ck0000898745-20230831
PRINCIPAL
FUNDS, INC.
(“PFI”
or the “Registrant”)
Statement
of Additional Information
Dated
December 31, 2023
This
Statement of Additional Information ("SAI") is not a prospectus. It contains
information in addition to the information in the Registrant's Prospectus. The
Prospectus, which may be amended from time to time, contains the basic
information you should know before investing in a Fund. You should read this SAI
together with the Prospectus dated December 31, 2023.
Incorporation
by Reference: The
audited financial statements, schedules of investments, and auditor’s report
included in the Registrant’s Annual
Report to Shareholders,
for the fiscal year ended August 31, 2023, are hereby incorporated by reference
into and are legally a part of this SAI.
For
a free copy of the current Prospectus, Semi-Annual Report, or Annual Report,
call 1-800-222-5852 or write:
Principal
Funds
P.O. Box 219971
Kansas City, MO 64121-9971
The
Prospectus may be viewed at www.PrincipalAM.com/Prospectuses.
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Symbols by Share Class |
Fund |
A |
C |
J |
Inst. |
R-1 |
R-3 |
R-4 |
R-5 |
R-6 |
S |
Blue
Chip |
PBLAX |
PBLCX |
PBCJX |
PBCKX |
| PGBEX
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PGBFX |
PGBGX |
PGBHX |
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Bond
Market Index |
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| PBIJX |
PNIIX |
PBIMX |
PBOIX |
PBIPX |
PBIQX |
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Capital
Securities |
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PCSFX |
Diversified
Real Asset |
PRDAX |
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| PDRDX |
| PGDRX |
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| PDARX |
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Edge
MidCap |
PEMCX |
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| PEDGX |
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| PEDMX |
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Global
Multi-Strategy |
PMSAX |
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| PSMIX |
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| PGLSX |
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Global
Sustainable Listed Infrastructure |
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| PGSLX |
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International
Equity Index |
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| PIDIX |
PILIX |
PIIOX |
PIIPX |
PIIQX |
PFIEX |
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International
Small Company |
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| PISMX |
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| PFISX |
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Opportunistic
Municipal |
PMOAX |
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| POMFX |
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Origin
Emerging Markets |
POEYX |
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| POEIX |
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| POEFX |
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Small-MidCap
Dividend Income |
PMDAX |
PMDDX |
| PMDIX |
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| PMDHX |
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Spectrum
Preferred and Capital Securities Income |
PPSAX |
PRFCX |
PPSJX |
PPSIX |
PUSAX |
PNARX |
PQARX |
PPARX |
PPREX |
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HISTORY
OF THE FUNDS
Principal
Funds, Inc. (“PFI” or the “Registrant”) was organized as Principal Special
Markets Fund, Inc. on January 28, 1993, as a Maryland corporation. The
Registrant changed its name to Principal Investors Fund, Inc. effective
September 14, 2000 and to Principal Funds, Inc. effective June 13,
2008.
On
January 12, 2007, the Registrant acquired WM Trust I, WM Trust II, and WM
Strategic Asset Management Portfolios, LLC.
Classes
offered by each series of the Registrant (each, a “Fund” and, together, the
“Funds”) are shown in the following table.
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Share
Class |
Fund |
A |
C |
J |
Inst. |
R-1 |
R-3 |
R-4 |
R-5 |
R-6 |
S |
Blue
Chip |
X |
X |
X |
X |
| X |
X |
X |
X |
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Bond
Market Index |
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| X |
X |
X |
X |
X |
X |
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Capital
Securities |
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| X |
Diversified
Real Asset |
X |
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| X |
| X |
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| X |
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Edge
MidCap |
X |
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| X |
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| X |
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Global
Multi-Strategy |
X |
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| X |
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| X |
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Global
Sustainable Listed Infrastructure |
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| X |
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International
Equity Index |
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| X |
X |
X |
X |
X |
X |
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International
Small Company |
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| X |
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| X |
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Opportunistic
Municipal |
X |
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| X |
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Origin
Emerging Markets |
X |
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| X |
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| X |
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Small-MidCap
Dividend Income |
X |
X |
| X |
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| X |
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Spectrum
Preferred and Capital Securities Income |
X |
X |
X |
X |
X |
X |
X |
X |
X |
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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.
