PRINCIPAL FUNDS,
INC. ("PFI" or the "Fund")
Statement of
Additional Information
dated March 1, 2018
This Statement of Additional
Information (SAI) is not a prospectus. It contains information in addition to
the information in the Fund's prospectus. The 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 March 1, 2018 for the Class T shares.
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 October 31, 2017, 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/prospectuses.
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Ticker
Symbols by Share Class |
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Fund |
T |
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Global Diversified
Income |
PGKTX |
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High Yield |
PHRTX |
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Short-Term
Income |
PTDTX |
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TABLE OF
CONTENTS |
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FUND HISTORY |
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CLASS
STRUCTURE |
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DESCRIPTION OF THE FUNDS’
INVESTMENTS AND RISKS |
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LEADERSHIP STRUCTURE AND BOARD
OF DIRECTORS |
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INVESTMENT ADVISORY AND OTHER
SERVICES |
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INTERMEDIARY
COMPENSATION |
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BROKERAGE ALLOCATION AND OTHER
PRACTICES |
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PURCHASE AND REDEMPTION OF
SHARES |
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PRICING OF FUND
SHARES |
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TAX
CONSIDERATIONS |
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PORTFOLIO HOLDINGS
DISCLOSURE |
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PROXY VOTING POLICIES AND
PROCEDURES |
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FINANCIAL
STATEMENTS |
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INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM |
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CONTROL PERSONS AND PRINCIPAL
HOLDERS OF SECURITIES |
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PORTFOLIO MANAGER
DISCLOSURE |
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APPENDIX A – DESCRIPTION OF
BOND RATINGS |
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APPENDIX B – PRICE MAKE UP
SHEET |
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APPENDIX C – PROXY VOTING
POLICIES |
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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.
The following Funds offer Class T
shares: Global Diversified Income, High Yield, and Short-Term Income.
The Funds offer multiple share
classes. 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 Global Investors, LLC
("PGI" or the "Manager") may recommend to the Board of Directors (the "Board"),
and the Board may elect, to close certain funds to new investors or close
certain funds to new and existing investors. PGI 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. PGI may also recommend to the Board, and the Board may
elect, to close certain share classes to new or new and existing
investors.
CLASS
STRUCTURE
Class T shares are offered pursuant
to this SAI.
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 fees,
Class T shares are subject to a Rule 12b-1 Distribution Plan and Agreement (a
“Plan”). The Board and initial shareholders of Class T shares have approved and
entered into a Plan. In adopting the Plans, the Board (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. 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.
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:
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formulation and implementation
of marketing and promotional activities; |
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preparation, printing, and
distribution of sales literature; |
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preparation, printing, and
distribution of prospectuses and the Fund reports to other than existing
shareholders; |
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obtaining such information
with respect to marketing and promotional activities as the Distributor
deems advisable; |
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making payments to dealers and
others engaged in the sale of shares or who engage in shareholder support
services; and |
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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 Class T. The fee is
0.25%.
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.
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 October 31, 2017:
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Fund |
Distribution/12b-1
Payments
(amounts in
thousands) |
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Global Diversified
Income |
$28,047 |
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High Yield |
5,914 |
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Short-Term
Income |
1,618 |
Transfer
Agency Agreement
The Transfer Agency Agreement
provides for Principal Shareholder Services, Inc. (“PSS”) (620 Coolidge Drive,
Suite 300, Folsom, CA 95630), an affiliate of PGI, to act as transfer and
shareholder servicing agent.
The Fund pays PSS for the following
services:
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issuance, transfer,
conversion, cancellation, and registry of ownership of Fund shares, and
maintenance of open account system; |
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preparation and distribution
of dividend and capital gain payments to
shareholders; |
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delivery, redemption and
repurchase of shares, and remittances to
shareholders; |
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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; |
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communication with
shareholders concerning the above items;
and |
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use of its best efforts to
qualify the Capital Stock of the Fund for sale in states and jurisdictions
as directed by the Fund. |
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.
Fund
Policies
The investment objective, principal
investment strategies and 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 that
those managing the investments of each Fund can select. Additional information
is also provided about the strategies that each Fund may use to try to achieve
its objective.
The composition of each Fund and the
techniques and strategies that those managing the fund's investments 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 without
shareholder approval.
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.
Fundamental
Restrictions
Each Fund has adopted the following
fundamental restrictions. Each fundamental restriction is a matter of
fundamental policy and 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.
Each Fund:
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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. |
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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. |
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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. |
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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. |
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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. |
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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.
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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. |
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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
Except as specifically noted, each
Fund has also adopted the following non-fundamental restrictions.
Non-fundamental restrictions are not fundamental policies and may be changed
without shareholder approval. It is contrary to each Fund's present policy
to:
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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 or
regulatory authority having jurisdiction, from time to
time. |
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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 that involve any future
payment obligation, as permitted under the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by any regulatory authority
having jurisdiction, from time to time, are not deemed to be pledges,
mortgages, hypothecations, or other encumbrances.
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Invest in companies for the
purpose of exercising control or
management. |
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Invest more than 25% of its
assets in foreign securities; however: |
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the High Yield Fund may not
invest more than 35% of its assets in foreign securities;
and |
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the Global Diversified Income
Fund may invest up to 100% of its assets in foreign
securities. |
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Invest more than 5% of its
total assets in real estate limited partnership
interests. |
The Global Diversified Income Fund
has not adopted this non-fundamental restriction.
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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. |
Non-Fundamental
Policy - Rule 35d-1 under the 1940 Act - Investment Company Names
The High Yield 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 type of investments, 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. For purposes of this non-fundamental restriction, the Fund tests
market capitalization ranges monthly.
For purposes of testing this
requirement with respect to:
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foreign currency investments,
each Fund will count forward foreign currency contracts and other
investments that have economic characteristics similar to foreign
currency; the value of such contracts and investments will include the
Fund’s investments in cash and/or cash equivalents to the extent such
instruments are used to cover the Fund’s exposure under its forward
foreign currency contracts and similar
investments. |
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derivatives instruments, each
Fund will typically count the mark-to-market value of such derivatives.
However, the Fund may use a derivative contract’s notional value when it
determines that notional value is an appropriate measure of the Fund’s
exposure to investments. For example, with respect to single name equity
swaps which are “fully paid” (equity swaps in which cash and/or cash
equivalents are specifically segregated on the Fund’s books for the
purpose of covering the full notional value of the swap), each Fund will
count the value of such cash and/or cash equivalents.
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investments in underlying
funds (including ETFs), each Fund will count all investments in an
underlying fund toward the requirement as long as 80% of the value of such
underlying fund's holdings focus on the particular type of investment
suggested by the Fund name. |
Investment
Strategies and Risks Related to Borrowing and Senior Securities,
Commodity-Related Investments, Industry Concentration and Loans
Borrowing and
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. 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.
Pursuant to SEC staff
interpretations of the 1940 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.
Commodity-Related
Investments
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 an
investment company 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.
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.
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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. |
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The Funds view their
investments in 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. |
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The Funds 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. |
Loans
A Fund may not make loans to other
persons except as permitted by (i) the 1940 Act and the rules and regulations
thereunder, or other successor law governing the regulation of registered
investment companies, or interpretations or modifications thereof by the U.S.
Securities and Exchange Commission (“SEC”), SEC staff or other authority of
competent jurisdiction, or (ii) pursuant to exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent jurisdiction.
Generally, this means the Funds are typically permitted to make loans, but must
take into account potential issues such as liquidity, valuation, and avoidance
of impermissible transactions. Examples of permissible loans include (a) the
lending of its portfolio securities, (b) the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with its
investment objectives and policies, (c) the entry into a repurchase agreement
(to the extent such entry is deemed to be a loan), and (d) loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom that may be granted by the SEC.
Other Investment
Strategies and Risks
Commodity
Index-Linked Notes
A commodity index-linked note is a
type of structured note that is a derivative instrument. 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, which means the
prices of commodity-linked notes may move in a different direction than
investments in traditional equity and debt securities. As an example, during
periods of rising inflation, debt securities have historically tended to
decrease in value and the prices of certain commodities, such as oil and metals,
have historically tended to increase. The reverse may be true during "bull
markets," when the value of traditional securities such as stocks and bonds is
increasing. Under such economic conditions, a fund's investments in commodity
index-linked notes may be expected not to perform as well as investments in
traditional securities. 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. If commodities prices move in tandem with the
prices of financial assets, they may not provide overall portfolio
diversification benefits.
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, 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.
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 those managing the fund's
investments, 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 those managing the fund's investments, 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.
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.
Derivatives
Options
on Securities and Securities Indices
The Funds may each 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.
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Exchange-Traded Options. 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 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
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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.
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Writing 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 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 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.
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. 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.
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 those
managing the fund's investments, correlate closely with the securities index and
which have a value at least equal to the aggregate amount of the securities
index options.
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 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.
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.
Futures
Contracts and Options on Futures Contracts
The Funds may each 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. The Commodity Futures Trading Commission regulates
futures contracts, options on futures contracts, and the commodity exchanges on
which they are traded. 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.
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 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.
With respect to futures contracts
that settle in cash, a Fund will cover (and mark-to-market on a daily basis)
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract. When entering into futures contracts that do not settle in cash
(physically-settled futures contracts), a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
full notional value of the contract. Physically-settled futures contracts (and
written options on such contracts) will be treated like cash-settled futures
contracts when a Fund has entered into a contractual arrangement with a third
party futures commission merchant or other counterparty to offset the Fund’s
exposure under the contract and, failing that, to assign its delivery obligation
under the contract to the counterparty.
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.
Risks Associated
with Futures Transactions. There are many 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 those managing the fund's investments 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
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.
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.
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.
Spread
Transactions
The Funds may each 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.
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.
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Interest rate swaps. 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 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.
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Currency swaps. 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.
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Index swaps. 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).
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Total return swaps. 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.
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Commodity swap agreements.
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
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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
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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.
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Investment Pools. 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 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.
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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. |
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Swaptions. 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. |
Obligations
under Swap Agreements. 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 those managing the fund's
investments in accordance with procedures established by the Board, to avoid any
potential leveraging of the Fund's portfolio. In cases where a Fund is a seller
of a credit default swap contract, the Fund will segregate liquid assets equal
to the notional amount of the contract. 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.
Risks associated
with Swap Agreements. 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 those managing the
fund's investments 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 those managing the fund's investments. 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 of
Swap Agreements. 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
those managing the fund's investments based on various factors,
including:
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the frequency of trades and
quotations, |
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the number of dealers and
prospective purchasers in the
marketplace, |
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dealer undertakings to make a
market, |
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the nature of the security
(including any demand or tender features),
and |
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the nature of the marketplace
for trades (including the ability to assign or offset a portfolio's rights
and obligations relating to the
investment). |
Such determination will govern
whether a swap will be deemed to be within each Fund's restriction on
investments in illiquid securities.
Valuing Swap
Agreements. 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.
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, commodity, equity, or fixed-income markets. Each Fund may
engage in futures trading in an effort to generate returns. 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.
Limitations
on the Use of Futures, Options on Futures Contracts, and Swaps
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 an investment company 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.
Risk of
Potential Government Regulation of Derivatives
It is possible that additional
government regulation of various types of derivative instruments, including
futures, options and swap agreements, may limit or prevent a fund from using
such instruments as a part of its investment strategy, and could ultimately
prevent a fund from being able to achieve its investment objective. It is
difficult to predict the effects future legislation and regulation in this area,
but the effects could be substantial and adverse. It is possible that
legislative and regulatory activity could limit or restrict the ability of a
fund to use certain instruments as a part of its investment strategy. For
instance, in December 2015, the SEC proposed new regulations applicable to a
mutual fund's use of derivatives and related instruments.
If adopted as proposed, these
regulations could significantly limit or impact a fund's ability to invest in
derivatives and related instruments, limit a fund's ability to employ certain
strategies that use derivatives and/or adversely affect the fund's performance,
efficiency in implementing strategies, and ability to pursue their investment
objectives. Limits or restrictions applicable to the counterparties with which
the funds engage in derivative transactions could also prevent the funds from
using certain instruments.
Fixed-Income
Securities
ETNs
Certain funds may invest in, or sell
short, exchange-traded notes (“ETNs”). ETNs are typically senior, unsecured,
unsubordinated debt securities whose returns are linked to the performance of a
particular market index less applicable fees and expenses. ETNs are listed on an
exchange and traded in the secondary market. The fund may hold the ETN until
maturity, at which time the issuer is obligated to pay a return linked to the
performance of the relevant market index. ETNs do not make periodic interest
payments and principal is not protected.
ETNs are subject to credit risk and
the value of the ETN may drop due to a downgrade in the issuer’s credit rating,
despite the underlying market benchmark or strategy remaining unchanged. The
value of an ETN may also be influenced by time to maturity, level of supply and
demand for the ETN, volatility and lack of liquidity in underlying assets,
changes in the applicable interest rates, changes in the issuer’s credit rating,
and economic, legal, political, or geographic events that affect the referenced
underlying asset. When a Fund invests in ETNs, it will bear their proportionate
share of any fees and expenses borne by the ETN. The Fund’s decision to sell its
ETN holdings may be limited by the availability of a secondary market. ETNs are
also subject to tax risk. The Internal Revenue Service ("IRS") and Congress are
considering proposals that would change the timing and character of income and
gains from ETNs. There may also be times when an ETN share trades at a premium
or discount to its market benchmark or strategy.
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 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.
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.
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.
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 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 analysis of
those managing the fund's investments of the issuer’s creditworthiness and
financial prospects, and of their 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.
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.
Foreign Currency
Transactions
Options
on Foreign Currencies
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.
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.
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.
Those managing the fund's
investments 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.
Foreign
Securities
Investing in foreign securities
carries political and economic risks distinct from those associated with
investing in the United States. Investments in foreign securities also involve
the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, limitation on or delays in
the removal of funds or other assets of a fund, political or financial
instability or diplomatic and other developments that could affect such
investments. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on
U.S. investment or on the ability to
repatriate assets or to convert currency into U.S. Dollars. There may be a
greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a risk of
local political, economic or social instability, military action or unrest or
adverse diplomatic developments.
Asia-Pacific
Countries
In addition to the risks of foreign
investing and the risks of investing in emerging markets, the developing market
Asia-Pacific countries in which a Fund may invest are subject to certain
additional or specific risks. In the Asia-Pacific markets, there is a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of these markets
also may be affected by developments with respect to more established markets in
the region, such as Japan and Hong Kong. Brokers in developing market
Asia-Pacific countries typically are fewer in number and less well capitalized
than brokers in the United States.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political
and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things: (i)
authoritarian governments or military involvement in political and economic
decision- making, including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and/or (v) ethnic, religious and racial
disaffection. In addition, the governments of many of such countries, such as
Indonesia, have a heavy role in regulating and supervising the economy.
An additional risk common to most
such countries is that the economy is heavily export-oriented and, accordingly,
is dependent upon international trade. The existence of overburdened
infrastructure and obsolete financial systems also present risks in certain
countries, as do environmental problems. Certain economies also depend to a
significant degree upon exports of primary commodities and, therefore, are
vulnerable to changes in commodity prices that, in turn, may be affected by a
variety of factors. The legal systems in certain developing market Asia-Pacific
countries also may have an adverse impact on a Fund. The rights of investors in
developing market Asia-Pacific companies may be more limited than those of
shareholders of U.S. corporations. It may be difficult or impossible to obtain
and/or enforce a judgment in a developing market Asia-Pacific
country.
China
Investing in China involves special
considerations, including: the risk of nationalization or expropriation of
assets or confiscatory taxation; greater governmental involvement in and control
over the economy, interest rates and currency exchange rates; controls on
foreign investment and limitations on repatriation of invested capital; greater
social, economic and political uncertainty; dependency on exports and the
corresponding importance of international trade; and currency exchange rate
fluctuations. The government of China maintains strict currency controls in
support of economic, trade and political objectives and regularly intervenes in
the currency market. The government's actions in this respect may not be
transparent or predictable. Furthermore, it is difficult for foreign investors
to directly access money market securities in China because of investment and
trading restrictions. These and other factors may decrease the value and
liquidity of a fund's investments.
Europe
The economies and markets of
European countries are often closely connected and interdependent, and events in
one European country can have an adverse impact on other European countries.
Certain funds may invest in securities of issuers that are domiciled in, or have
significant operations in, member countries of the Economic and Monetary Union
of the European Union (the “EU”), which requires member countries to comply with
restrictions on inflation rates, deficits, interest rates, debt levels and
fiscal and monetary controls. Decreasing imports or exports, changes in
governmental or EU regulations on trade, changes in the exchange rate of the
euro (the common currency of certain EU countries), the default or threat of
default by an EU member country on its sovereign debt, and/or an economic
recession in an EU member country may have a significant adverse effect on the
economies of EU member countries and their trading partners, including some or
all of the emerging markets countries. Although certain European countries do
not use the euro, many of these countries are obliged to meet the criteria for
joining the euro zone. Consequently, these countries must comply with many of
the restrictions noted above. The European financial markets have experienced
volatility and adverse trends in recent years due to concerns about economic
downturns, rising government debt levels and the possible default of government
debt in several European countries. Further defaults or restructurings by
governments and other entities of their debt could have additional adverse
effects on economies, financial markets and asset valuations around the world.
In addition, one or more countries may abandon the euro and/or withdraw from the
EU, including, with respect to the latter, the United Kingdom (the "UK"), which
is a significant market in the global economy. The impact of these actions,
especially if they occur in a disorderly fashion, is not clear but could be
significant and far-reaching and could adversely impact the value of investments
in the region.
The UK’s referendum vote to leave
the EU (referred to as "Brexit") could cause business disruptions and
uncertainty and thus adversely impact the financial results and operations of
various European companies and economies.
Although the precise time frame for
Brexit is uncertain, it is currently expected that the UK will seek to withdraw
from the EU with an anticipated completion date within two years after notifying
the European Council of the UK’s intention to withdraw. The effects of Brexit
will largely depend on any agreements the UK makes to retain access to EU
markets either during a transitional period or more permanently. Brexit could
lead to legal and tax uncertainty and potentially divergent national laws and
regulations as the UK determines which EU laws to replace or
replicate.
Additionally, Brexit could lead to
global economic uncertainty and result in significant volatility in the global
stock markets and currency exchange rate fluctuations.
Japan
Japanese investments may be
significantly affected by events influencing Japan’s economy and the exchange
rate between the Japanese yen and the U.S. Dollar. Japan’s economy fell into a
long recession in the 1990s. After a few years of mild recovery in the
mid-2000s, Japan’s economy fell into another recession as a result of the recent
global economic crisis. Japan is heavily dependent on exports and foreign oil.
Japan is located in a seismically active area, and in 2011 experienced an
earthquake of a sizable magnitude and a tsunami that significantly affected
important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full
extent of the impact of these events on Japan’s economy and on foreign
investment in Japan is difficult to estimate. Japan’s economic prospects may be
affected by the political and military situations of its near neighbors, notably
North and South Korea, China, and Russia.
Latin
America
Most Latin American countries have
experienced, at one time or another, severe and persistent levels of inflation,
including, in some cases, hyperinflation. This has, in turn, led to high
interest rates, extreme measures by governments to keep inflation in check, and
a generally debilitating effect on economic growth. Although inflation in many
countries has lessened, there is no guarantee it will remain at lower levels. In
addition, the political history of certain Latin American countries has been
characterized by political uncertainty, intervention by the military in civilian
and economic spheres, and political corruption. Such developments, if they were
to reoccur, could reverse favorable trends toward market and economic reform,
privatization, and removal of trade barriers, and result in significant
disruption in securities markets. Certain Latin American countries may also have
managed currencies which are maintained at artificial levels to the U.S. Dollar
rather than at levels determined by the market. This type of system can lead to
sudden and large adjustments in the currency which, in turn, can have a
disruptive and negative effect on foreign investors. There is no significant
foreign exchange market for many currencies and it would, as a result, be
difficult for the Fund to engage in foreign currency transactions designed to
protect the value of the Fund’s interests in securities denominated in such
currencies. Finally, a number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and reschedulings
of, repayment with respect to these debts. Such events can restrict the
flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
High Yield
Securities
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 Global (if the bond has been rated
by only one of those agencies, that rating will determine whether the bond is
below investment grade; if the bond has not been rated by either of those
agencies, those managing the fund's investments 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. Those managing the fund's
investments 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 those
managing the fund's investments deem 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.
Initial Public
Offerings ("IPOs")
An IPO is a company's first offering
of stock to the public. IPO risk is that the market value of IPO shares will
fluctuate considerably due to factors such as the absence of a prior public
market, unseasoned trading, the small number of shares available for trading,
and limited information about the issuer. The purchase of IPO shares may involve
high transaction costs. IPO shares are subject to market risk and liquidity
risk. In addition, the market for IPO shares can be speculative and/or inactive
for extended periods. The limited number of shares available for trading in some
IPOs may make it more difficult for a fund to buy or sell significant amounts of
shares without an unfavorable impact on prevailing prices. Investors in IPO
shares can be affected by substantial dilution in the value of their shares by
sales of additional shares and by concentration of control in existing
management and principal shareholders.
When a fund's asset base is small, a
significant portion of the fund's performance could be attributable to
investments in IPOs because such investments would have a magnified impact on
the fund. As the fund's assets grow, the effect of the fund's investments in
IPOs on the fund's performance probably will decline, which could reduce the
fund's performance. Because of the price volatility of IPO shares, a fund may
choose to hold IPO shares for a very short period. This may increase the
turnover of the fund's portfolio and lead to increased expenses to the fund,
such as commissions and transaction costs. By selling IPO shares, the fund may
realize taxable gains it will subsequently distribute to
shareholders.
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.
Inverse Floating
Rate and Other 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.
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 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. Certain MLPs regulated by the FERC have the right, but are not
obligated, to redeem common units held by an investor who is not subject to U.S.
federal income taxation. The financial condition and results of operations of an
MLP that redeems its common units could be adversely impacted.
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.
Municipal
Obligations and AMT-Subject Bonds
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 are industrial
development bonds 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.
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.
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.
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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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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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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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.
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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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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. |
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.
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 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 those
managing the fund's investments 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 those
managing the fund's investments.
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.
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. Those managing the fund's investments monitor on an
ongoing basis the pricing, quality, and liquidity of such instruments and
similarly monitor 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.
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.
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.
Portfolio
Turnover (Active Trading)
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.
Preferred
Securities
Preferred securities can include:
traditional preferred securities, hybrid-preferred securities, $25 par hybrid
preferred securities, baby bonds, 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, 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.
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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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Floating rate 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. |
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.
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").
Repurchase and
Reverse Repurchase Agreements, Mortgage Dollar Rolls and
Sale-Buybacks
The Funds may invest in repurchase
and reverse repurchase agreements. Repurchase agreements typically involve the
purchase of debt securities from a financial institution such as a bank, savings
and loan association, or broker-dealer. A repurchase agreement provides that the
fund sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by a fund collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the fund holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected fund bears a risk of
loss. To minimize such risks, the fund enters into repurchase agreements only
with parties those managing the fund's investments deem creditworthy (those that
are large, well-capitalized, and well-established financial institutions). In
addition, the value of the securities collateralizing the repurchase agreement
is, and during the entire term of the repurchase agreement remains, at least
equal the acquisition price the Funds pay to the seller of the securities.
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
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 those managing the fund's
investments.
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 those
managing the fund's investments deem 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 segregated by liquid assets equal in value to
the amount of the Fund's forward commitment to repurchase the subject
security.
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. As described above, some of the Funds have adopted investment
restrictions that limit investments in illiquid securities. 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.
Royalty
Trusts
A royalty trust generally acquires
an interest in natural resource or chemical companies and distributes the income
it receives to its investors. A sustained decline in demand for natural resource
and related products could adversely affect royalty trust revenues and cash
flows. Such a decline could result from a recession or other adverse economic
conditions, an increase in the market price of the underlying commodity, higher
taxes or other regulatory actions that increase costs, or a shift in consumer
demand. Rising interest rates could harm the performance and limit the capital
appreciation of royalty trusts because of the increased availability of
alternative investments at more competitive yields. Fund shareholders will
indirectly bear their proportionate share of the royalty trusts'
expenses.
Securitized
Products - 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
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.
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.
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.
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.
Temporary
Defensive Measures/Money Market Instruments
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:
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U.S. Government Securities -
Securities issued or guaranteed by the U.S. government, including treasury
bills, notes, and bonds. |
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U.S. Government Agency
Securities - Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government. |
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U.S. agency obligations
include, but are not limited to, the Bank for Cooperatives, Federal Home
Loan Banks, and Federal Intermediate Credit
Banks. |
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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.
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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 those managing the fund's investments, 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. |
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 those managing the fund's
investments 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, with certain exceptions permitted
by applicable regulations. |
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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. |
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.
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 those managing the fund's
investments in accordance with procedures established by the Board, 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.
LEADERSHIP
STRUCTURE AND BOARD OF DIRECTORS
Overall responsibility for directing
the business and affairs of PFI rests with the Board, 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,
eight 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 and investment consultant, 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 S.
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. From 2011-2015, Mr. Hirsch served 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.
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.
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.
Elizabeth
A. Nickels. Ms. Nickels has served as a Director
of PFI and PVC and as a Trustee of the Trust since September 2015. Ms. Nickels
currently serves as a director of SpartanNash. From 2008 to 2017, she served as
a director of the not-for-profit Spectrum Health Systems; from 2014 to 2016, she
served as a director of Charlotte Russe; from 2014 to 2015, she served as a
director of Follet Corporation; and from 2013 to 2015, she served as a director
of PetSmart. Ms. Nickels was formerly employed by Herman Miller, Inc. in several
capacities: from 2012 to 2014, as the Executive Director of the Herman Miller
Foundation; from 2007 to 2012, as President of Herman Miller Healthcare; and
from 2000 to 2007, as Chief Financial Officer. Through her education and
employment experience, she is experienced with financial, accounting and
regulatory 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, PVC, and the
Trust since 2015. Mr. Beer previously served as Executive Vice President of PFI
and PVC (2001-2015) and the Trust (2014-2015). Mr. Beer also served as Executive
Vice President (2008-2015), Chief Operating Officer (2008-2015) and director of
Principal Management Corporation ("PMC") (2006-2017), prior to PMC's merger with
and into Principal Global Investors, LLC ("PGI"). Mr. Beer has also served as
the President and a director of PSI and PSS. Mr. Beer serves as Executive
Director - Funds and Director of PGI. Prior to working for PMC, 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, as a Trustee of the Trust
since 2014, and as Chair of the PFI and PVC board since 2012 and of the Trust
board since 2014. Ms. Everett serves as President of Retirement and Income
Solutions at Principal®. From 2011-2015, she served as
Chair and President of PMC. From 2004-2008, Ms. Everett was Senior Vice
President and Deputy General Counsel at Principal®. From 2001-2004, she was Vice
President and Counsel at Principal®. 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.
Patrick G.
Halter. Mr. Halter has
served as a Director of PFI and PVC, and as a Trustee of the Trust, since 2017.
Mr. Halter also serves as Chief Operating Officer and director of PGI, and Chief
Executive Officer and Chair of Principal Real Estate Investors ("PREI"). He has
served in various other positions since joining Principal® in 1984. Through his
education and employment experience, Mr. Halter is experienced with financial,
accounting, 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
PGI or its affiliates, as appropriate, regarding risks faced by PFI. The Board,
with the assistance of Fund management and PGI, 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 PGI valuation committee comprised of PFI
officers and officers of PGI 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.
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 nine 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 711
High 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 six 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.
The following directors are
considered to be Independent Directors.
|
|
|
|
|
|
|
Name,
Address,
and Year of
Birth |
Position(s)
Held
with Fund
and 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
711 High Street
Des Moines, IA
50392
1948 |
Director (since
2004)
Member Nominating and
Governance Committee |
Principal, EBA
Associates
(consulting and
investments) |
135 |
Durango Herald,
Inc.;
McClatchy Newspapers,
Inc. |
|
|
|
|
|
|
|
Leroy T. Barnes,
Jr.
711 High Street
Des Moines, IA
50392
1951 |
Director (since
2012)
Member Audit
Committee |
Retired
|
135 |
McClatchy Newspapers, Inc.;
Herbalife Ltd.; Frontier Communications, Inc. |
|
|
|
|
|
|
|
Craig Damos
711 High Street
Des Moines, IA
50392
1954 |
Director (since
2008)
Member 15(c)
Committee
Member Audit
Committee |
President, The Damos Company
(consulting services) |
135 |
Hardin
Construction |
|
|
|
|
|
|
|
Mark A. Grimmett
711 High Street
Des Moines, IA
50392
1960 |
Director (since
2004)
Member 15(c)
Committee
Member Executive
Committee
Member Nominating and
Governance Committee |
Formerly, Executive Vice
President and CFO, Merle Norman Cosmetics, Inc. (cosmetics
manufacturing) |
135 |
None |
|
|
|
|
|
|
|
Fritz S. Hirsch
711 High Street
Des Moines, IA
50392
1951 |
Director (since
2005)
Member 15(c)
Committee
Member Operations
Committee |
Formerly, CEO, MAM USA
(manufacturer of infant and juvenile products) |
135 |
Focus Products Group
(housewares); MAM USA |
|
|
|
|
|
|
|
Tao Huang
711 High Street
Des Moines, IA
50392
1962 |
Director (since
2012)
Member 15(c)
Committee
Member Operations
Committee |
Retired |
135 |
Armstrong World Industries,
Inc. (manufacturing) |
|
|
|
|
|
|
|
Karen (“Karrie”)
McMillan
711 High Street
Des Moines, IA
50392
1961 |
Director (since
2014)
Member Operations
Committee |
Managing Director, Patomak
Global Partners, LLC (financial services consulting). Formerly, General
Counsel, Investment Company Institute |
135 |
None |
|
|
|
|
|
|
|
Elizabeth A.
Nickels
711 High Street
Des Moines, IA
50392
1962 |
Director (since
2015)
Member Audit
Committee |
Formerly Executive Director,
Herman Miller Foundation; Formerly President Herman Miller
Healthcare |
135 |
Charlotte Russe; Follet
Corporation; PetSmart; SpartanNash; Spectrum Health
Systems |
The following directors are
considered to be Interested Directors because they are affiliated persons of
Principal Global Investors, LLC ("PGI," or the "Manager”), Principal Funds
Distributor, Inc. ("PFD” or "the "Distributor”) and/or the Fund’s principal
underwriter, or Principal Securities, Inc. ("PSI”), the Fund’s former principal
underwriter.
|
|
|
|
|
|
|
Name,
Address,
and Year of
Birth |
Position(s)
Held
with Fund
and 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 and
President (since 2015)
Director (since
2012)
Member Executive
Committee |
Executive Director - Funds and
Director, PGI (since 2017)
Chief Executive Officer and
Director, PFD (since 2015)
Executive Director/Principal
Funds & Trust, PLIC (since 2015)
VP/Chief Operating Officer
Principal Funds, PLIC (2014-2015)
VP/Mutual Funds & Broker
Dealer, PLIC (2001-2014)
President, Chief Executive
Officer, and Chair, PMC (2015-2017)
EVP/Chief Operating Officer,
PMC (2008-2015)
Director, PMC (2006-2015)
President and Director, PSI
(2005-2015)
Chairman and Executive Vice
President, PSS (since 2015)
President and Director, PSS
(2007-2015)
|
135 |
None |
|
|
|
|
|
|
|
Nora M. Everett
Des Moines, IA
50392
1959 |
Chair (since 2012)
Director (since
2008)
Member Executive
Committee |
Director, Finisterre
Director, Origin
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, PSI (since 2015)
Chief Executive Officer,
PSI (2009-2015)
Chairman, PSI (2011-2015)
Chairman, PSS
(2011-2015)
|
135 |
None |
|
|
|
|
|
|
|
Patrick G. Halter
Des
Moines, IA 50392
1959 |
Director (since
2017) |
Chief Operating Officer, PGI
(Since 2017)
Director, PGI (Since
2003)
Director, Morley (Since
2017)
Chair, Post (Since
2017)
Chair, PREI (since
2004)
Chief Executive Officer, PREI
(since 2005)
Chair, Spectrum (Since
2017)
|
135 |
None |
|
|
|
• |
Finisterre Capital LLP
(Finisterre) |
|
|
|
• |
Morley Capital Management, Inc.
