PRATIMA BANDLA
 
 
442 E MIDLAKE DR
 
 
DRAPER UT 84020-7828
ORIGIN EMERGING MARKETS (A)
10.15%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA R/O MICHAEL D COSTABILE
 
 
4205 N FORK RD
 
 
EUREKA MO 63025-2306

92


Fund/Class
Percentage of Ownership
Name and Address of Owner
ORIGIN EMERGING MARKETS (A)
47.17%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA KATHLEEN S HENSCH
 
 
7809 HIDDEN LAKE DRIVE SE
 
 
HUDONSVILLE MI 48426
ORIGIN EMERGING MARKETS (I)
8.23%
LIFETIME 2020 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
10.17%
LIFETIME 2040 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
7.05%
LIFETIME 2050 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
14.59%
LIFETIME 2030 FUND
 
 
ATTN MUTUAL FUND ACCOUNTING-H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
7.97%
FBO CHS CUSTOM TARGET DATE FUND OF
 
 
FUNDS SEP ACCTS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
5.90%
DCGT AS TTEE AND/OR CUST
 
 
FBO PRINCIPAL TRUST CO CITS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
5.60%
DCGT AS TTEE AND/OR CUST
 
 
FBO PRINCIPAL TRUST CO CITS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
ORIGIN EMERGING MARKETS (I)
7.82%
DCGT AS TTEE AND/OR CUST
 
 
FBO PRINCIPAL TRUST CO CITS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001

93


Fund/Class
Percentage of Ownership
Name and Address of Owner
ORIGIN EMERGING MARKETS (I)
6.06%
DCGT AS TTEE AND/OR CUST
 
 
FBO PRINCIPAL TRUST CO CITS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (A)
5.27%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
PREFERRED SECURITIES (A)
7.10%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
PREFERRED SECURITIES (A)
16.32%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
PREFERRED SECURITIES (A)
9.89%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
PREFERRED SECURITIES (A)
9.56%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
PREFERRED SECURITIES (A)
5.22%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
PREFERRED SECURITIES (A)
10.16%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484
PREFERRED SECURITIES (A)
10.47%
CHARLES SCHWAB & CO INC
 
 
SPECIAL CUSTODY A/C FOR THE
 
 
BENEFIT OF CUSTOMERS
 
 
ATTN MUTUAL FUNDS
 
 
101 MONTGOMERY ST
 
 
SAN FRANCISCO CA 94104-4151

94


Fund/Class
Percentage of Ownership
Name and Address of Owner
PREFERRED SECURITIES (C)
13.90%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
PREFERRED SECURITIES (C)
5.20%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
PREFERRED SECURITIES (C)
14.68%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
PREFERRED SECURITIES (C)
11.09%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
PREFERRED SECURITIES (C)
30.12%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484
PREFERRED SECURITIES (I)
11.86%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
PREFERRED SECURITIES (I)
5.07%
PRINCIPAL LIFE INSURANCE CO
 
 
FBO PRINCIPAL FINANCIAL GROUP
 
 
ATTN: RIS NPIO TRADE DESK
 
 
711 HIGH STREET
 
 
DES MOINES IA 50392-9992
PREFERRED SECURITIES (I)
13.41%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
PREFERRED SECURITIES (I)
18.54%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484

95


Fund/Class
Percentage of Ownership
Name and Address of Owner
PREFERRED SECURITIES (P)
14.29%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
PREFERRED SECURITIES (P)
12.55%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
PREFERRED SECURITIES (P)
18.95%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
PREFERRED SECURITIES (P)
45.61%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484
PREFERRED SECURITIES (R1)
80.05%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (R1)
7.10%
FIIOC FBO
 
 
SUTTON ORTHOPAEDICS & SPORTS
 
 
MEDICINE PC 401K PROFIT SHARING
 
 
100 MAGELLAN WAY
 
 
COVINGTON KY 41015-1987
PREFERRED SECURITIES (R2)
88.32%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (R2)
9.66%
GREAT-WEST TRUST COMPANY LLC TTEE F
 
 
EMPLOYEE BENEFITS CLIENTS 401K - FG
 
 
8515 E ORCHARD RD 2T2
 
 
GREENWOOD VILLAGE CO 80111-5002
PREFERRED SECURITIES (R3)
15.60%
PIMS/PRUDENTIAL RETIREMENT
 
 
AS NOMINEE FOR THE TTEE/CUST PL 765
 
 
ACME MONACO CORPORATION 401 K
 
 
PO BOX 264
 
 
PLAINVILLE CT 06062-0264

96


Fund/Class
Percentage of Ownership
Name and Address of Owner
PREFERRED SECURITIES (R3)
71.33%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (R4)
47.10%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (R4)
47.41%
INTERACTIVE BROKERS LLC
 
 
2 PICKWICK PLZ STE 202
 
 
GREENWICH CT 06830-5576
PREFERRED SECURITIES (R5)
56.43%
DCGT AS TTEE AND/OR CUST
 
 
FBO PLIC VARIOUS RETIREMENT PLANS OMNIBUS
 
 
ATTN NPIO TRADE DESK
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
PREFERRED SECURITIES (R5)
6.27%
MG TRUST COMPANY CUST
 
 
FBO CONDLEY & COMPANY
 
 
717 17TH ST STE 1300
 
 
DENVER CO 80202-3304
PREFERRED SECURITIES (R5)
22.81%
VANGUARD FIDUCIARY TRUST CO
 
 
FBO 401K CLIENTS
 
 
ATTN INVESTMENT SERVICES
 
 
PO BOX 2600
 
 
VALLEY FORGE PA 19482-2600
REAL ESTATE ALLOCATION (A)
8.01%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
REAL ESTATE ALLOCATION (A)
36.29%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
REAL ESTATE ALLOCATION (A)
5.61%
HARLEY D ALBERS
 