MULTIPLE
CLASS STRUCTURE
The
Board has adopted a multiple class plan (the “Multiple Class Plan”) pursuant to
U.S. Securities and Exchange Commission (“SEC”) Rule 18f-3. The share classes
each Fund offers are identified in the chart included under the heading “History
of the Funds.” The share classes offered under the Multiple Class Plan include:
Classes A, C, J, Institutional, R-1, R-3, R-4, R-5, R-6, and S.
Class
A shares are generally sold with a sales charge that is a variable percentage
based on the amount of the purchase, as described in the Prospectus. Certain
redemptions of Class A shares within 12 months of purchase may be subject to a
contingent deferred sales charge (“CDSC”), as described in the
Prospectus.
Class
C shares are not subject to a sales charge at the time of purchase but are
subject to a 1% CDSC on shares redeemed within 12 months of purchase, as
described in the Prospectus.
Class
J shares are sold without any front-end sales charge. A CDSC of 1% is imposed if
Class J shares are redeemed within 18 months of purchase, as described in the
Prospectus.
Sales
charge waivers and reductions may be available depending on whether shares are
purchased directly from the Fund or through a financial intermediary, as
described in the Prospectus and Appendix B to the Prospectus, titled
“Intermediary-Specific Sales Charge Waivers and Reductions.”
For
Classes A, C, and J shares purchased from the Fund or through an intermediary
not identified on Appendix B to the Prospectus, the CDSC is waived on
shares:
•redeemed
within 90 days after an account is re-registered due to a shareholder's
death;
•redeemed
to pay surrender fees;
•redeemed
to pay retirement plan fees;
•redeemed
involuntarily from accounts with small balances;
•redeemed
due to the shareholder's disability (as defined by the Internal Revenue Code)
provided the shares were purchased prior to the disability;
•redeemed
from retirement plans to satisfy minimum distribution rules under the Internal
Revenue Code;
•redeemed
from a retirement plan to assure the plan complies with the Internal Revenue
Code;
•redeemed
from retirement plans qualified under Section 401(a) of the Internal Revenue
Code due to the plan participant's death, disability, retirement, or separation
from service after attaining age 55;
•redeemed
from retirement plans to satisfy excess contribution rules under the Internal
Revenue Code; or
•redeemed
using a systematic withdrawal plan (up to 1% per month (measured cumulatively
with respect to non-monthly plans) of the value of the fund account at the time,
and beginning on the date, the systematic withdrawal plan begins). (The free
withdrawal privilege not used in a calendar year is not added to the free
withdrawal privileges for any following year.)
For
Class J shares purchased from the Fund or through an intermediary not identified
on Appendix B to the Prospectus, the CDSC also is waived on shares:
•redeemed
that were purchased pursuant to the Small Amount Force Out program (SAFO);
or
•of
the Money Market Fund redeemed within 30 days of the initial purchase if the
redemption proceeds are transferred to another Principal IRA, defined as either
a fixed or variable annuity issued by Principal Life Insurance Company to fund
an IRA, a Principal Bank IRA product, or a WRAP account IRA sponsored by
Principal Securities, Inc. (PSI).
Institutional
Class and Classes R-1, R-3, R-4, R-5, and R-6 shares are available without any
front-end sales charge or CDSC. Classes R-1, R-3, R-4, and R-5 shares are
available through employer-sponsored retirement plans. Such plans may impose
fees in addition to those charged by the Funds. Classes R-1, R-3, R-4, and R-5
shares are subject to asset-based charges (described below). Class R-6 shares
are generally available through the defined contribution investment only
channel.
PGI
receives a fee for providing investment advisory and certain corporate
administrative services under the terms of the Management Agreement between the
Registrant and PGI. In addition to the management fee, the Funds’ Classes R-1,
R-3, R-4, and R-5 shares pay PGI a service fee and an administrative services
fee under the terms of a Service Agreement between the Registrant and PGI and an
Administrative Services Agreement between the Registrant and PGI,
respectively.