(Morley) |
|
|
|
• |
Origin Asset Management LLP
(Origin) |
|
|
|
• |
Post Advisory Group, LLC
(Post) |
|
|
|
• |
Principal Financial Advisors,
Inc. (PFA) |
|
|
|
• |
Principal Funds Distributor,
Inc. (PFD) |
|
|
|
• |
Principal Life Insurance
Company (PLIC) |
|
|
|
• |
Principal Management
Corporation (PMC) |
|
|
|
• |
Principal Real Estate
Investors, LLC (PREI) |
|
|
|
• |
Principal Securities, Inc.
(PSI) formerly Princor Financial Services
Corporation |
|
|
|
• |
Principal Shareholder Services,
Inc. (PSS) |
|
|
|
• |
Spectrum Asset Management,
Inc.. (Spectrum) |
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. 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 |
President and Chief Executive
Officer (since 2015)
Director (since
2012)
Member Executive
Committee |
Executive Director - Funds and
Director, PGI (since 2017)
Chief Executive Officer and
Director, PFD (since 2015)
Executive Director/Principal
Funds & Trust, PLIC (since 2015)
VP/Chief Operating Officer
Principal Funds, PLIC (2014-2015)
VP/Mutual Funds & Broker
Dealer, PLIC (2001-2014)
President, Chief Executive
Officer, and Chair, PMC (2015-2017)
EVP/Chief Operating Officer,
PMC (2008-2015)
Director, PMC (2006-2015)
President and Director, PSI
(2005-2015)
Chairman and Executive Vice
President, PSS (since 2015)
President and Director, PSS
(2007-2015) |
|
|
|
|
|
Randy L. Bergstrom
Des Moines, IA 50392
1955 |
Assistant Tax
Counsel
(since 2005) |
Counsel, PGI
Counsel,
PLIC |
|
|
|
|
|
Jennifer A. Block
Des Moines, IA
50392
1973 |
Vice President and Counsel
(since 2017)
Assistant Counsel
(2010-2017)
Assistant Secretary (since
2015) |
Counsel, PGI (since
2017)
Counsel, PFD
(2009-2013)
Counsel, PLIC
Counsel, PMC (2009-2013,
2014-2017)
Counsel, PSI (2009-2013)
Counsel, PSS
(2009-2013) |
|
|
|
|
|
Tracy W. Bollin
Des Moines, IA
50392
1970 |
Chief Financial
Officer
(since 2014)
|
Managing Director, PGI (since
2016)
Chief Financial Officer, PFA
(2010-2015)
Senior Vice President, PFD
(since 2015)
Chief Financial Officer, PFD
(2010-2016)
Chief Operating Officer and
Senior Vice President, PMC (2015-2017)
Director, PMC (2014-2017)
Chief Financial Officer, PMC
(2010-2015)
Chief Financial Officer, PSI
(2010-2015)
President, PSS (since 2015)
Director, PSS (since 2014)
Chief Financial Officer, PSS
(2010-2015) |
|
|
|
|
|
Nora M. Everett
Des Moines, IA 50392
1959 |
Chair (since 2012)
Director (since
2008)
Member Executive
Committee |
Director, Finisterre
Director, Origin
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, PSI (since 2015)
Chief Executive Officer,
PSI (2009-2015)
Chairman, PSI (2011-2015)
Chairman, PSS
(2011-2015) |
|
|
|
|
|
Ashley J.
Fuhrmeister
Des Moines, IA
50392
1982 |
Assistant Counsel (since
2018) |
Counsel, PLIC (since
2017)
Prior thereto, Attorney in
Private Practice |
|
|
|
|
|
Gina L. Graham
Des Moines, IA
50392
1965 |
Treasurer (since
2016) |
Vice President/Treasurer, PGI
(since 2016)
Vice President/Treasurer,
Morley (since 2016)
Vice President/Treasurer, PFA
(since 2016)
Vice President/Treasurer, PFD
(since 2016)
Vice President/Treasurer, PLIC
(since 2016)
Vice President/Treasurer, PMC
(2016-2017)
Vice President/Treasurer, PREI
(since 2016)
Vice President/Treasurer, PSI
(since 2016)
Vice President/Treasurer, PSS
(since 2016) |
|
|
|
|
|
Layne A. Rasmussen
Des Moines, IA 50392
1958 |
Vice President (since
2005) |
Vice President/Controller, PMC
(through 2017)
Director - Accounting, PLIC
(since 2015)
Financial Controller, PLIC
(prior to 2015) |
|
|
|
|
|
|
|
|
|
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) |
|
Sara L. Reece
Des Moines, IA
50392
1975 |
Vice President and Controller
(since 2016) |
Director - Accounting, PLIC
(since 2015)
Assistant Financial Controller,
PLIC (prior to 2015) |
|
|
|
|
|
Thomas G. Reymann
II
Des Moines, IA
50392
1958 |
Assistant Counsel (since
2014) |
Assistant General Counsel, PLIC
(since 2014)
Assistant General Counsel, PMC
(2015-2017)
Assistant General Counsel, TAMG
(2013-2014)
Vice President/CFTC Principal,
TAM (2013-2014) |
|
|
|
|
|
Teri R. Root
Des Moines, IA
50392
1979 |
Interim Chief Compliance
Officer (since 2018)
Deputy Chief Compliance Officer
(2015 - 2018) |
Deputy Chief Compliance
Officer, PGI (since 2017)
Vice President and Chief
Compliance Officer, PMC (2015-2017)
Compliance Officer, PMC
(2010-2013)
Vice President, PSS (since
2015) |
|
|
|
|
|
Britney L.
Schnathorst
Des Moines, IA
50392
1981 |
Assistant Secretary (since
2017)
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, PGI (since
2017)
Counsel, PFD
(2006-2013)
Counsel, PLIC
Counsel, PMC (2007-2013,
2014-2017)
Counsel, PSI (2007-2013)
|
|
|
|
|
|
Dan L. Westholm
Des Moines, IA 50392
1966 |
Assistant Treasurer
(since 2006) |
Assistant Vice
President/Treasurer, PGI (since 2017)
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 (since 2014)
Director-Treasury, PLIC
(2007-2014)
Director-Treasury, PMC
(2003-2013)
Assistant Vice
President/Treasury, PMC (2013-2017)
Assistant Vice
President/Treasury, PSI (since 2013)
Director-Treasury, PSI
(2011-2013)
Assistant Vice
President/Treasury, PSS (since 2013)
Director-Treasury, PSS
(2007-2013) |
|
|
|
|
|
Beth C. Wilson
Des Moines, IA 50392
1956 |
Vice President and Secretary
(since 2007) |
Director and Secretary-Funds,
PLIC
Vice President, PMC
(2007-2013) |
|
|
|
|
|
Clint L. Woods
Des Moines, IA
50392
1961 |
Of Counsel (since
2017)
Vice President
(2016-2017)
Counsel
(2015-2017) |
Vice President (since
2015)
Associate General Counsel,
Governance Officer, and Assistant Corporate Secretary, PLIC (since
2013) |
|
|
|
|
|
Jared A. Yepsen
Des Moines, IA 50392
1981 |
Assistant Tax Counsel (since
2017) |
Counsel, PGI (since 2017)
Counsel, PLIC (since
2015)
Senior Attorney, TLIC
(2013-2015)
Attorney, TLIC (2010-2013)
|
•Finisterre Capital LLP
(Finisterre)
•
Morley Capital Management, Inc.
(Morley)
•Origin Asset Management LLP
(Origin)
•Principal Financial Advisors, Inc.
(PFA)
•Principal Funds Distributor, Inc.
(PFD)
•Principal Global Investors, LLC
(PGI)
•Principal Life Insurance Company
(PLIC)
•Principal Management Corporation
(PMC)
•
Principal Real Estate
Investors, LLC (PREI)
•Principal Securities, Inc. (PSI)
formerly Princor Financial Services Corporation
•Principal Shareholder Services, Inc.
(PSS)
•Transamerica Asset Management, Inc.
(TAM)
•Transamerica Asset Management Group
(TAMG)
•Transamerica Life Insurance Company
(TLIC)
The following tables set forth the
dollar range of the equity securities of the Funds included in this SAI, and the
aggregate dollar range of equity securities of investment companies in the Fund
Complex, which were beneficially owned by the Directors as of December 31,
2016. As of that date, Directors did not own shares of Funds included in this
SAI that are 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 |
McMillan |
Nickels |
|
Global Diversified Income
|
A |
E |
D |
A |
C |
A |
D |
A |
|
High Yield |
A |
A |
D |
A |
C |
A |
A |
A |
|
Short-Term
Income |
A |
A |
A |
E |
A |
A |
A |
A |
|
Total Fund
Complex |
E |
E |
E |
E |
E |
E |
E |
E |
Directors
Considered to be "Interested Persons"
|
|
|
|
|
|
Principal
Funds, Inc.
(through participation in an
Employee benefit
plan) |
Beer |
Everett |
Halter* |
|
Global Diversified
Income |
C |
A |
A |
|
Total Fund
Complex |
E |
E |
E |
*Director's appointment effective
December 12, 2017.
Compensation.
The Fund does not pay
any remuneration to its Directors or officers who are employed by the Manager or
its affiliates. The Fund's Board annually considers a proposal to reimburse the
Manager for certain expenses, including a portion of the Chief Compliance
Officer's compensation. If the proposal is adopted, these amounts are allocated
across all Funds based on relative net assets of each portfolio.
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 October 31, 2017. On that date, there were 3 Funds (with a total of
134 portfolios in the Fund Complex). The Fund does not provide retirement
benefits or pensions to any of the Directors.
|
|
|
|
|
Director |
The
Funds
In this
SAI |
Fund
Complex |
|
Elizabeth
Ballantine |
$29,194 |
$265,500 |
|
Leroy T. Barnes,
Jr. |
$31,888 |
$290,000 |
|
Craig Damos |
$34,155 |
$307,000 |
|
Mark A.
Grimmett |
$35,132 |
$319,500 |
|
Fritz S. Hirsch |
$32,548 |
$296,000 |
|
Tao Huang |
$30,898 |
$281,000 |
|
Karen ("Karrie")
McMillan |
$30,074 |
$273,500 |
|
Elizabeth A.
Nickels |
$29,963 |
$272,500 |
INVESTMENT
ADVISORY AND OTHER SERVICES
Investment
Advisors
Principal Global Investors, LLC
(“PGI”), an indirect subsidiary of Principal Financial Group, Inc.
("Principal®"), serves as the manager for the
Fund. Principal Management Corporation, previously an affiliate of PGI, served
as manager to the Fund prior to its merger with and into PGI on May 1,
2017.
PGI is the discretionary advisor
(directly makes decisions to purchase or sell securities) for the following
Funds: High Yield, Short-Term Income, and a portion of the assets of Global
Diversified Income.
PGI has executed agreements with
various Sub-Advisors. Under those Sub-Advisory agreements, the Sub-Advisor
agrees to assume the obligations of PGI to provide investment advisory services
for a specific Fund. For these services, PGI pays each Sub-Advisor a
fee.
|
|
|
Sub-Advisor:
|
Analytic
Investors, LLC (“Analytic Investors”), is wholly-owned by Wells
Capital Management, Inc., which is indirectly wholly-owned by Wells Fargo
& Company. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
Colonial
First State Asset Management (Australia) Limited is 100% owned by Colonial
First State Group Limited, which is a wholly-owned subsidiary of
Commonwealth Bank of Australia (“CBA”). CBA was founded in 1911 and
is Australia's largest bank by market capitalization and provides
integrated financial services. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor:
|
DDJ Capital
Management, LLC (“DDJ”) is a privately-owned
Massachusetts limited liability company. David Breazzano, DDJ’s
co-founder, president and chief investment officer, is the largest equity
owner and holds 100% voting control of the
firm. |
|
|
|
Fund(s):
|
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor:
|
Logan
Circle Partners, L.P. (“Logan Circle”), is a wholly-owned indirect
subsidiary of MetLife, Inc. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
Post
Advisory Group, LLC (“Post”) is an indirect majority-owned
subsidiary of Principal Financial Group,
Inc. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
Principal
Real Estate Investors, LLC ("Principal - REI"), is an indirect subsidiary of
Principal Financial Group, Inc. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
Spectrum
Asset Management, Inc. ("Spectrum") is an indirect subsidiary of
Principal Financial Group, Inc. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
Stone
Harbor Investment Partners LP (“Stone Harbor”) is 100% employee owned. Stone
Harbor Investment Partners GP LLC, SHIP Capital Partners LP, and Peter
John Wilby are control persons of Stone
Harbor. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
|
|
|
Sub-Advisor: |
W. H.
Reaves & Co., Inc. (doing business as Reaves
Asset Management) is employee owned and no employee owns 25% or more of
the firm. |
|
|
|
Fund(s): |
a portion of the assets of
Global Diversified Income |
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 PGI or affiliated
advisors, see the Interested Director and Officer tables in the “Leadership
Structure and Board of Directors” section.
Codes of
Ethics
The Fund, PGI, each of the
Sub-Advisors, and PFD have adopted Codes of Ethics (“Codes”) under Rule 17j-1 of
the 1940 Act. PGI and each Sub-Advisor have 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 reviews reports at least annually regarding the operation of the
Code of Ethics of the Fund, PGI, 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, PGI, 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):
|
|
|
|
|
|
|
|
|
Fund |
First
$500
million |
Next
$500
million |
Next
$500
million |
Next
$500
million |
Next
$1
billion |
Over
$3
billion |
|
Global Diversified
Income |
0.80 |
0.78 |
0.76 |
0.75 |
0.73 |
0.70 |
|
|
|
|
|
Fund |
First
$250
million |
Over
$250
million |
|
High Yield |
0.625% |
0.50% |
|
|
|
|
|
|
Fund |
First
$200
million |
Next
$300
million |
Over
$500
million |
|
Short-Term
Income |
0.50% |
0.45% |
0.40% |
Fund
Operating Expenses
Each Fund pays all of its operating
expenses. Under the terms of the Management Agreement, PGI 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
PGI, 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 PGI, under the
terms of the Management Agreement. Principal Shareholder Services, Inc., an
affiliate of PGI, provides transfer agent services for Class T shares, including
qualifying Class T shares of the Fund for sale in states and other
jurisdictions.
Contractual
Limits on Total Annual Fund Operating Expenses
PGI 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)
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 PGI 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 |
T |
Expiration |
|
Global Diversified
Income |
1.08% |
2/28/2019 |
|
High Yield |
0.90% |
2/28/2019 |
|
Short-Term
Income |
0.79% |
2/28/2019 |
Contractual
Management Fee Waivers
PGI has contractually agreed to
limit the Global Diversified Income Fund’s management fees. The expense limit
will reduce the Fund's Management Fees by the amount listed below:
|
|
|
|
|
Contractual
Fee Waivers |
|
Fund |
Waiver |
Expiration |
|
Global Diversified
Income |
0.01% |
2/28/2019 |
Management
Fees Paid
Fees paid for investment management
services during the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
Management
Fees for Periods Ended October 31
(amounts in
thousands) |
|
Fund |
2017 |
|
2016 |
|
2015 |
|
|
Global Diversified
Income |
82,900 |
|
76,671 |
|
79,391 |
|
|
High Yield |
18,127 |
|
17,138 |
|
18,757 |
|
|
Short-Term
Income |
16,000 |
|
12,038 |
|
11,130 |
|
Sub-Advisory
Agreements for the Funds
PGI (and not the Fund) pays the
sub-advisers fees determined pursuant to a sub-advisory Agreement with each
sub-adviser, including those sub-advisers that are at least 95% owned, directly
or indirectly, by PGI or its affiliates ("Wholly-Owned Sub-Advisers") and the
other sub-advisers listed in the tables below. Fees paid to sub-advisers are
individually negotiated between PGI and each sub-adviser and may vary.
|
|
|
|
|
|
|
|
|
Aggregate
Fees Paid to Sub-Advisers (other than Wholly-Owned Sub-Advisers and
Post)
for Fiscal
Years Ended October 31 (dollar amounts in thousands) |
|
|
2017 |
2016 |
2015 |
|
Fund |
Dollar
Amount |
Percent
of Average
Daily Net Assets |
Dollar
Amount |
Percent
of Average
Daily Net Assets |
Dollar
Amount |
Percent
of Average
Daily Net Assets |
|
Global Diversified
Income |
$20,237,542 |
0.40% |
$22,412,937 |
0.40% |
$25,958,440 |
0.42% |
|
|
|
|
|
|
|
|
|
Fees Paid to
Post for Fiscal Years Ended October 31 (dollar amounts in
thousands) |
|
|
2017 |
2016 |
2015 |
|
Fund |
Dollar
Amount |
Percent
of Average
Daily Net Assets |
Dollar
Amount |
Percent
of Average
Daily Net Assets |
Dollar
Amount |
Percent
of Average
Daily Net
Assets |
|
Global Diversified Income
(Post) |
$2,282,722 |
0.30% |
$3,353,023 |
0.30% |
$3,037,519 |
0.30% |
|
|
|
|
|
|
|
|
|
Underwriting
Fees for Periods Ended October 31 (dollar amounts in
thousands) |
|
Fund |
2017 |
|
2016 |
|
2015 |
|
|
Global Diversified
Income |
$900 |
|
$807 |
|
$1,319 |
|
|
High
Yield |
189 |
|
165 |
|
161 |
|
|
Short-Term
Income |
355 |
|
342 |
|
363 |
|
Custodian
The custodian of the portfolio
securities and cash assets of the Funds is The 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, PGI or its affiliates enter into agreements with some
intermediaries pursuant to which the intermediaries receive payments for
providing services relating to Fund shares. Examples of such services are
administrative, networking, recordkeeping, sub-transfer agency and/or
shareholder services. In some situations the Fund will reimburse PGI or its
affiliates for making such payments; in others the Fund may make such payments
directly to intermediaries.
In addition, PGI 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. In addition, PGI or its
affiliates may pay, without reimbursement from the Fund, compensation from their
own resources to certain large plan sponsors to help cover the cost of providing
educational materials to plan participants.
The amounts paid to intermediaries
may vary, and may vary by fund.
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.
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. Ask your
Financial Professional or visit your intermediary's website for more information
about the total amounts paid to them by PGI and its affiliates, and by sponsors
of other investment companies your Financial Professional may recommend to
you.
Your intermediary may charge you
additional fees other than those disclosed in 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 November 30, 2017, 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:
|
|
|
|
Acclaim Benefits,
Inc. |
John Hancock Trust
Co. |
|
AIG Advisor
Group |
J.P. Morgan Securities
LLC |
|
AIG SunAmerica
Life |
Kestra Investment Services,
LLC |
|
American Century
Investments |
KMS Financial Services,
Inc. |
|
American United Life Insurance
Co. |
Koesten Hirschmann &
Crabtree Inc |
|
Ameriprise Financial
Services |
Ladenburg Thalmann Advisors
Network LLC |
|
Ameritas Investments
Corp |
Lakeside Wealth Management
Group, LLC |
|
Arete Wealth Advisors
LLC |
Lincoln Financial Advisors
Corp |
|
Ascensus |
Lincoln Financial Securities
Corp |
|
AssetMark Trust
Company |
Lincoln Retirement Services
Co. |
|
AXA Advisors,
LLC |
Lockton Financial Advisors
LLC |
|
Benefit Plan
Administrators |
LPL Financial
Corporation |
|
Benefit
Solutions |
Massachusetts Mutual Life
Insurance Company |
|
Benefit Trust
Company |
Mercer HR
Services |
|
Blue Prairie Group
LLC |
Merrill
Lynch |
|
Blue Water Asset
Management |
MidAtlantic Capital
Corporation |
|
Broadridge Business Process
Outsourcing, LLC |
MML Investors Services
Inc. |
|
|
|
|
Cadaret, Grant & Company,
Inc |
Morgan
Stanley |
|
Caitlin John
LLC |
National Financial
Services |
|
Callan
Associates |
Nationwide Investment Services
Corp |
|
Cambridge Investment Research
Inc. |
New England Inv &
Retirement Group, Inc |
|
Cetera Advisor Networks
LLC |
New York State Deferred
Compensation Plan |
|
Cetera Advisors
LLC |
Newport Group Retirement Plan
Services |
|
Cetera Financial
Group |
Northwestern Mutual Investment
Services |
|
Cetera Financial Specialists
LLC |
Oppenheimer &
Co. |
|
Cetera Investment Services
LLC |
Park Avenue Securities,
LLC |
|
Charles Schwab &
Co. |
Pershing |
|
Charles Schwab Trust
Company |
Plan Administrators,
Inc. |
|
Citigroup Global Markets
Inc. |
Principal Life Insurance
Company |
|
Comerica Retirement
Services |
Principal Securities,
Inc. |
|
Commonwealth Financial
Network |
ProEquities
Inc. |
|
Compusys
(Texas) |
Prudential Retirement
Services |
|
CPI Qualified
Consultants |
Purshe Kaplan Sterling
Investments |
|
CUSO Financial Services,
LP |
Putnam Investors
Services |
|
David A Noyes &
Co. |
Raymond James & Associates,
Inc. |
|
Digital Retirement
Solutions |
Raymond James Financial
Services, Inc. |
|
Edward Jones |
RBC Capital Markets
Corp. |
|
ePlan Services,
Inc. |
RBC Correspondent
Services |
|
Fidelity Investment
Institutional Operations Co. |
Reliance Trust
Company |
|
Financial Telesis
Inc. |
Retirement Plan
Analytics |
|
First Allied
Securities |
Retirement
Clearinghouse |
|
First Heartland Capital
Inc. |
Robert W. Baird &
Co. |
|
FSC Securities
Corporation |
Royal Alliance Associates,
Inc. |
|
Girard Securities,
Inc |
SagePoint Financial,
Inc. |
|
GRP Advisor
Alliance |
Securities America,
Inc. |
|
GWFS Equities,
Inc. |
Securities Service Network,
Inc. |
|
Hewitt Financial Services,
LLC |
Security Financial Resources
(Security Benefit) |
|
Hightower Advisors,
LLC |
Standard Insurance
Company |
|
HighTower Securities,
LLC |
Standard Retirement
Services |
|
ICMA-Retirement
Corp. |
Stifel Nicolaus & Company,
Inc. |
|
Investacorp
Inc. |
Summit Brokerage Services,
Inc. |
|
Janney Montgomery
Scott |
Suntrust Investment Services,
Inc. |
|
JJB Hilliard WL Lyons,
Inc. |
T. Rowe Price Retirement Plan
Services |
|
TD Ameritrade
Inc. |
Vanguard Group,
The |
|
TD Ameritrade Trust
Company |
Voya Financial Advisors,
Inc. |
|
TIAA-CREF |
Voya Institutional Plan
Services, LLC |
|
Total Administrative Services
Corporation |
Voya Institutional Trust
Co. |
|
Triad Advisors,
Inc. |
Walkner Condon Financial
Advisors |
|
Trust Company of
America |
Wells Fargo Advisors FINET,
LLC |
|
UBS Financial Services,
Inc. |
Wells Fargo Advisors,
LLC |
|
Unionbanc Investment Services,
LLC |
Wells Fargo Bank,
N.A. |
|
US Bancorp
Investments |
Wells Fargo Clearing Services
LLC |
|
VALIC Retirement Services
Company |
Woodbury Financial
Services |
|
Vanguard Brokerage
Services |
Xerox (ACS) HR
Solutions |
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 PGI, 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 PGI and of each
Fund's Sub-Advisor is to obtain the best overall terms. In pursuing this
objective, PGI or the Sub-Advisor considers all matters it deems relevant,
including the breadth of the market in the security, the price of the 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 PGI 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 PGI 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 PGI 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, PGI 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. PGI 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.
PGI 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. PGI 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 PGI or a Sub-Advisor may use it in servicing some
or all of the accounts it manages. PGI and the Sub-Advisors allocated portfolio
transactions for the Funds indicated in the following table to certain brokers
for the year ended October 31, 2017 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 |
|
Global Diversified
Income |
$779,677,051 |
$925,347 |
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 PGI, 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 investment company 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 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
Investments Implementation Services, LLC. 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 October 31 |
|
Fund |
2017 |
2016 |
2015 |
|
Global
Diversified Income |
$8,463,153 |
$4,866,513 |
$6,474,815 |
|
High
Yield |
9,897 |
|
— |
|
— |
|
|
Short-Term
Income |
11,700 |
|
— |
|
— |
|
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.
Brokerage commissions from the
portfolio transactions effected for the Funds were paid to brokers affiliated
with PGI or its Sub-Advisors for the fiscal years ended October 31 as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund Complex |
Affiliated
Broker
Receiving Commissions |
2017
Fund's
Total
Commissions
Paid |
% of
Fund's Total
Commissions
|
%
of
Dollar Amount
of
Fund's
Commissionable
Transactions |
|
Global
Diversified Income |
|
|
BNY Mellon Asset Management
North America Corporation |
ConvergEx Execution Solutions
LLC |
$ |
110,731 |
|
1.31 |
% |
1.98 |
% |
|
|
Credit Suisse Asset Management,
LLC |
Credit Suisse,
Inc. |
522,180 |
|
6.17 |
% |
3.62 |
% |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities
LLC |
674,455 |
|
7.97 |
% |
5.19 |
% |
|
|
American Century Investment
Management, Inc. |
Nomura Securities
International, Inc. |
102,279 |
|
1.21 |
% |
0.81 |
% |
|
|
Baird Investment
Management |
Robert W. Baird &
Co. |
49,325 |
|
0.58 |
% |
0.29 |
% |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
55,516 |
|
0.66 |
% |
1.01 |
% |
|
|
Columbus Circle Investors, EDGE
Asset Management, Inc., Finisterre Capital LLP, Origin Asset Management
LLP, Post Advisory Group, LLC, Principal Global Investors, LLC, and
Principal Real Estate Investors, LLC |
Spectrum Asset Management, Inc.
|
92,326 |
|
1.09 |
% |
0.76 |
% |
|
|
Analytic Investors,
LLC |
Wells Fargo Securities,
LLC |
78,365 |
|
0.93 |
% |
0.50 |
% |
|
|
William Blair & Company,
L.L.C. |
William Blair & Company,
L.L.C. |
14,893 |
|
0.18 |
% |
0.17 |
% |
|
Total |
$ |
1,700,070 |
|
20.10 |
% |
14.33 |
% |
|
High Yield
Fund |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
$ |
1,283 |
|
12.96 |
% |
19.94 |
% |
|
|
|
Total |
$ |
1,283 |
|
12.96 |
% |
19.94 |
% |
|
Short-Term
Income Fund |
|
|
American Century Investment
Management, Inc. |
Nomura Securities
International, Inc. |
$ |
11,700 |
|
100.00 |
% |
100.00 |
% |
|
|
|
Total
|
$ |
11,700 |
|
100.00 |
% |
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund Complex |
Affiliated
Broker
Receiving Commissions |
2016 Fund's
Total
Commissions
Paid |
% of
Fund's Total
Commissions
|
%
of
Dollar Amount
of
Fund's
Commissionable
Transactions |
|
Global
Diversified Income |
|
|
BNY Mellon Asset Management
North America Corporation* |
ConvergEx Execution Solutions
LLC |
$ |
136,462 |
|
2.80 |
% |
3.00 |
% |
|
|
American Century Investment
Management, Inc. |
Nomura Securities
International, Inc. |
98,009 |
|
2.01 |
% |
1.06 |
% |
|
|
Credit Suisse Asset Management,
LLC |
Credit Suisse,
Inc. |
341,734 |
|
7.02 |
% |
3.47 |
% |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities
LLC |
317,237 |
|
6.52 |
% |
3.39 |
% |
|
|
Baird Investment
Management |
Robert W. Baird &
Co. |
24,555 |
|
0.50 |
% |
0.25 |
% |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
38,175 |
|
0.78 |
% |
0.51 |
% |
|
|
Columbus Circle
Investors
Edge Asset Management,
Inc.
Finisterre Capital
LLP
Origin Asset Management
LLP
Post Advisory Group,
LLC
Principal Global Investors,
LLC
Principal Real Estate
Investors, LLC |
Spectrum Asset Management,
Inc. |
40,857 |
|
0.84 |
% |
0.47 |
% |
|
|
William Blair & Company,
L.L.C. |
William Blair & Company,
L.L.C. |
2,817 |
|
0.06 |
% |
0.06 |
% |
|
Total |
$ |
999,846 |
|
20.53 |
% |
12.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund Complex |
Affiliated
Broker
Receiving Commissions |
2015
Fund's
Total
Commissions
Paid |
% of
Fund's Total
Commissions
|
%
of
Dollar Amount
of
Fund's
Commissionable
Transactions |
|
Global
Diversified Income |
|
|
BNY Mellon Asset Management
North America Corporation* |
ConvergEx Execution Solutions
LLC |
$ |
133,416 |
|
2.06 |
% |
2.86 |
% |
|
|
American Century Investment
Management, Inc. |
CIBC World Markets
Corp. |
47,586 |
|
0.73 |
% |
0.28 |
% |
|
|
Credit Suisse Asset Management,
LLC |
Credit Suisse,
Inc. |
507,428 |
|
7.84 |
% |
5.60 |
% |
|
|
Goldman Sachs Asset Management,
L.P. |
Goldman Sachs &
Co. |
275,216 |
|
4.25 |
% |
4.44 |
% |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities
LLC |
427,713 |
|
6.61 |
% |
5.22 |
% |
|
|
Baird Investment
Management |
Robert W. Baird &
Co. |
17,557 |
|
0.27 |
% |
0.16 |
% |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
59,795 |
|
0.92 |
% |
1.38 |
% |
|
|
Columbus Circle
Investors
Edge Asset Management,
Inc.
Finisterre Capital
LLP
Origin Asset Management
LLP
Post Advisory Group,
LLC
Principal Global Investors,
LLC
Principal Real Estate
Investors, LLC |
Spectrum Asset Management,
Inc. |
49,179 |
|
0.76 |
% |
0.64 |
% |
|
Total |
$ |
1,517,890 |
|
23.44 |
% |
20.58 |
% |
|
|
|
*
|
Effective
January 31, 2018, Mellon Capital Management Corporation changed its name
to BNY Mellon Asset Management North America
Corporation. |
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
commission 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.
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 October 31, 2017.
|
|
|
|
|
|
Holdings of
Securities of Principal Funds, Inc. Regular Brokers and
Dealers |
|
Fund |
Broker or
Dealer |
Holdings
(in
thousands) |
|
Global Diversified
Income |
Bank of America Corp
|
$17,461 |
|
|
Bank of New York Mellon
Corp/The |
2,090 |
|
|
|
Citigroup Inc |
101,782 |
|
|
|
Credit Suisse Group AG
|
21,998 |
|
|
|
Goldman Sachs Group Inc/The
|
10,894 |
|
|
|
Morgan Stanley |
214,831 |
|
|
|
UBS Group AG |
107,108 |
|
|
|
Wells Fargo & Co
|
259,664 |
|
|
High Yield |
Goldman Sachs Group Inc/The
|
193,144 |
|
|
Short-Term
Income |
Bank of America
Corp |
93,091 |
|
|
|
Bank of New York Mellon
Corp/The |
42,286 |
|
|
|
Citigroup Inc |
63,289 |
|
|
|
Credit Suisse Group AG
|
1,146 |
|
|
|
Goldman Sachs Group Inc/The
|
88,608 |
|
|
|
Morgan Stanley |
98,550 |
|
|
|
UBS Group AG |
26,321 |
|
|
|
Wells Fargo & Co
|
47,335 |
|
Allocation of
Trades
By the Manager
(“PGI”). PGI has its
own trading platform and personnel that perform trade-related functions. Where
applicable, PGI trades on behalf of its own clients. Such transactions are
executed in accordance with PGI's trading policies and procedures, including,
but not limited to trade allocations and order aggregation, purchase of new
issues, and directed brokerage. PGI acts as discretionary 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. PGI 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 its respective clients, occasions arise in which PGI deems it
advisable to purchase or sell the same equity securities for two or more client
accounts at the same or approximately the same time, PGI may submit the orders
to purchase or sell to a broker/dealer for execution on an aggregate or
“bunched” basis. 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 PGI relating to that aggregated
order on a given business day, with all transaction costs relating to that
aggregated order shared on a pro rata basis.