 
PO BOX 563
 
 
HUTCHINSON MN 55350-0563
REAL ESTATE ALLOCATION (A)
7.54%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA MAURICE C TRENT
 
 
83421 HIGHWAY 101
 
 
FLORENCE OR 97439-8358

97


Fund/Class
Percentage of Ownership
Name and Address of Owner
REAL ESTATE ALLOCATION (A)
15.01%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
IRA THOMAS A PAYN
 
 
1070 BAY ST APT 22
 
 
FLORENCE OR 97439-9326
REAL ESTATE ALLOCATION (I)
100.00%
PRINCIPAL MANAGEMENT CORPORATION
 
 
PRINCIPAL FINANCIAL GROUP
 
 
ATTN: SUBSIDIARY ACCOUNT N002-E020
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-9992
REAL ESTATE DEBT INCOME (A)
7.62%
PRINCIPAL LIFE INSURANCE CO CUST
 
 
SEP IRA BRIAN K JENKS
 
 
11100 WAYZATA BLVD STE 405
 
 
MINNETONKA MN 55305-5533
REAL ESTATE DEBT INCOME (A)
77.40%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
REAL ESTATE DEBT INCOME (I)
63.05%
PRINCIPAL GLOBAL INVESTORS LLC
 
 
ATTN LAUREL RUETER G-016-N20
 
 
801 GRAND AVE
 
 
DES MOINES IA 50309-8000
REAL ESTATE DEBT INCOME (I)
36.94%
REAL ESTATE ALLOCATION FUND
 
 
ATTN MUTUAL FUND ACCOUNTING H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
SMALL-MIDCAP DIVIDEND INCOME (A)
8.60%
NATIONAL FINANCIAL SERVICES LLC
 
 
FOR THE EXCL BENE OF OUR CUSTOMERS
 
 
499 WASHINGTON BLVD
 
 
ATTN MUTUAL FUNDS DEPT 4TH FL
 
 
JERSEY CITY NJ 07310-2010
SMALL-MIDCAP DIVIDEND INCOME (A)
19.32%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
SMALL-MIDCAP DIVIDEND INCOME (A)
6.09%
LPL FINANCIAL
 
 
OMNIBUS CUSTOMER ACCOUNT
 
 
ATTN MUTUAL FUND TRADING
 
 
4707 EXECUTIVE DR
 
 
SAN DIEGO CA 92121-3091
SMALL-MIDCAP DIVIDEND INCOME (A)
7.67%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523

98


Fund/Class
Percentage of Ownership
Name and Address of Owner
SMALL-MIDCAP DIVIDEND INCOME (A)
7.97%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
SMALL-MIDCAP DIVIDEND INCOME (A)
6.57%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR E FL 3
 
 
JACKSONVILLE FL 32246-6484
SMALL-MIDCAP DIVIDEND INCOME (C)
11.86%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
SMALL-MIDCAP DIVIDEND INCOME (C)
7.49%
PERSHING LLC
 
 
1 PERSHING PLZ
 
 
JERSEY CITY NJ 07399-0001
SMALL-MIDCAP DIVIDEND INCOME (C)
6.18%
STIFEL NICOLAUS & CO INC
 
 
EXCLUSIVE BENEFIT OF CUSTOMERS
 
 
501 N BROADWAY
 
 
SAINT LOUIS MO 63102-2188
SMALL-MIDCAP DIVIDEND INCOME (C)
14.76%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
SMALL-MIDCAP DIVIDEND INCOME (C)
17.35%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
SMALL-MIDCAP DIVIDEND INCOME (C)
10.73%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
SMALL-MIDCAP DIVIDEND INCOME (C)
12.18%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484

99


Fund/Class
Percentage of Ownership
Name and Address of Owner
SMALL-MIDCAP DIVIDEND INCOME (I)
35.18%
FIRST CLEARING LLC
 
 
SPECIAL CUSTODY ACCT FOR THE
 
 
EXCLUSIVE BENEFIT OF CUSTOMER
 
 
2801 MARKET ST
 
 
SAINT LOUIS MO 63103-2523
SMALL-MIDCAP DIVIDEND INCOME (I)
16.27%
SAM BALANCED PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING -H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
SMALL-MIDCAP DIVIDEND INCOME (I)
14.44%
SAM CONS GROWTH PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING -H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
SMALL-MIDCAP DIVIDEND INCOME (I)
10.85%
SAM FLEXIBLE INCOME PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING -H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
SMALL-MIDCAP DIVIDEND INCOME (I)
8.66%
SAM STRATEGIC GROWTH PORTFOLIO PIF
 