Service
Agreement (Classes R-1, R-3, R-4, and R-5 Shares)
The
Service Agreement provides for PGI to provide certain personal services to
shareholders (plan sponsors) and beneficial owners (plan members) of those
classes. These personal services include:
• responding
to plan sponsor and plan member inquiries;
• providing
information regarding plan sponsor and plan member investments; and
• providing
other similar personal services or services related to the maintenance of
shareholder accounts as contemplated by National Association of Securities
Dealers (NASD) Rule 2830 (or any successor thereto).
As
compensation for these services, Principal Funds will pay PGI service fees equal
to 0.25% of the average daily net assets attributable to each of the R-1, R-3,
R-4, and R-5 Classes. The service fees are calculated and accrued daily and paid
monthly to PGI (or at such other intervals as Principal Funds and PGI may
agree).
Administrative
Services Agreement (Classes R-1, R-3, R-4, and R-5 Shares)
The
Administrative Services Agreement provides for PGI to provide services to
beneficial owners of Fund shares. Such services include:
• receiving,
aggregating, and processing purchase, exchange, and redemption requests from
plan shareholders;
• providing
plan shareholders with a service that invests the assets of their accounts in
shares pursuant to pre-authorized instructions submitted by plan
members;
• processing
dividend payments from the Funds on behalf of plan shareholders and changing
shareholder account designations;
• acting
as shareholder of record and nominee for plans;
• maintaining
account records for shareholders and/or other beneficial owners;
• providing
notification to plan shareholders of transactions affecting their
accounts;
• forwarding
prospectuses, financial reports, tax information, and other communications from
the Fund to beneficial owners;
• distributing,
receiving, tabulating, and transmitting proxy ballots of plan shareholders;
and
• other
similar administrative services.
As
compensation for these services, Principal Funds will pay PGI service fees equal
to 0.28% of the average daily net assets attributable to the R-1 Class, 0.07% of
the average daily net assets of the R-3 Class, 0.03% of the average daily net
assets of the R-4 Class, and 0.01% of the average daily net assets of the R-5
Class. The service fees are calculated and accrued daily and paid monthly to PGI
(or at such other intervals as Principal Funds and PGI may agree).
PGI
will generally, at its discretion, appoint (and may at any time remove) other
parties, including companies affiliated with PGI, as its agent to carry out the
provisions of the Service Agreement and/or the Administrative Services
Agreement. However, the appointment of an agent shall not relieve PGI of any of
its responsibilities or liabilities under those agreements. Any fees paid to
agents under these agreements shall be the sole responsibility of
PGI.
Class
S: Class S shares are available without any front-end sales charge or CDSC.
Eligibility to invest in the Capital Securities Fund is limited to certain
wrap-fee program accounts. Only wrap-fee program accounts as to which Spectrum
and/or PGI have an agreement with the wrap-fee program’s sponsor (“Sponsor”) or
the wrap account owner to provide investment advisory or sub-advisory services
(either directly or by providing a model investment portfolio created and
maintained by Spectrum and/or PGI to the Sponsor or one or more
Sponsor-designated investment managers) (“Eligible Wrap Accounts”) are eligible
to purchase shares of the Fund. References to Wrap Fee Advisor shall mean
Spectrum and/or PGI in their role providing such services to Eligible Wrap
Accounts.
A
client agreement with the Sponsor to open an account in the Sponsor’s wrap-fee
program typically may be obtained by contacting the Sponsor or your financial
advisor. Purchase and sale decisions regarding Fund shares for your wrap account
ordinarily will be made by the Wrap Fee Advisor, the Sponsor, or a
Sponsor-designated investment manager, depending on the particular wrap-fee
program in which your wrap account participates. If your wrap-fee account’s use
of the Wrap Fee Advisor’s investment style is terminated by you, the Sponsor, or
the Wrap Fee Advisor, your wrap account will cease to be an Eligible Wrap
Account and you will be required to redeem all your shares of the Capital
Securities Fund. Each Eligible Wrap Account, by purchasing shares, agrees to any
such redemption.