Because of PGI's role as investment
advisor to each of the Funds and as discretionary advisor for funds of funds as
well as some of the underlying funds, conflicts may arise in connection with the
services PGI provides to funds of funds with respect to asset class and target
weights for each asset class and investments made in underlying funds. PGI also
provides 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 PGI provides to the funds of funds that it
manages, in connection with the services PGI provides to other funds of funds
and Multi-Managed Funds, for the following reasons:
|
|
|
• |
PGI serves as the investment
adviser to the underlying mutual funds in which the funds of funds invest,
sometimes as the discretionary advisor, and an affiliated investment
adviser may serve as sub-adviser to the mutual funds in which a fund of
funds may invest. This raises a potential conflict because PGI's or an
affiliated company's profit margin may vary depending upon the underlying
fund in which the funds of funds invest; |
|
|
|
• |
PGI or an affiliated person
may serve as investment adviser to a portion of a Multi-Managed Fund. This
raises a potential conflict because PGI'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 PGI 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, PGI 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. PGI 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, PGI does the following:
|
|
|
• |
Maintains a documented,
systematic methodology for determining into which mutual funds the funds
of funds invest that does not give undue consideration to the impact to
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 PGI or its
affiliates; |
|
|
|
• |
Reminds its investment
personnel who provide services to the funds of funds or Multi-Managed
Funds of PGI's inherent conflicts of interest, and PGI'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 |
|
|
|
• |
PGI's Investment Oversight and
Risk Committee monitors the services provided to the funds of funds and
Multi-Managed Funds to ensure such services conform to the applicable
investment methodology, that undue consideration is not given to PGI or
its affiliates, and that such services reflect PGI'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 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.
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 T shares 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, plus applicable sales
charges. 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."
Dividends and capital gains
distributions, if any, on a Fund's Class T 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.
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.
Exchanges Between
Classes of Shares
Exchanging Class T Shares of one
Fund for Class T Shares of another Fund will result in the imposition of an
additional sales charge.
PRICING OF FUND
SHARES
Each Fund's shares are bought and
sold at the current net asset value ("NAV") per share plus any applicable sales
charge. 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.
The Funds will not treat an intraday
unscheduled disruption in NYSE trading as a closure of the NYSE and will price
its shares as of 3:00 p.m. Central Time, if the particular disruption directly
affects only the NYSE.
For all Funds the share price is
calculated by:
|
|
|
• |
taking the current market
value of the total assets of the Fund |
|
|
|
• |
subtracting liabilities of the
Fund |
|
|
|
• |
dividing the remainder
proportionately into the classes of the
Fund |
|
|
|
• |
subtracting the liability of
each class |
|
|
|
• |
dividing the remainder by the
total number of shares owned in that
class. |
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. Debt securities with remaining maturities of sixty
days or less for which market quotations and information furnished by a third
party pricing service are not readily available will be valued at amortized
cost, which approximates current value. 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.
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 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 the Advisor is authorized to make such
determinations subject to the oversight of the Board as may from time to time be
necessary.
Appendix B provides a specimen
price-make-up sheet showing how the Fund calculates the total offering price per
share.
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 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
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 December 31, 2018, 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.
PORTFOLIO
HOLDINGS DISCLOSURE
The portfolio holdings of any 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, 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 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 PGI 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, Bloomberg LC, ICE Data Services, J.J. Kenny, J.P. Morgan
PricingDirect, Inc., Markit Partners, and Standard & Poor’s Securities
Evaluations, 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, PGI 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 PGI’s Chief
Compliance Officer ("CCO") must approve such disclosure, in writing before it
occurs. The Fund currently has disclosure agreements with the
following:
|
|
|
|
Abacus Group
LLC |
Infinit
Outsourcing |
|
Abel Noser |
Investment Company Institute
(ICI) |
|
Advent |
Investor
Analytics |
|
Advent Custodial Data
(ACD) |
Iron
Mountain |
|
Advent Portfolio
Exchange |
ITG |
|
Archway Technology Partners,
LLC |
JPMorgan Worldwide Securities
Services |
|
Ascendant Compliance
Management |
LexisNexis |
|
Ashland
Partners |
Lipper |
|
Barclays
Capital |
LiquidNet |
|
Barra |
Markit WSO
Services |
|
Barra Portfolio
Manager |
Misys International Banking
Systems, Inc. |
|
Black Mountain
Systems |
Moody's Analytics Knowledge
Services |
|
BlackRock Solutions Aladdin
System |
Morgan
Stanley |
|
Bloomberg LC |
Morningstar,
Inc. |
|
Broadridge Financial Solutions,
Inc. |
MSCI Inc. |
|
Brown Brothers
Harriman |
Omgeo LLC |
|
Capital Confirmation, Inc.
|
Omgeo
TradeSuite |
|
Charles River |
Open Finance,
LLC |
|
Charles River
Development |
Pershing Prime
Services |
|
Charles River Systems,
Inc. |
Pricing
Direct |
|
Charles River Trading
System |
Proxy Edge |
|
Citco Fund
Services |
Quantitative Service
Group |
|
CitiDirect
(FSR) |
Risk Metrics |
|
Citigroup Global Transaction
Services |
RR Donnelley and
Sons |
|
Confluence
Technologies |
Russell Investments
Implementation Services, LLC |
|
Cortland Capital Market
Services LLC |
SEI Global Services,
Inc. |
|
Eagle Investment Systems
Corp. |
SEI Manager
Dashboard |
|
Electra Information
Systems |
SS&C Hedge Fund Services,
North America, Inc. |
|
Electra Securities &
Reconciliation System |
SS&C
Technologies |
|
Eze Castle |
State Street Bank &
Trust |
|
Eze Software
Group |
SunGard/Protogent
PTA |
|
FactSet |
Super
Derivatives |
|
FactSet Research Systems
Inc. |
Syntel Inc. |
|
Financial Recovery Technologies
(FRT) |
TriOptima |
|
Financial Tracking Technologies
LLC |
Varden Technologies
Inc |
|
FIS Global Asset
Management |
Vermillion
Software |
|
Fiserv Solutions,
Inc. |
Viteos Fund
Services |
|
Global Link -
GTSS |
West Hedge |
|
Global Trading
Analytics |
Wilshire
Atlas |
|
Goldman Sachs |
Wolters
Kluwer |
|
INDATA |
Yield
Book |
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'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 PGI nor any other party receives
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. In addition, the Fund's
Board 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 has delegated
responsibility for decisions regarding proxy voting for securities held by each
Fund to PGI or to that Fund's Sub-Advisor, as appropriate. PGI and each
Sub-Advisor will vote such proxies in accordance with its proxy policies and
procedures, which have been reviewed by the Board, and which are found in
Appendix C. Any material changes to the proxy policies and procedures will be
submitted to the Board for approval.
Funds that operate as funds of funds
invest in shares of other Funds. PGI 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, PGI will vote shares of such
fund on any proposal submitted to the fund's 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, 2017, is available, without charge, upon request, by
calling 1-800-222-5852 or on the SEC website at www.sec.gov.
FINANCIAL
STATEMENTS
The financial statements of the Fund
at October 31, 2017, are incorporated herein by reference to the Fund’s most
recent Annual 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
Control
Persons
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. As of February 6, 2018, there were no shareholders identified that
own more than 25% of the voting securities of the Global Diversified Income
Fund, High Yield Fund, or Short-Term Income Fund.
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,
Institutional, R-1, R-2, R-3, R-4, R-5, and R-6 shares.
The funds of funds or Principal Life
Insurance Company will vote in the same proportion as shares of the Funds owned
by other shareholders. Therefore, these funds do not 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").
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 of
February 6, 2018. The list is presented in alphabetical order by fund.
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
GLOBAL DIVERSIFIED INCOME
(A) |
13.89% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(A) |
13.45% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(A) |
13.11% |
MORGAN STANLEY SMITH
BARNEY |
|
|
|
HARBOR FINANCIAL
CENTER |
|
|
|
PLAZA 2 3RD
FLOOR |
|
|
|
JERSEY CITY NJ
07311 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(A) |
8.57% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
GLOBAL DIVERSIFIED INCOME
(A) |
7.47% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR E FL
3 |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(A) |
5.83% |
UBS WM USA |
|
|
|
0O0 11011 6100 OMNI ACCOUNT
M/F |
|
|
|
SPEC CDY A/C EBOC
UBSFSI |
|
|
|
1000 HARBOR
BLVD |
|
|
|
WEEHAWKEN NJ
07086-6761 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(A) |
5.02% |
LPL
FINANCIAL |
|
|
|
OMNIBUS CUSTOMER
ACCOUNT |
|
|
|
ATTN MUTUAL FUND
TRADING |
|
|
|
4707 EXECUTIVE
DR |
|
|
|
SAN DIEGO CA
92121-3091 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
22.14% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
13.79% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR E FL
3 |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
13.00% |
MORGAN STANLEY SMITH
BARNEY |
|
|
|
HARBOR FINANCIAL
CENTER |
|
|
|
PLAZA 2 3RD
FLOOR |
|
|
|
JERSEY CITY NJ
07311 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
9.45% |
RAYMOND
JAMES |
|
|
|
OMNIBUS FOR MUTUAL
FUNDS |
|
|
|
HOUSE ACCT FIRM
92500015 |
|
|
|
ATTN: COURTNEY
WALLER |
|
|
|
880 CARILLON
PKWY |
|
|
|
ST PETERSBURG FL
33716-1102 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
8.26% |
UBS WM USA |
|
|
|
0O0 11011 6100 OMNI ACCOUNT
M/F |
|
|
|
SPEC CDY A/C EBOC
UBSFSI |
|
|
|
1000 HARBOR
BLVD |
|
|
|
WEEHAWKEN NJ
07086-6761 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
5.88% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
GLOBAL DIVERSIFIED INCOME
(C) |
5.80% |
CHARLES SCHWAB & CO
INC |
|
|
|
SPECIAL CUSTODY ACCT FBO
CUSTOMERS |
|
|
|
ATTN MUTUAL
FUNDS |
|
|
|
101 MONTGOMERY
ST |
|
|
|
SAN FRANCISCO CA
94104-4151 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(C) |
5.65% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
23.58% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
14.77% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR E FL
3 |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
10.21% |
MORGAN STANLEY SMITH
BARNEY |
|
|
|
HARBOR FINANCIAL
CENTER |
|
|
|
PLAZA 2 3RD
FLOOR |
|
|
|
JERSEY CITY NJ
07311 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
8.96% |
UBS WM USA |
|
|
|
0O0 11011 6100 OMNI ACCOUNT
M/F |
|
|
|
SPEC CDY A/C EBOC
UBSFSI |
|
|
|
1000 HARBOR
BLVD |
|
|
|
WEEHAWKEN NJ
07086-6761 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
6.36% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
6.30% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR EXCLUSIVE BENEFIT OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
6.29% |
CHARLES SCHWAB & CO
INC |
|
|
|
SPECIAL CUSTODY A/C FOR THE
BENEFIT OF CUSTOMERS |
|
|
|
ATTN MUTUAL
FUNDS |
|
|
|
101 MONTGOMERY
ST |
|
|
|
SAN FRANCISCO CA
94104-4151 |
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
GLOBAL DIVERSIFIED INCOME
(I) |
5.86% |
LPL
FINANCIAL |
|
|
|
OMNIBUS CUSTOMER
ACCOUNT |
|
|
|
ATTN MUTUAL FUND
TRADING |
|
|
|
4707 EXECUTIVE
DR |
|
|
|
SAN DIEGO CA
92121-3091 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(I) |
5.80% |
RAYMOND
JAMES |
|
|
|
OMNIBUS FOR MUTUAL
FUNDS |
|
|
|
HOUSE ACCT FIRM
92500015 |
|
|
|
ATTN: COURTNEY
WALLER |
|
|
|
880 CARILLON
PKWY |
|
|
|
ST PETERSBURG FL
33716-1102 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(R6) |
50.01% |
PRINCIPAL TRUST
COMPANY |
|
|
|
PRINCIPAL TRUST TARGET
DATE |
|
|
|
COLLECTIVE INVESTMENT
FUNDS |
|
|
|
1013 CENTRE RD STE
300 |
|
|
|
WILMINGTON DE
19805-1265 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(R6) |
14.48% |
LIFETIME 2020
FUND |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(R6) |
12.13% |
LIFETIME 2030
FUND |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(R6) |
5.81% |
SAM FLEXIBLE INCOME PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
GLOBAL DIVERSIFIED INCOME
(T) |
100.00% |
PRINCIPAL GLOBAL INVESTORS
LLC |
|
|
|
ATTN SEAN CLINES
801-9A08 |
|
|
|
801 GRAND
AVE |
|
|
|
DES MOINES IA
50309-8000 |
|
|
|
|
|
HIGH YIELD (A) |
15.33% |
CHARLES SCHWAB & CO
INC |
|
|
|
SPECIAL CUSTODY A/C FOR THE
BENEFIT OF CUSTOMERS |
|
|
|
ATTN MUTUAL
FUNDS |
|
|
|
101 MONTGOMERY
ST |
|
|
|
SAN FRANCISCO CA
94104-4151 |
|
|
|
|
|
HIGH YIELD (A) |
13.84% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
HIGH YIELD (A) |
9.09% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
HIGH YIELD (A) |
6.05% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
HIGH YIELD (A) |
5.39% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR EAST 3RD
FL |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
HIGH YIELD (C) |
25.99% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
HIGH YIELD (C) |
11.17% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
HIGH YIELD (C) |
10.32% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
HIGH YIELD (C) |
6.62% |
UBS WM USA |
|
|
|
0O0 11011 6100 OMNI ACCOUNT
M/F |
|
|
|
SPEC CDY A/C EBOC
UBSFSI |
|
|
|
1000 HARBOR
BLVD |
|
|
|
WEEHAWKEN NJ
07086-6761 |
|
|
|
|
|
HIGH YIELD (C) |
6.04% |
LPL
FINANCIAL |
|
|
|
OMNIBUS CUSTOMER
ACCOUNT |
|
|
|
ATTN MUTUAL FUND
TRADING |
|
|
|
4707 EXECUTIVE
DR |
|
|
|
SAN DIEGO CA
92121-3091 |
|
|
|
|
|
HIGH YIELD (C) |
5.55% |
MORGAN STANLEY SMITH
BARNEY |
|
|
|
HARBOR FINANCIAL
CENTER |
|
|
|
PLAZA 2 3RD
FLOOR |
|
|
|
JERSEY CITY NJ
07311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
HIGH YIELD (C) |
5.48% |
RAYMOND
JAMES |
|
|
|
OMNIBUS FOR MUTUAL
FUNDS |
|
|
|
HOUSE ACCT FIRM
92500015 |
|
|
|
ATTN: COURTNEY
WALLER |
|
|
|
880 CARILLON
PKWY |
|
|
|
ST PETERSBURG FL
33716-1102 |
|
|
|
|
|
HIGH YIELD (C) |
5.45% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR EAST 3RD
FL |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
HIGH YIELD (I) |
28.41% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
HIGH YIELD (I) |
13.63% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR EXCLUSIVE BENEFIT OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
HIGH YIELD (I) |
12.95% |
PERSHING LLC |
|
|
|
1 PERSHING
PLZ |
|
|
|
JERSEY CITY NJ
07399-0001 |
|
|
|
|
|
HIGH YIELD (I) |
6.42% |
CHARLES SCHWAB & CO
INC |
|
|
|
SPECIAL CUSTODY A/C FOR THE
BENEFIT OF CUSTOMERS |
|
|
|
ATTN MUTUAL
FUNDS |
|
|
|
101 MONTGOMERY
ST |
|
|
|
SAN FRANCISCO CA
94104-4151 |
|
|
|
|
|
HIGH YIELD (I) |
5.95% |
UBS WM USA |
|
|
|
0O0 11011 6100 OMNI ACCOUNT
M/F |
|
|
|
SPEC CDY A/C EBOC
UBSFSI |
|
|
|
1000 HARBOR
BLVD |
|
|
|
WEEHAWKEN NJ
07086-6761 |
|
HIGH YIELD (R6) |
26.61% |
SAM FLEXIBLE INCOME PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
HIGH YIELD (R6) |
16.21% |
SAM BALANCED PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
HIGH YIELD (R6) |
11.89% |
PRINCIPAL LIFE INSURANCE CO
CUST |
|
|
|
FBO PRINCIPAL FINANCIAL GROUP
OMNIBUS WRAPPED |
|
|
|
ATTN INDIVIDUAL LIFE
ACCOUNTING |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
HIGH YIELD (R6) |
10.07% |
SAM CONS BALANCED PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
HIGH YIELD (R6) |
7.75% |
THE PRINCIPAL TRST FOR
PST-RTRMENT |
|
|
|
FOR MEDICAL BENEFITS FOR
EMPLOYEES 61021 |
|
|
|
ATTN STEPHANIE WATTS
711-4D79 |
|
|
|
PRINCIPAL FINANCIAL
GROUP |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
HIGH YIELD (T) |
100.00% |
PRINCIPAL GLOBAL INVESTORS
LLC |
|
|
|
ATTN SEAN CLINES
801-9A08 |
|
|
|
801 GRAND
AVE |
|
|
|
DES MOINES IA
50309-8000 |
|
|
|
|
|
SHORT-TERM INCOME
(A) |
22.40% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
SHORT-TERM INCOME
(A) |
10.01% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
SHORT-TERM INCOME
(A) |
8.17% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR EAST 3RD
FL |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
SHORT-TERM INCOME
(C) |
20.28% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
FOR THE EXCL BENE OF OUR
CUSTOMERS |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
ATTN MUTUAL FUNDS DEPT 4TH
FL |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
SHORT-TERM INCOME
(C) |
12.10% |
WELLS FARGO CLEARING SERVICES
LLC |
|
|
|
SPECIAL CUSTODY ACCT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMER |
|
|
|
2801 MARKET
ST |
|
|
|
SAINT LOUIS MO
63103-2523 |
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
SHORT-TERM INCOME
(C) |
5.29% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR E FL
3 |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
22.68% |
PRINCIPAL TRUST
COMPANY |
|
|
|
PRINCIPAL TRUST TARGET
DATE |
|
|
|
COLLECTIVE INVESTMENT
FUNDS |
|
|
|
1013 CENTRE RD STE
300 |
|
|
|
WILMINGTON DE
19805-1265 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
9.43% |
SAM FLEXIBLE INCOME PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
9.31% |
SAM BALANCED PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
7.99% |
LIFETIME 2020
FUND |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
6.92% |
CHARLES SCHWAB & CO
INC |
|
|
|
SPECIAL CUSTODY ACCOUNT FOR
THE |
|
|
|
EXCLUSIVE BENEFIT OF
CUSTOMERS |
|
|
|
ATTN MUTUAL
FUNDS |
|
|
|
101 MONTGOMERY
ST |
|
|
|
SAN FRANCISCO CA
94104-4151 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
6.47% |
PRINCIPAL LIFE INSURANCE CO
CUST |
|
|
|
FBO PRINCIPAL FINANCIAL GROUP
OMNIBUS WRAPPED |
|
|
|
ATTN INDIVIDUAL LIFE
ACCOUNTING |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(I) |
5.43% |
SAM CONS BALANCED PORTFOLIO
PIF |
|
|
|
ATTN MUTUAL FUND ACCOUNTING
H221 |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(R1) |
53.83% |
DCGT AS TTEE AND/OR
CUST |
|
|
|
FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS |
|
|
|
ATTN NPIO TRADE
DESK |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
SHORT-TERM INCOME
(R1) |
13.91% |
PRINCIPAL TRUST
COMPANY |
|
|
|
FBO CONCORP CONCRETE INC
DEFINED |
|
|
|
BENEFIT PENSION
PLAN |
|
|
|
4687 E CORTLAND
AVE |
|
|
|
FRESNO CA
93726-6310 |
|
|
|
|
|
SHORT-TERM INCOME
(R1) |
11.30% |
EWR, INC |
|
|
|
FBO EXEC RETIREMENT PLAN OF
EWR, INC |
|
|
|
ATTN JOSEPH
WYRICK |
|
|
|
6055 PRIMACY PKWY STE
100 |
|
|
|
MEMPHIS TN
38119-5514 |
|
|
|
|
|
SHORT-TERM INCOME
(R1) |
9.74% |
PRINCIPAL TRUST COMPANY
FBO |
|
|
|
ALTON GROUP INC CASH BALANCE
PLAN |
|
|
|
3365 N MILL
RD |
|
|
|
DRYDEN MI
48428-9361 |
|
|
|
|
|
SHORT-TERM INCOME
(R1) |
9.25% |
PRINCIPAL TRUST
COMPANY |
|
|
|
FBO THINK SECURITY CONSULTING
LLC |
|
|
|
PENSION PLAN |
|
|
|
235 PARK VIEW
AVE |
|
|
|
PIEDMONT CA
94610-1041 |
|
|
|
|
|
SHORT-TERM INCOME
(R2) |
91.43% |
DCGT AS TTEE AND/OR
CUST |
|
|
|
FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS |
|
|
|
ATTN NPIO TRADE
DESK |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(R2) |
8.10% |
MLPF&S FOR THE
SOLE |
|
|
|
BENEFIT OF ITS
CUSTOMERS |
|
|
|
ATTN FUND
ADMINISTRATION |
|
|
|
4800 DEER LAKE DR E FL
3 |
|
|
|
JACKSONVILLE FL
32246-6484 |
|
|
|
|
|
SHORT-TERM INCOME
(R3) |
78.87% |
DCGT AS TTEE AND/OR
CUST |
|
|
|
FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS |
|
|
|
ATTN NPIO TRADE
DESK |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(R3) |
5.24% |
PRINCIPAL TRUST
COMPANY |
|
|
|
FBO EXEC NQ EXCESS DEF OF
GAZETTE CO |
|
|
|
ATTN SUSAN
SAGGIONE |
|
|
|
1013 CENTRE
RD |
|
|
|
WILMINGTON DE
19805-1265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
SHORT-TERM INCOME
(R4) |
47.43% |
WACHOVIA BANK NATIONAL
ASSOCIATION |
|
|
|
FBO DEF COMP PLAN OF CED INC
(PS D EF) |
|
|
|
ATTN SHELLEY
ANDERSON |
|
|
|
ONE WEST FOURTH
STREET |
|
|
|
WINSTON SALEM NC
27101-3818 |
|
|
|
|
|
SHORT-TERM INCOME
(R4) |
35.85% |
DCGT AS TTEE AND/OR
CUST |
|
|
|
FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS |
|
|
|
ATTN NPIO TRADE
DESK |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(R4) |
6.55% |
PRINCIPAL TRUST
COMPANY |
|
|
|
FBO INSURITY INC DEF COMP
PLAN |
|
|
|
ATTN SUSAN
SAGGIONE |
|
|
|
1013 CENTRE
RD |
|
|
|
WILMINGTON DE
19805-1265 |
|
|
|
|
|
SHORT-TERM INCOME
(R4) |
5.99% |
PRINCIPAL TRUST
COMPANY |
|
|
|
FBO NQ BENEFIT FOR HCES OF
MIECO |
|
|
|
ATTN SUSAN
SAGGIONE |
|
|
|
1013 CENTRE
RD |
|
|
|
WILMINGTON DE
19805-1265 |
|
|
|
|
|
SHORT-TERM INCOME
(R5) |
31.22% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
SHORT-TERM INCOME
(R5) |
20.40% |
DCGT AS TTEE AND/OR
CUST |
|
|
|
FBO PLIC VARIOUS RETIREMENT
PLANS OMNIBUS |
|
|
|
ATTN NPIO TRADE
DESK |
|
|
|
711 HIGH ST |
|
|
|
DES MOINES IA
50392-0001 |
|
|
|
|
|
SHORT-TERM INCOME
(R5) |
12.16% |
CHURCHILL MORTGAGE
CORPORATION |
|
|
|
FBO CHURCHILL MORTGAGE
CORPORATION |
|
|
|
INCENTIVE BONUS
PLAN |
|
|
|
ATTN SHEREE
BARLETT |
|
|
|
761 OLD HICKORY BLVD STE
400 |
|
|
|
BRENTWOOD TN
37027-4519 |
|
|
|
|
|
SHORT-TERM INCOME
(R5) |
6.30% |
AMERICAN ENTERPRISE SERVICES
INC |
|
|
|
FBO AES SUPPLEMENTAL BENEFIT
PLAN |
|
|
|
ATTN PATRICIA
ANDERSON |
|
|
|
601 6TH AVE |
|
|
|
DES MOINES IA
50309-1605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund/Class |
Percent
of
Ownership |
Name and
Address of Owner |
|
SHORT-TERM INCOME
(R5) |
6.27% |
RELIANCE TRUST
CO |
|
|
|
FBO EXEC NQ DC OF FIDELITY
& GUARANTY LIFE HLDGS |
|
|
|
ATTN GLENDA
CRAIG |
|
|
|
1100 ABERNATHY RD STE
400 |
|
|
|
ATLANTA GA
30328-5634 |
|
|
|
|
|
SHORT-TERM INCOME
(R5) |
5.35% |
NATIONAL FINANCIAL SERVICES
LLC |
|
|
|
499 WASHINGTON
BLVD |
|
|
|
JERSEY CITY NJ
07310-1995 |
|
|
|
|
|
SHORT-TERM INCOME
(T) |
100.00% |
PRINCIPAL GLOBAL INVESTORS
LLC |
|
|
|
ATTN SEAN CLINES
801-9A08 |
|
|
|
801 GRAND
AVE |
|
|
|
DES MOINES IA
50309-8000 |
Management
Ownership
As of February 6, 2018, 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 Global Investors, LLC's portfolio managers first. Next, the section
includes information about the sub-advisors' portfolio managers alphabetically
by sub-advisor.
Information in this section is as of
October 31, 2017, unless otherwise noted.
Advisor:
Principal Global Investors, LLC (Fixed Income Portfolio Managers)
|
|
|
|
|
|
|
|
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 |
|
Mark P.
Denkinger: High
Yield Fund |
|
|
|
|
|
Registered investment
companies |
1 |
$10.6 million |
0 |
$0 |
|
Other pooled investment
vehicles |
2 |
$203.6 million |
0 |
$0 |
|
Other accounts |
11 |
$2.0 billion |
0 |
$0 |
|
|
|
|
|
|
|
John R.
Friedl: Short-Term
Income Fund |
|
|
|
|
|
Registered investment
companies |
6 |
$5.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
0 |
$0 |
0 |
$0 |
|
Other accounts |
1 |
$464.2 million |
0 |
$0 |
|
|
|
|
|
|
|
Ryan P.
McCann: Short-Term
Income Fund |
|
|
|
|
|
Registered investment
companies |
6 |
$5.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
0 |
$0 |
0 |
$0 |
|
Other accounts |
1 |
$464.2 million |
0 |
$0 |
|
|
|
|
|
|
|
Scott J.
Peterson: Short-Term Income
Fund |
|
|
|
|
|
Registered investment
companies |
6 |
$5.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
0 |
$0 |
0 |
$0 |
|
Other accounts |
2 |
$517.6 million |
0 |
$0 |
|
|
|
|
|
|
|
Josh
Rank - High
Yield Fund |
|
|
|
|
|
Registered investment
companies |
1 |
$10.6 million |
0 |
$0 |
|
Other pooled investment
vehicles |
2 |
$203.6 million |
0 |
$0 |
|
Other accounts |
11 |
$2.0 billion |
0 |
$0 |
|
|
|
|
|
|
|
Darrin E.
Smith: High Yield
Fund |
|
|
|
|
|
Registered investment
companies |
1 |
$10.6 million |
0 |
$0 |
|
Other pooled investment
vehicles |
2 |
$203.6 million |
0 |
$0 |
|
Other accounts |
11 |
$2.0 billion |
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.
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 |
|
Mark P.
Denkinger |
High Yield |
over
$1,000,000 |
|
John R. Friedl |
Short-Term Income
|
None |
|
Ryan P. McCann |
Short-Term Income
|
None |
|
Scott J.
Peterson |
Short-Term Income
|
$100,001 -
$500,000 |
|
Josh Rank |
High Yield |
$100,001 -
$500,000 |
|
Darrin E. Smith |
High Yield |
$100,001 -
$500,000 |
Advisor:
Principal Global Investors, LLC (Principal Portfolio StrategiesSM 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 |
|
Jake S.
Anonson: Global Diversified Income
Fund |
|
|
|
|
|
Registered investment
companies |
26 |
$14.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
11 |
$2.9 billion |
0 |
$0 |
|
Other accounts |
0 |
$0 |
0 |
$0 |
|
|
|
|
|
|
|
Jessica S.
Bush: Global
Diversified Income Fund |
|
|
|
|
|
Registered investment
companies |
26 |
$14.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
11 |
$2.9 billion |
0 |
$0 |
|
Other accounts |
0 |
$0 |
0 |
$0 |
|
|
|
|
|
|
|
Marcus W.
Dummer: Global Diversified Income
Fund |
|
|
|
|
|
Registered investment
companies |
26 |
$14.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
11 |
$2.9 billion |
0 |
$0 |
|
Other accounts |
0 |
$0 |
0 |
$0 |
|
|
|
|
|
|
|
Kelly A.
Grossman: Global
Diversified Income Fund |
|
|
|
|
|
Registered investment
companies |
21 |
$14.1 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
11 |
$2.9 billion |
0 |
$0 |
|
Other accounts |
0 |
$0 |
0 |
$0 |
|
|
|
|
|
|
|
Benjamin E.
Rotenberg: Global Diversified Income
Fund |
|
|
|
|
|
Registered investment
companies |
26 |
$14.8 billion |
0 |
$0 |
|
Other pooled investment
vehicles |
11 |
$2.9 billion |
0 |
$0 |
|
Other accounts |
0 |
$0 |
0 |
$0 |
|
|
|
|
|
|
Compensation
Principal Global Investors, LLC
("PGI") 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 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
variable component is designed to reinforce delivery of investment performance,
firm performance, team collaboration, regulatory compliance, operational
excellence, client retention and client satisfaction. Investment 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. The structure is uniformly applied amongst all investment
professionals.
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 Principal Financial Group (“PFG”) restricted stock units and funds
managed by the team, via a co-investment program. Both payment vehicles are
subject to a three year vesting schedule. The overall measurement framework and
the deferred component are well aligned with our desired focus on clients’
objectives (e.g. co-investment), alignment with Principal stakeholders, and
talent retention.
In addition, investment
professionals have investments in funds managed by the team through retirement
plans offered by the Principal (e.g. 401(k) plan) and direct personal
investments.
Ownership of
Securities
|
|
|
|
|
Portfolio
Manager |
PFI Funds
Managed by Portfolio Manager |
Dollar Range
of Securities Owned by the Portfolio Manager |
|
Jake S. Anonson |
Global Diversified
Income |
$100,001 -
$500,000 |
|
Jessica S. Bush |
Global Diversified
Income |
$50,001 -
$100,000 |
|
Marcus W.
Dummer |
Global Diversified
Income |
$50,001 -
$100,000 |
|
Kelly A.