 
ATTN MUTUAL FUND ACCOUNTING -H221
 
 
711 HIGH ST
 
 
DES MOINES IA 50392-0001
SMALL-MIDCAP DIVIDEND INCOME (P)
7.66%
MORGAN STANLEY SMITH BARNEY
 
 
HARBOR FINANCIAL CENTER
 
 
PLAZA 2 3RD FLOOR
 
 
JERSEY CITY NJ 07311
SMALL-MIDCAP DIVIDEND INCOME (P)
29.04%
UBS WM USA
 
 
0O0 11011 6100
 
 
OMNI ACCOUNT M/F
 
 
ATTN DEPARTMENT MANAGER
 
 
1000 HARBOR BLVD 5TH FL
 
 
WEEHAWKEN NJ 07086-6761
SMALL-MIDCAP DIVIDEND INCOME (P)
45.96%
RAYMOND JAMES
 
 
OMNIBUS FOR MUTUAL FUNDS
 
 
HOUSE ACCT FIRM 92500015
 
 
ATTN: COURTNEY WALLER
 
 
880 CARILLON PKWY
 
 
ST PETERSBURG FL 33716-1102
SMALL-MIDCAP DIVIDEND INCOME (P)
7.65%
MLPF&S FOR THE SOLE
 
 
BENEFIT OF ITS CUSTOMERS
 
 
ATTN FUND ADMINISTRATION
 
 
4800 DEER LAKE DR EAST 3RD FL
 
 
JACKSONVILLE FL 32246-6484

100


Management Ownership
As of June 4, 2015, the Officers and Directors of the Fund as a group owned less than 1% of the outstanding shares of any Class of any of the Funds.
PORTFOLIO MANAGER DISCLOSURE
(as provided by the Investment Advisors)
This section contains information about portfolio managers and the other accounts they manage, their compensation, and their ownership of securities. The “Ownership of Securities” tables reflect the portfolio managers’ beneficial ownership, which means a direct or indirect pecuniary interest. For some portfolio managers, this includes beneficial ownership of fund shares through participation in an employee benefit program which invests in Principal Funds, Inc. For information about potential material conflicts of interest, see Brokerage Allocation and Other Practices - Allocation of Trades.
This section lists information about Principal Management Corporation’s portfolio managers first. Next, the section includes information about the sub-advisors’ portfolio managers alphabetically by sub-advisor.
Information in this section as of August 31, 2014, unless otherwise noted.
Advisor: Principal Management Corporation
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets of the
Accounts that base the Advisory
Fee on Performance
Jake S. Anonson: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
1
$9.7 billion
0
$0
Other pooled investment vehicles
1
$392.7 million
0
$0
Other accounts
0
$0
0
$0
Jessica S. Bush: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
1
$9.7 billion
0
$0
Other pooled investment vehicles
1
$392.7 million
0
$0
Other accounts
0
$0
0
$0
Marcus W. Dummer: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
1
$9.7 billion
0
$0
Other pooled investment vehicles
1
$392.7 million
0
$0
Other accounts
0
$0
0
$0
James W. Fennessey: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
39
$65.6 billion
0
$0
Other pooled investment vehicles
24
$12.3 billion
0
$0
Other accounts
0
$0
0
$0
Kelly A. Grossman: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
1
$9.7 billion
0
$0
Other pooled investment vehicles
1
$392.7 million
0
$0
Other accounts
0
$0
0
$0
Benjamin E. Rotenberg: Diversified Real Asset and Global Multi-Strategy Funds
 
 
 
 
Registered investment companies
1
$9.7 billion
0
$0
Other pooled investment vehicles
1
$392.7 million
0
$0
Other accounts
0
$0
0
$0

101


Compensation
Principal Management Corporation offers investment professionals a competitive compensation structure that is evaluated annually relative to other global asset management firms. The objectives are to align individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Contribution to our overall investment process is an important consideration as well. Sharing ideas, working effectively with team members and being a good corporate citizen are important components of our long-term success and are highly valued.
All employees of Principal, including portfolio managers, are eligible to participate in a 401(k) plan sponsored by Principal Financial Group. In addition, all employees are eligible to purchase Principal Financial Group stock through an employee stock purchase plan.
For Ms. Bush, Mr. Fennessey, and Ms. Grossman:
Compensation is comprised of base salary and variable incentive components. Variable incentive components are driven by company and individual performance. Fund performance is not directly taken into account when determining variable incentive. No part of salary, variable incentive, or retirement plan compensation is tied to asset levels.
These employees are eligible for a Defined Benefit or Cash Balance retirement plan and a Long Term Incentive Pay program.
For Mr. Anonson, Mr. Dummer, and Mr. Rotenberg:
Compensation is comprised of base salary and variable incentive components. Variable incentive components are driven by sales in specific channels. A portion of variable incentive is discretionary, based on a combination of business results and individual contributions. Fund performance is not directly taken into account when determining variable incentive. No part of salary, variable incentive, or retirement plan compensation is tied to asset levels.
These employees are eligible for a Defined Benefit or Cash Balance retirement plan and a Long Term Incentive Pay program.
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned
by the Portfolio Manager
Jake S. Anonson
Diversified Real Asset
$10,001 - $50,000
Jake S. Anonson
Global Multi-Strategy
$1 - $10,000
Jessica S. Bush
Diversified Real Asset
$1 - $10,000
Jessica S. Bush
Global Multi-Strategy
$1 - $10,000
Marcus W. Dummer
Diversified Real Asset
None
Marcus W. Dummer
Global Multi-Strategy
None
James W. Fennessey
Diversified Real Asset
None
James W. Fennessey
Global Multi-Strategy
None
Kelly A. Grossman
Diversified Real Asset
$1 - $10,000
Kelly A. Grossman
Global Multi-Strategy
$1 - $10,000
Benjamin E. Rotenberg
Diversified Real Asset
None
Benjamin E. Rotenberg
Global Multi-Strategy
None

102


Sub-Advisor:
Edge Asset Management, Inc.
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets of the
Accounts that base the Advisory
Fee on Performance
Daniel R. Coleman: Small-MidCap Dividend Income and EDGE MidCap Funds*
 
 
 