Rule
12b-1 Fees / Distribution Plans and Agreements
The
distributor for the Funds is Principal Funds Distributor, Inc. (“PFD” or the
“Distributor”). PFD's address is 711 High Street, Des Moines, IA
50392.
In
addition to the management and service fees, certain of the Funds’ share classes
are subject to a Rule 12b-1 Distribution Plan and Agreement (each, a “Plan” and,
together, the “Plans”). The Board and initial shareholders of Classes A, C, J,
R-1, R-3, and R-4 shares have approved and entered into a Plan. In adopting the
Plans, the Board (including a majority of board members who are not interested
persons of the Funds, as defined in the Investment Company Act of 1940, as
amended) determined that there was a reasonable likelihood that the Plans would
benefit the Funds and the shareholders of the affected classes. Among the
possible benefits of the Plans include the potential for building and retaining
Fund assets, as well as the ability to offer an incentive for registered
representatives to provide ongoing servicing to shareholders.
The
Plans provide that each Fund makes payments to the Fund’s Distributor from
assets of each share class that has a Plan to compensate the Distributor and
other selling dealers, various banks, broker-dealers, and other financial
intermediaries, for providing certain services to the Fund. Such services may
include, but are not limited to:
• formulation
and implementation of marketing and promotional activities;
• preparation,
printing, and distribution of sales literature;
• preparation,
printing, and distribution of prospectuses and the Fund reports to
other-than-existing shareholders;
• obtaining
such information with respect to marketing and promotional activities as the
Distributor deems advisable;
• making
payments to dealers and others engaged in the sale of shares or who engage in
shareholder support services; and
• providing
training, marketing, and support with respect to the sale of
shares.
Each
Fund pays the Distributor a fee after the end of each month at an annual rate as
a percentage of the daily net asset value of the assets attributable to each
share class as follows:
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Share
Class |
Maximum
Annualized
12b-1
Fee |
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A
(1)
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0.25% |
C
(1)
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1.00% |
J
(1)
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0.15% |
R-1 |
0.35% |
R-3 |
0.25% |
R-4 |
0.10% |
(1)The
Distributor also receives the proceeds of any CDSC imposed.
Effective
January 1, 2021, the Distributor has voluntarily agreed to limit the
distribution fees attributable to Class J, reducing the Funds’ distribution fees
for Class J shares by 0.020%.* This voluntary waiver may be revised or
terminated at any time without notice to shareholders.
* For
the period from December 31, 2016 to December 31, 2020, the voluntary waiver was
0.030%.
The
Distributor may remit on a continuous basis all of these sums to its investment
representatives and other financial intermediaries as a trail fee in recognition
of their services and assistance.
Currently,
the Distributor makes payments to dealers on accounts for which such dealer is
designated dealer of record. Payments are based on the average net asset value
of the accounts invested in Classes A, C, J, R-1, R-3, or R-4
shares.
Under
the Plans, the Funds have no legal obligation to pay any amount that exceeds the
compensation limit. The Funds do not pay, directly or indirectly, interest,
carrying charges, or other financing costs in association with these Plans. All
fees paid under a Fund’s Plan are paid to the Distributor, which is entitled to
retain such fees paid by the Fund without regard to the expenses that it
incurs.
For
the fiscal year ended August 31, 2023, each Fund made the following 12b-1
payments to PFD, and PFD, from these 12b-1 payments, made the following payments
to financial intermediaries that distribute and/or service the Fund’s shares.
The “Retained by PFD” column reflects the difference between the amount paid by
the Fund to PFD and the amount of that 12b-1 fee paid by PFD to financial
intermediaries. That difference/remainder is then used by PFD to pay for other
12b-1-eligible expenses. For the fiscal year ended August 31, 2023, the
12b-1-eligible expenses for each Fund were greater than the amount of the Fund’s
12b-1 payments to PFD.