Grossman |
Global Diversified
Income |
$1 to
$10,000 |
|
Benjamin E.
Rotenberg |
Global Diversified
Income |
$10,001 -
$50,000 |
APPENDIX A –
DESCRIPTION OF BOND RATINGS
Moody's
Investors Service, Inc. Rating Definitions:
Long-Term Obligation
Ratings
Ratings assigned on Moody's global
long-term obligation rating scales are forward-looking opinions of the relative
credit risk of financial obligations issued by non-financial corporates,
financial institutions, structured finance vehicles, project finance vehicles,
and public sector entities. Long-term ratings are assigned to issuers or
obligations with an original maturity of one year or more and reflect both on
the likelihood of default on contractually promised payments and the expected
financial loss suffered in the event of default.1
1
For certain
structured finance, preferred stock and hybrid securities in which payment
default events are either not defined or do not match investor’s expectations
for timely payment, the ratings
reflect the likelihood of impairment and the expected financial loss in the
event of impairment.
|
|
|
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 be subject to contractually
allowable write-downs of principal that could result in impairment. Together the
hybrid indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that
security.
SHORT-TERM NOTES: Short-term ratings
are assigned to obligations with an original maturity of thirteen months or less
and reflect both on the likelihood of a default on contractually promised
payments and the expected financial loss suffered in the event of default.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or related
supporting institutions) have a superior ability to repay short-term debt
obligations.
Issuers rated Prime-2 (or related
supporting institutions) have a strong ability to repay short-term debt
obligations.
Issuers rated Prime-3 (or related
supporting institutions) have an acceptable ability to repay short-term
promissory obligations.
Issuers rated Not Prime do not fall
within any of the Prime rating categories.
US MUNICIPAL SHORT-TERM DEBT: The
Municipal Investment Grade (MIG) scale is used to rate US municipal bonds of up
to three years maturity. MIG ratings are divided into three levels - MIG 1
through MIG 3 - while speculative grade short-term obligations are designated
SG.
MIG 1 denotes superior credit
quality, afforded excellent protection from highly reliable liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2 denotes strong credit quality
with ample margins of protection, although not as large as in the preceding
group.
MIG 3 notes are of acceptable credit
quality. Liquidity and cash-flow protection may be narrow and market access for
refinancing is likely to be less well-established.
SG denotes speculative-grade credit
quality and may lack sufficient margins of protection.
Description
of S&P Global Ratings' Credit Rating Definitions:
S&P Global's credit rating, both
long-term and short-term, is a forward-looking opinion of the creditworthiness
of an obligor with respect to a specific obligation. This assessment takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The credit rating is not a
recommendation to purchase, sell or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular
investor.
The ratings are statements of
opinion as of the date they are expressed furnished by the issuer or obtained by
S&P Global from other sources S&P Global considers reliable. S&P
Global does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or for other circumstances.
The ratings are based, in varying
degrees, on the following considerations:
|
|
|
• |
Likelihood of payment -
capacity and willingness of the obligor to meet its financial commitment
on an obligation in accordance with the terms of the
obligation; |
|
|
|
• |
Nature of and provisions of
the obligation; |
|
|
|
• |
Protection afforded by, and
relative position of, the obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditor's rights. |
LONG-TERM CREDIT
RATINGS:
|
|
|
AAA: |
Obligations rated ‘AAA’ have
the highest rating assigned by S&P Global. The obligor’s capacity to
meet its financial commitment on the obligation is extremely
strong. |
|
|
|
AA: |
Obligations rated ‘AA’ differ
from the highest-rated issues only in small degree. The obligor’s capacity
to meet its financial commitment on the obligation is very
strong. |
|
|
|
A: |
Obligations rated ‘A’ have a
strong capacity to meet financial commitment on the obligation although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated
categories. |
|
|
|
BBB: |
Obligations rated ‘BBB’
exhibit adequate protection parameters; however, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to meet financial commitment on the
obligation. |
|
|
|
BB, B, CCC, |
Obligations rated ‘BB’, ‘B’,
‘CCC’, ‘CC’, and ‘C’ are regarded, on balance, as having
significant |
|
|
|
CC, and C: |
speculative characteristics.
‘BB’ indicates the lowest degree of speculation and ‘C’ the highest degree
of speculation. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major risk exposures to adverse
conditions. |
|
|
|
BB: |
Obligations rated ‘BB’ are
less vulnerable to nonpayment than other speculative issues. However it
faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor’s
inadequate capacity to meet its financial commitment on the
obligation. |
|
|
|
B: |
Obligations rated ‘B’ are more
vulnerable to nonpayment than ‘BB’ but the obligor currently has the
capacity to meet its financial commitment on the obligation. Adverse
business, financial, or economic conditions will likely impair this
capacity. |
|
|
|
CCC: |
Obligations rated ‘CCC’ are
currently vulnerable to nonpayment and is dependent upon favorable
business, financial, and economic conditions for the obligor to meet its
financial commitment on the obligation. If adverse business, financial, or
economic conditions occur, the obligor is not likely to have the capacity
to meet its financial commitment on the
obligation. |
|
|
|
CC: |
Obligations rated ‘CC’ are
currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a
default has not yet occurred but S&P Global expects default to be a
virtual certainty, regardless of anticipated time to
default. |
|
|
|
C: |
The rating ‘C’ is highly
vulnerable to nonpayment, the obligation is expected to have lower
relative seniority or lower ultimate recovery compared to higher rated
obligations. |
|
|
|
D: |
Obligations rated ‘D’ are in
default, or in breach of an imputed promise. For non-hybrid capital
instruments, the ‘D’ rating category is used when payments on an
obligation are not made on the date due, unless S&P Global believes
that such payments will be made within five business days in the absence
of a stated grace period or within the earlier of the stated grace period
or 30 calendar days. The rating will also be used upon filing for
bankruptcy petition or the taking of similar action and where default is a
virtual certainty. If an obligation is subject to a distressed exchange
offer the rating is lowered to ‘D’. |
Plus (+) or Minus (-): The ratings
from ‘AA’ to ‘CCC’ may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
|
|
|
NR: |
Indicates that no rating has
been requested, that there is insufficient information on which to base a
rating or that S&P Global does not rate a particular type of
obligation as a matter of policy. |
SHORT-TERM CREDIT RATINGS: Ratings
are graded into four categories, ranging from ‘A-1’ for the highest quality
obligations to ‘D’ for the lowest.
|
|
|
A-1: |
This is the highest category.
The obligor’s capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a
plus sign (+). This indicates that the obligor’s capacity to meet its
financial commitment on these obligations is extremely
strong. |
|
|
|
A-2: |
Issues carrying this
designation are somewhat more susceptible to the adverse effects of the
changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is
satisfactory. |
|
|
|
A-3: |
Issues carrying this
designation exhibit adequate capacity to meet their financial obligations.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet it financial
commitment on the obligation. |
|
|
|
B: |
Issues rated ‘B’ are regarded
as vulnerable and have significant speculative characteristics. The
obligor has capacity to meet financial commitments; however, it faces
major ongoing uncertainties which could lead to obligor’s inadequate
capacity to meet its financial
obligations. |
|
|
|
C: |
This rating is assigned to
short-term debt obligations that are currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions to meet its financial commitment on the
obligation. |
|
|
|
D: |
This rating indicates that the
issue is either in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category is used when
payments on an obligation are not made on the date due, unless S&P
Global believes that such payments will be made within five business days
in the absence of a stated grace period or within the earlier of the
stated grace period or 30 calendar days. The rating will also be used upon
filing for bankruptcy petition or the taking of similar action and where
default is a virtual certainty. If an obligation is subject to a
distressed exchange offer the rating is lowered to
‘D’. |
MUNICIPAL SHORT-TERM NOTE RATINGS:
S&P Global rates U.S. municipal notes with a maturity of less than three
years as follows:
|
|
|
SP-1: |
A strong capacity to pay
principal and interest. Issues that possess a very strong capacity to pay
debt service is given a "+" designation. |
|
|
|
SP-2: |
A satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the terms of the
notes. |
|
|
|
SP-3: |
A speculative capacity to pay
principal and interest. |
Fitch,
Inc. Rating Definitions:
Fitch’s credit ratings are forward
looking and typically attempt to assess the likelihood of repayment by the
obligor at “ultimate/final maturity” and thus material changes in economic
conditions and expectations (for a particular issuer) may result in a rating
change. Credit ratings are opinions on relative credit quality and not a
predictive measure of specific default probability.
Investment Grade
|
|
|
AAA: |
Highest credit quality. ‘AAA’
ratings denote the lowest expectation of credit risk. They are assigned
only in case of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events. |
|
|
|
AA: |
Very high credit quality. ‘AA’
ratings denote expectations of very low credit risk. They indicate very
strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable
events. |
|
|
|
A: |
High credit quality. ‘A’
ratings denote low expectation of credit risk. The capacity for timely
payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher
ratings. |
|
|
|
BBB: |
Good credit quality. ‘BBB’
ratings indicate that expectations of credit risk are currently low. The
capacity for payment of financial commitments is considered adequate, but
adverse business or economic conditions are more likely to impair this
capacity. |
Speculative Grade
|
|
|
BB: |
Speculative. ‘BB’ ratings
indicate an elevated vulnerability to credit risk, particularly in the
event of adverse changes in business or economic conditions over time;
however, business or financial alternatives may be available to allow
financial commitments to be met. |
|
|
|
B: |
Highly speculative. ‘B’
ratings indicate that material credit risk is
present. |
|
|
|
CCC: |
Substantial credit risk. ‘CCC’
ratings indicate that substantial credit risk is
present. |
|
|
|
CC: |
Very high levels of credit
risk. ‘CC’ ratings indicate very high levels of credit
risk. |
|
|
|
C: |
Exceptionally high levels of
credit risk. ‘C’ indicates exceptionally high levels of credit
risk. |
|
|
|
D: |
Default. ‘D’ ratings indicate
an issuer has entered into bankruptcy filings, administration,
receivership, liquidation or which has otherwise ceased
business. |
Note: The
modifiers “+” or “-“ may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
obligation rating category, or to corporate finance obligation ratings in the
categories below ‘B’.
Short-Term Credit
Ratings
A short-term issuer or obligation
rating is based in all cases on the short-term vulnerability to default of the
rated entity or security stream, and relates to the capacity to meet financial
obligations in accordance with the documentation governing the relevant
obligation. Short-Term Ratings are assigned to obligations whose initial
maturity is viewed as “short term” based on market convention. Typically, this
means up to 13 months for corporate, structured and sovereign obligations, and
up to 36 months for obligations in US public finance markets.
|
|
|
F1: |
Highest short-term credit
quality. Indicates the strongest intrinsic capacity for timely payment of
financial commitments; may have an added “+” to denote any exceptionally
strong credit feature. |
|
|
|
F2: |
Good short-term credit
quality. Good intrinsic capacity for timely payment of financial
commitments. |
|
|
|
F3: |
Fair short-term credit
quality. The intrinsic capacity for timely payment of financial
commitments is adequate. |
|
|
|
B: |
Speculative short-term credit
quality. Minimal capacity for timely payment of financial commitments,
plus heightened vulnerability to near term adverse changes in financial
and economic conditions. |
|
|
|
C: |
High short-term default risk.
Default is a real possibility. |
|
|
|
RD: |
Restricted default. Indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically
applicable to entity ratings only. |
|
|
|
D: |
Default. Indicates a
broad-based default event for an entity, or the default of a specific
short-term obligation. |
Recovery Ratings
Recovery Ratings are assigned to
selected individual securities and obligations, most frequently for individual
obligations of corporate issuers with speculative grade ratings.
Among the factors that affect
recovery rates for securities are the collateral, the seniority relative to
other obligations in the capital structure (where appropriate), and the expected
value of the company or underlying collateral in distress.
The Recovery Rating scale is based
upon the expected relative recovery characteristics of an obligation upon the
curing of a default, emergence from insolvency or following the liquidation or
termination of the obligor or its associated collateral. Recovery Ratings are an
ordinal scale and do not attempt to precisely predict a given level of recovery.
As a guideline in developing the rating assessments, the agency employs broad
theoretical recovery bands in its ratings approach based on historical averages
and analytical judgment, but actual recoveries for a given security may deviate
materially from historical averages.
|
|
|
RR1: |
Outstanding recovery prospects
given default. ‘RR1’ rated securities have characteristics consistent with
securities historically recovering 91%-100% of current principal and
related interest. |
|
|
|
RR2: |
Superior recovery prospects
given default. ‘RR2’ rated securities have characteristics consistent with
securities historically recovering 71%-90% of current principal and
related interest. |
|
|
|
RR3: |
Good recovery prospects given
default. ‘RR3’ rated securities have characteristics consistent with
securities historically recovering 51%-70% of current principal and
related interest. |
|
|
|
RR4: |
Average recovery prospects
given default. ‘RR4’ rated securities have characteristics consistent with
securities historically recovering 31%-50% of current principal and
related interest. |
|
|
|
RR5: |
Below average recovery
prospects given default. ‘RR5’ rated securities have characteristics
consistent with securities historically recovering 11%-30% of current
principal and related interest. |
|
|
|
RR6: |
Poor recovery prospects given
default. ‘RR6’ rated securities have characteristics consistent with
securities historically recovering 0%-10% of current principal and related
interest. |
APPENDIX B –
PRICE MAKE UP SHEET
|
|
|
|
|
|
Class
T |
|
|
|
|
Maximum
Offering Price Calculation |
|
|
|
|
(as of October 31,
2017) |
|
|
|
|
|
|
|
|
|
|
NAV |
= |
Maximum
Offering Price |
|
|
(1-Sales
Charge Percentage) |
|
|
|
|
|
|
Fund |
|
|
|
|
|
|
|
|
|
Global Diversified
Income |
$14.17 |
= |
$14.53 |
|
|
(1-.025) |
|
|
|
|
|
|
High Yield |
$7.50 |
= |
$7.69 |
|
|
(1-.025) |
|
|
|
|
|
|
Short-Term
Income |
$12.20 |
= |
$12.51 |
|
|
(1-.025) |
APPENDIX C –
PROXY VOTING POLICIES
The proxy voting policies applicable
to each Fund appear in the following order:
The Fund's proxy voting policy is
first, followed by PGI’s proxy voting policy, and followed by the Sub-Advisors,
alphabetically.
Principal
Global Investors, LLC
Principal Real
Estate Investors, LLC
Proxy Voting
and Class Action Monitoring
Background
Rule 206(4)-6 under the Advisers
Act requires every investment adviser who exercises voting authority with
respect to client securities to adopt and implement written policies and
procedures, reasonably designed to ensure that the adviser votes proxies in the
best interest of its clients. The procedures must address material conflicts
that may arise in connection with proxy voting. The Rule further requires the
adviser to provide a concise summary of the adviser’s proxy voting process and
offer to provide copies of the complete proxy voting policy and procedures to
clients upon request. Lastly, the Rule requires that the adviser disclose to
clients how they may obtain information on how the adviser voted their
proxies.
Risks
In developing this policy and
procedures, the Advisers considered numerous risks associated with their voting
of client proxies. This analysis includes risks such as:
|
|
|
• |
The Advisers do not maintain
a written proxy voting policy as required by Rule
206(4)-6. |
|
|
|
• |
Proxies are not voted in
Clients’ best interests. |
|
|
|
• |
Proxies are not identified
and voted in a timely manner. |
|
|
|
• |
Conflicts between the
Advisers’ interests and the Client are not identified; therefore, proxies
are not voted appropriately. |
|
|
|
• |
The third-party proxy voting
services utilized by the Advisers are not
independent. |
|
|
|
• |
Proxy voting records and
Client requests to review proxy votes are not maintained. The Advisers
have established the following guidelines as an attempt to mitigate these
risks. |
Policy
The Advisers believe that proxy
voting and the analysis of corporate governance issues, in general, are
important elements of the portfolio management services provided to advisory
clients. The Advisers’ guiding principles in performing proxy voting are to make
decisions that (i) favor proposals that tend to maximize a company's shareholder
value and (ii) are not influenced by conflicts of interest. These principles
reflect the Advisers’ belief that sound corporate governance creates a framework
within which a company can be managed in the interests of its
shareholders.
In addition, as a fiduciary, the
Advisers also monitor Clients’ ability to participate in class action events
through the regular portfolio management process. Accordingly, the Advisers have
adopted the policies and procedures set out below, which are designed to ensure
that the Advisers comply with legal, fiduciary, and contractual obligations with
respect to proxy voting and class actions.
Proxy Voting
Procedures
The Advisers have implemented
these procedures with the premise that portfolio management personnel base their
determinations of whether to invest in a particular company on a variety of
factors, and while corporate governance is one such factor, it may not be the
primary consideration. As such, the principles and positions reflected in the
procedures are designed to guide in the voting of proxies, and not necessarily
in making investment decisions.
The Investment Accounting
Department has assigned a Proxy Voting Team to manage the proxy voting process.
The Investment Accounting Department has delegated the handling of class action
activities to a Senior Investment Accounting Leader.
Institutional
Shareholder Services
Based on the Advisers’ investment
philosophy and approach to portfolio construction, and given the complexity of
the issues that may be raised in connection with proxy votes, the Advisers have
retained the services of Institutional Shareholder Services (“ISS”). ISS is a
wholly owned subsidiary MSCI, Inc. which is a leading global provider of
investment decision support tools. ISS offers proxy voting solutions to
institutional clients globally. The services provided to the Advisers include
in-depth research, voting recommendations, vote execution, recordkeeping, and
reporting.
The Advisers have elected to
follow the ISS Standard Proxy Voting Guidelines (the “Guidelines”), which embody
the positions and factors that the Advisers’ Portfolio Management Teams (“PM
Teams”) generally consider important in casting proxy votes.1 The Guidelines address a wide
variety of individual topics, including, among other matters, shareholder voting
rights, anti-takeover defenses, board structures, the election of directors,
executive and director compensation, reorganizations, mergers, and various
shareholder proposals. In connection with each proxy vote, ISS prepares a
written analysis and recommendation (“ISS Recommendation”) that reflects ISS’s
application of the Guidelines to the particular proxy issues. ISS Proxy Voting
Guidelines Summaries are accessible to all PM Teams on the ISS system. They are
also available from the Proxy Voting Team.
Voting
Against ISS Recommendations
On any particular proxy vote,
Portfolio Managers may decide to diverge from the Guidelines. Where the
Guidelines do not direct a particular response and instead list relevant
factors, the ISS Recommendation will reflect ISS’s own evaluation of the
factors.
If the Portfolio Manager’s
judgment differs from that of ISS, a written record is created reflecting the
process (See Appendix titled “Report for
Proxy Vote(s) Against the ISS Recommendation(s)”), including:
|
|
|
1. |
The requesting PM Team’s
reasons for the decision; |
|
|
|
2. |
The approval of the lead
Portfolio Manager for the requesting PM
Team; |
|
|
|
3. |
Notification to the Proxy
Voting Team and other appropriate personnel (including other Advisers
Portfolio Managers who may own the particular
security); |
|
|
|
4. |
A determination that the
decision is not influenced by any conflict of interest; and review and
approval by the Compliance Department |
|
|
|
|
|
|
|
1
The
Advisers have various Portfolio Manager Teams organized by asset classes
and investment strategies. |
Conflicts
of Interest
The Advisers have implemented
procedures designed to prevent conflicts of interest from influencing proxy
voting decisions. These procedures include our use of the Guidelines and ISS
Recommendations. Proxy votes cast by the Advisers in accordance with the
Guidelines and ISS Recommendations are generally not viewed as being the product
of any conflicts of interest because the Advisers cast such votes pursuant to a
pre-determined policy based upon the recommendations of an independent third
party.
Our procedures also prohibit the
influence of conflicts of interest where a PM Team decides to vote against an
ISS Recommendation, as described above. In exceptional circumstances, the
approval process may also include consultation with the Advisers’ senior
management, the Law Department, Outside Counsel, and/or the Client whose account
may be affected by the conflict. The Advisers maintain records of the resolution
of any proxy voting conflict of interest.
Proxy
Voting Instructions and New Accounts
Institutional
Accounts
As part of the new account opening
process for discretionary institutional Clients, the Advisers’ Investment
Accounting Department is responsible for sending a proxy letter to the Client’s
custodian. This letter instructs the custodian to send the Client’s proxy
materials to ISS for voting. The custodian must complete the letter and fax it
to ISS, with a copy to the Advisers’ Investment Accounting Department. This
process is designed to ensure and document that the custodian is aware of its
responsibility to send proxies to ISS.
The Investment Accounting
Department is responsible for maintaining this proxy instruction letter in the
Client’s file and for scanning it into the Advisers’ OnBase system. These steps
are part of the Advisers’ Account Opening Process.
SMA
- Wrap Accounts
The Advisers’
SMA Operations Department is responsible for servicing wrap accounts, which
includes providing instructions to the relevant wrap sponsor for setting up
accounts with ISS. Fixed
Income and Private Investments
Voting decisions with respect to
Client investments in fixed income securities and the securities of
privately-held issuers will generally be made by the relevant Portfolio Managers
based on their assessment of the particular transactions or other matters at
issue.
Client
Direction
Clients may choose to vote proxies
themselves, in which case they must arrange for their custodians to send proxy
materials directly to them. Upon request, the Advisers can accommodate
individual Clients that have developed their own guidelines with ISS or another
proxy service. Clients may also discuss with the Advisers the possibility of
receiving individualized reports or other individualized services regarding
proxy voting conducted on their behalf. Such requests should be centralized
through the Advisers’ Proxy Voting Team.
Securities
Lending
At times, neither the Advisers nor
ISS will be allowed to vote proxies on behalf of Clients when those Clients have
adopted a securities lending program. Typically, Clients who have adopted
securities lending programs have made a general determination that the lending
program provides a greater economic benefit than retaining the ability to vote
proxies. Notwithstanding this fact, in the event that a proxy voting matter has
the potential to materially enhance the economic value of the Client’s position
and that position is lent out, the Advisers will make reasonable efforts to
inform the Client that neither the Advisers nor ISS is able to vote the proxy
until the lent security is recalled.
Abstaining
from Voting Certain Proxies
The Advisers shall at no time
ignore or neglect their proxy voting responsibilities. However, there may be
times when refraining from voting is in the Client’s best interest, such as when
the Advisers’ analysis of a particular proxy issue reveals that the cost of
voting the proxy may exceed the expected benefit to the Client. Such proxies may
be voted on a best-efforts basis. These issues may include, but are not limited
to:
|
|
|
– |
Restrictions for share
blocking countries;2 |
|
|
|
– |
Casting a vote on a foreign
security may require that the adviser engage a
translator; |
|
|
|
– |
Restrictions on foreigners’
ability to exercise votes; |
|
|
|
– |
Requirements to vote proxies
in person; |
|
|
|
– |
Requirements to provide
local agents with power of attorney to facilitate the voting
instructions; |
|
|
|
– |
Untimely notice of
shareholder meeting; |
|
|
|
– |
Restrictions on the sale of
securities for a period of time in proximity to the shareholder
meeting. |
Proxy
Solicitation
Employees must promptly inform the
Advisers’ Proxy Voting Team of the receipt of any solicitation from any person
related to Clients’ proxies. As a matter of practice, the Advisers do not reveal
or disclose to any third party how the Advisers may have voted (or intend to
vote) on a particular proxy until after such proxies have been counted at a
shareholder’s meeting. However, the Proxy Voting Team may disclose that it is
the Advisers’ general policy to follow the ISS Guidelines. At no time may any
Employee accept any remuneration in the solicitation of proxies.
Handling
of Information Requests Regarding Proxies
Employees may be contacted by
various entities that request or provide information related to particular proxy
issues. Specifically, investor relations, proxy solicitation, and
corporate/financial communications firms (e.g., Ipreo, Richard Davies, DF King,
Georgeson Shareholder) may contact the Advisers to ask questions regarding total
holdings of a particular stock across advisory Clients, or how the Advisers
intends to vote on a particular proxy. In addition, issuers may call (or hire
third parties to call) with intentions to influence the Advisers’ votes (i.e.,
to vote against ISS).
|
|
|
|
|
|
|
2
In
certain markets where share blocking occurs, shares must be “frozen” for
trading purposes at the custodian or sub-custodian in order to vote.
During the time that shares are blocked, any pending trades will not
settle. Depending on the market, this period can last from one day to
three weeks. Any sales that must be executed will settle late and
potentially be subject to interest charges or other punitive
fees. |
Employees that receive information
requests related to proxy votes should forward such communications (e.g., calls,
e-mails, etc.) to the Advisers’ Proxy Voting Team. The Proxy Voting Team will
take steps to verify the identity of the caller and his/her firm prior to
exchanging any information. In addition, the Proxy Voting Team may consult with
the appropriate Portfolio Manager(s) and/or the CCO or CCO NA with respect to
the type of information that can be disclosed. Certain information may have to
be provided pursuant to foreign legal requirements (e.g., Section 793 of the UK
Companies Act).
External
Managers
Where Client assets are placed
with managers outside of the Advisers, whether through separate accounts,
funds-of-funds or other structures, such external managers are responsible for
voting proxies in accordance with the managers’ own policies. The Advisers may,
however, retain such responsibilities where deemed appropriate.
Proxy
Voting Errors
In the event that any Employee
becomes aware of an error related to proxy voting, he/she must promptly report
that matter to the Advisers’ Proxy Voting Team. The Proxy Voting Team will take
immediate steps to determine whether the impact of the error is material and to
address the matter. The Proxy Voting Team, with the assistance of the CCO or CCO
NA (or their designee), will generally prepare a memo describing the analysis
and the resolution of the matter. Supporting documentation (e.g., correspondence
with ISS, Client, Portfolio Managers/ analysts, etc.) will be maintained by the
Compliance Department. Depending on the severity of the issue, the Law
Department, Outside Counsel, and/or affected Clients may be contacted. However,
the Advisers may opt to refrain from notifying non-material de minimis errors to
Clients.
Recordkeeping
The Advisers must maintain the
documentation described in the following section for a period of not less than
five (5) years, the first two (2) years at the principal place of business. The
Proxy Voting Team, in coordination with ISS, is responsible for the following
procedures and for ensuring that the required documentation is
retained.
Client
request to review proxy votes:
|
|
|
• |
Any request, whether written
(including e-mail) or oral, received by any Employee of the Advisers, must
be promptly reported to the Proxy Voting Team. All written requests must
be retained in the Client’s permanent
file. |
|
|
|
• |
The Proxy Voting Team
records the identity of the Client, the date of the request, and the
disposition (e.g., provided a written or oral response to Client’s
request, referred to third party, not a proxy voting client, other
dispositions, etc.) in a suitable place. |
|
|
|
• |
The Proxy Voting Team
furnishes the information requested to the Client within a reasonable time
period (generally within 10 business days). The Advisers maintain a copy
of the written record provided in response to Client’s written (including
e-mail) or oral request. A copy of the written response should be attached
and maintained with the Client’s written request, if applicable and
maintained in the permanent file. |
|
|
|
• |
Clients are permitted to
request the proxy voting record for the 5 year period prior to their
request. |
Proxy
statements received regarding client securities:
|
|
|
• |
Upon inadvertent receipt of
a proxy, the Advisers forward the proxy to ISS for voting, unless the
client has instructed otherwise. |
Note:
The Advisers are
permitted to rely on proxy statements filed on the SEC’s EDGAR system instead of
keeping their own copies.
Proxy
voting records:
|
|
|
• |
The Advisers’ proxy voting
record is maintained by ISS. The Proxy Voting Team, with the assistance of
the Investment Accounting and SMA Operations Departments, periodically
ensures that ISS has complete, accurate, and current records of Clients
who have instructed the Advisers to vote proxies on their
behalf. |
|
|
|
• |
The Advisers maintain
documentation to support the decision to vote against the ISS
recommendation. |
|
|
|
• |
The Advisers maintain
documentation or any communications received from third parties, other
industry analysts, third party service providers, company’s management
discussions, etc. that were material in the basis for any voting
decision. |
Procedures for
Class Actions
In general, it is the Advisers’
policy not to file class action claims on behalf of Clients. The Advisers
specifically do not act on behalf of former Clients who may have owned the
affected security but subsequently terminated their relationship with the
Advisers. The Advisers only file class actions on behalf of Clients if that
responsibility is specifically stated in the advisory contract, as it is the
Advisers’ general policy not to act as lead plaintiff in class
actions.
The process of g class action
claims is carried out by the Investment Accounting Department. In the event the
Advisers opt out of a class action settlement, the Advisers will maintain
documentation of any cost/benefit analysis to support that
decision.
The Advisers are mindful that they
have a duty to avoid and detect conflicts of interest that may arise in the
class action claim process. Where actual, potential or apparent conflicts are
identified regarding any material matter, the Advisers manage the conflict by
seeking instruction from the Law Department and/or outside counsel.
Disclosure
The Advisers ensure that Part 2A
of Form ADV is updated as necessary to reflect: (i) all material changes to this
policy; and (ii) regulatory requirements.
Responsibility
Various individuals and
departments are responsible for carrying out the Advisers’ proxy voting and
class action practices, as mentioned throughout these policies and procedures.
The Investment Accounting Department has assigned a Proxy Voting Team to manage
the proxy voting process. The Investment Accounting Department has delegated the
handling of class action activities to a Senior Investment Accounting
Leader.
In general, the Advisers’ CCO or
CCO NA (or their designee) oversees the decisions related to proxy voting, class
actions, conflicts of interest, and applicable record keeping and disclosures.
In addition, the Compliance Department periodically reviews the voting of
proxies to ensure that all such votes - particularly those diverging from the
judgment of ISS - were voted in a manner consistent with the Advisers’ fiduciary
duties.
Revised 9/2013 ♦ Supersedes
12/2012
Proxy Voting
Policies and Procedures For
Principal
Exchange Traded Funds
Principal Funds,
Inc.
Principal
Investors Fund
Principal
Variable Contracts Fund
Principal Retail
Funds
(March 9,
2015)
It is each fund's policy to delegate
authority to its advisor or sub-advisor, as appropriate, to vote proxy ballots
relating to the fund's portfolio securities in accordance with the advisor's or
sub-advisor's voting policies and procedures.
The advisor or sub-advisor must
provide, on a quarterly basis:
|
|
|
1. |
Written affirmation that all
proxies voted during the preceding calendar quarter, other than those
specifically identified by the advisor or sub-advisor, were voted in a
manner consistent with the advisor's or sub-advisor's voting policies and
procedures. In order to monitor the potential effect of conflicts of
interest of an advisor or sub-advisor, the advisor or sub-advisor will
identify any proxies the advisor or sub-advisor voted in a manner
inconsistent with its policies and procedures. The advisor or sub-advisor
shall list each vote, explain why the advisor or sub-advisor voted in a
manner contrary to its policies and procedures, state whether the advisor
or sub-advisor’s vote was consistent with the recommendation to the
advisor or sub-advisor of a third party and, if so, identify the third
party; and |
|
|
|
2. |
Written notification of any
changes to the advisor's or sub-advisor's proxy voting policies and
procedures made during the preceding calendar
quarter. |
The advisor or sub-advisor must
provide, no later than July 31 of each year, the following information regarding
each proxy vote cast during the 12-month period ended June 30 for each fund
portfolio or portion of fund portfolio for which it serves as investment
advisor, in a format acceptable to fund management:
|
|
|
1. |
Identification of the issuer
of the security; |
|
|
|
2. |
Exchange ticker symbol of the
security; |
|
|
|
3. |
CUSIP number of the
security; |
|
|
|
4. |
The date of the shareholder
meeting; |
|
|
|
5. |
A brief description of the
subject of the vote; |
|
|
|
6. |
Whether the proposal was put
forward by the issuer or a shareholder; |
|
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Whether and how the vote was
cast; |
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Whether the vote was cast for
or against management of the issuer. |
Analytic
Investors, LLC
Proxy Voting
Policy and Procedure
Analytic Investors, LLC (“Analytic”)
assumes a fiduciary responsibility to vote proxies in the best interest of its
clients. In addition, with respect to benefit plans under the Employee
Retirement Income Securities Act (ERISA), Analytic acknowledges its
responsibility as a fiduciary to vote proxies prudently and solely in the best
interest of plan participants and beneficiaries. So that it may fulfill these
fiduciary responsibilities to clients, Analytic has adopted and implemented
these written policies and procedures reasonably designed to ensure that it
votes proxies in the best interest of clients.