 
Registered investment companies
5
$10.7 billion
0
$0
Other pooled investment vehicles
3
$128.2 million
0
$0
Other accounts
2
$710.3 million
0
$0
David W. Simpson: Small-MidCap Dividend Income Fund
 
 
 
 
Registered investment companies
2
$6.6 billion
0
$0
Other pooled investment vehicles
3
$127.3 million
0
$0
Other accounts
2
$567.0 million
0
$0
*Information as of 12/31/2014.
Compensation
Edge Asset Management offers a competitive compensation structure that is evaluated annually relative to other asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to offer market competitive compensation that aligns individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Compensation for all team members is comprised of base salary and variable incentive components. As team members advance in their careers, the variable component increases in its proportion commensurate with responsibility levels.
The variable component for investment professionals is designed to reinforce investment performance, firm performance, team collaboration, regulatory compliance, operational excellence, client retention and client satisfaction. Fund performance is measured against relative client benchmarks and peer groups over one year, three-year and five-year periods, calculated quarterly, reinforcing a longer term orientation.
Payments under the variable incentive plan are delivered in the form of cash or a combination of cash and deferred compensation.  The amount of incentive delivered in the form of deferred compensation depends on the size of an individual’s incentive award as it relates to a tiered deferral scale.  Deferred compensation is required to be invested into funds managed by the team, via a co-investment program; thus, aligning the interests of investment professionals with client objectives. Co-investment is subject to a three year cliff vesting schedule which meets our objective of increased employee retention.
In addition to base salary and variable incentive, portfolio managers and senior professionals participate in the Principal Financial Group Long-term Incentive Plan (“Plan”). Awards from this Plan are based on individual performance and are delivered in the form of three-year cliff vest Principal Financial Group (“PFG”) RSUs or a combination of three-year cliff vest PFG RSUs and three-year ratable vest PFG stock options; therefore, aligning the interests of team members with PFG stakeholders.
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned
by the Portfolio Manager
Daniel R. Coleman
EDGE MidCap
None
Daniel R. Coleman
Small-MidCap Dividend Income
$100,001 - $500,000
David W. Simpson
Small-MidCap Dividend Income
$500,001 - $1,000,000


103


Sub-Advisor:
Mellon Capital Management Corporation (“Mellon Capital”)
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets of the
Accounts that base the Advisory
Fee on Performance
David C. Kwan: Bond Market Index Fund
 
 
 
 
Registered investment companies
20
$9.9 billion
0
$0
Other pooled investment vehicles
45
$15.3 billion
0
$0
Other accounts
37
$24.0 billion
0
$0
Gregg Lee: Bond Market Index Fund
 
 
 
 
Registered investment companies
20
$9.9 billion
0
$0
Other pooled investment vehicles
45
$15.3 billion
0
$0
Other accounts
37
$24.0 billion
0
$0
Zandra Zelaya: Bond Market Index Fund
 
 
 
 
Registered investment companies
20
$9.9 billion
0
$0
Other pooled investment vehicles
45
$15.3 billion
0
$0
Other accounts
37
$24.0 billion
0
$0
Compensation
The primary objectives of the Mellon Capital compensation plans are to:
•
Motivate and reward superior investment and business performance
•
Motivate and reward continued growth and profitability
•
Attract and retain high-performing individuals critical to the on-going success of Mellon Capital
•
Create an ownership mentality for all plan participants
Cash compensation is comprised primarily of a market-based base salary and variable incentives (cash and deferred). Base salary is determined by the employees' experience and performance in the role, taking into account the ongoing compensation benchmark analyses. Base salary is generally a fixed amount that may change as a result of an annual review, upon assumption of new duties, or when a market adjustment of the position occurs. Funding for the Mellon Capital Annual and Long Term Incentive Plan is through a pre-determined fixed percentage of overall Mellon Capital profitability. Therefore, all bonus awards are based initially on Mellon Capital's financial performance. Annual incentive opportunities are pre-established for each individual, expressed as a percentage of base salary ("target awards"). These targets are derived based on a review of competitive market data for each position annually. Annual awards are determined by applying multiples to this target award. Awards are 100% discretionary. Factors considered in awards include individual performance, team performance, investment performance of the associated portfolio(s) (including both short and long term returns) and qualitative behavioral factors. Other factors considered in determining the award are the asset size and revenue growth/retention of the products managed (if applicable). Awards are paid partially in cash with the balance deferred through the Long Term Incentive Plan.
Participants in the Long Term Incentive Plan have a high level of accountability and a large impact on the success of the business due to the position's scope and overall responsibility. This plan provides for an annual award, payable in cash after a three-year cliff vesting period as well as a grant of BNY Mellon Restricted Stock for senior level roles.
Mellon Capital's Portfolio Managers responsible for managing mutual funds are paid by Mellon Capital and not by the mutual funds. The same methodology described above is used to determine Portfolio Manager compensation with respect to the management of mutual funds and other accounts. Mutual fund Portfolio Managers are also eligible for the standard retirement benefits and health and welfare benefits available to all Mellon Capital employees. Certain Portfolio Managers may be eligible for additional retirement benefits under several supplemental retirement plans that Mellon Capital provides to restore dollar-for-dollar the benefits of management employees that had been cut back solely as a result of certain limits due to the tax laws. These plans are structured to provide the same retirement benefits as the standard retirement benefits. In addition, mutual fund Portfolio Managers whose compensation exceeds certain limits may elect to defer a portion of their salary and/or bonus under The Bank of New York Mellon Corporation Deferred Compensation Plan for Employees.