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Fund |
Paid
by Fund to PFD (amounts in thousands) |
Paid
by PFD to
Financial
Intermediaries
(amounts
in thousands) |
Retained
by PFD
(amounts
in thousands) |
Blue
Chip |
$5,098 |
$4,924 |
$174 |
Bond
Market Index |
73 |
66 |
7 |
Capital
Securities |
— |
— |
— |
Diversified
Real Asset |
262 |
262 |
— |
Edge
MidCap |
42 |
41 |
1 |
Global
Multi-Strategy |
95 |
94 |
1 |
Global
Sustainable Listed Infrastructure |
— |
— |
— |
International
Equity Index |
39 |
34 |
5 |
International
Small Company |
— |
— |
— |
Opportunistic
Municipal |
108 |
108 |
— |
Origin
Emerging Markets |
13 |
13 |
— |
Small-MidCap
Dividend Income |
738 |
733 |
5 |
Spectrum
Preferred and Capital Securities Income |
3,497 |
3,349 |
148 |
Principal
Underwriter
PFD
acts as the principal underwriter in the continuous public offering of the
Funds’ shares. The table below shows the aggregate dollar amount of underwriting
commissions and the amount retained by PFD for the last three fiscal years ended
August 31:
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Underwriting
Fees for Periods Ended August 31
(amounts
in thousands) |
| 2023 |
2022 |
2021 |
Fund |
Total
Underwriting Commissions |
Amount
Retained by PFD |
Total
Underwriting Commissions |
Amount
Retained by PFD |
Total
Underwriting Commissions |
Amount
Retained by PFD |
Blue
Chip |
$1,495 |
$305 |
$2,423 |
$467 |
$3,115 |
$563 |
Bond
Market Index |
1 |
1 |
1 |
1 |
6 |
6 |
Capital
Securities |
— |
— |
— |
— |
— |
— |
Diversified
Real Asset |
54 |
17 |
147 |
30 |
30 |
6 |
Edge
MidCap |
46 |
10 |
55 |
8 |
73 |
11 |
Global
Multi-Strategy |
13 |
3 |
8 |
2 |
5 |
1 |
Global
Sustainable Listed Infrastructure |
— |
— |
— |
— |
— |
— |
International
Equity Index |
— |
— |
— |
— |
— |
— |
International
Small Company |
— |
— |
— |
— |
7 |
1 |
Opportunistic
Municipal |
9 |
2 |
26 |
4 |
14 |
6 |
Origin
Emerging Markets |
7 |
1 |
17 |
3 |
42 |
7 |
Small-MidCap
Dividend Income |
74 |
13 |
81 |
17 |
113 |
21 |
Spectrum
Preferred and Capital Securities Income |
408 |
147 |
455 |
222 |
727 |
245 |
PFD
does not charge fees on redemptions or repurchases of Fund shares. The amounts
in the table above for Total Underwriting Commissions include any applicable
contingent deferred sales charges and front-end sales charges.
Transfer
Agency Agreement (Classes A, C, J, Institutional, R-1, R-3, R-4, R-5, R-6, and
S)
The
Transfer Agency Agreement provides for Principal Shareholder Services, Inc.
(“PSS”) (711 High Street, Des Moines, IA 50392), an affiliate of PGI, to act as
transfer and shareholder servicing agent for the Classes A, C, J, Institutional,
R-1, R-3, R-4, R-5, R-6, and S.
•For
Classes A, C, and R-6, and Institutional Class shares, the Registrant pays PSS a
fee for the services provided pursuant to the Transfer Agency Agreement in an
amount equal to the costs incurred by PSS for providing such
services.
•For
Class J shares, the Registrant pays PSS a fee for the services provided pursuant
to the Transfer Agency Agreement in an amount that includes profit.