Proxy
Oversight
Analytic acknowledges that it has a
duty of care to its clients that requires it to monitor corporate events and
vote client proxies. The firm’s Chief Operating Officer and Chief Compliance
Officer monitor policies and procedures governing proxy voting. Analytic has a
policy not to be unduly influenced by representatives of management or any
public interest or other outside groups when voting proxies. To this end,
Analytic has contracted with an independent proxy voting service (the “Proxy
Service”).
Proxy
Voting Service
The role of the Proxy Service
includes researching proxy matters, executing the voting process, maintaining a
record of all proxies voted on behalf of Analytic, advising Analytic of any
material conflicts of interest (see below), and providing Analytic with
documentation of the voting record. Analytic has opted to delegate all proxy
voting to the Proxy Service except for those instances when a conflict of
interest (see below) prevents the Proxy Service from voting according to its
guidelines. A copy of the voting policy guidelines of the Proxy Service is
attached.
Conflicts
of Interest
Occasions may arise during the
voting process in which the best interest of clients might conflict with the
Proxy Service’s interests. A conflict of interest would generally apply when
circumstances where the proxy services internal controls do not provide
sufficient separation of duties, including: (i) business relationships where the
Proxy Service has a substantial business relationship with, or is actively
soliciting business from, a company soliciting proxies, or (ii) personal or
family relationships whereby an employee of the Proxy Service has a family
member or other personal relationship that is affiliated with a company
soliciting proxies, such as a spouse who serves as a director of a public
company, or (iii) if a substantial business relationship exists with a proponent
or opponent of a particular initiative.
At times of such conflict of
interest, the Proxy Service will recuse itself from voting a proxy and notify
Analytic. Upon notification of the Proxy Service’s recusal from voting,
Analytic’s Chief Compliance Officer or Chief Operating Officer will then vote
the proxy, adhering to the original voting policy guidelines provided by the
Proxy Service. Analytic will not override the voting guidelines of the Proxy
Service. A record of the voting by Analytic will be retained by the Chief
Compliance Officer.
Voting
Guidelines
Analytic has reviewed the Proxy
Service’s voting recommendations and have determined that the policy provides
guidance in the best interest of our clients. A copy of these guidelines is
attached. The firm’s clients may elect to institute client specific voting
guidelines. Upon notification of these instructions, Analytic will supply the
Proxy Service with the client directed voting guidelines.
Proxy
Voting Record
The Chief Compliance Officer will
ensure the Proxy Service can provide, on demand, a record containing the
following information regarding the voting of proxies: (i) the name of the
issuer, (ii) the CUSIP number (or similar security identification information),
(iii) the shareholder meeting date, (iv) number of shares voted, (v) a brief
description of the matter brought to vote; (vi) whether the proposal was
submitted by management or a shareholder, (vii) how the Service voted the proxy
(for, against, abstained), and (viii) whether the proxy was voted for or against
management.
Obtaining
a Voting Proxy Report
Clients may request a copy of the
guidelines governing proxy voting and/or a report on how their individual
securities were voted by calling Analytic’s Chief Compliance Officer at
1-800-618-1872 or [email protected]. The report will be provided free of
charge.
Recordkeeping
Pursuant to Rule 204-2 of the
Investment Advisers Act of 1940, Analytic will maintain the following records
for five years in an easily accessible place, the first two years in its
office:
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Analytic’s proxy voting
policies and procedures, as well as the voting guidelines of the Proxy
Service; |
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Proxy statements received
regarding client securities (proxy statements filed via EDGAR will not be
separately maintained by Analytic); |
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Records of votes cast on
behalf of clients; |
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Records of written client
requests for voting information; |
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Records of written responses
from Analytic to both written and verbal client requests;
and |
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Any other documents prepared
that were material to Analytic’s decision to vote a proxy or that
memorialized the basis for the decision. |
Colonial
First State
Global
Asset Management
Guidelines and
principals for corporate engagement on governance, environment and social
issues
1. Introduction
Corporate governance is concerned
with the way corporate entities are governed, as distinct from the way
businesses within those companies are managed on a day to day basis.
Corporate governance addresses the
issues facing boards of directors, such as:
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strategy, financial policies,
disclosure, legal issues and standards of corporate behaviour W the level
and type of interaction with senior management
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relationships with the
shareholders and other stakeholders interested in the affairs of the
company (such as fund managers, creditors, debt financiers, analysts,
auditors and corporate regulators) |
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oversight of the company’s
material environmental and social risks1 and the manner in which these
are being monitored, disclosed and managed in the interests of
shareholders and other relevant stakeholders, and
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Colonial First State Asset
Management (Australia) Limited (CFSAMA) is in a position to influence the
environmental, social and governance (ESG) performance of companies via
discussions with management or the board of directors and through the exercising
of proxy votes. The exercising of the voting rights must be in the best
interests of our unitholders and clients.
The scope of this document pertains
primarily to the engagement of companies listed on the Australian Securities
Exchange; however the principles may also be used to guide our engagement
activities in other jurisdictions.
CFSAMA follows the Investment and
Financial Services Association (IFSA) guidelines on corporate governance (see
Appendix A). The guidelines cover four key areas: communication, voting, proxy
voting policy and procedures and reporting to clients.
This document includes environmental
and social guidelines (section 5) which have been developed based on Colonial
First State Global Asset Management’s2 Responsible Investment
Policy3 (Annexure B) and the United Nations
Principles for Responsible Investment.4
Notes:
1. Refers to issues including human
capital and the alignment of people strategies with business strategies, human
rights, workplace safety and relationships with important stakeholder groups
such as regulators, consumer advocacy groups and non-government
organisations.
2. Colonial First State Global Asset
Management is a business name owned by Colonial First State Asset Management
(Australia) Limited (CFSAMA).
3. More detail on Colonial First
State Global Asset Management’s approach can be found at
cfsgam.com.au/UNPRI.
4. http://www.unpri.org.
2. Communication
As a major investor, CFSAMA believes
in having direct contact with the management and/or directors of companies into
which we invest. This contact might include constructive communication about
performance, corporate governance, environmental and social issues, or other
matters affecting stakeholder interests and long-term shareholder value.
As a shareholder, CFSAMA is entitled
to receive reports and accounts and other explanatory circulars from companies
which are required by law or regulatory authorities. We also have the right to
attend company meetings and raise questions about the affairs of the company.
While these formal bases for communication are necessary, they may not be
sufficient to allow companies and shareholders to gain full understanding of
each other’s aims and requirements.
Direct dialogue will give CFSAMA a
better appreciation of a company’s objectives, its potential problems and the
quality of its management, while making the company aware of our expectations
and requirements as a shareholder. In regard to environmental and social issues,
CFSAMA will engage management on those matters that it believes have material
impact on company earnings and value, and on best practices which the company
should adopt.
As the intent of this dialogue is
not to make CFSAMA an insider, in view of the insider trading provisions of the
Corporations Act, care must be taken when communicating directly with the board
of directors and management of companies. CFSAMA has an Insider Trading Policy
in place which outlines protocols should inside information come into our
possession.
3. Voting
CFSAMA will vote on all issues at company meetings where it
has the authority to do so. Voting rights are a valuable asset which should be
managed with the same care and diligence as any other asset. Ultimately,
shareholders’ ability to influence management depends on shareholders’
willingness to exercise those rights.
CFSAMA generally supports boards by
positive use of its voting power unless there is good reason for doing
otherwise. Where a board has received steady support over a period of time, it
should become a matter of concern for that board if support is not forthcoming
on a particular matter. When CFSAMA intends to vote against a proposal, we may
choose to make representations to a company prior to the vote so that
appropriate consultation may take place with a view to achieving a satisfactory
solution.
Where a satisfactory outcome cannot
be achieved on an important issue, it may be desirable for the relevant fund
manager or delegate to attend the relevant meeting of the company and to explain
why the proposal is being opposed. In such cases a poll may be requested to
ensure that the vote is duly recorded.
All votes must be made in the best
interest of the unitholders and clients. It is acknowledged that our goal is to
apply our corporate governance guidelines and principles in a consistent manner.
However, on rare occasions CFSAMA may deem it to be in the best interests of
unitholders and clients to exercise its proxy vote in a manner that is not
consistent on certain occasions, as a degree of subjectivity may be required.
For example, it may be acceptable for a non-executive director to hold six board
positions and provide a meaningful contribution, while for another director six
board positions may be too demanding and result in a less meaningful
contribution. Following are examples of voting issues and our current position:
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Directors/non-executive
directors – we
consider independence of a non-executive director to mean that they have
not been former executives of the relevant company for a minimum of five
(5) years. |
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Audit and
remuneration committees – membership of an audit
committee should be non-executive. Members of both committees should be
listed in annual reports and identified on the notice of re-election of
directors. It is preferred that only non-executive directors sit as
members of the remuneration committee. |
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New
directors – there
should be a formal and transparent procedure for the appointment of new
directors to a board. The Chairman and a majority of the members of the
Nomination Committee should be non-executive directors.
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Number of
board appointments – non-executive directors
must balance their number of board appointments with their personal
ability to provide a meaningful contribution to each board. Similarly,
executive directors who have outside directorships need to ensure that
their contribution to their current employer is not diminished.
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Removal of
directors – we
will not support changes to company constitutions that weaken the position
of non-executive directors on the board. |
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Retirement
by rotation –
with the exception of the Chief Executive, we expect all directors to seek
re-election, with one third seeking election each year. For directors over
the age of 72, and provided that the constitution of the company permits
re-election, the usual assessment criteria for selecting directors will
apply. |
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Division of
roles – in most
cases the role of Chairman and Chief Executive should be split. We
consider that board changes involving the Chief Executive becoming
Chairman or executive directors becoming nonexecutive is acceptable only
if there is a clear majority of independent
directors. |
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Hostile
takeovers –
CFSAMA will meet both parties at least once before making a decision. Any
decision made will be in the best interests of unit/shareholders.
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Political
donations –
CFSAMA supports the notion that companies should seek a mandate from
shareholders before making political donations. Such mandates should last
for no longer than three years. Justification of political donations
should be provided at the annual general meeting or in the annual
report. |
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Remuneration – we support the principle
that there should be full disclosure of directors’ total remuneration
packages, including share options, fringe benefits and retirement
benefits. We expect appropriate justification for levels of remuneration
and the link of these to company objectives and performance from the
Chairman of the Remuneration Committee. |
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Termination
payments – we
believe that payments on termination of executive directors’ contracts
should not be excessive. In the case of poor performance, a statement of
justification should be given. We may write to the Chairman of the
Remuneration Committee to ask for details of compensation payments to
departing executive directors if they are not published. Disclosure of any
contingent liabilities should be made. |
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Long term
incentive schemes
– we support the introduction of share-based incentive schemes as a means
of aligning the longer-term interests of management and shareholders.
These schemes should be subject to shareholder approval and have
reasonably demanding performance targets. We prefer that no awards vest
at, or below, median performance with an appropriate comparator universe.
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Options for
non-executive directors – we are of the view that
these should not be granted. We support the notion that non-executive
directors can be paid in the stock of the company.
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Environmental
and social risks
– we believe that well governed companies have appropriate environmental
and social risk policies and management procedures in place. As part of
the governance process, we expect boards to have oversight of these risks
and policies, and executive management to be able to publicly report on
these risks and there management and indicate where appropriate the
potential impact on company earnings. |
4. Proxy voting
policy and procedures
CFSAMA is advised of corporate
actions such as proxy voting by its custodian. The Head of each asset class or
their authorised signatory is responsible for ensuring that all company resolutions are reviewed and
an appropriate and consistent recommendation is made in line with the corporate
governance guidelines and principles as outlined in this document. Each
resolution is to be stated and the voting intention with supporting views is to
be confirmed in writing by the Head of the asset class or their authorised
signatory. In cases where the resolution may be contentious in nature, a more
detailed explanation as to the reasons for the voting intention 2 is to be
outlined. Examples of contentious issues are executive remuneration packages or
the appointment of non-independent directors.
Once the proxy voting intentions
have been confirmed by the Head of asset class or their authorised signatory,
they must communicate the decision to the Investment Management Support unit in
an agreed format by the pre-advised cut-off. The Investment Management Support
unit has sole responsibility for instructing the relevant custodian of the proxy
voting instruction, and whether there is any necessity for a member of the
Investment team to attend the meeting and vote the shares or call a poll in
person. The Investment Management Support unit will maintain records of all
proxy voting decisions in a format which will allow the dissemination of this
data to the relevant clients.
CFSAMA will only vote in the best
interests of its unitholders and clients. It is CFSAMA’s duty to put any other
unit/share holder relationship or interest to one side when deciding how to vote
on behalf of unit-holders and clients.
5. Environmental,
social and governance assessment and engagement
CFSAMA recognises that ESG issues
impact on business value and has developed its own ‘integrated’ approach to
responsible investment in keeping with the United Nations Principles for
Responsible Investment and other emerging industry performance standards
(Appendix C).
CFSAMA is committed to integrating
ESG factors into its investment decision-making, ownership and engagement
policies and procedures. CFSAMA believes good management of environmental and
social issues is integral to good corporate governance. CFSAMA will engage with
companies in which it invests, or is considering for investment, with regard to
their ESG risk management policies, strategies, performance, disclosure and
management capabilities.
CFSAMA’s approach to environmental
and social issues is based on the rigorous assessment of how ESG issues impact
on company earnings and value. To achieve this, and in keeping with CFSAMA’s
corporate governance principles, our approach is premised on the following:
ESG
disclosure –
encouraging the companies we invest in to disclose their material ESG risks and
performance in keeping with emerging best practice
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Engagement
– as owners, or
potential owners, engage companies, and where appropriate, vote on issues
where company value is at risk from ESG issues
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Voting – as owners, CFSAMA portfolio
managers will develop their own voting positions on key environmental and
social issues, and |
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Reporting – the outcomes of engagement
and voting activities to clients. |
5.1 ESG
Disclosure
To ensure CFSAMA has adequate
information to assess the value at stake (risks and opportunities) we will
encourage and recommend companies to disclose their material ESG risks and
performance in keeping with emerging global standards. More specifically,
companies are expected to report on the following aspects:
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Environmental and social risks
impacting materially on earnings, including contingent liabilities
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Governance policies and
procedures for assuring compliance with internal ESG policies, improving
performance and mitigating risks across operations, supply chain and
products and services |
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CFSAMA expects all ASX/S&P
300 companies to report in keeping with these guidelines
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ESG risks
and performance –
companies are encouraged to report their ESG performance publically on a
regular basis in line with the Global Reporting Initiative’s G3
Guidelines. In recommending G3 as the preferred ESG disclosure framework,
CFSAMA expects companies, especially smaller companies and companies in
emerging markets, to select only those key performance indicators that
appropriately represent the material ESG considerations pertinent to their
operations (see Appendix C) |
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Emerging
markets – for
companies with operations in developing countries and/or who source
products from these companies, CFSAMA expects these companies to be
operating within the OECD Guidelines for Multinational Enterprises
(Appendix C) |
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Climate
change –
companies operating in high energy and greenhouse gas intensive sectors
are expected to report their climate change risks and opportunities in
line with the Global Framework for Climate Risk Disclosure (Appendix C),
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Sector
guidelines –
should CFSAMA develop its own sector guidelines, it will make these
available to companies which face material ESG issues in their operations.
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5.2 Engagement
Procedures and Process As an owner of company shares,
CFSAMA will engage companies on ESG issues in the following circumstances:
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Risk
– where CFSAMA’s
assessment shows that certain ESG factors have a material impact on
company earnings or value or have the potential to do so
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Management
Performance –
where, in CFSAMA’s assessment, management is not adequately addressing ESG
issues that could have a material impact on earnings and/or value
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Process – in keeping with CFSAMA’s
approach, company engagement on ESG issues, when necessary, will be
primarily carried out on a direct basis (e.g. by correspondence requesting
information and/or clarification; meeting with management; and indirectly
via its proxy voting process |
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Outcomes – CFSAMA takes its ownership
and engagement responsibilities seriously and will only engage companies
on material issues. CFSAMA engages companies to achieve specific outcomes,
namely ensure good ESG practices and thereby protect investor interests.
In instances where management does not respond adequately to CFSAMA’s
engagement, this may impact negatively on its valuation assessment and/or
could result in CFSAMA divesting its ownership
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Accountability
– given
engagement is an integral part of ownership, company engagement is best
carried out by the responsible portfolio managers and their investment
teams |
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Themes – CFSAMA recognises that ESG
covers a wide range of issues and therefore it will concentrate its
efforts on those material ESG issues in which it has a significant
understanding and where it can exert influence towards achieving a
specific outcome, and |
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Collaboration
– CFSAMA
recognises the benefits of collaborative engagement and therefore where
appropriate, may collaborate in industry initiatives and forums where
appropriate. |
5.3 Voting on
Environmental and Social Issues
In keeping with CFSAMA’s approach to
responsible investment (Annexure B) and governance (see section 3), sector
positions will be developed on key environmental and social issues to guide
engagement and voting. These positions will be developed in line with CFSAMA’s
principle of acting in the best interests of unitholders and clients.
It is important to note however,
given the low probability of environmental and social issues being included on
company AGM agenda’s, most engagement activity pertaining to these issues is
likely to occur directly with management.
The ESG guidelines and principles
contained in document will be used to assist decision-making and company
engagement activities across all our various funds. However, given the
independent manner in which CFSAMA’s various funds are governed and managed, it
is nevertheless possible for managers to vote differently on and have different
perspectives about company ESG performance.
5.4 Reporting on
Engagement Activities
In keeping with existing practice,
CFSAMA will record and report to clients and other relevant stakeholders on all
material ESG engagement activities on biannual basis.
6. Reporting to
clients Wherever a
discrete mandate client delegates responsibility for exercising proxy votes,
CFSAMA will report back to the client how votes were cast on their behalf, if
requested by the client.
The authority and responsibility for
exercising proxy votes will be defined within the investment management
agreement executed between CFSAMA and each discrete mandate client. However,
CFSAMA may still receive proxy voting instructions from each discrete mandate
client on a case by case basis or alternatively the discrete mandate client may
instruct their custodian directly. The frequency and content of any reporting to
a client is provided for in the Investment Management Agreement.
Where the client’s discrete
portfolio contains Commonwealth Bank of Australia (CBA) shares, it will be
explained to the client that CFSAMA is unable to vote these shares due to the
nature of the ASIC exemption allowing us to purchase CBA shares for our funds.
The Investment Management Support unit will provide details of the resolutions
to be voted on at the meeting to the Investments team for their information
only. The Investment Management Support unit will also provide details of the
agenda to the Distribution team who will ensure that that any clients holding
CBA shares are provided with a copy of the agenda and advised of the deadline
for advising the voting instruction to apply to their holdings. The Distribution
team will pass these voting instructions back to the Investment Management
Support unit who will be responsible for ensuring that the relevant custodians
are provided with instructions on how to exercise the proxies.
7. External
managers
In relation to all securities in the
investment mandates, the external manager is free to exercise or refrain from
exercising any voting rights (or direct the Custodian to do so) as it sees fit.
For the avoidance of doubt, CFSAMA
is not permitted to issue any instruction in respect of, or which in any way
influences, the voting powers of the external manager and the external manager
is entitled to ignore any such instruction.
Appendix A
A summary of the Investment and
Financial Services Association (IFSA) Guidelines.
IFSA
Guidelines
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Guideline
1: Communication
Investment managers should encourage direct contact with companies
including constructive communication with both senior management and board
members about performance, corporate governance and other matters
affecting shareholder interests. |
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Guideline
2: Voting
Investment managers should vote on all material issues at all Australian
company meetings where they have voting authority and responsibility to do
so. |
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Guideline
3: Proxy Voting Policy and Procedures Investment managers should
have a written policy on the exercising of proxy votes that is approved by
their board and formal internal procedures to ensure that policy is
applied consistently. |
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Guideline
4: Reporting to Clients Wherever a client delegates
responsibility for exercising proxy votes, the investment manager should
report back to the client when votes are cast (including abstentions) on
investment owned by the client. Reporting on voting should be part of the
regular reporting process to each client. The investment manager should
report back to clients whether or not the votes are cast. The report
should include a positive statement that the investment manager has
complied with its obligation to exercise voting rights in the client’s
interests only. If an investment manager is unable to make the statement
without qualification, the report should include an explanation.
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Appendix B
Colonial First
State Global Asset Management Responsible Investment Policy Statement
Introduction
ESG issues are increasingly
impacting on business value. Colonial First State Global Asset Management
recognises this trend in business imperatives and is committed to enhancing its
integration of ESG factors in investment decision-making. Such an approach is
consistent with the company striving for excellence in all that it does and with
being a responsible investor.
We define ‘responsible investment’
as the integration of ESG issues into institutional investment decision-making
and ownership practices, such that medium-to-longterm returns to beneficiaries
are improved.
Our
goal
Our goal is to be a leading
Australian-based global fund manager and part of the global leadership group on
responsible investing. We recognise that this will be a phased process and we
will liaise closely with our clients and other stakeholders to ensure their
interests are being addressed.
Our
approach
Our focus is on enhancing the
investment processes that have brought us success to date and making them even
more robust by formally incorporating ESG considerations. This is distinct from
what many call ‘socially responsible investing’ or ‘ethical investing’ which
often seeks to limit or negatively screen a universe of investments. Consistent
with our business plans, Colonial First State Global Asset Management has signed
the United Nations Principles for Responsible Investment. In signing the
Principles, we publicly commit to adopt and implement them, consistent with our
fiduciary responsibilities. We will:
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integrate ESG considerations
into our investment, ownership and engagement policies and procedures
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engage with companies in which
we invest, or are considering for investment, with regard to their ESG
risk management strategies, performance, disclosure and management
capabilities, as well as sharing with them our approach and implementation
progress |
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assess ESG risks at a sector
and asset level, rather than excluding any specific sectors from
consideration W develop specific policies and procedures on how we
approach prominent ESG issues, such as climate change and human rights
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encourage the entities in
which we invest to improve and report on their ESG performance in keeping
with emerging best practice |
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promote responsible investment
by playing an active part in relevant debates, policy consultations and in
the global network of investors who face similar ESG integration
challenges, and |
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manage and report on our own
ESG performance in keeping with emerging best practice. We will annually
review our performance, with the setting of objectives and targets at the
end of each calendar year, commencing in 2007. We will also submit annual
reviews to the UN PRI on our progress. |
Because our business covers a broad
range of asset classes, investment styles and risk profiles, much of the work
for this effort takes place at the investment team level. Each of these teams
will maintain its own responsible investment implementation plan that is
tailored to its activities and circumstances.
Review
This is our first Responsible
Investment Policy. We acknowledge that emerging best practice and global
standards are evolving rapidly and therefore to ensure our approach remains
relevant, we undertake to review this policy on an annual basis until further
notice.
Signed:
/s/ Warwick Negus
Warwick Negus
(CEO)
Approved 27 August 2007
Appendix C
CFSAMA –
Preferred ESG disclosure frameworks
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1. |
Australian
Superannuation ESG Guidelines – contains suggestions for funds
on how to incorporate ESG issues into investment processes and to
facilitate the broader consideration of ESG issues across the investment
industry. The guidelines also provide suggestions for fund managers and
asset consultants to assist with the consideration of ESG issues, outlines
the expectations that superannuation funds may have of their service
providers and provides broad expectations and suggestions on ESG
disclosure for listed companies. |
http://www.acsi.org.au/dsp_viewContent.cfm?news=1&nid=123
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2. |
The Global
Reporting Initiative (GRI) – is a not-for-profit,
worldwide, multi-stakeholder network of business, civil society, labour,
investors, accountants and others that collaborate through
consensus-seeking approaches to create and continuously improve a
sustainability reporting framework. The third version of the Guidelines,
known as the G3 Guidelines, is the world’s most widely used sustainability
reporting framework. |
This framework sets out the
principles and indicators that organisations can use to measure and report their
significant economic, environmental, and social performance. The cornerstone of
the framework is the Sustainability Reporting Guidelines, covering nine
principles and nine standard disclosure performance indicator categories
(environment, human rights, labour practices and decent work, society, product
responsibility and economic).
http://www.globalreporting.org/
ReportingFramework/ G3Guidelines/
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3. |
Global
Framework for Climate Risk Disclosure – is a statement of investors’
expectations about the information that they need to analyse climate risk
and opportunities. The Framework aims to encourage standardised climate
risk disclosure so that it is easy for companies to provide and easy for
investors to analyse. The Framework is not a new reporting mechanism.
Instead, the investors supporting the Framework intend for companies to
report through existing reporting mechanisms, including mandatory
financial disclosures to securities agencies, the leading voluntary
mechanisms (the Carbon Disclosure Project and the Global Reporting
Initiative), and other communications with investors.
|
http://www.unepfi.org/fileadmin/documents/
using_ framework.pdf
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4. |
Carbon
Disclosure Project (CDP) – is an independent
not-for-profit organisation, supported by investors, that facilitates a
dialogue with companies, supported by quality information regarding the
implications for shareholder value and commercial operations presented by
climate change. The cornerstone of the CDP is the annual survey of the
world’s largest corporations and which is emerging as one of the main
climate change reporting frameworks. |
http://www.cdproject.net/
|
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|
5. |
OECD
Guidelines for Multinational Enterprises – are recommendations
addressed by governments to multinational enterprises operating in or from
adhering countries (the 30 OECD member countries plus ten non-member
countries: Argentina, Brazil, Chile, Egypt, Estonia, Israel, Latvia,
Lithuania, Romania and Slovenia). They provide voluntary principles and
standards for responsible business conduct in a variety of areas including
employment and industrial relations, human rights, environment,
information disclosure, combating bribery, consumer interests, science and
technology, competition, and taxation. |
http://www.oecd.org/daf/investment/guidelines/
DD J CAPITAL
MANAGEMENT, LLC
PROXY VOTING
POLICIES AND PROCEDURES Updated March 13, 2012
I.Overview
In accordance with the fiduciary
duties owed to our clients and Rule 206(4)-6 promulgated by the Securities and
Exchange Commission (the "SEC") under the Investment Advisers
Act of 1940 (the "Advisers
Act"), DDJ Capital
Management, LLC ("DDI"), a registered investment adviser, has adopted and
implemented these Proxy Voting Policies and Procedures (the "Policies") that we believe are reasonably
designed to ensure that proxies are voted in the best interests of our clients.
Because our authority to vote proxies on behalf of our clients is established by
our advisory contracts with such clients, the Policies have been tailored to
reflect these specific contractual obligations.1 The Policies also reflect the
long-standing fiduciary standards and responsibilities for ERISA accounts set
out in Department of Labor Bulletin 94-2, 29 C.F.R. 2509.94-2 (July 29,
1994).
II.Statement of
Proxy Voting Policy
It is the policy of DDJ to vote
all proxies in the best interests and for the benefit of its clients. We believe
that this means voting in accordance with our judgment as to what voting
decision is most likely to maximize total return to the client as an investor in
the company whose securities are being voted, including, where applicable,
returns to the client on positions held in non-voting securities of that issuer
or securities of other issuers that may be materially affected by the outcome of
the vote.
DDJ primarily manages investments
in high-yield and distressed debt, rather than equity, securities. As a result,
DDJ does not receive proxies in connection with most of our clients' investment
positions. However, certain of our client accounts do hold equity securities.
Many of the proxies received by DDJ with respect to securities held in client
accounts relate to special situations, such as the restructuring of an issuer
that is emerging or recently emerged from bankruptcy, that is in financial
distress or that has significant debt obligations but improving fundamentals.
DDJ believes that it is not appropriate, in most cases, to vote proxies with
respect to the securities of such issuers in accordance with fixed,
pre-determined guidelines. Accordingly, DDJ generally reviews and makes a voting
decision on each matter presented in such proxy on an individual, case-by-case
basis. DDJ generally gives similar, case-by-case treatment to proxies with
respect to securities of other issuers, with the exception of routine matters
noted below. Normally, voting decisions are made by the portfolio manager or
research analyst responsible at the time of the vote for monitoring the
corporate events of the particular
1 Certain clients may withhold proxy
voting authority from DDJ. In such instances, DDJ will not vote any proxies
received with respect to the underlying client account, though DDJ may provide
consultation to such client in advance of any applicable voting
deadline.
issuer of the securities to be
voted. DDJ believes such individualized consideration of proxy voting decisions
best serves our clients' interests. For certain more routine matters that are
commonly presenting to shareholders for vote and that do not involve issuers in
special situations or other circumstances requiring individual analysis, DDJ has
established general voting guidelines that are set forth in Section VJJ of these
Policies. However, with respect to any particular proxy, DDJ is not obligated to
follow these general voting guidelines.
In certain circumstances, DDJ may
elect to not vote proxies with respect to securities held in client accounts,
including, but not limited to, situations where (a) the securities are no longer
held in a client's account; (b) the proxy or related materials are not received
in sufficient time to allow DDJ to analyze the material or cast an informed vote
by the voting deadline; or (c) DDJ concludes that the costs of voting a proxy
outweigh any potential benefits to its clients.
III. Proxy
Voting Procedures
DDJ has designated an internal
proxy administrator (the "Administrator"). The Administrator is
responsible for coordinating the review and voting of client proxies. With
respect to pending proxy matters, the Administrator reviews on a regular basis
the information provided to us electronically by the custodians for our clients
(generally, in whose name (or nominee name) the security has been
registered).2 Upon concluding that a proxy has
been distributed to shareholders by an issuer in which a client has a long
position, the Administrator monitors incoming regular mail for paper copies of
such proxies. The Administrator follows up directly with the custodian, issuer
and/or Automatic Data Processing, Inc. ("ADP") in the event that the issuer
(or other shareholder service) has not timely delivered such paper proxy to
DDJ.
Following receipt of a proxy, the
Administrator reviews the proxy and the matters to be voted therein. The
Administrator also cross-checks the shareholdings information contained in the
proxy with the applicable client holdings report to confirm that the ownership
information on file with ADP, the custodian and/or the issuer matches our
internal records; to the extent that it does not, the Administrator will attempt
to reconcile the discrepancy directly with the applicable custodian.
Furthermore, any material conflicts of interest identified by the Administrator
are resolved as described in Section IV below. The Administrator then
distributes the proxy to the applicable portfolio manager or research analyst so
that s/he can review the proxy in accordance with the procedures outlined in
Section II above. If the portfolio manager or research analyst is aware of any
matter that may constitute a material conflict of interest, s/he will contact
the Administrator such that the conflict may be addressed in accordance with the
procedures described in Section IV below. Otherwise, the portfolio manager or
research analyst will return the completed proxy to the Administrator. The
Administrator then provides the Chief Compliance Officer (or a designee) with a
copy of the completed proxy for review. If the Chief Compliance Officer is aware
of any material conflict of interest, s/he will contact the Administrator such
that the conflict may be addressed in accordance with the procedures described
in Section IV below. Otherwise, the Administrator votes the proxy in accordance
with the instructions provided by the portfolio manager or research analyst
typically either
2 DDJ may also review ProxyEdge, an
electronic proxy notification and voting service to which DDJ subscribes, for
information regarding proxy voting.
electronically (typically via
www.proxyvote.com) or via paper ballot, as
applicable.3 After the Administrator has voted
the proxy, the Administrator keeps a copy of the proxy, together with a
completed internal checklist of proxy procedures maintained by DDJ (the form of
which is attached hereto as Exhibit
A), for record
keeping purposes.