104


Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned
by the Portfolio Manager
David C. Kwan
Bond Market Index
None
Gregg Lee
Bond Market Index
None
Zandra Zelaya
Bond Market Index
None


105


Sub-Advisor: Origin Asset Management LLP
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base
the Advisory
Fee on
Performance
Total Assets
of the
Accounts
that
base the
Advisory
Fee on
Performance
John Birkhold: Origin Emerging Markets Fund
 
 
 
 
Registered investment companies
1
$388.1 million
0
$0
Other pooled investment vehicles
6
$1.1 billion
3
$176.0 million
Other accounts
7
$1.9 billion
2
$846.9 million
Chris Carter: Origin Emerging Markets Fund
 
 
 
 
Registered investment companies
1
$388.1 million
0
$0
Other pooled investment vehicles
6
$1.1 billion
3
$176.0 million
Other accounts
7
$1.9 billion
2
$846.9 million
Nigel Dutson: Origin Emerging Markets Fund
 
 
 
 
Registered investment companies
1
$388.1 million
0
$0
Other pooled investment vehicles
6
$1.1 billion
3
$176.0 million
Other accounts
7
$1.9 billion
2
$846.9 million
Tarlock Randhawa: Origin Emerging Markets Fund
 
 
 
 
Registered investment companies
1
$388.1 million
0
$0
Other pooled investment vehicles
6
$1.1 billion
3
$176.0 million
Other accounts
7
$1.9 billion
2
$846.9 million
Nerys Weir: Origin Emerging Markets Fund
 
 
 
 
Registered investment companies
1
$388.1 million
0
$0
Other pooled investment vehicles
6
$1.1 billion
3
$176.0 million
Other accounts
7
$1.9 billion
2
$846.9 million
Compensation
Origin Asset Management LLP offers investment professionals a competitive compensation structure that is evaluated relative to other asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to align team contributions in a manner that is consistent with industry standards and business results. Compensation of Origin's portfolio managers is formed of a competitive fixed salary and a share of a bonus pool which is a function of the annual profitability of the firm. Select members of the investment team further share in the firm’s profits based on their overall partner ownership.
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned by the Portfolio Manager
John Birkhold
Origin Emerging Markets
None
Chris Carter
Origin Emerging Markets
None
Nigel Dutson
Origin Emerging Markets
None
Tarlock Randhawa
Origin Emerging Markets
None
Nerys Weir
Origin Emerging Markets
None

106


Sub-Advisor: Principal Global Investors, LLC (“PGI”) (Equity Portfolio Managers)
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets of the
Accounts that base the Advisory
Fee on Performance
Christopher Ibach: Global Opportunities Fund
 
 
 
 
Registered Investment Companies
2
$1.2 billion
1
$11.0 million
Other pooled investment vehicles
0
$0
0
$0
Other accounts
10
$4.5 billion
2
$45.4 million
Thomas L. Kruchten: International Equity Index Fund
 
 
 
 
Registered Investment Companies
5
$8.3 billion
0
$0
Other pooled investment vehicles
3
$20.1 billion
0
$0
Other accounts
1
$128.7 million
0
$0
Tiffany N. Lavastida: International Small Company Fund
 
 
 
 
Registered investment companies
0
$0
0
$0
Other pooled investment vehicles
1
$917.1 million
0
$0
Other accounts
5
$3.4 billion
2
$204.8 million
Xiaoxi Li: Global Opportunities Fund
 
 
 
 
Registered investment companies
2
$1.2 billion
1
$11.0 million
Other pooled investment vehicles
0
$0
0
$0
Other accounts
9
$4.5 billion
2
$45.4 million
K. William Nolin: Blue Chip Fund
 
 
 
 
Registered Investment Companies
2
$9.6 billion
0
$0
Other pooled investment vehicles
4
$3.0 billion
0
$0
Other accounts
8
$103.5 million
0
$0
Brian W. Pattinson: International Small Company Fund
 
 
 
 
Registered investment companies
2
$592.0 million
0
$0
Other pooled investment vehicles
4
$2.0 billion
0
$0
Other accounts
5
$1.2 billion
3
$230.4 million
Tom Rozycki: Blue Chip Fund
 
 
 
 
Registered Investment Companies
2
$9.6 billion
0
$0
Other pooled investment vehicles
3
$2.1 billion
0
$0
Other accounts
8
$103.5 million
0
$0
Mustafa Sagun: Global Opportunities Fund
 
 
 
 
Registered Investment Companies
2
$1.2 billion
1
$11.0 million
Other pooled investment vehicles
2
$14.0 million
0
$0
Other accounts
12
$4.7 billion
3
$45.7 million
Compensation
Principal Global Investors offers investment professionals a competitive compensation structure that is evaluated annually relative to other global asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to align individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Compensation for equity investment professionals at all levels is comprised of base salary and variable incentive components. As team members advance in their careers, the variable component increases in its proportion commensurate with responsibility levels.