The
Registrant pays PSS for the following services for Classes A, C, J, and R-6, and
Institutional Class shares:
•issuance,
transfer, conversion, cancellation, and registry of ownership of Fund shares,
and maintenance of open account system;
•preparation
and distribution of dividend and capital gain payments to
shareholders;
•delivery,
redemption, and repurchase of shares, and remittances to
shareholders;
•the
tabulation of proxy ballots and the preparation and distribution to shareholders
of notices, proxy statements and proxies, reports, confirmation of transactions,
prospectuses, and tax information;
•communication
with shareholders concerning the above items; and
•use
of its best efforts to qualify the capital stock of the Funds for sale in states
and jurisdictions as directed by the Funds.
The
Registrant does not pay for these services for Classes R-1, R-3, R-4, and R-5
shares.
PSS will pay operating expenses attributable to Classes R-1, R-3, R-4, and R-5
shares related to (a) the cost of meetings of shareholders and (b) the costs of
initial and ongoing qualification of the capital stock of the Funds for sale in
states and jurisdictions.
DESCRIPTION
OF THE FUNDS’ INVESTMENTS AND RISKS
The
Registrant is a registered, open-end management investment company, commonly
called a mutual fund. The Registrant consists of multiple investment portfolios,
which are referred to as “Funds.” Each Fund has its own investment objective,
strategies, and portfolio management team. As described below, each Fund has
adopted a fundamental policy regarding diversification, as that term is used in
the Investment Company Act of 1940, as amended (the “1940 Act”), and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
Fund
Policies
The
investment objective, principal investment strategies, and principal risks of
each Fund are described in the Prospectus. This SAI 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 other 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 a
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 a Fund’s portfolio.
The
investment objective of each Fund and, except as described below as “fundamental
restrictions,” the investment strategies described in this SAI and the
Prospectus 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 the Prospectus or
SAI.
Fundamental
Restrictions
Except
as specifically noted, 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, except as permitted by the 1940 Act or other
governing statute and the rules thereunder, the SEC, or other regulatory agency
with authority over the Funds. The 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 Fund shares or (2) 67% or
more of the Fund 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:
1)may
not issue senior securities, except as permitted under the 1940 Act, as amended,
and as interpreted, modified, or otherwise permitted by regulatory authority
having jurisdiction, from time to time.
2)has
adopted a commodities policy, as follows:
(a)The
Opportunistic Municipal Fund may not purchase or sell commodities, except as
permitted under the 1940 Act, as amended, and as interpreted, modified, or
otherwise permitted by regulatory authority having jurisdiction, from time to
time.
(b)The
remaining Funds may not purchase or sell commodities, except as permitted by
applicable law, regulation, or regulatory authority having
jurisdiction.
3)may
not purchase or sell real estate, which term does not include securities of
companies that deal in real estate or mortgages or investments secured by real
estate or interests therein, except that each Fund reserves freedom of action to
hold and to sell real estate acquired as a result of the Fund’s ownership of
securities.
4)may
not borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
5)may
not make loans, except as permitted under the 1940 Act, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
6)has
adopted a policy regarding diversification, as follows:
(a)The
Global Sustainable Listed Infrastructure Fund has elected to be
non-diversified.
(b)All
other Funds have elected to be treated as a "diversified" investment company, as
that term is used in the 1940 Act, as amended, and as interpreted, modified, or
otherwise permitted by regulatory authority having jurisdiction, from time to
time.
7)has
adopted a concentration policy, as follows:
(a)The
Capital Securities, Diversified Real Asset, Global Sustainable Listed
Infrastructure, and Spectrum Preferred and Capital Securities Income Funds will
concentrate their investments in a particular industry or group of industries as
described in the Prospectus.
(b)The
Bond Market Index and International Equity Index Funds will not concentrate
their investments in a particular industry, except to the extent that their
related Index is also so concentrated.
(c)The
Opportunistic Municipal Fund may not concentrate, as that term is used in the
1940 Act, its investments in a particular industry, except as permitted under
the 1940 Act, as amended, and as interpreted, modified, or otherwise permitted
by regulatory authority having jurisdiction, from time to time.
(d)The
remaining Funds may not concentrate, 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, its investments in a
particular industry or group of industries.
8) may
not act as an underwriter of securities, except to the extent that the Fund may
be deemed to be an underwriter in connection with the sale of securities held in
its portfolio.