In the event that the
Administrator is out of the office, the DDJ Head Trader assumes responsibility
for the timely internal distribution and voting of proxies.
IV. Conflicts
of Interest
From time to time, DDJ (and/or its
affiliates) may have a material conflict of interest with respect to a matter to
be voted. For example, it is possible that DDJ (or one of its affiliates) may
have a very significant business relationship with either the company whose
stock is being voted, the person soliciting the proxy or a third party that has
a material interest in the outcome of the proxy vote. If the Administrator
identifies or is notified of a potential material conflict of interest, the
Administrator will convene a meeting of DDJ's internal proxy committee, which
has been created to address situations when such conflicts arise. The internal
proxy committee, which consists of one or more members of the DDJ legal
department and such other DDJ personnel as may be designated to serve on the
committee from time to time, will then meet to determine whether voting on such
proxy matter presents a material conflict of interest. In the event that the
internal committee concludes that there is a material conflict of interest, DDJ
generally will request a waiver of the conflict or voting instructions from the
client, a representative of the client or an appropriate independent third
party. Specifically:
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for investment fund clients
of DDJ that have established an independent board of advisors, DDJ will
disclose the conflict to such board of advisers of the applicable
investment fund, and either vote the proxy as instructed by the applicable
board or obtain a waiver for DDJ to vote the
proxy; |
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for investment fund clients
of DDJ that have not established a board of advisors, DDJ will disclose
the conflict (a) to such fund's independent accountants or another
unaffiliated third party advisor selected by DDJ, and vote the proxy in
accordance with the instructions of such proxy advisor, or (b) to the
underlying investors (e.g., limited partners) of such investment fund and
seek either voting instructions or a waiver of the conflict directly from
a majority in interest with respect to such
investors; |
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for any commingled vehicle
established as a trust, DDJ will disclose the conflict to the trustee of
such entity (provided that the trustee is unaffiliated with DDJ), and seek
either voting instructions or a waiver of the conflict from such
trustee; |
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for ERISA accounts, DDJ will
disclose the conflict to the plan sponsor, trustee or other named
fiduciary for the plan and seek either voting instructions or a waiver of
the conflict from such fiduciary; and |
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for other non-ERISA separate
accounts, DDJ will disclose the conflict to the underlying client and seek
either voting instructions or a waiver of the conflict directly from such
client. |
3 In certain cases, depending on the
voting authority provided to DDJ by the underlying client, DDJ may instruct the
client's custodian to vote the proxy in accordance with DDJ's
direction.
In the event that the client,
client representative or other third party, as the case may be, does not desire
to direct the vote of the proxy matter in question, DDJ may, as circumstances
warrant, take other steps, such as consulting with its outside legal counsel or
an independent third party service, which steps are designed to result in a
decision that is demonstrably based on the clients' best interests and not the
product of the conflict. If a material conflict cannot be resolved as described
above, DDJ will not vote the proxy.
V.Maintenance of
Proxy Voting Records
As required by Rule 204-2 under
the Advisers Act, DDJ maintains records of proxies that it has voted on behalf
of its clients. These records include:
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(i) |
a copy of DDJ's internal
policies and procedures with respect to proxy voting, as updated from time
to time; |
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(ii) |
copies of proxy statements
received regarding securities held in client accounts, unless the
materials are available electronically through the SEC's EDGAR
system; |
(iii)a record of each vote cast on
behalf of our clients;
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(iv) |
a copy of any internal
documents created by DDJ that were material to making the decision how to
vote proxies on behalf of its clients;
and |
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(v) |
each written client request
for proxy voting records and DDJ's written response to any (written or
oral) client request for such records. |
With respect to accounts managed
on behalf of any plan subject to ERISA, DDJ also maintains accurate proxy voting
records to enable the named fiduciary of such accounts to determine whether DDJ
is fulfilling its ERISA obligations with respect to a particular account. DDJ
will maintain these proxy voting books and records for a period of six years.
These records will be maintained for at least the first two years in DDJ's
office.
VI.Disclosure
DDJ will provide each client a
summary of these Policies. Alternatively, or upon the request of any client, DDJ
will provide such client copies of its full Policies as well as information with
respect to how DDJ voted proxies on behalf of such client.
VII. Proxy
Voting Guidelines
The following guidelines are not
exhaustive and do not include all potential voting issues. Because proxy voting
issues and the circumstances of individual portfolio companies are so varied,
there may be instances when DDJ will not vote in strict adherence to these
guidelines. In addition, votes on matters not covered by these guidelines will
be determined in accordance with the policies and procedures principles set
forth above. For example, proxy votes that present company-specific issues of a
non-routine nature may be more appropriately handled on a case-by-case basis, as
described above. At any time, DDJ may seek voting instructions from some or all
of the clients holding the securities to be voted, and, as a result, client
instructions may cause DDJ to vote differently for different clients on the same
matter.
I. The Board of
Directors
A.Director
Nominees in Uncontested Elections
Vote for
director nominees,
examining the following factors:
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long-term corporate
performance record of the company's stock relative to a market index;
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•composition of board and key board
committees.
In certain cases, and when
information is readily available, we may also review:
•corporate governance provisions
and takeover activity;
•board decisions regarding
executive pay;
•board decisions regarding
majority-supported shareholder proposals in back-to-back years;
•director compensation;
and
•number of other board seats held
by nominee.
B.Majority of
Independent Directors
Vote for
proposals that the
board be comprised of a majority of independent directors.
Vote for
proposals that
request that the board audit, compensation and/or nominating committees include
independent directors exclusively.
C.Director and
Officer Indemnification and Liability Protection
Vote on a case-by-case
basis proposals
concerning director and officer indemnification and liability
protection.
Vote against
proposals to limit or
eliminate entirely director and officer liability for monetary damages for
violating the duty of care.
Vote against
indemnification
proposals that would expand coverage beyond just legal expenses to include
coverage for acts or omissions, such as gross negligence or worse, that are more
serious violations of fiduciary obligations than mere carelessness.
Vote for
only those proposals
that provide such expanded coverage in cases when a director's or officer's
legal defense was unsuccessful if: (1) the director or officer was found to have
acted in good faith and in a manner that he reasonably believed was in the best
interests of the company, and
(2) only if the
director's legal expenses would be covered.
II.Proxy
Contests
A. Director
Nominees in Contested Elections
Vote on a case-by-case
basis when the
election of directors is contested, examining some or all of the following
factors:
•long-term financial performance of
the company relative to its industry;
•management's track
record;
•background to the proxy
contest;
•qualifications of director
nominees (both slates);
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evaluation of what each side
is offering shareholders, as well as the likelihood that the proposed
objectives and goals can be met; and |
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stock ownership positions of
director nominees. |
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III. |
Auditors
Ratifying Auditors |
Vote for
proposals to ratify
auditors, unless it appears that: an auditor has a financial interest in or
association with the company that impairs the auditor's independence; or there
is reason to believe that the independent auditor has rendered an opinion which
is neither accurate nor indicative of the company's financial
position.
IV.Proxy Contest
Defenses
A. Shareholder
Ability to Call Special Meetings
Vote against
proposals to restrict
or prohibit shareholder ability to call special meetings.
Vote for
proposals that remove
restrictions on the right of shareholders to act independently of
management.
B.Shareholder
Ability to Act by Written Consent
Vote against
proposals to restrict
or prohibit shareholder ability to take action by written consent.
Vote for
proposals to allow or
make easier shareholder action by written consent.
C.Shareholder
Ability to Alter the Size of the Board
Vote for
proposals that seek
to fix the size of the board.
Vote against
proposals that give
management the ability to alter the size of the board without shareholder
approval.
V.Capital
Structure
Common Stock
Authorization
Vote on a case-by-case
basis proposals to
increase the number of shares of common stock authorized for issue.
B.Stock
Distributions: Splits and Dividends
Vote for
management proposals
to increase common share authorization for a stock split, provided that the
split does not result in an increase of authorized but unissued shares of more
than 100% after giving effect to the shares needed for the split.
C.Reverse Stock
Splits
Vote against
management proposals
to implement a reverse stock split.
D.Share
Repurchase Programs
Vote for
management proposals
to institute open-market share repurchase plans in which all shareholders may
participate on equal terms.
VI.Executive and
Director Compensation
In general, we vote on a
case-by-case
basis on executive
and director compensation plans, with the view that viable compensation programs
reward the creation of stockholder wealth by having a high payout sensitivity to
increases in shareholder value.
In evaluating a pay plan, we may
consider its dilutive effect both on shareholder wealth and on voting power. We
may consider equity-based compensation along with cash components of pay.
Administrative features may also be factored into our vote. For example, our
policy is
that the plan should generally be
overseen by a committee of independent directors; insiders should not generally
serve on compensation committees.
Other factors, such as repricing
underwater stock options without shareholder approval, may cause us to vote
against a plan. Additionally, in some cases we would vote against a plan deemed
unnecessary.
A.Proposals to
Limit Executive and Director Pay
Vote on a case-by-case
basis all proposals
that seek additional disclosure of executive and director pay
information.
Vote on a case-by-case
basis all other
proposals that seek to limit executive and director pay.
Vote for
proposals to expense
options, unless the company has already publicly committed to expensing options
by a specific date.
B.Employee Stock
Ownership Plans (ESOPs)
Vote for
proposals that
request shareholder approval in order to implement an ESOP or to increase
authorized shares for existing ESOPs, except in cases when the number of shares
allocated to the ESOP is "excessive" (i.e., generally greater than 5% of
outstanding shares).
C.401(k) Employee
Benefit Plans
Vote for
proposals to
implement a 401(k) savings plan for employees. VII. Mergers
and Corporate Restructurings
Vote on a case-by-case
basis proposals
related to mergers and acquisitions, taking into account some or all of the
following factors:
•anticipated financial and
operating benefits;
•offer price (cost vs.
premium);
•prospects of the combined
companies;
•how the deal was negotiated;
and
•changes in corporate governance
and their impact on shareholder rights.
Exhibit
A
Proxy
Checklist
Name of Issuer:
Date proxy required to be
voted: Record Datej
Cross-check proxy ownership
disclosure with internal DDJ holdings report
Deliver checklist and proxy to
Responsible Analyst:
Receive completed proxy from
Responsible Analyst
Deliver completed proxy to Legal
Department
Receive completed proxy from
Legal Department
Confirm with CFO, DDJ Head Trader,
Responsible Analyst and Legal Department that no
material conflicts were
identified.
If any of the
addressees or copied persons believes that there may be a potential material
conflict of interest with respect to a proxy matter to be voted, please notify
me so that I may convene a meeting of the DDJ Internal Proxy Committee in
accordance with the Policies.
Either:
Vote proxy via on
in
accordance
with instructions provided by the
Responsible Analyst.
or
Convene DDJ Internal Proxy
Committee and vote proxy accordingly
File proxy in accordance with
internal record-keeping procedures
Comments:
Initialed:
Chris Kaminski
Administrator
LOGAN CIRCLE
PARTNERS, LP
PROXY VOTING
POLICY AND PROCEDURES
This policy defines procedures for
voting securities held on behalf of each client for which Logan Circle Partners,
LP (“Logan Circle”) has the discretionary authority to vote, and to ensure that
such securities are voted for the benefit of and in the best interest of the
client.
I. General
Policy
It is the policy of Logan Circle
to consider and vote each proxy proposal in the best interests of client
accounts for whom Logan Circle provides discretionary investment management
services and has authority to vote their proxies. Logan Circle will not vote
proxies if the advisory agreement does not expressly require Logan Circle to do
so. Logan Circle also will not vote proxies if account has explicitly reserved
the authority for itself.
In fulfilling its obligations to
clients, Logan Circle will act in a manner consistent with
the investment objectives and
guidelines of its clients. If appropriate to do so, Logan Circle may employ an
independent service provider to vote a proxy or to advise in the voting of a
proxy. In certain situations, a client or its fiduciary may provide Logan Circle
with their own proxy voting policy. In these situations, Logan Circle will
generally seek to comply with such policy to the extent it would not be
inconsistent with the fiduciary responsibility of Logan Circle.
II. Procedures for
Voting Proxies
To assist Logan Circle in its
responsibility for voting proxies and to ensure consistency in voting proxies on
behalf of its clients, Logan Circle utilizes the proxy voting and recordkeeping
services of Institutional Shareholder Services (“ISS”). ISS is an independent
third-party service provider that specializes in providing a variety of
proxy-related services to institutional investment managers. The services
provided by ISS to Logan Circle include research, issuer analysis, and voting
recommendations as well as vote execution, reporting, and
recordkeeping.
A. Monitoring
for Proxies
Both ISS and client custodians
monitor for corporate events of the underlying securities held in client
accounts. For those accounts for which Logan Circle has proxy voting authority,
Logan Circle will give direction to each client’s custodian to forward the proxy
statements to ISS to vote the proxy. Operations staff will notify ISS of all new
and existing client accounts that have delegated proxy voting authorization to
Logan Circle. Operations staff will provide all necessary information to ISS and
to the client’s custodian in order to facilitate ISS tracking clients’ proxy
statements and ballots, reconciling the share amounts reflected on the proxy
ballot with client account holdings, to electronically vote such ballots, and
maintaining the required records which detail the manner in which ISS has voted
Logan Circle client account proxies.
B. Proxy
Evaluation and Voting
1. Logan Circle shall designate one
or more employees of Logan Circle (each a “designated employee”) to review
proxies received by Logan Circle for which Logan Circle has the responsibility
to vote and to ensure that all proxies are voted according to Logan Circle’s
guidelines. Logan Circle’s voting actions shall follow the recommendations of
ISS set forth in its Proxy Voting Guidelines, unless otherwise stated in Logan
Circle’s guidelines.
2. In instances where Logan Circle
does not follow ISS’s recommendation, the designated Logan Circle employee will
review the proxy materials and provide a written recommendation to the portfolio
manager(s), Compliance and Operations for review and approval. All overrides of
ISS recommendations will be documented and approved by Compliance. The
documentation may include copies of materials that were material to the
evaluation and the recommendation made by the designated employee.
3. In instances where ISS does not
provide a recommendation, Operations staff of Logan Circle shall promptly
forward such proxy materials to the designated employee of Logan Circle for
review. The designated Logan Circle employee will review the proxy materials and
provide a written recommendation as set for in subsection B.2.
above.
4. In cases where a client has asked
Logan Circle for advice with respect to a proxy, the designated employee will
submit a written recommendation to Compliance, who will review the
recommendation for delivery to the client to confirm that there is not a
potential conflict of interest.
C. Conflicts
of Interest
1. The term “conflict of interest”
refers to a situation in which Logan Circle
or its affiliates have a financial
interest in a matter presented by a proxy, other than the obligation Logan
Circle incurs as investment adviser, which may compromise Logan Circle’s freedom
of judgment and action with respect to the voting of the proxy. Examples
include:
a. Companies affiliated with
directors and officers of Logan Circle or its affiliates; or
b. Companies
that maintain significant business relationships with Logan Circle or its
affiliates, or with which Logan Circle or its affiliate are actively seeking a
significant business relationship.
2. When a potential conflict of
interest exists, proxies will be voted in accordance with the ISS Proxy Voting
Guidelines. In rare instances, Logan Circle may decline to vote the proxy the
potential conflict of interest cannot be mitigated.
3. All voting decisions by Logan
Circle on behalf of its clients shall be influenced by other clients of Logan
Circle. All proxy voting proposals are intended to be voted in the client’s best
interests.
D. Reporting
and Disclosure
Logan Circle shall disclose within
its Form ADV where clients can obtain information on how their securities were
voted. Logan Circle shall also describe this proxy voting policy and procedures
within the Form ADV, along with a disclosure that a client shall be provided a
copy upon request.
E. Annual
Review of Proxy Voting and Recordkeeping Service Providers
1. Operations and Compliance shall
annually review the services provided by ISS or any other proxy voting and
recording service provider retained by Logan Circle to assess whether the proxy
service provider is capable of making impartial proxy voting recommendations in
the best interests of Logan Circle’s clients. In making such an assessment the
review may consider:
a. The proxy service provider’s
conflict management procedures and assessment of the effectiveness of the
implementation of such procedures;
b. The proxy service provider’s Form
ADV, if applicable, and other disclosure made by a proxy service provider
regarding its products, services and methods of addressing conflicts of
interest; and/or,
c. Inquiries to, and discussions
with, representatives of a proxy service provider regarding its products,
services and methods of addressing conflicts of interest.
2. No less than annually, Logan
Circle shall obtain from each proxy service provider a copy of its conflict
management procedures and request that the proxy service provider provide an
update of any material revision to such procedures.
F. Recordkeeping
1. Logan Circle shall retain records
relating to the voting of proxies, including:
a. A copy of this Proxy Voting Policy
and Procedures and the ISS Proxy Voting Guidelines relating to the voting of
proxies.
b. A copy of each proxy statement
received by Logan Circle regarding portfolio securities in client accounts:
however, Logan Circle shall rely on proxy statements filed on the SEC’s EDGAR
system instead of maintaining its own copies of proxy statements.
c. A record of each vote cast by
Logan Circle on behalf of a client. Logan Circle may maintain records of proxy
votes cast on behalf of Logan Circle’s clients at ISS provided that ISS provides
an undertaking to provide a copy of the documents promptly upon
request.
d. A copy of each written client
request for information on how
Logan Circle voted proxies on
behalf of the client account, and a copy of any written response by
Logan Circle to the client
account.
e. A copy of any document prepared by
Logan Circle that was material to making a decision regarding how to vote
proxies or that memorializes the basis for the decision.
2. These records shall be retained
for five (5) years from the end of the fiscal year during which the last entry
was made on such record and during the first two (2) years
onsite at the appropriate office
of Logan Circle.
Adopted: November 1, 2007
Amended: July 1 2011
Amended: January 1, 2014
Summary
Proxy Voting Guidelines
Logan Circle Partners will follow
the proxy voting guidelines adopted by of Institutional
Shareholder Services (“ISS”)
except as stated below:
Political
Spending & Lobbying Activities
Generally vote AGAINST proposals
requesting greater disclosure of a company's political contributions and trade
association spending policies and activities. However, the following will be
considered:
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The company's current
disclosure of policies and oversight mechanisms related to its direct
political contributions and payments to trade associations or other groups
that may be used for political purposes, including information on the
types of organizations supported and the business rationale for supporting
these organizations; and |
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Recent significant
controversies, fines, or litigation related to the company's political
contributions or political activities. |
Transparency. Inclusiveness.
Global Expertise.
2014 U.S. Proxy Voting Concise
Guidelines
December 19, 2013
Institutional Shareholder Services
Inc.
Copyright © 2013 by
ISS
www.issgovernance.com
ISS' 2014 U.S.
Proxy Voting Concise Guidelines
The policies
contained herein are a sampling of select, key proxy voting guidelines and are
not exhaustive. A full listing of ISS’ 2014 proxy voting guidelines can be found
at:
http://www.issgovernance.com/policy/2014/policy_information
Routine/Miscellaneous
Auditor
Ratification
Vote for proposals to ratify
auditors unless any of the following apply:
• An
auditor has a financial interest in or association with the company, and is
therefore not independent;
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There is reason to believe
that the independent auditor has rendered an opinion that is neither
accurate nor indicative of the company’s financial
position; |
• Poor
accounting practices are identified that rise to a serious level of concern,
such as: fraud; misapplication of
GAAP, or material weaknesses
identified in Section 404 disclosures; or
• Fees for
non-audit services (“Other” fees) are excessive.
Non-audit fees are excessive
if:
•
Non-audit (“other”) fees > audit fees + audit-related
fees + tax compliance/preparation fees
ttt
Board of
Directors:
Voting on
Director Nominees in Uncontested Elections
Four fundamental principles apply
when determining votes on director nominees:
1. Accountability
2. Responsiveness
3. Composition
4. Independence
Generally vote
for director nominees, except under the following circumstances:
1.
Accountability
Vote against1 or withhold from the entire board
of directors (except new nominees2, who should be considered
case-by- case) for the following:
__________________
1
In general,
companies with a plurality vote standard use “Withhold” as the contrary vote
option in director elections; companies with a majority vote standard use
“Against”. However, it will vary by company and the proxy must be checked to
determine the valid contrary vote option for the particular
company.
2
A “new nominee”
is any current nominee who has not already been elected by shareholders and who
joined the board after the
problematic action in question
transpired. If ISS cannot determine whether the nominee joined the board before
or after the problematic action transpired, the nominee will be considered a
“new nominee” if he or she joined the board within the 12 months prior to the
upcoming shareholder meeting.
Problematic
Takeover Defenses
Classified
Board Structure:
|
|
|
1.1. |
The board is classified, and
a continuing director responsible for a problematic governance issue at
the board/committee level that would warrant a withhold/against vote
recommendation is not up for election. All appropriate nominees (except
new) may be held accountable. |
Director
Performance Evaluation:
|
|
|
1.2. |
The board lacks
accountability and oversight, coupled with sustained poor performance
relative to peers. Sustained poor performance is measured by one- and
three-year total shareholder returns in the bottom half of a company’s
four-digit GICS industry group (Russell 3000 companies only). Take into
consideration the company’s five-year total shareholder return and
operational metrics. Problematic provisions include but are not limited
to: |
• A
classified board structure;
• A
supermajority vote requirement;
|
|
|
• |
Either a plurality vote
standard in uncontested director elections or a majority vote standard
with no plurality carve-out for contested
elections; |
• The
inability of shareholders to call special meetings;
• The
inability of shareholders to act by written consent;
• A
dual-class capital structure; and/or
• A
non–shareholder-approved poison pill.
Poison
Pills:
|
|
|
1.3. |
The company’s poison pill
has a “dead-hand” or “modified dead-hand” feature. Vote against or
withhold from nominees every year until this feature is
removed; |
|
|
|
1.4. |
The board adopts a poison
pill with a term of more than 12 months (“long-term pill”), or renews any
existing pill, including any “short-term” pill (12 months or less),
without shareholder approval. A commitment or policy that puts a newly
adopted pill to a binding shareholder vote may potentially offset an
adverse vote recommendation. Review such companies with classified boards
every year, and such companies with annually elected boards at least once
every three years, and vote against or withhold votes from all nominees if
the company still maintains a non-shareholder-approved poison pill;
or |
1.5. The
board makes a material adverse change to an existing poison pill without
shareholder approval.
Vote case-by-case on all nominees
if:
1.6. The
board adopts a poison pill with a term of 12 months or less (“short-term pill”)
without shareholder approval,
taking into account the following
factors:
|
|
|
• |
The date of the pill‘s
adoption relative to the date of the next meeting of
shareholders—i.e.
whether the
company had time to put the pill on ballot for shareholder ratification
given the circumstances; |
• The
issuer’s rationale;
• The
issuer’s governance structure and practices; and
• The
issuer’s track record of accountability to shareholders.
Problematic
Audit-Related Practices
Generally vote against or withhold
from the members of the Audit Committee if:
1.7. The
non-audit fees paid to the auditor are excessive (see discussion under
“Auditor
Ratification”);
1.8. The
company receives an adverse opinion on the company’s financial statements from
its auditor; or
|
|
|
1.9. |
There is persuasive evidence
that the Audit Committee entered into an inappropriate indemnification
agreement with its auditor that limits the ability of the company, or its
shareholders, to pursue legitimate legal recourse against the audit
firm. |
Vote case-by-case on members of
the Audit Committee, and potentially the full board, if:
|
|
|
1.10. |
Poor accounting practices
are identified that rise to a level of serious concern, such as: fraud,
misapplication of GAA; and material weaknesses identified in Section 404
disclosures. Examine the severity, breadth, chronological sequence, and
duration, as well as the company’s efforts at remediation or corrective
actions, in determining whether withhold/against votes are
warranted. |
Problematic
Compensation Practices/Pay for Performance Misalignment
In the absence of an Advisory Vote
on Executive Compensation ballot item or in egregious situations, vote against
or withhold from the members of the Compensation Committee, and potentially the
full board, if:
1.11. There is a significant
misalignment between CEO pay and company performance (pay for
performance);
1.12. The company maintains
significant problematic pay practices;
1.13. The board exhibits a
significant level of poor communication and responsiveness to
shareholders;
1.14. The company fails to submit
one-time transfers of stock options to a shareholder vote; or
1.15. The company fails to fulfill
the terms of a burn rate commitment made to shareholders.
Vote case-by-case on Compensation
Committee members (or, in exceptional cases, the full board) and the
Management
Say-on-Pay proposal
if:
1.16. The company's previous
say-on-pay proposal received the support of less than 70 percent of votes cast,
taking into account:
• The
company's response, including:
|
|
|
o |
Disclosure of engagement
efforts with major institutional investors regarding the issues that
contributed to the low level of support; |
o Specific
actions taken to address the issues that contributed to the low level of
support;
o Other
recent compensation actions taken by the company;
• Whether
the issues raised are recurring or isolated;
• The
company's ownership structure; and
|
|
|
• |
Whether the support level
was less than 50 percent, which would warrant the highest degree of
responsiveness. |
Governance
Failures
Under extraordinary circumstances,
vote against or withhold from directors individually, committee members, or the
entire board, due to:
1.17. Material failures of
governance, stewardship, risk oversight3, or fiduciary responsibilities at
the company;
1.18. Failure to replace
management as appropriate; or
1.19. Egregious actions related to
a director’s service on other boards that raise substantial doubt about his or
her
ability to effectively oversee
management and serve the best interests of shareholders at any
company.
_______________
3
Examples of
failure of risk oversight include, but are not limited to: bribery; large or
serial fines or sanctions from regulatory bodies;
significant adverse legal judgments
or settlements; hedging of company stock; or significant pledging of company
stock.
2.
Responsiveness
Vote case-by-case on individual
directors, committee members, or the entire board of directors, as appropriate,
if:
2.1. The board failed to act on a
shareholder proposal that received the support of a majority of the shares cast
in the previous year. Factors that will be considered are:
•
Disclosed outreach efforts by the board to shareholders
in the wake of the vote;
•
Rationale provided in the proxy statement for the level
of implementation;
• The
subject matter of the proposal;
• The
level of support for and opposition to the resolution in past
meetings;
• Actions
taken by the board in response to the majority vote and its engagement with
shareholders;
|
|
|
• |
The continuation of the
underlying issue as a voting item on the ballot (as either shareholder or
management proposals); and |
• Other
factors as appropriate.
2.2. The board failed to act on
takeover offers where the majority of shares are tendered;
2.3. At the previous board
election, any director received more than 50 percent withhold/against votes of
the shares cast and the company has failed to address the issue(s) that caused
the high withhold/against vote;
2.4. The board implements an
advisory vote on executive compensation on a less frequent basis than the
frequency
that received the majority of
votes cast at the most recent shareholder meeting at which shareholders voted on
the say-on-pay frequency; or
2.5. The board implements an
advisory vote on executive compensation on a less frequent basis than the
frequency that received a plurality, but not a majority, of the votes cast at
the most recent shareholder meeting at which shareholders voted on the
say-on-pay frequency, taking into account:
• The
board's rationale for selecting a frequency that is different from the frequency
that received a plurality;
• The
company's ownership structure and vote results;
• ISS'
analysis of whether there are compensation concerns or a history of problematic
compensation practices;
and
• The
previous year's support level on the company's say-on-pay proposal.
3.
Composition
Attendance at
Board and Committee Meetings:
|
|
|
3.1. |
Generally vote against or
withhold from directors (except new nominees, who should be considered
case-by- case4) who attend less than 75
percent of the aggregate of their board and committee meetings for the
period for which they served, unless an acceptable reason for absences is
disclosed in the proxy or another SEC filing. Acceptable reasons for
director absences are generally limited to the
following: |
• Medical
issues/illness;
• Family
emergencies; and
• Missing
only one meeting (when the total of all meetings is three or
fewer).
|
|
|
3.2. |
If the proxy disclosure is
unclear and insufficient to determine whether a director attended at least
75 percent of the aggregate of his/her board and committee meetings during
his/her period of service, vote against or withhold from the director(s)
in question. |
Overboarded
Directors:
_______________________
4
For new nominees
only, schedule conflicts due to commitments made prior to their appointment to
the board are considered if disclosed in the proxy or another SEC
filing.
Vote against or withhold from
individual directors who:
3.3. Sit on
more than six public company boards; or
3.4. Are
CEOs of public companies who sit on the boards of more than two public companies
besides their own —
withhold only at their outside
boards5.
4.
Independence
Vote against or withhold from
Inside Directors and Affiliated Outside Directors when:
|
|
|
4.1. |
The inside or affiliated
outside director serves on any of the three key committees: audit,
compensation, or nominating; |
4.2. The
company lacks an audit, compensation, or nominating committee so that the full
board functions as that
committee;
|
|
|
4.3. |
The company lacks a formal
nominating committee, even if the board attests that the independent
directors fulfill the functions of such a committee;
or |
4.4. Independent
directors make up less than a majority of the directors.
ttt
Proxy
Access
ISS supports proxy access as an
important shareholder right, one that is complementary to other best -practice
corporate governance features. However, in the absence of a uniform standard,
proposals to enact proxy access may vary widely; as such, ISS is not setting
forth specific parameters at this time and will take a case-by-case approach in
evaluating these proposals.
Vote case-by-case on proposals to
enact proxy access, taking into account, among other factors:
•
Company-specific factors; and
•
Proposal-specific factors, including:
• The
ownership thresholds proposed in the resolution (i.e., percentage and
duration);
• The
maximum proportion of directors that shareholders may nominate each year;
and
|
|
|
• |
The method of determining
which nominations should appear on the ballot if multiple shareholders
submit nominations. |
ttt
Proxy
Contests—Voting for Director Nominees in Contested Elections
Vote case-by-case on the election
of directors in contested elections, considering the following
factors:
•
Long-term financial performance of the target company
relative to its industry;
•
Management’s track record;
•
Background to the proxy contest;
•
Qualifications of director nominees (both
slates);
•
Strategic plan of dissident slate and quality of
critique against management;
___________________
5
Although all of
a CEO’s subsidiary boards will be counted as separate boards, ISS will not
recommend a withhold vote from the CEO of a parent company board or any of the
controlled (>50 percent ownership) subsidiaries of that parent, but will do
so at subsidiaries that are less than 50 percent controlled and boards outside
the parent/subsidiary relationships.
•
Likelihood that the proposed goals and objectives can be
achieved (both slates);
• Stock
ownership positions.
When the addition of shareholder
nominees to the management card (“proxy access nominees”) results in a number of
nominees on the management card which exceeds the number of seats available for
election, vote case-by-case considering the same factors listed
above.
ttt
Shareholder
Rights & Defenses
Poison Pills-
Management Proposals to Ratify Poison Pill
Vote case-by-case on management
proposals on poison pill ratification, focusing on the features of the
shareholder rights plan. Rights plans should contain the following
attributes:
• No lower
than a 20% trigger, flip-in or flip-over;
• A term
of no more than three years;
• No
dead-hand, slow-hand, no-hand or similar feature that limits the ability of a
future board to redeem the pill;
|
|
|
• |
Shareholder redemption
feature (qualifying offer clause); if the board refuses to redeem the pill
90 days after a qualifying offer is announced, 10 percent of the shares
may call a special meeting or seek a written consent to vote on rescinding
the pill. |
In addition, the rationale for
adopting the pill should be thoroughly explained by the company. In examining
the request for the pill, take into consideration the company’s existing
governance structure, including: board independence, existing takeover defenses,
and any problematic governance concerns.
ttt
Poison Pills-
Management Proposals to Ratify a Pill to Preserve Net Operating Losses
(NOLs)
Vote against proposals to adopt a
poison pill for the stated purpose of protecting a company's net operating
losses (NOL) if the term of the pill would exceed the shorter of three years and
the exhaustion of the NOL.