107


Variable compensation takes the form of a profit share plan with funding based on percentage of pre-tax, pre-bonus operating earnings of Principal Global Equities. The plan is designed to provide line-of-sight to investment professionals, enabling them to share in current and future business growth while reinforcing delivery of investment performance, collaboration, regulatory compliance, operational excellence, client retention and client satisfaction. The variable component is well aligned with client goals and objectives, with the largest determinant being investment performance relative to appropriate client benchmarks and peer groups. Relative performance metrics are measured over rolling one-year, three-year and five-year periods, calculated quarterly, reinforcing a longer term orientation. In addition to investment performance, other discretionary factors such as team and individual results also contribute to the quantum of incentive compensation. Discretionary compensation metrics are specifically aligned with the results of the Equities group. The structure is uniformly applied among all investment professionals, including portfolio managers, research analysts, traders and team leaders.
Payments under the variable incentive plan may be in the form of cash or a combination of cash and deferred compensation. The amount of variable compensation delivered in the form of deferred compensation depends on the size of an individual’s incentive award as it relates to a tiered deferral scale. Half of the deferred compensation is awarded in Principal Financial Group (“PFG”) restricted stock units and the other half is required to be invested into equity funds managed by the team, via a co-investment program. Both payment vehicles are subject to a three year vesting schedule.
All senior team members have substantial investments in funds managed by the group, including deferred compensation, retirement plans and direct personal investments. It should be noted that the Company’s retirement plans and deferred compensation plans generally utilize its non-registered group separate accounts or commingled vehicles rather than the traditional mutual funds. However, in each instance these vehicles are managed in lockstep alignment with the mutual funds (i.e. “clones”).
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned
by the Portfolio Manager
Christopher Ibach
Global Opportunities
None
Thomas L. Kruchten
International Equity Index
None
Tiffany N. Lavastida
International Small Company
None
Xiaoxi Li
Global Opportunities
None
K. William Nolin
Blue Chip
$100,001 - $500,000
Brian W. Pattinson
International Small Company
None
Tom Rozycki
Blue Chip
None
Mustafa Sagun
Global Opportunities
None

108


Sub-Advisor: Principal Global Investors, LLC (“PGI”) (Fixed-Income Portfolio Managers)
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets of the
Accounts that base the Advisory
Fee on Performance
William C. Armstrong - Credit Opportunities Explorer Fund
 
 
 
 
Registered Investment Companies
3
$3.5 billion
0
$0
Other pooled investment vehicles
5
$4.6 billion
0
$0
Other accounts
18
$6.6 billion
2
$892.6 million
Mark P. Denkinger - Dynamic High Yield Explorer Fund
 
 
 
 
Registered Investment Companies
1
$3.8 billion
0
$0
Other pooled investment vehicles
3
$73.4 million
0
$0
Other accounts
7
$566.6 million
2
$261.7 million
Jason Hahn - Dynamic High Yield Explorer Fund
 
 
 
 
Registered Investment Companies
0
$0
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
1
$10.1 million
0
$0
James Noble -  Opportunistic Municipal Fund
 
 
 
 
Registered Investment Companies
2
$430.2 million
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
1
$42.7 million
0
$0
Tina Paris - Credit Opportunities Explorer Fund
 
 
 
 
Registered Investment Companies
1
$79.6 million
0
$0
Other pooled investment vehicles
3
$912.2 million
0
$0
Other accounts
14
$6.4 billion
0
$0
Josh Rank - Dynamic High Yield Explorer Fund
 
 
 
 
Registered Investment Companies
0
$0
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
2
$143.9 million
1
$37.9 million
Darrin E. Smith - Dynamic High Yield Explorer Fund
 
 
 
 
Registered Investment Companies
1
$3.8 billion
0
$0
Other pooled investment vehicles
3
$73.4 million
0
$0
Other accounts
7
$566.6 million
2
$261.7 million
Darryl Trunnel - Credit Opportunities Explorer Fund
 
 
 
 
Registered Investment Companies
1
$79.6 million
0
$0
Other pooled investment vehicles
1
$47.3 million
0
$0
Other accounts
2
$89.2 million
0
$0
James Welch - Opportunistic Municipal Fund
 
 
 
 
Registered Investment Companies
2
$430.2 million
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
1
$42.7 million
0
$0
Compensation
Principal Global Investors offers investment professionals a competitive compensation structure that is evaluated annually relative to other global asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to align individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Compensation for fixed income investment professionals at all levels is comprised of base salary and variable incentive components. As team members advance in their careers, the variable component increases in its proportion commensurate with responsibility levels.

109


Variable compensation takes the form of a profit share plan with funding based on a percentage of pre-tax, pre-bonus operating earnings of Principal Global Fixed Income. The plan is designed to provide line-of-sight to investment professionals, enabling them to share in current and future business growth while reinforcing delivery of investment performance, collaboration, regulatory compliance, operational excellence, client retention and client satisfaction. The variable component is well aligned with client goals and objectives, with the largest determinant being investment performance relative to appropriate client benchmarks and peer groups. Relative performance metrics are measured over rolling one-year, three-year and five-year periods, calculated quarterly, reinforcing a longer term orientation. In addition to investment performance, other discretionary factors such as team and individual results also contribute to the quantum of incentive compensation. Discretionary compensation metrics are specifically aligned with the results of the Fixed Income group. The structure is uniformly applied among all investment professionals, including portfolio managers, research analysts, traders and team leaders.
Payments under the variable incentive plan may be in the form of cash or a combination of cash and deferred compensation. The amount of variable compensation delivered in the form of deferred compensation depends on the size of an individual’s incentive award as it relates to a tiered deferral scale. Half of the deferred compensation is awarded in Principal Financial Group (“PFG”) restricted stock units and the other half is required to be invested into fixed income funds managed by the team, via a co-investment program. Both payment vehicles are subject to a three year vesting schedule.
All senior team members have substantial investments in funds managed by the group, including deferred compensation, retirement plans and direct personal investments. It should be noted that the Company’s retirement plans and deferred compensation plans generally utilize its non-registered group separate accounts or commingled vehicles rather than the traditional mutual funds. However, in each instance these vehicles are managed in lockstep alignment with the mutual funds (i.e. “clones”).
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned
by the Portfolio Manager
William C. Armstrong
Credit Opportunities Explorer
None
Mark P. Denkinger
Dynamic High Yield Explorer
None
Jason Hahn
Dynamic High Yield Explorer
None
James Noble
Opportunistic Municipal
None
Tina Paris
Credit Opportunities Explorer
None
Josh Rank
Dynamic High Yield Explorer
None
Darrin E. Smith
Dynamic High Yield Explorer
None
Darryl Trunnel
Credit Opportunities Explorer
None
James Welch
Opportunistic Municipal
None