Non-Fundamental
Restrictions
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:
1)Invest
more than 15% of its net assets in illiquid securities and in repurchase
agreements maturing in more than seven days, except to the extent permitted by
applicable law or regulatory authority having jurisdiction, from time to
time.
2)Pledge,
mortgage, or hypothecate its assets, except to secure permitted borrowings. The
deposit of underlying securities and other assets in escrow and other collateral
arrangements in connection with transactions 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.
3)Invest
in companies for the purpose of exercising control or management.
4)Invest
more than 25% of its assets in foreign securities; however:
(a)the
Spectrum Preferred and Capital Securities Income Fund may not invest more than
60% of its assets in foreign securities;
(b)the
Capital Securities, Diversified Real Asset, Global Multi-Strategy, Global
Sustainable Listed Infrastructure, International Equity Index, International
Small Company, and Origin Emerging Markets Funds each may invest up to 100% of
its assets in foreign securities;
(c)the
Bond Market Index Fund may invest in foreign securities to the extent that the
relevant index is so invested; and
(d)the
Opportunistic Municipal Fund may not invest in foreign securities.
5)Invest
more than 5% of its total assets in real estate limited partnership
interests.
The
Diversified Real Asset and Global Multi-Strategy Funds have not adopted this
non-fundamental restriction.
6)Acquire
securities of other investment companies in reliance on Section 12(d)(1)(F) or
(G) of the 1940 Act, invest more than 10% of its total assets in securities of
other investment companies, invest more than 5% of its total assets in the
securities of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company, except in
connection with a merger, consolidation, or plan of reorganization and except as
permitted by the 1940 Act, SEC Rules adopted under the 1940 Act, or exemptions
granted by the SEC. 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
Except
as specifically noted, each Fund has also adopted a 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. A 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 policy, each Fund tests market capitalization
ranges monthly.
For
purposes of testing this requirement with respect to:
•Forward
foreign currency contracts and other investments that have economic
characteristics similar to foreign currency:
the value of such contracts and investments may include the Fund’s investments
in cash and/or cash equivalents to the extent such cash and/or cash equivalents
are maintained with respect to the Fund’s exposure under its forward foreign
currency contracts and similar investments.
•Derivatives
instruments:
each Fund will typically count the mark-to-market value of such derivatives.
However, a 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 that are
“fully paid” (equity swaps in which cash and/or cash equivalents are posted as
collateral 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.
•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.
The
Global Multi-Strategy Fund has not adopted this non-fundamental
policy.
The
Opportunistic Municipal Fund has adopted a fundamental policy that requires it,
under normal circumstances, to invest at least 80% of its net assets, plus the
amount of any borrowings for investment purposes, in investments, the income
from which is exempt from federal income tax or so that at least 80% of the
income the Fund distributes will be exempt from federal income tax.
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.
Commodity-Related
Investments
All
Funds Except the Diversified Real Asset Fund and the Global Multi-Strategy
Fund
Under
the 1940 Act, a fund’s registration statement must recite the fund’s policy with
regard to investing in commodities. Each Fund may invest in commodities to the
extent permitted by applicable law and under its fundamental and non-fundamental
policies and restrictions. Pursuant to a claim for exclusion filed with the
Commodity Futures Trading Commission (“CFTC”) on behalf of each of the Funds
under Rule 4.5, PGI is not deemed to be a “commodity pool operator” under the
Commodity Exchange Act (“CEA”) as it specifically relates to PGI’s operations
with respect to the Funds, and the Funds, therefore, are not considered
regulated commodity pools and are not subject to registration or regulation
under the CEA. The CFTC amended Rule 4.5 exclusions 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 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. Each Fund intends to limit its use of
futures contracts, options on futures contracts, and swaps to the degree
necessary to fall within one of the two exclusions. If a Fund is unable to do
so, it may incur expenses that are necessary to comply with the CEA and rules
the CFTC has adopted under it.