Vote case-by-case on management
proposals for poison pill ratification, considering the following factors, if
the term of the pill would be the shorter of three years (or less) and the
exhaustion of the NOL:
• The
ownership threshold to transfer (NOL pills generally have a trigger slightly
below 5 percent);
• The
value of the NOLs;
|
|
|
• |
Shareholder protection
mechanisms (sunset provision, or commitment to cause expiration of the
pill upon exhaustion or expiration of
NOLs); |
|
|
|
• |
The company's existing
governance structure including: board independence, existing takeover
defenses, track record of responsiveness to shareholders, and any other
problematic governance concerns; and |
• Any
other factors that may be applicable.
ttt
Shareholder
Ability to Act by Written Consent
Generally vote against management
and shareholder proposals to restrict or prohibit shareholders' ability to act
by written consent.
Generally vote for management and
shareholder proposals that provide shareholders with the ability to act by
written consent, taking into account the following factors:
•
Shareholders' current right to act by written
consent;
• The
consent threshold;
• The
inclusion of exclusionary or prohibitive language;
• Investor
ownership structure; and
•
Shareholder support of, and management's response to,
previous shareholder proposals.
Vote case-by-case on shareholder
proposals if, in addition to the considerations above, the company has the
following governance and antitakeover provisions:
• An
unfettered6 right for shareholders to call
special meetings at a 10 percent threshold;
• A
majority vote standard in uncontested director elections;
• No
non-shareholder-approved pill; and
• An
annually elected board.
ttt
CAPITAL/RESTRUCTURING
Common Stock
Authorization
Vote for proposals to increase the
number of authorized common shares where the primary purpose of the increase is
to issue shares in connection with a transaction on the same ballot that
warrants support.
Vote against proposals at
companies with more than one class of common stock to increase the number of
authorized shares of the class of common stock that has superior voting
rights.
Vote against proposals to increase
the number of authorized common shares if a vote for a reverse stock split on
the same ballot is warranted despite the fact that the authorized shares would
not be reduced proportionally.
Vote case-by-case on all other
proposals to increase the number of shares of common stock authorized for
issuance. Take into account company-specific factors that include, at a minimum,
the following:
• Past
Board Performance:
o The
company's use of authorized shares during the last three years
• The
Current Request:
o Disclosure
in the proxy statement of the specific purposes of the proposed
increase;
o Disclosure
in the proxy statement of specific and severe risks to shareholders of not
approving the request;
and
|
|
|
o |
The dilutive impact of the
request as determined by an allowable increase calculated by ISS
(typically 100 percent of existing authorized shares) that reflects the
company's need for shares and total shareholder
returns. |
ttt
________________________
6
"Unfettered"
means no restrictions on agenda items, no restrictions on the number of
shareholders who can group together to reach the 10 percent threshold, and only
reasonable limits on when a meeting can be called: no greater than 30 days after
the last annual meeting and no greater than 90 prior to the next annual
meeting.
Dual Class
Structure
Generally vote against proposals
to create a new class of common stock, unless:
• The
company discloses a compelling rationale for the dual-class capital structure,
such as:
|
|
|
• |
The company's auditor has
concluded that there is substantial doubt about the company's ability to
continue as a going concern; or |
• The new
class of shares will be transitory;
|
|
|
• |
The new class is intended
for financing purposes with minimal or no dilution to current shareholders
in both the short term and long term; and |
• The new
class is not designed to preserve or increase the voting power of an insider or
significant shareholder.
ttt
Preferred Stock
Authorization
Vote for proposals to increase the
number of authorized preferred shares where the primary purpose of the increase
is to issue shares in connection with a transaction on the same ballot that
warrants support.
Vote against proposals at
companies with more than one class or series of preferred stock to increase the
number of authorized shares of the class or series of preferred stock that has
superior voting rights.
Vote case-by-case on all other
proposals to increase the number of shares of preferred stock authorized for
issuance. Take into account company-specific factors that include, at a minimum,
the following:
• Past
Board Performance:
o The
company's use of authorized preferred shares during the last three
years;
• The
Current Request:
o Disclosure
in the proxy statement of the specific purposes for the proposed
increase;
o Disclosure
in the proxy statement of specific and severe risks to shareholders of not
approving the request;
o In cases
where the company has existing authorized preferred stock, the dilutive impact
of the request as
determined by an allowable
increase calculated by ISS (typically 100 percent of existing authorized
shares)
that reflects the company's need
for shares and total shareholder returns; and
o Whether
the shares requested are blank check preferred shares that can be used for
antitakeover purposes.
ttt
Mergers and
Acquisitions
Vote case-by-case on mergers and
acquisitions. Review and evaluate the merits and drawbacks of the proposed
transaction, balancing various and sometimes countervailing factors
including:
|
|
|
• |
Valuation
- Is the value
to be received by the target shareholders (or paid by the acquirer)
reasonable? While the fairness opinion may provide an initial starting
point for assessing valuation reasonableness, emphasis is placed on the
offer premium, market reaction and strategic
rationale. |
|
|
|
• |
Market
reaction - How
has the market responded to the proposed deal? A negative market reaction
should cause closer scrutiny of a deal. |
|
|
|
• |
Strategic
rationale -
Does the deal make sense strategically? From where is the value derived?
Cost and revenue synergies should not be overly aggressive or optimistic,
but reasonably achievable. Management should also have a favorable track
record of successful integration of historical
acquisitions. |
|
|
|
• |
Negotiations
and process -
Were the terms of the transaction negotiated at arm's-length? Was the
process fair and equitable? A fair process helps to ensure the best price
for shareholders. Significant negotiation "wins" can also signify the deal
makers' competency. The comprehensiveness of the sales process
(e.g., full auction,
partial |
auction, no auction) can also
affect shareholder value.
|
|
|
• |
Conflicts
of interest -
Are insiders benefiting from the transaction disproportionately and
inappropriately as compared to non-insider shareholders? As the result of
potential conflicts, the directors and officers of the company may be more
likely to vote to approve a merger than if they did not hold these
interests. Consider whether these interests may have influenced these
directors and officers to support or recommend the merger. The CIC figure
presented in the "ISS Transaction Summary" section of this report is an
aggregate figure that can in certain cases be a misleading indicator of
the true value transfer from shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to determine
whether a potential conflict exists. |
|
|
|
• |
Governance
- Will the
combined company have a better or worse governance profile than the
current governance profiles of the respective parties to the transaction?
If the governance profile is to change for the worse, the burden is on the
company to prove that other issues (such as valuation) outweigh any
deterioration in governance. |
ttt
COMPENSATION
Executive Pay
Evaluation
Underlying all evaluations are
five global principles that most investors expect corporations to adhere to in
designing and
administering executive and
director compensation programs:
|
|
|
1. |
Maintain appropriate
pay-for-performance alignment, with emphasis on long-term shareholder
value: This principle encompasses overall executive pay practices, which
must be designed to attract, retain, and appropriately motivate the key
employees who drive shareholder value creation over the long term. It will
take into consideration, among other factors, the link between pay and
performance; the mix between fixed and variable pay; performance goals;
and equity-based plan costs; |
2. Avoid
arrangements that risk “pay for failure”: This principle addresses the
appropriateness of long or indefinite
contracts, excessive severance
packages, and guaranteed compensation;
|
|
|
3. |
Maintain an independent and
effective compensation committee: This principle promotes oversight of
executive pay programs by directors with appropriate skills, knowledge,
experience, and a sound process for compensation decision-making
(e.g., including access to
independent expertise and advice when
needed); |
|
|
|
4. |
Provide shareholders with
clear, comprehensive compensation disclosures: This principle underscores
the importance of informative and timely disclosures that enable
shareholders to evaluate executive pay practices fully and
fairly; |
|
|
|
5. |
Avoid inappropriate pay to
non-executive directors: This principle recognizes the interests of
shareholders in ensuring that compensation to outside directors does not
compromise their independence and ability to make appropriate judgments in
overseeing managers’ pay and performance. At the market level, it may
incorporate a variety of generally accepted best
practices. |
Advisory Votes
on Executive Compensation—Management Proposals (Management Say-on-Pay)
Vote case-by-case on ballot items
related to executive pay and practices, as well as certain aspects of outside
director compensation.
Vote against Advisory Votes on
Executive Compensation (Management Say-on-Pay—MSOP) if:
• There is
a significant misalignment between CEO pay and company performance (pay
for performance);
• The
company maintains significant problematic
pay practices;
• The
board exhibits a significant level of poor
communication and responsiveness to shareholders.
Vote against or withhold from the
members of the Compensation Committee and potentially the full board
if:
|
|
|
• |
There is no MSOP on the
ballot, and an against vote on an MSOP is warranted due to a pay for
performance misalignment, problematic pay practices, or the lack of
adequate responsiveness on compensation issues raised previously, or a
combination thereof; |
|
|
|
• |
The board fails to respond
adequately to a previous MSOP proposal that received less than 70 percent
support of votes cast; |
|
|
|
• |
The company has recently
practiced or approved problematic pay practices, including option
repricing or option backdating; or |
• The
situation is egregious.
Vote against an equity plan on the
ballot if:
• A pay
for performance misalignment is found, and a significant portion of the CEO’s
misaligned pay is attributed to
non-performance-based equity
awards, taking into consideration:
o Magnitude
of pay misalignment;
o Contribution
of non-performance-based equity grants to overall pay; and
o The
proportion of equity awards granted in the last three fiscal years concentrated
at the named
executive officer (NEO)
level.
Primary
Evaluation Factors for Executive Pay
Pay-for-Performance
Evaluation
ISS annually conducts a
pay-for-performance analysis to identify strong or satisfactory alignment
between pay and performance over a sustained period. With respect to companies
in the Russell 3000 index, this analysis considers the following:
1. Peer
Group7 Alignment:
|
|
|
• |
The degree of alignment
between the company's annualized TSR rank and the CEO's annualized total
pay rank within a peer group, each measured over a three-year
period. |
• The
multiple of the CEO's total pay relative to the peer group median.
|
|
|
2. |
Absolute Alignment – the
absolute alignment between the trend in CEO pay and company TSR over the
prior five fiscal years – i.e., the difference between the trend in annual
pay changes and the trend in annualized TSR during the
period. |
If the above analysis demonstrates
significant unsatisfactory long-term pay-for-performance alignment or, in the
case of non-Russell 3000 index companies, misaligned pay and performance are
otherwise suggested, our analysis may include any of the following qualitative
factors, if they are relevant to the analysis to determine how various pay
elements may work to encourage or to undermine long-term value creation and
alignment with shareholder interests:
• The
ratio of performance- to time-based equity awards;
• The
overall ratio of performance-based compensation;
• The
completeness of disclosure and rigor of performance goals;
• The
company's peer group benchmarking practices;
_______________________
7
The revised peer
group is generally comprised of 14-24 companies that are selected using market
cap, revenue (or assets for certain financial firms), GICS industry group and
company's selected peers' GICS industry group with size constraints, via a
process designed to select peers that are closest to the subject company in
terms of revenue/assets and industry and also within a market cap bucket that is
reflective of the company's.
|
|
|
• |
Actual results of
financial/operational metrics, such as growth in revenue, profit, cash
flow, etc., both absolute and relative to
peers; |
|
|
|
• |
Special circumstances
related to, for example, a new CEO in the prior FY or anomalous equity
grant practices (e.g., bi-annual awards); |
•
Realizable pay8 compared to grant pay;
and
• Any
other factors deemed relevant.
Problematic
Pay Practices
The focus is on executive
compensation practices that contravene the global pay principles,
including:
•
Problematic practices related to non-performance-based
compensation elements;
•
Incentives that may motivate excessive risk-taking;
and
• Options
Backdating.
Problematic Pay
Practices related to Non-Performance-Based Compensation Elements
Pay elements that are not directly
based on performance are generally evaluated case-by-case considering the
context of a company's overall pay program and demonstrated pay-for-performance
philosophy. Please refer to ISS' Compensation FAQ document for detail on
specific pay practices that have been identified as potentially problematic and
may lead to negative recommendations if they are deemed to be inappropriate or
unjustified relative to executive pay best practices. The list below highlights
the problematic practices that carry significant weight in this overall
consideration and may result in adverse vote recommendations:
|
|
|
• |
Repricing or replacing of
underwater stock options/SARS without prior shareholder approval
(including cash buyouts and voluntary surrender of underwater
options); |
•
Excessive perquisites or tax gross-ups, including any
gross-up related to a secular trust or restricted stock vesting;
• New or
extended agreements that provide for:
o CIC
payments exceeding 3 times base salary and average/target/most recent
bonus;
o CIC
severance payments without involuntary job loss or substantial diminution of
duties ("single" or
"modified single"
triggers);
o CIC
payments with excise tax gross-ups (including "modified"
gross-ups).
Incentives that
may Motivate Excessive Risk-Taking
•
Multi-year guaranteed bonuses;
• A single
or common performance metric used for short- and long-term plans;
•
Lucrative severance packages;
• High pay
opportunities relative to industry peers;
•
Disproportionate supplemental pensions; or
• Mega
annual equity grants that provide unlimited upside with no downside
risk.
Factors that potentially mitigate
the impact of risky incentives include rigorous claw-back provisions and robust
stock ownership/holding guidelines.
Options
Backdating
The following factors should be
examined case-by-case to allow for distinctions to be made between “sloppy”
plan
administration versus deliberate
action or fraud:
_______________________
8 ISS research reports will include
realizable pay for S&P1500 companies.
• Reason
and motive for the options backdating issue, such as inadvertent vs. deliberate
grant date changes;
• Duration
of options backdating;
• Size of
restatement due to options backdating;
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Corrective actions taken by
the board or compensation committee, such as canceling or re-pricing
backdated options, the recouping of option gains on backdated grants;
and |
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Adoption of a grant policy
that prohibits backdating, and creates a fixed grant schedule or window
period for equity grants in the future. |
Board
Communications and Responsiveness
Consider the following factors
case-by-case when evaluating ballot items related to executive pay on the
board’s
responsiveness to investor input
and engagement on compensation issues:
• Failure
to respond to majority-supported shareholder proposals on executive pay topics;
or
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Failure to adequately
respond to the company's previous say-on-pay proposal that received the
support of less than 70 percent of votes cast, taking into
account: |
o The
company's response, including:
¤
Disclosure of engagement efforts with major
institutional investors regarding the issues that
contributed to the low level of
support;
¤ Specific
actions taken to address the issues that contributed to the low level of
support;
¤ Other
recent compensation actions taken by the company;
o Whether
the issues raised are recurring or isolated;
o The
company's ownership structure; and
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Whether the support level
was less than 50 percent, which would warrant the highest degree of
responsiveness. |
ttt
Frequency of
Advisory Vote on Executive Compensation ("Say When on Pay")
Vote for annual advisory votes on
compensation, which provide the most consistent and clear communication channel
for shareholder concerns about companies' executive pay programs.
ttt
Voting on
Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
Vote case-by-case on
say on Golden Parachute proposals, including consideration of existing
change-in-control arrangements maintained with named executive officers rather
than focusing primarily on new or extended arrangements.
Features that may result in an
against recommendation include one or more of the following, depending on the
number, magnitude, and/or timing of issue(s):
• Single-
or modified-single-trigger cash severance;
•
Single-trigger acceleration of unvested equity
awards;
•
Excessive cash severance (>3x base salary and
bonus);
• Excise
tax gross-ups triggered and payable (as opposed to a provision to provide excise
tax gross-ups);
•
Excessive golden parachute payments (on an absolute
basis or as a percentage of transaction equity value); or
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Recent amendments that
incorporate any problematic features (such as those above) or recent
actions (such as extraordinary equity grants) that may make packages so
attractive as to influence merger agreements that may not be in the best
interests of shareholders; or |
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• |
The company's assertion that
a proposed transaction is conditioned on shareholder approval of the
golden parachute advisory vote. |
Recent amendment(s) that
incorporate problematic features will tend to carry more weight on the overall
analysis. However, the presence of multiple legacy problematic features will
also be closely scrutinized.
In cases where the golden
parachute vote is incorporated into a company's advisory vote on compensation
(management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance
with these guidelines, which may give higher weight to that component of the
overall evaluation.
ttt
Equity-Based
and Other Incentive Plans
Vote case-by-case on equity-based
compensation plans. Vote against the equity plan if any of the following factors
apply:
• The
total cost of the company’s equity plans is unreasonable;
• The plan
expressly permits repricing;
• A
pay-for-performance misalignment is found;
• The
company’s three year burn rate exceeds the burn rate cap of its industry
group;
• The plan
has a liberal change-of-control definition; or
• The plan
is a vehicle for problematic pay practices.
Social/Environmental
Issues
Global Approach
Issues covered under the policy
include a wide range of topics, including consumer and product safety,
environment and energy, labor standards and human rights, workplace and board
diversity, and corporate political issues. While a variety of factors goes into
each analysis, the overall principle guiding all vote recommendations focuses on
how the proposal may enhance or protect shareholder value in either the short or
long term.
Generally vote case-by-case,
taking into consideration whether implementation of the proposal is likely to
enhance or protect shareholder value, and, in addition, the following will also
be considered:
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• |
If the issues presented in
the proposal are more appropriately or effectively dealt with through
legislation or government regulation; |
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• |
If the company has already
responded in an appropriate and sufficient manner to the issue(s) raised
in the proposal; |
• Whether
the proposal's request is unduly burdensome (scope or timeframe) or overly
prescriptive;
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• |
The company's approach
compared with any industry standard practices for addressing the issue(s)
raised by the proposal; |
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• |
If the proposal requests
increased disclosure or greater transparency, whether or not reasonable
and sufficient information is currently available to shareholders from the
company or from other publicly available sources;
and |
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• |
If the proposal requests
increased disclosure or greater transparency, whether or not
implementation would reveal proprietary or confidential information that
could place the company at a competitive
disadvantage. |
ttt
Political
Activities
Lobbying
Vote case-by-case on proposals
requesting information on a company’s lobbying (including direct, indirect, and
grassroots
lobbying) activities, policies, or
procedures, considering:
• The
company’s current disclosure of relevant lobbying policies, and management and
board oversight;
• The
company’s disclosure regarding trade associations or other groups that it
supports, or is a member of, that
engage in lobbying activities;
and
• Recent
significant controversies, fines, or litigation regarding the company’s
lobbying-related activities.
ttt
Political
Contributions
Generally vote for proposals
requesting greater disclosure of a company's political contributions and trade
association spending policies and activities, considering:
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• |
The company's current
disclosure of policies and oversight mechanisms related to its direct
political contributions and payments to trade associations or other groups
that may be used for political purposes, including information on the
types of organizations supported and the business rationale for supporting
these organizations; and |
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• |
Recent significant
controversies, fines, or litigation related to the company's political
contributions or political activities. |
Vote against proposals barring a
company from making political contributions. Businesses are affected by
legislation at the federal, state, and local level; barring political
contributions can put the company at a competitive disadvantage.
Vote against proposals to publish
in newspapers and other media a company's political contributions. Such
publications could present significant cost to the company without providing
commensurate value to shareholders.
ttt
Political
Ties
Generally vote against proposals
asking a company to affirm political nonpartisanship in the workplace, so long
as:
• There
are no recent, significant controversies, fines, or litigation regarding the
company’s political contributions or
trade association spending;
and
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• |
The company has procedures
in place to ensure that employee contributions to company-sponsored
political action committees (PACs) are strictly voluntary and prohibit
coercion. |
Vote against proposals asking for
a list of company executives, directors, consultants, legal counsels, lobbyists,
or investment bankers that have prior government service and whether such
service had a bearing on the business of the company. Such a list would be
burdensome to prepare without providing any meaningful information to
shareholders.
ttt
8. Foreign
Private Issuers Listed on U.S. Exchanges
Vote against (or withhold from)
non-independent director nominees at companies which fail to meet the following
criteria: a majority-independent board, and the presence of an audit, a
compensation, and a nomination committee, each of which is entirely composed of
independent directors.
Where the design and disclosure
levels of equity compensation plans are comparable to those seen at U.S.
companies, U.S. compensation policy will be used to evaluate the compensation
plan proposals. Otherwise, they, and all other voting items, will be evaluated
using the relevant ISS regional or market proxy voting guidelines.
ttt
Disclosure/Disclaimer
This document and all of the
information contained in it, including without limitation all text, data,
graphs, and charts (collectively, the "Information") is the property of
Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some
cases third party suppliers.
The Information has not been
submitted to, nor received approval from, the United States Securities and
Exchange Commission or any other regulatory body. None of the Information
constitutes an offer to sell (or a solicitation of an offer to buy), or a
promotion or recommendation of, any security, financial product or other
investment vehicle or any trading strategy, and ISS does not endorse, approve,
or otherwise express any opinion regarding any issuer, securities, financial
products or instruments or trading strategies.
The user of the Information
assumes the entire risk of any use it may make or permit to be made of the
Information.
ISS MAKES NO EXPRESS OR IMPLIED
WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY
DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED
WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS,
MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF
THE INFORMATION.
Without limiting any of the
foregoing and to the maximum extent permitted by law, in no event shall ISS have
any liability regarding any of the Information for any direct, indirect,
special, punitive, consequential (including lost profits), or any other damages
even if notified of the possibility of such damages. The foregoing shall not
exclude or limit any liability that may not by applicable law be excluded or
limited.
ttt
Proxy and
Corporate Action Voting Policy
Policy
Post Advisory Group, LLC (“Post”)
acts as discretionary investment adviser for various clients, including clients
governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and
registered open‐ended investment companies (“mutual funds”). While Post
primarily manages fixed income securities, it does often hold a limited amount
of voting securities (or securities for which shareholder action is solicited)
in a client account. Thus, unless a client (including a “named fiduciary” under
ERISA) specifically reserves the right to vote its own proxies or to take
shareholder action in other corporate actions, Post will vote proxies or act on
other actions received in sufficient time prior to their deadlines as part of
its discretionary authority over the assets. Corporate actions may include, for
example and without limitation, tender offers or exchanges, bankruptcy
proceedings, and class actions.
When voting proxies or acting on
corporate actions for clients, Post’s decisions will be made in the best
interests of its clients overall. Post shall act in a prudent and diligent
manner and make voting decisions which Post believes enhance the value of the
assets of client accounts overall. With respect to ERISA accounts, plan
beneficiaries and participants, voting will be in accordance with ERISA and the
U.S. Department of Labor (“DOL”) guidance thereunder.
Purpose
The purpose of this Proxy and
Corporate Action Voting Policy (the “Policy”) is to memorialize the procedures
and policies adopted by Post to enable it to comply with its accepted
responsibilities and the requirements of Rule 206(4)‐6 under the Investment
Advisers Act of 1940, as amended, (the “Advisers Act”) and ERISA.
Procedures
Post’s Operations Department is
ultimately responsible for ensuring that proxies received by Post are voted in a
timely manner and voted consistently across portfolios. Although many proxy
proposals can be voted in accordance with our established guidelines, we
recognize that some proposals require special consideration, which may dictate
that we make an exception to our broad guidelines.
Where a proxy proposal raises a
material conflict of interest between Post’s interests and the client’s, Post
will disclose the conflict to the relevant clients and obtain their consent to
the proposed vote prior to voting the securities. When a client does not respond
to such a conflict disclosure request or denies the request, Post will abstain
from voting the securities held by that client’s account.
Record
Keeping
In accordance with Rule 204‐2
under the Advisers Act and DOL Interpretive Bulletin 94‐2 issued under ERISA,
Post will maintain for the time periods set forth in the Rule 204‐2 (i) this
Policy, and all amendments thereto; (ii) all proxy statements received regarding
client securities (provided, however, that Post may rely on the proxy statement
filed on EDGAR as its records, and may rely on proxy statements and records of
proxy votes cast by Post that are maintained with a third party such as a proxy
voting service, provided that Post has obtained an undertaking from the third
party to provide a copy of the documents promptly upon request); (iii) a record
of votes cast on behalf of clients; (iv) records of client requests for proxy
voting information; (v) any documents prepared by the adviser that were material
to making a decision how to vote or that memorialized the basis for the
decision; and (vi) records relating to requests made to clients regarding
conflicts of interest in voting the proxy.
Post will describe in its Part II
of Form ADV (or other brochure fulfilling the requirement of Rule 204‐3 under
the Advisers Act) its proxy voting policies and procedures and the manner in
which clients may obtain information on how Post voted their securities. Clients
may obtain information on how their securities were voted or a copy of this
Policy by written request addressed to Post. Post will coordinate with the
relevant mutual fund service providers to assist in the provision of information
required to be filed by such mutual funds on Form N‐PX.
Proxy and Corporate Action Voting
Policy 2012
Guidelines
Each proxy issue will be
considered individually, and voted in a manner which Post believes enhances the
value of client accounts overall. The following guidelines are a partial list to
be used in evaluating voting proposals contained in the proxy
statements.
Post generally looks unfavorably
upon:
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Issues regarding Board
entrenchment and anti‐takeover measures such as the following:
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Proposals to stagger board
members’ terms; |
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Proposals to limit the
ability of shareholders to call special meetings;
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Proposals to require super
majority votes; |
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Proposals requesting
excessive increases in authorized common or preferred shares where
management provides no explanation for the use or need of these additional
shares; |
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Proposals regarding “fair
price” provisions; |
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Proposals regarding “poison
pill” provisions; and |
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Permitting “green mail.”
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Providing cumulative voting
rights. |
Post generally looks favorably
upon:
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Election of directors
recommended by management, except if there is a proxy fight.
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Election of auditors
recommended by management, unless seeking to replace if there exists a
dispute over policies. |
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Date and place of annual
meeting. |
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Rotation of annual meeting
place. |
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Limitation on charitable
contributions or fees paid to lawyers. |
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Ratification of directors’
actions on routine matters since previous annual meeting.
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Limiting directors’
liability. |
Post assesses the following on a
case by case basis:
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Pay directors solely in
stock. |
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Eliminate director mandatory
retirement policy. |
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Mandatory retirement age for
directors. |
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Rotate annual meeting
location/date. |
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Option and stock grants to
management and directors. |
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Allowing indemnification of
directors and/or officers after reviewing the applicable state laws and
extent of protection requested. |
Proxy and Corporate Action Voting
Policy 2012
SPECTRUM ASSET
MANAGEMENT, INC.
POLICY ON PROXY
VOTING
FOR INVESTMENT
ADVISORY CLIENTS
GENERAL POLICY
Spectrum, an investment adviser
registered with the Securities and Exchange Commission, acts as investment
advisor for various types of client accounts (e.g. employee benefit plans,
governmental plans, mutual funds, insurance company separate accounts, corporate
pension plans, endowments and foundations). While Spectrum receives
few proxies for the preferred shares it manages, Spectrum nonetheless will, when
delegated the authority by a client, vote these shares per the following policy
voting standards and processes:
STANDARDS:
Spectrum’s standards aim to ensure
the following in keeping with the best interests of its clients:
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That Spectrum act solely in
the interest of its clients in providing for ultimate long-term
stockholder value. |
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• |
That Spectrum act without
undue influence from individuals or groups who may have an economic
interest in the outcome of a proxy vote. |
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That the custodian bank is
aware of our fiduciary duty to vote proxies on behalf of others – Spectrum
relies on the best efforts of the custodian bank to deliver all proxies we
are entitled to vote. |
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That Spectrum will exercise
its right to vote all proxies on behalf of its clients (or permit clients
to vote their interest, as the case(s) may
be). |
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That Spectrum will implement
a reasonable and sound basis to vote
proxies. |
PROCESSES:
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A. |
Following ISS’
Recommendations |
Spectrum has selected
Institutional Shareholder Services (ISS) to assist it with its proxy voting
responsibilities. Spectrum follows ISS Standard Proxy Voting
guidelines (the “Guidelines”). The Guidelines embody the positions
and factors Spectrum generally considers important in casting proxy votes. They
address a wide variety of individual topics, including, among other matters,
shareholder voting rights, anti-takeover defenses, board structures, the
election of directors, executive and director compensation, reorganizations,
mergers, and various shareholder proposals. Recognizing the complexity and
fact-specific nature of many corporate governance issues, the Guidelines often
do not direct a particular voting outcome, but instead identify factors ISS
considers in determining how the vote should be cast.
In connection with each proxy
vote, ISS prepares a written analysis and recommendation (an "ISS
Recommendation") that reflects ISS's application of Guidelines to the particular
proxy issues. Where the Guidelines do not direct a particular response and
instead list relevant factors, the ISS Recommendation will reflect ISS's own
evaluation of the factors. Spectrum may on any particular proxy vote decide to
diverge from the Guidelines or an ISS Recommendation. In such cases, our
procedures require: (i) the requesting Portfolio Manager to set forth the
reasons for their decision; (ii) the approval of the Chief Investment Officer;
(iii) notification to the Compliance Department and other appropriate Principal
Global Investors personnel; (iv) a determination that the decision is not
influenced by any conflict of interest; and (v) the creation of a written record
reflecting the process.
Spectrum generally votes proxies
in accordance with ISS’ recommendations. When Spectrum follows ISS’
recommendations, it need not follow the conflict of interest procedures in
Section B, below.
From time to time ISS may have a
business relationship or affiliation with one or more issuers held in Spectrum
client accounts, while also providing voting recommendations on these issuers’
securities. Because this practice may present a conflict of interest
for ISS, Spectrum’s Chief Compliance Officer will require from ISS at least
annually additional information, or a certification that ISS has adopted
policies and procedures to detect and mitigate such conflicts of interest in
issuing voting recommendations. Spectrum may obtain voting
recommendations from two proxy voting services as an additional check on the
independence of the ISS’ voting recommendations.
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B. |
Disregarding ISS’
Recommendations |
Should Spectrum determine not to
follow ISS’ recommendation for a particular proxy, Spectrum will use the
following procedures for identifying and resolving a material conflict of
interest, and will use the Proxy Voting Guidelines (below) in determining how to
vote. The Report for Proxy Vote(s) against RiskMetrics Recommendation(s),
Exhibit A hereto, shall be completed in each such instance.
Spectrum will classify proxy vote
issues into three broad categories: Routine Administrative Items,
Special Interest Issues, and Issues Having the Potential for Significant
Economic Impact. Once the Senior Portfolio Manager has analyzed and
identified each issue as belonging in a particular category, and disclosed the
conflict of interests to affected clients and obtained their consents prior to
voting, Spectrum will cast the client’s vote(s) in accordance with the
philosophy and decision guidelines developed for that category. New
and unfamiliar issues are constantly appearing in the proxy voting
process. As new issues arise, we will make every effort to classify
them among the following three categories. If we believe it would be
informative to do so, we may revise this document to reflect how we evaluate
such issues.
Due to timing delays, logistical
hurdles and high costs associated with procuring and voting international
proxies, Spectrum has elected to approach international proxy voting on the
basis of achieving “best efforts at a reasonable cost.”
As a fiduciary, Spectrum owes its
clients an undivided duty of loyalty. We strive to avoid even the
appearance of a conflict that may compromise the trust our clients have placed
in it. This is true with respect to proxy voting and thus Spectrum
has adopted the following procedures for addressing potential or actual
conflicts of interest.
Identifying
a Conflict of Interest. There may be a material conflict
of interest when Spectrum votes a proxy solicited by an issuer whose retirement
plan or fund we manage or with whom Spectrum, an affiliate, or an officer or
director of Spectrum or of an affiliate has any other material business or
personal relationship that may affect how we vote the issuer’s
proxy. To avoid any perceived material conflict of interest, the
following procedures have been established for use when Spectrum encounters a
potential material conflict to ensure that voting decisions are based on a
clients’ best interest and are not the product of a material
conflict.