110


Sub-Advisor: Principal Real Estate Investors, LLC
Effective on August 31, 2015, in the section for Principal Real Estate Investors, LLC, delete references to Randall Mundt.
Other Accounts Managed
 
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base
the Advisory
Fee on
Performance
Total Assets
of the Accounts that base the
Advisory
Fee on
Performance
Scott M. Carson: Real Estate Debt Income Fund
 
 
 
 
Registered investment companies
0
$0
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
2
$375.9 million
0
$0
Indraneel ("Indy") Karlekar: Real Estate Allocation Fund
 
 
 
 
Registered investment companies
0
$0
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
0
$0
0
$0
Randall Mundt: Real Estate Allocation Fund
 
 
 
 
Registered investment companies
0
$0
0
$0
Other pooled investment vehicles
0
$0
0
$0
Other accounts
0
$0
0
$0
Marc Peterson: Real Estate Allocation and Real Estate Debt Income Funds
 
 
 
 
Registered investment companies
0
$0
0
$0
Other pooled investment vehicles
3
$308.6 million
0
$0
Other accounts
11
$906.2 million
0
$0
Kelly D. Rush: Real Estate Allocation Fund
 
 
 
 
Registered investment companies
6
$6.6 billion
0
$0
Other pooled investment vehicles
4
$461.3 million
0
$0
Other accounts
19
$2.1 billion
1
$20.2 million
Compensation
Principal Real Estate Investors offers investment professionals a competitive compensation structure that is evaluated annually relative to other global asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to align individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Compensation for real estate investment professionals at all levels is comprised of base salary and variable incentive components. As team members advance in their careers, the variable component increases in its proportion commensurate with responsibility levels.
Variable compensation takes the form of a profit share plan with funding based on a percentage of pre-tax, pre-bonus operating earnings of the boutique (e.g. REIT, CMBS). The plan is designed to provide line-of-sight to investment professionals, enabling them to share in current and future business growth while reinforcing delivery of investment performance, collaboration, regulatory compliance, operational excellence, client retention and client satisfaction. The variable component is well aligned with client goals and objectives, with the largest determinant being investment performance relative to appropriate client benchmarks and peer groups. Relative performance metrics are measured over rolling one-year and three-year periods, calculated quarterly, reinforcing a longer term orientation. In addition to investment performance, other discretionary factors such as team and individual results also contribute to the quantum of incentive compensation. Discretionary compensation metrics are specifically aligned with the results of the Real Estate group. The structure is uniformly applied among all investment professionals, including portfolio managers, research analysts, traders and team leaders.

111


Payments under the variable incentive plan may be in the form of cash or a combination of cash and deferred compensation. The amount of variable compensation delivered in the form of deferred compensation depends on the size of an individual’s incentive award as it relates to a tiered deferral scale. Half of the deferred compensation is awarded in Principal Financial Group (“PFG”) restricted stock units and the other half is required to be invested into funds managed by the team, via a co-investment program. Both payment vehicles are subject to a three year vesting schedule.
All senior team members have substantial investments in funds managed by the group, including deferred compensation, retirement plans and direct personal investments. It should be noted that the Company’s retirement plans and deferred compensation plans generally utilize its non-registered group separate accounts or commingled vehicles rather than the traditional mutual funds. However, in each instance these vehicles are managed in lockstep alignment with the mutual funds (i.e. “clones”).
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned by the Portfolio Manager
Scott M.Carson
Real Estate Debt Income
None
Indraneel ("Indy") Karlekar
Real Estate Allocation
None
Randall Mundt
Real Estate Allocation
None
Marc Peterson
Real Estate Allocation
None
Marc Peterson
Real Estate Debt Income
None
Kelly D. Rush
Real Estate Allocation
None

112


Sub-Advisor:
Spectrum Asset Management, Inc.
Other Accounts Managed
 
Total
Number
of Accounts
Total Assets
in the
Accounts
Number of
Accounts
that base the
Advisory Fee on
Performance
Total Assets
of the
Accounts that base the Advisory
Fee on Performance
Fernando ("Fred") Diaz: Capital Securities and Preferred Securities Funds
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
54
$5.1 billion
0
$0
Roberto Giangregorio: Capital Securities and Preferred Securities Funds
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
53
$5.1 billion
0
$0
L. Phillip Jacoby, IV: Capital Securities and Preferred Securities Funds
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
62
$5.1 billion
0
$0
Manu Krishnan: Capital Securities and Preferred Securities Funds
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
54
$5.1 billion
0
$0
Mark A. Lieb: Capital Securities and Preferred Securities Funds
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
61
$5.1 billion
0
$0
Kevin Nugent:  Preferred Securities Fund
 
 
 
 
Registered investment companies
6
$3.5 billion
0
$0
Other pooled investment vehicles
15
$3.7 billion
0
$0
Other accounts
54
$5.1 billion
0
$0
Compensation
Spectrum Asset Management offers investment professionals a competitive compensation structure that is evaluated relative to other asset management firms to ensure its continued competitiveness and alignment with industry best practices. The objective of the structure is to align individual and team contributions with client performance objectives in a manner that is consistent with industry standards and business results.
Compensation for investment professionals at all levels is comprised of base salary and variable incentive components. As team members advance in their careers, the variable component increases in its proportion commensurate with responsibility levels. The incentive component is aligned with performance and goals of the firm. Salaries are established based on a benchmark of salary levels of relevant asset management firms, taking into account each portfolio manager’s position and responsibilities, experience, contribution to client servicing, compliance with firm and/or regulatory policies and procedures, work ethic, seniority and length of service, and contribution to the overall functioning of the organization. Base salaries are fixed, but are subject to periodic adjustments, usually on an annual basis.

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The variable incentive is in the form of a discretionary bonus and may represent a significant proportion of an individual’s total annual compensation. Discretionary bonuses are determined quarterly and are based on a methodology used by senior management that takes into consideration several factors, including but not necessarily limited to those listed below:
•
Changes in overall firm assets under management, including those assets in the Fund. (Portfolio managers are not directly incentivized to increase assets (“AUM”), although they are indirectly compensated as a result of an increase in AUM)
•
Portfolio performance (on a pre-tax basis) relative to benchmarks measured annually. (The relevant benchmark is a custom benchmark composed of 50% Merrill Lynch Preferred Stock - Fixed Rate Index and 50% Barclays Securities US Tier 1 Index).
•
Contribution to client servicing
•
Compliance with firm and/or regulatory policies and procedures
•
Work ethic
•
Seniority and length of service
•
Contribution to overall functioning of organization
Ownership of Securities
Portfolio Manager
PFI Funds Managed by Portfolio Manager
Dollar Range of Securities Owned by the Portfolio Manager
Fernando ("Fred") Diaz
Capital Securities
None
Fernando ("Fred") Diaz
Preferred Securities
None
Roberto Giangregorio
Capital Securities
None
Roberto Giangregorio
Preferred Securities
None
L. Phillip Jacoby, IV
Capital Securities
None
L. Phillip Jacoby, IV
Preferred Securities
$100,001 - $500,000
Manu Krishnan
Capital Securities
None
Manu Krishnan
Preferred Securities
None
Mark A. Lieb
Capital Securities
None
Mark A. Lieb
Preferred Securities
$100,001 - $500,000
Kevin Nugent
Preferred Securities
None


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APPENDIX A
The following persons served on the Board of Governors of the Investment Company Institute during the last two most recently completed calendar years (2013-2014), during which time Karen (“Karrie”) McMillan served as an officer (General Counsel) of ICI (through February 2014):
Investment Adviser or Principal Underwriter/Control Person
Name of Officer
Company
Office Held at Company
Period of Service on ICI Board*
BlackRock Financial Management, Inc.
Paul L. Audet
BlackRock, Inc.
Senior Managing Director and Head of U.S. Mutual Funds
2012-present
Jennison Associates LLC
Judy Rice
Prudential Mutual Funds
Chairman
2003-2012
Jennison Associates LLC
Stuart S. Parker
Prudential Investments
President
2012-present
Loomis, Sayles & Company, L.P.
John T. Hailer
Natixis Global Asset Management, L.P.
President and CEO, U.S. and Asia
2009-present
Mellon Capital Management
Jonathan Baum
Bank of New York Mellon / Dreyfus Corporation
Chairman and CEO
2009-2013
PMC and affiliated sub-advisers identified as members of the Principal Financial Group in “Investment Advisory and Other Services”
Ralph C. Eucher
Principal Financial Group
Executive Vice President
2004-2012
PMC and affiliated sub-advisers identified as members of the Principal Financial Group in “Investment Advisory and Other Services”
Nora M. Everett
Principal Funds, Inc.
President and CEO
2012-present
Symphony Asset Management LLC
Thomas S. Schreier Jr.
Nuveen Investments
Vice Chairman, Wealth Management
2007-present
*
As of December 31, 2013


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APPENDIX B – 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.
Aaa:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A:
Obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa:
Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
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.
Caa:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
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 by 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 the likelihood of a default on contractually promised payments. 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.

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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 designed SG.
MIG 1 denotes superior credit quality, afforded excellent protection from established cash flows, reliable liquidity support, or 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 Standard & Poor's Corporation's Credit Ratings:
A Standard & Poor'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 obligors such as guarantors, insurers, or lessees.
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 Standard & Poor's from other sources Standard & Poor's considers reliable. Standard & Poor's 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 default - 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 Standard & Poor's. 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

117


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 meeting 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 Standard & Poor’s 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 Standard & Poor’s 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. This rating will also be used upon filing for bankruptcy petition or the taking or 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 Standard & Poor’s does not rate a particular type of obligation as a matter of policy.
SHORT-TERM CREDIT RATINGS: Short-Term credit ratings are forward-looking opinions of the likelihood of timely payment of obligations having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from ‘A-1’ for the highest quality obligations to ‘D’ for the lowest. Ratings are applicable to both taxable and tax-exempt commercial paper. The four categories are as follows:
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 protection parameters. 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.

118


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 Standard & Poor’s 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. This rating will also be used upon filing for bankruptcy petition or the taking or 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: Standard & Poor's 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.

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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.

120


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, 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.


121


APPENDIX C
Proxy Voting Policies
The proxy voting policies applicable to each Fund appear in the following order:
Principal’s proxy voting policy is first, followed by the Sub-Advisors, alphabetically.

122