Monitoring
for Conflicts of Interest. All employees of
Spectrum are responsible for monitoring for conflicts of interest and referring
any that may be material to the CCO for resolution. At least
annually, the CCO will take reasonable steps to evaluate the nature of
Spectrum’s material business relationships (and those of its affiliates) with
any company whose preferred securities are held in client accounts (a “portfolio
company”) to assess which, if any, could give rise to a conflict of
interest. CCO’s review will focus on the following three
categories:
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Business Relationships – The
CCO will consider whether Spectrum (or an affiliate) has a substantial
business relationship with a portfolio company or a proponent of a proxy
proposal relating to the portfolio company (e.g., an employee group), such
that failure to vote in favor of management (or the proponent) could harm
the adviser’s relationship with the company (or proponent). For
example, if Spectrum manages money for the portfolio company or an
employee group, manages pension assets, leases office space from the
company, or provides other material services to the portfolio company, the
CCO will review whether such relationships may give rise to a conflict of
interest. |
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Personal Relationships – The
CCO will consider whether any senior executives or portfolio managers (or
similar persons at Spectrum’s affiliates) have a personal relationship
with other proponents of proxy proposals, participants in proxy contests,
corporate directors, or candidates for directorships that might give rise
to a conflict of interest. |
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Familial Relationships – The
CCO will consider whether any senior executives or portfolio managers (or
similar persons at Spectrum’s affiliates) have a familial relationship
relating to a portfolio company (e.g., a spouse or other relative who
serves as a director of a portfolio company, is a candidate for such a
position, or is employed by a portfolio company in a senior
position). |
In monitoring for conflicts of
interest, the CCO will consider all information reasonably available to it about
any material business, personal, or familial relationship involving Spectrum
(and its affiliates) and a portfolio company, including the
following:
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A list of clients that are
also public companies, which is prepared and updated by the Operations
Department and retained in the Compliance
Department. |
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Publicly available
information. |
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Information generally known
within Spectrum. |
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Information actually known
by senior executives or portfolio managers. When considering a proxy
proposal, investment professionals involved in the decision-making process
must disclose any potential material conflict that they are aware of to
the CCO prior to any substantive discussion of a proxy
matter. |
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Information obtained
periodically from those persons whom the CCO reasonably believes could be
affected by a conflict arising from a personal or familial relationship
(e.g., portfolio managers, senior
management). |
The CCO may, at his discretion,
assign day-to-day responsibility for monitoring for conflicts to a designated
person. With respect to monitoring of affiliates, the CCO in
conjunction with PGI’s CCO may rely on information barriers between Spectrum and
its affiliates in determining the scope of its monitoring of conflicts involving
affiliates.
Determining
Whether a Conflict of Interest is “Material” – On a regular basis, CCO will
monitor conflicts of interest to determine whether any may be “material” and
therefore should be referred to PGI for resolution. The SEC has not
provided any specific guidance as to what types of conflicts may be “material”
for purposes of proxy voting, so therefore it would be appropriate to look to
the traditional materiality analysis under the federal securities laws, i.e.,
that a “material” matter is one that is reasonably likely to be viewed as
important by the average shareholder.
Whether a conflict may be material
in any case will, of course, depend on the facts and circumstances. However, in
considering the materiality of a conflict, Spectrum will use the following
two-step approach:
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1. |
Financial Materiality – The
most likely indicator of materiality in most cases will be the dollar
amount involved with the relationship in question. For purposes
of proxy voting, it will be presumed that a conflict is not material
unless it involves at least 5% of Spectrum’s annual revenues or a minimum
dollar amount of $1,000,000. Different percentages or dollar
amounts may be used depending on the nature and degree of the conflict
(e.g., a higher number if the conflict arises through an affiliate rather
than directly with Spectrum). |
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2. |
Non-Financial Materiality –
A non-financial conflict of interest might be material (e.g., conflicts
involving personal or familial relationships) and should be evaluated
based on the facts and circumstances of each
case. |
If the CCO has any question as to
whether a particular conflict is material, it should presume the conflict to be
material and refer it to the PGI’s CCO for resolution. As in the case
of monitoring conflicts, the CCO may appoint a designated person or subgroup of
Spectrum’s investment team to determine whether potential conflicts of interest
may be material.
Resolving
a Material Conflict of Interest – When an employee of Spectrum
refers a potential material conflict of interest to the CCO, the CCO will
determine whether a material conflict of interest exists based on the facts and
circumstances of each particular situation. If the CCO determines
that no material conflict of interest exists, no further action is necessary and
the CCO will notify management accordingly. If the CCO determines
that a material conflict exists, CCO must disclose the conflict to affected
clients and obtain consent from each as to the manner in which Spectrum proposes
to vote.
Clients may obtain information
about how we voted proxies on their behalf by contacting Spectrum’s Compliance
Department.
PROXY
VOTING GUIDELINES
CATEGORY
I: Routine
Administrative Items
Philosophy: Spectrum is willing
to defer to management on matters of a routine administrative
nature. We feel management is best suited to make those decisions
which are essential to the ongoing operation of the company and which do not
have a major economic impact on the corporation and its
shareholders. Examples of issues on which we will normally defer to
management’s recommendation include:
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2. |
increasing the authorized
number of common shares |
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3. |
election of unopposed
directors |
CATEGORY
II: Special
Interest Issues
Philosophy: While there are many
social, political, environmental and other special interest issues that are
worthy of public attention, we do not believe the corporate proxy process is the
appropriate arena in which to achieve gains in these areas. Our
primary responsibility in voting proxies is to provide for the greatest
long-term value for Spectrum’s clients. We are opposed to proposals
which involve an economic cost to the corporation, or which restrict the freedom
of management to operate in the best interest of the corporation and its
shareholders. However, in general we will abstain from voting on
shareholder social, political and environmental proposals because their
long-term impact on share value cannot be calculated with any reasonable degree
of confidence.
CATEGORY
III: Issues
Having the Potential for Significant Economic Impact
Philosophy: Spectrum is not
willing to defer to management on proposals which have the potential for major
economic impact on the corporation and the value of its shares. We
believe such issues should be carefully analyzed and decided by the owners of
the corporation. Presented below are examples of issues which we
believe have the potential for significant economic impact on shareholder
value.
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1. |
Classification
of Board of Directors. Rather than
electing all directors annually, these provisions stagger a board,
generally into three annual classes, and call for only one-third to be
elected each year. Staggered boards may help to ensure
leadership continuity, but they also serve as defensive
mechanisms. Classifying the board makes it more difficult to
change control of a company through a proxy contest involving election of
directors. In general, we vote on a case by case basis on
proposals for staggered boards, but generally favor annual elections of
all directors. |
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2. |
Cumulative
Voting of Directors. Most
corporations provide that shareholders are entitled to cast one vote for
each director for each share owned - the one share, one vote
standard. The process of cumulative voting, on the other hand,
permits shareholders to distribute the total number of votes they have in
any manner they wish when electing directors. Shareholders may
possibly elect a minority representative to a corporate board by this
process, ensuring representation for all sizes of
shareholders. Outside shareholder involvement can encourage
management to maximize share value. We generally support
cumulative voting of directors. |
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3. |
Prevention
of Greenmail. These proposals
seek to prevent the practice of “greenmail”, or targeted share repurchases
by management of company stock from individuals or groups seeking control
of the company. Since only the hostile party receives payment,
usually at a substantial premium over the market value of its shares, the
practice discriminates against all other shareholders. By
making greenmail payments, management transfers significant sums of
corporate cash to one entity, most often for the primary purpose of saving
their jobs. Shareholders are left with an asset-depleted and
often less competitive company. We think that if a corporation
offers to buy back its stock, the offer should be made to all
shareholders, not just to a select group or individual. We are
opposed to greenmail and will support greenmail prevention
proposals. |
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4. |
Supermajority
Provisions. These corporate
charter amendments generally require that a very high percentage of share
votes (70-81%) be cast affirmatively to approve a merger, unless the board
of directors has approved it in advance. These provisions have
the potential to give management veto power over merging with another
company, even though a majority of shareholders favor the
merger. In most cases we believe requiring supermajority
approval of mergers places too much veto power in the hands of management
and other minority shareholders, at the expense of the majority
shareholders, and we oppose such
provisions. |
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5. |
Defensive
Strategies. These proposals
will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the
proposal enhances long-term economic
value. |
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6. |
Business
Combinations or Restructuring. These proposals
will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the
proposal enhances long-term economic
value. |
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7. |
Executive
and Director Compensation. These proposals
will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the
proposal enhances long-term economic
value. |
Exhibit
A to Proxy Policy
Report
for Proxy Vote(s) Against RiskMetrics Recommendation(s)
This form should be completed in
instances in which SAMI Portfolio Manager(s) decide to vote against RiskMetrics
recommendations.
1. Security Name /
Symbol:
2. Issue up for vote:
3. Summary of RiskMetrics
recommendation (see attached full RiskMetrics recommendation:
4. Reasons for voting against
RiskMetrics recommendation (supporting documentation may be
attached):
5. Determination of potential
conflicts (if any):
6. Contacted Compliance
Department: Yes / No
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Name of individual
contacted: |
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Date: |
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7. Contacted other SAMI portfolio
managers who have position in same security:
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Yes / No |
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Name of individual
contacted: |
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Date: |
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8. Portfolio Manager
Signature: |
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Date: |
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Portfolio Manager
Name: |
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Portfolio Manager
Signature*: |
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Date: |
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Portfolio Manager
Name: |
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*Note: All Portfolio Managers who
manage portfolios that hold relevant security must sign.
STONE HARBOR
INVESTMENT PARTNERS LP
PROXY VOTING
POLICIES AND PROCEDURES
Stone Harbor Investment Partners
LP (“Stone Harbor”) votes proxies for each client that has specifically
authorized Stone Harbor to vote them in the investment management contract or
otherwise, and votes proxies for each ERISA account unless the plan document or
investment advisory agreement specifically reserves the responsibility to vote
proxies to the plan trustees or other named fiduciary. These policies and
procedures are intended to fulfill applicable requirements imposed on Stone
Harbor by the Investment Advisers Act of 1940, as amended, and the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations adopted thereunder.
In voting proxies, Stone Harbor is
guided by general fiduciary principles. Stone Harbor’s goal is to act prudently,
solely in the best interest of the beneficial owners of the accounts it manages,
and, in the case of ERISA accounts, for the exclusive purpose of providing
economic benefits to such persons. Stone Harbor attempts to consider all factors
of its vote that could affect the value of the investment, and will vote proxies
in the manner that it believes will be consistent with efforts to maximize
shareholder values.
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1. |
Account
Set-up and Review: For new clients, the General
Counsel will inform the Operations team as to whether the client retained
the responsibility to vote proxies or delegated that responsibility to
Stone Harbor. Designated personnel within Operations will ensure that the
account is set-up to vote proxies with the appropriate custodian and
systems. |
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2. |
Securities
Lending: Stone
Harbor does not generally have the authority to lend securities on behalf
of its clients. For those clients for which Stone Harbor does have such
authority, Stone Harbor has decided not to engage in securities lending.
Stone Harbor will monitor upcoming proxy meetings and call back
securities, if applicable, in anticipation of an important vote to be
taken among holders of such securities. In determining whether to call
back securities, the relevant portfolio manager(s) will consider whether
the request that the client benefit to the client in voting the matter
outweighs the benefit to the client in keeping the stock on
loan. |
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3. |
Voting
Proxies. Stone Harbor will generally vote proxies
according to the policies described below, subject to consideration of
overrides and material conflicts. |
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D. |
VOTING
POLICY GUIDELINES |
Stone Harbor generally follows the
guidelines listed below. If deemed to be in the best interests of a client, the
portfolio manager may override the guidelines listed below. The Compliance
Committee reviews all overrides.
Vote CASE-BY-CASE on shareholder
proposals on auditor rotation, taking into account these factors:
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Tenure of the audit firm
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Establishment and disclosure
of a renewal process whereby the auditor is regularly evaluated for both
audit quality and competitive price |
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Length of the rotation
period advocated in the proposal |
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Significant audit-related
issues |
2.Board of
Directors
Voting
on Director Nominees in Uncontested Elections
Generally, vote CASE-BY-CASE. But
WITHHOLD votes from:
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Insiders and affiliated
outsiders on boards that are not at least majority
independent |
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Directors who sit on more
than six boards |
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Compensation Committee
members if there is a disconnect between the CEO’s pay and
performance |
Classification/Declassification
of the Board
Vote AGAINST proposals to classify
the board.
Vote FOR proposals to repeal
classified boards and to elect all directors annually.
Independent
Chairman (Separate Chairman/CEO)
Vote FOR shareholder proposals
asking that the chairman and CEO positions be separated (independent chairman),
unless the company has a strong countervailing governance structure, including a
lead director, two-thirds independent board, all independent key committees, and
established governance guidelines.
Majority
of Independent Directors/Establishment of Committees
Vote FOR shareholder proposals
asking that a majority or more of directors be independent.
Open
Access (shareholder resolution)
Vote CASE-BY-CASE, taking into
account the ownership threshold proposed in the resolution and the proponent’s
rationale.
Shareholder
Ability to Act by Written Consent
Vote AGAINST proposals to restrict
or prohibit shareholder ability to take action by written consent.
Vote FOR proposals to allow or
make easier shareholder action by written consent.
Shareholder
Ability to Call Special Meetings
Vote AGAINST proposals to restrict
or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove
restrictions on the right of shareholders
to act independently of
management.
Supermajority
Vote Requirements
Vote AGAINST proposals to require
a supermajority shareholder vote.
Vote FOR proposals to lower
supermajority vote requirements.
Cumulative
Voting
Vote AGAINST proposals to
eliminate cumulative voting.
Vote CASE-BY-CASE on proposals to
restore or permit cumulative voting relative to the company’s other governance
provisions.
Confidential
Voting
Vote FOR shareholder proposals
requesting that corporations adopt confidential voting, use independent vote
tabulators and use independent inspectors of election. In proxy contests,
support confidential voting proposals only if dissidents agree to the same
policy that applies to management.
Voting
for Director Nominees in Contested Elections
Vote CASE-BY-CASE on contested
elections of directors, considering factors that include the long-term financial
performance, management’s track record, qualifications of director nominees
(both slates), and an evaluation of what each side is offering
shareholders.
Reimbursing
Proxy Solicitation Expenses
Vote CASE-BY-CASE, depending on
the reasonableness of the basis of the solicitation.
5.Poison
Pills
Vote FOR shareholder proposals
that ask a company to submit its poison pill for shareholder ratification.
Review on a CASE-BY-CASE basis shareholder proposals to redeem a company’s
poison pill and management proposals to ratify a poison pill.
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6. |
Mergers
and Corporate Restructurings |
Vote CASE-BY-CASE on mergers and
corporate restructurings based on such features as the fairness opinion,
pricing, strategic rationale, and the negotiating process.
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7. |
Reincorporation
Proposals |
Vote CASE-BY-CASE on proposals to
change a company's state of incorporation, giving consideration to both
financial and corporate governance concerns, including the reasons for
reincorporating, a comparison of the governance provisions, and a comparison of
the jurisdictional laws. Vote FOR reincorporation when the economic factors
outweigh any neutral or negative governance changes.
Common
Stock Authorization
Vote CASE-BY-CASE on proposals to
increase the number of shares of common stock authorized for
issuance.
Vote AGAINST proposals at
companies with dual-class capital structures to increase the number of
authorized shares of the class of stock that has superior voting
rights.
Vote FOR proposals to approve
increases beyond the allowable increase when a company's shares are in danger of
being delisted or if a company's ability to continue to operate as a going
concern is uncertain.
Dual-Class
Stock
Vote AGAINST proposals to create a
new class of common stock with superior voting rights.
Vote FOR proposals to create a new
class of nonvoting or sub-voting common stock if:
1It is intended for financing
purposes, with minimal or no dilution to current shareholders; or
2It is not designed to preserve the
voting power of an insider or significant shareholder.
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9. |
Executive
and Director Compensation |
Vote AGAINST a plan if the cost
exceeds a reasonable level.
Vote FOR a plan if the cost is
reasonable, unless either of the following conditions apply:
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The plan expressly permits
repricing without shareholder approval for listed companies;
or |
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There is a disconnect
between the CEO’s pay and performance (an increase in pay and a decrease
in performance), the main source for the pay increase is equity-based, and
the CEO participates in the plan being voted on.
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Management
Proposals Seeking Approval to Reprice Options
Vote CASE-BY-CASE on management
proposals seeking approval to reprice options, giving consideration to the
following:
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Historic trading
patterns |
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Rationale for the
repricing |
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Value-for-value
exchange |
Employee
Stock Purchase Plans
Vote CASE-BY-CASE on employee
stock purchase plans.
Vote FOR employee stock purchase
plans where all of the following apply:
3Purchase price is at least 85
percent of fair market value;
4Offering period is 27 months or
less, and
5Potential voting power dilution
(VPD) is 10 percent or less.
Vote AGAINST employee stock
purchase plans where any of the opposite conditions apply.
Shareholder
Proposals on Compensation
Generally vote CASE-BY-CASE,
taking into account company performance, pay level versus peers, pay level
versus industry, and long term corporate outlook. But generally vote FOR
shareholder proposals that:
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Advocate performance-based
equity awards (indexed options, premium-priced options, performance-vested
awards), unless the proposal is overly restrictive or the company already
substantially uses such awards |
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Call for a shareholder vote
on extraordinary benefits contained in Supplemental Executive Retirement
Plans (SERPs). |
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10. |
Social
and Environmental Issues |
These issues cover a wide range of
topics, including consumer and public safety, environment and energy, general
corporate issues, labor standards and human rights, military business, and
workplace diversity.
In general, vote CASE-BY-CASE.
While a wide variety of factors goes into each analysis, the overall principal
guiding all vote recommendations focuses on how the proposal will enhance the
economic value of the company.
Vote:
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FOR proposals for the
company to amend its Equal Employment Opportunity (EEO) Statement to
include reference to sexual orientation, unless the change would result in
excessive costs for the company. |
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AGAINST resolutions asking
for the adopting of voluntary labeling of ingredients or asking for
companies to label until a phase out of such ingredients has been
completed. |
In furtherance of Stone Harbor’s
goal to vote proxies in the best interests of clients, Stone Harbor will seek to
identify and address material conflicts of interest that may arise between Stone
Harbor and its clients before voting proxies on behalf of such clients. All
Stone Harbor employees must play an important role in helping our organization
identify potential conflicts of interest that could impact Stone Harbor’s proxy
voting. Stone Harbor employees need to (i) be aware of the potential for
conflicts of interest on the part of Stone Harbor in voting proxies on behalf of
client accounts both as a result of an employee’s personal relationships and due
to special circumstances that may arise during the conduct of Stone Harbor’s
business; and (ii) bring conflicts of interest of which they become aware to the
attention of Stone Harbor Legal/Compliance.
Potential conflicts of interest
may exist in situations where Stone Harbor is called to vote on a proxy proposal
regarding the issuer where Stone Harbor or an affiliate also:
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Manages the issuer’s pension
plan |
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Manages money for the
proponent |
Additional conflicts may exist if
AN EXECUTIVE OF Stone Harbor or an affiliate is a close relative of, or has a
business relationship with:
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An executive of the issuer
or proponent |
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A director of the issuer or
proponent |
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A person who is a candidate
to be a director of the issuer |
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A proponent of the proxy
proposal |
If Stone Harbor determines that it
has, or may be perceived to have, a conflict of interest when voting a proxy,
the Compliance Committee will address such matters involving such conflicts of
interest as follows:
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1. |
If a proposal is addressed
by the specific policies herein, Stone Harbor will vote in accordance with
such policies; and |
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2. |
If the proxy proposal is (i)
not addressed by the specific policies or (ii) requires a case-by-case
determination by Stone Harbor, the vote will be referred to the Compliance
Committee. The Compliance Committee will review the potential conflict and
determine how to vote the proxy in the best interest of the client. The
Compliance Committee will memorialize the rationale of such vote in
writing. |
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E. |
COMPOSITION
OF THE COMPLIANCE COMMITTEE |
The Compliance Committee consists
of the following voting members:
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Chief Investment Officer
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Chief Executive Officer
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Chief Compliance
Officer |
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Chief Financial Officer
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Each of the Committee members may
appoint a supervised delegate to attend a Committee meeting in the event that
the member is unable to attend. A minimum of three voting members is required
for a quorum and the affirmative votes of a majority of those present are
required for decisions.
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F. |
RECORD
KEEPING AND OVERSIGHT |
Stone Harbor’s Operations team
shall maintain or have available the following records relating to proxy
voting:
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a copy of each proxy form
(as voted); |
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a copy of each proxy
solicitation (including proxy statements) and related materials with
regard to each vote: |
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documentation relating to
the identification and resolution of conflicts of
interest; |
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any documents created by
Stone Harbor that were material to a proxy voting decision or that
memorialized the basis for that decision; and
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a copy of each written
client request for information on how Stone Harbor voted proxies on behalf
of the client or a client request for a copy of Stone Harbor’s Proxy
Voting Policies and Procedures, and a copy of any such written response by
Stone Harbor to any (written or oral) client request for information on
how Stone Harbor voted proxies on behalf of the requesting
client. |
Such records will be maintained
for a period of at least five years, the most two recent years in a readily
accessible place.
Legal/Compliance will periodically
review proxy votes, related records and processes to help ensure that proxies
are being voted appropriately. The Compliance Committee will review at least
annually the proxy voting guidelines, process and any portfolio manager
overrides.
Clients may obtain information
about how Stone Harbor voted with respect to their securities, as well as a copy
of Stone Harbor’s Proxy Voting Policies and Procedures, by contacting their
relationship manager.
March 2011
W. H. Reaves & Company,
Inc.
PROXY VOTING
POLICIES AND PROCEDURES
The act of managing assets of
clients may include the voting of proxies related to such managed assets. Where
the power to vote in person or by proxy has been delegated, directly or
indirectly, to the investment adviser, the investment adviser has the fiduciary
responsibility for (a) voting in a manner that is in the best interests of the
client, and (b) properly dealing with potential conflicts of interest arising
from proxy proposals being voted upon.
The policies and procedures of W. H.
Reaves & Company, Inc. (“WHR”) ("the Adviser") for voting proxies received
for accounts managed by the Adviser are set forth below and are applicable if:
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The underlying advisory
agreement entered into with the client expressly provides that the Adviser
shall be responsible to vote proxies received in connection with the
client’s account; or |
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The underlying advisory
agreement entered into with the client is silent as to whether or not the
Adviser shall be responsible to vote proxies received in connection with
the client’s account and the Adviser has discretionary
authority over investment decisions for the client’s account;
or |
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In case of an employee benefit
plan, the client (or any plan trustee or other fiduciary) has
not reserved the
power to vote proxies in either the underlying advisory agreement entered
into with the client or in the client’s plan
documents. |
These Proxy Voting Policies and
Procedures are designed to ensure that proxies are voted in an appropriate
manner and should complement the Adviser’s investment policies and procedures
regarding its general responsibility to monitor the performance and/or corporate
events of companies which are issuers of securities held in managed accounts.
Any questions about these policies and procedures should be directed to WHR’s
Compliance Department.
In the absence of specific voting
guidelines from a client, WHR will vote proxies in a manner that is in the best
interest of the client, which may result in different voting results for proxies
for the same issuer. The Adviser shall consider only those factors that relate
to the client's investment or dictated by the client’s written instructions,
including how its vote will economically impact and affect the value of the
client's investment (keeping in mind that, after conducting an appropriate
cost-benefit analysis, not voting at all on a presented proposal may be in the
best interest of the client). WHR believes that voting proxies in accordance
with the following policies is in the best interests of its
clients.
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A. |
Specific
Voting Policies
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The Adviser will generally
vote for the election of directors (where no corporate governance issues
are implicated). |
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The Adviser will generally
vote for the selection of independent
auditors. |
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The Adviser will generally
vote for increases in or reclassification of common
stock. |
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The Adviser will generally
vote for management recommendations adding or amending indemnification
provisions in charter or by-laws. |
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The Adviser will generally
vote for changes in the board of
directors. |
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The Adviser will generally
vote for outside director compensation. |
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The Adviser will generally
vote for proposals that maintain or strengthen the shared interests of
shareholders and management |
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The Adviser will generally
vote for proposals that increase shareholder
value |
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The Adviser will generally
vote for proposals that will maintain or increase shareholder influence
over the issuer's board of directors and
management |
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The Adviser will generally
vote for proposals that maintain or increase the rights of
shareholders |
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2. |
Non-Routine and Conflict of
Interest Items: |
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The Adviser will generally
vote for management proposals for merger or reorganization if the
transaction appears to offer fair value. |
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The Adviser will generally
vote against shareholder resolutions that consider only non-financial
impacts of mergers |
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The Adviser will generally
vote against anti-greenmail provisions. |
If the proxy includes a Routine Item
that implicates corporate governance changes, a Non-Routine Item where no
specific policy applies or a Conflict of Interest Item where no specific policy
applies, then the Adviser may engage an independent third party to determine how
the proxies should be voted.
In voting on each and every issue,
the Adviser and its employees shall vote in a prudent and timely fashion and
only after a careful evaluation of the issue(s) presented on the
ballot.
In exercising its voting discretion,
the Adviser and its employees shall avoid any direct or indirect conflict of
interest raised by such voting decision. The Adviser will provide adequate
disclosure to the client if any substantive aspect or foreseeable result of the
subject matter to be voted upon raises an actual or potential conflict of
interest to the Adviser or:
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any affiliate of the Adviser.
For purposes of these Proxy Voting Policies and Procedures, an affiliate
means: |
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(i) |
any person directly, or
indirectly through one or more intermediaries, controlling, controlled by
or under common control with the Adviser; |
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(ii) |
any officer, director,
principal, partner, employer, or direct or indirect beneficial owner of
any 10% or greater equity or voting interest of the Adviser;
or |
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(iii) |
any other person for which a
person described in clause (ii) acts in any such
capacity; |
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any issuer of a security for
which the Adviser (or any affiliate of the Adviser) acts as a sponsor,
advisor, manager, custodian, distributor, underwriter, broker, or other
similar capacity; or |
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any person with whom the
Adviser (or any affiliate of the Adviser) has an existing, material
contract or business relationship that was not entered into in the
ordinary course of the Adviser’s (or its affiliate’s)
business. |
After informing the client of any
potential conflict of interest, the Adviser will take other appropriate action
as required under these Proxy Voting Policies and Procedures, as provided
below.
The Adviser shall keep certain
records required by applicable law in connection with its proxy voting
activities for clients and shall provide proxy-voting information to clients
upon their written or oral request.
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3. |
PROXY
VOTING PROCEDURES |
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A. |
The Account Representative or
the Portfolio Manager the “Responsible Party”) shall be designated by the
Adviser to make discretionary investment decisions for the client's
account will be responsible for voting the proxies related to that
account. The Responsible Party should assume that he or she has the power
to vote all proxies related to the client’s account if any one of the
three circumstances set forth in Section 1 above regarding proxy voting
powers is applicable. |
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B. |
All proxies and ballots
received by WHR will be forwarded to the Responsible Party and then logged
in upon receipt in the “Receipt of Proxy Voting Material” log.
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C. |
Prior to voting, the
Responsible Party will verify whether his or her voting power is subject
to any limitations or guidelines issued by the client (or in the case of
an employee benefit plan, the plan's trustee or other
fiduciaries). |
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D. |
Prior to voting, the
Responsible Party will verify whether an actual or potential conflict of
interest with the Adviser or any Interested Person exists in connection
with the subject proposal(s) to be voted upon. The determination regarding
the presence or absence of any actual or potential conflict of interest
shall be adequately documented by the Responsible Party (i.e., comparing
the apparent parties affected by the proxy proposal being voted upon
against the Adviser’s internal list of Interested Persons and, for any
matches found, describing the process taken to determine the anticipated
magnitude and possible probability of any conflict of interest being
present), which shall be reviewed and signed off on by the Responsible
Party’s direct supervisor (and if none, by the board of directors or a
committee of the board of directors of the Adviser).
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E. |
If an actual or potential
conflict is found to exist, written notification of the conflict (the
“Conflict Notice”) shall be given to the client or the client’s designee
(or in the case of an employee benefit plan, the plan's trustee or other
fiduciary) in sufficient detail and with sufficient time to reasonably
inform the client (or in the case of an employee benefit plan, the plan's
trustee or other fiduciary) of the actual or potential conflict involved.
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Specifically, the Conflict Notice
should describe:
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the proposal to be voted upon;
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the actual or potential
conflict of interest involved; |
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the Adviser’s vote
recommendation (with a summary of material factors supporting the
recommended vote); and |
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if applicable, the
relationship between the Adviser and any Interested
Person. |
The Conflict Notice will either
request the client’s consent to the Adviser’s vote recommendation or may request
the client to vote the proxy directly or through another designee of the client.
The Conflict Notice and consent thereto may be sent or received, as the case may
be, by mail, fax, electronic transmission or any other reliable form of
communication that may be recalled, retrieved, produced, or printed in
accordance with the recordkeeping policies and procedures of the Adviser. If the
client (or in the case of an employee benefit plan, the plan's trustee or other
fiduciary) is unreachable or has not affirmatively responded before the response
deadline for the matter being voted upon, the Adviser may:
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engage a non-Interested Party
to independently review the Adviser’s vote recommendation if the vote
recommendation would fall in favor of the Adviser’s interest (or the
interest of an Interested Person) to confirm that the Adviser’s vote
recommendation is in the best interest of the client under the
circumstances; |
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cast its vote as recommended
if the vote recommendation would fall against the Adviser’s interest (or
the interest of an Interested Person) and such vote recommendation is in
the best interest of the client under the circumstances;
or |
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abstain from voting if such
action is determined by the Adviser to be in the best interest of the
client under the circumstances. |
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F. |
The Responsible Party will
promptly vote proxies received in a manner consistent with the Proxy
Voting Policies and Procedures stated above and guidelines (if any) issued
by client (or in the case of an employee benefit plan, the plan's trustee
or other fiduciaries if such guidelines are consistent with ERISA).
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G. |
In accordance with SEC Rule
204-2(c)(2), as amended, the Responsible Party shall retain in the
respective client’s file, the following: |
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A copy of the proxy statement
received (unless retained by a third party for the benefit of the Adviser
or the proxy statement is
available from the SEC’s Electronic Data Gathering, Analysis, and
Retrieval (EDGAR) system); |
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A record of the vote cast
(unless this record is retained by a third party for the benefit of the
Adviser and the third party is able to
promptly provide the Adviser with a copy of the voting record upon its
request); |
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A record memorializing the
basis for the vote cast; |
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A copy of any document created
by the Adviser or its employees that was material in making the decision
on how to vote the subject proxy; and, |
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A copy of any Conflict Notice,
conflict consent or any other written communication (including emails or
other electronic communications) to or from the client (or in the case of
an employee benefit plan, the plan's trustee or other fiduciaries)
regarding the subject proxy vote cast by, or the vote recommendation of,
the Adviser. |
The above copies and records shall
be retained in the client’s file for a period not less than five (5) years (or
in the case of an employee benefit plan, no less than six (6) years), which
shall be maintained at the appropriate office of the Adviser.
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H. |
Periodically, but no less than
annually, the Adviser will: |
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Verify that all annual proxies
for the securities held in the client’s account have been received;
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Verify that each proxy
received has been voted in a manner consistent with the Proxy Voting
Policies and Procedures and the guidelines (if any) issued by the client
(or in the case of an employee benefit plan, the plan's trustee or other
fiduciaries); |
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3. |
Review the files to verify
that records of the voting of the proxies have been properly maintained;
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4. |
Prepare a written report for
each client regarding compliance with the Proxy Voting Policies and
Procedures; and |
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Maintain an internal list of
Interested Persons. |
Proxies and Class
Action Lawsuits
WHR will be required to take action
and render advice with respect to voting of proxies solicited by or with respect
to the issuers of securities in which assets of the Account may be invested from
time to time. However, WHR will not take any action or render any
advice with respect to any securities held in the Account, which are named in or
subject to class action lawsuits. WHR may, only at the client’s request, offer
clients advice regarding corporate actions