Diversified
Real Asset Fund and Global Multi-Strategy Fund
The
Diversified Real Asset Fund and the Global Multi-Strategy Fund are each deemed
to be a “commodity pool” under the CEA, and PGI is considered a “commodity pool
operator” with respect to each such Fund. PGI is, therefore, subject to dual
regulation by the SEC and the CFTC. The CFTC or the SEC could alter the
regulatory requirements governing the use of commodity futures (which include
futures on broad-based securities indexes, interest rate futures, and currency
futures) or options on commodity futures or swaps transactions by investment
companies, including these Funds.
To
gain exposure to the commodity markets within the limitations of the federal tax
law requirements applicable to regulated investment companies under the Internal
Revenue Code of 1986, as amended (the “Code”), the Diversified Real Asset Fund
and the Global Multi-Strategy Fund may each invest up to 25% of its total assets
in its respective wholly-owned subsidiary organized under the laws of the Cayman
Islands (a “Cayman Subsidiary”). The Diversified Real Asset Fund and the Global
Multi-Strategy Fund may test for compliance with certain investment restrictions
on a consolidated basis with its Cayman Subsidiary. With respect to investments
that involve leverage, each Cayman Subsidiary’s assets will be aggregated with
the assets of the respective parent fund for compliance with the SEC’s
derivatives rule.
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 (MSCI)/Standard &
Poor’s Global Industry Classification Standard (GICS), the Directory of
Companies Filing Annual Reports with the SEC, or any other reasonable industry
classification system. With respect to monitoring industry concentration, a Fund
concentrating in the “financial services industry” concentrates its investments
in one or more industries classified within the broader financial services
sector.
•Each
Fund interprets its policy with respect to concentration in a particular
industry to apply only to direct investments in the securities of issuers in a
particular industry.
•For
purposes of this restriction, government securities (such as treasury securities
or mortgage-backed securities that are issued or guaranteed by the U.S.
government, its agencies, or instrumentalities) are not subject to the Funds’
industry concentration restrictions.
•Each
Fund views its 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.
Loans
A
Fund may not make loans to other persons, except (i) as permitted by 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 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 the
Fund’s investment objective 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, including, for example, new or revised laws or
regulations, the market price of the securities may decline below the purchase
price paid by a fund.
In
general, securities that 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
Each
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
Funds
may write (sell) and purchase call and put options on securities and on
securities indices. 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 that the Fund plans to purchase, or to generate additional
revenue.
•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 transaction.
•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.
•FLexible
EXchange Options (“FLEX Options”). FLEX Options are customized options contracts
available through national securities exchanges that are guaranteed for
settlement by the Options Clearing Corporation (“OCC”), a market clearinghouse.
FLEX Options provide investors with the ability to customize terms of an option,
including exercise prices, exercise styles (European-style options, which are
exercisable only at the expiration date, versus American-style options, which
are exercisable any time prior to the expiration date), and expiration dates,
while achieving price discovery in competitive, transparent auction markets and
avoiding the counterparty exposure of the OTC option positions.
There
is no assurance that a liquid secondary market on an options exchange will exist
for any particular option, or at any particular time, and for some options no
secondary market on an exchange or elsewhere may exist. If a Fund is unable to
close out a call option on securities that it has written before the option is
exercised, the Fund may be required to purchase the optioned securities in order
to satisfy its obligation under the option to deliver such securities. If the
Fund is unable to effect a closing sale transaction with respect to options on
securities that it has purchased, it would have to exercise the option in order
to realize any profit and would incur transaction costs upon the purchase and
sale of the underlying securities. The writing and purchasing of options is a
highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Imperfect correlation between the options and securities markets may detract
from the effectiveness of attempted hedging. Options transactions may result in
significantly higher transaction costs and portfolio turnover for a
Fund.
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 time period until the expiration of the option and interest
rates. The premium generates additional income for the Fund if the option
expires unexercised or is closed out at a profit. By writing a call, a Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option, but it retains the
risk of loss if the price of the security should decline. By writing a put, a
Fund assumes the risk that it may have to purchase the underlying security at a
price that may be higher than its market value at time of exercise.
A
Fund usually owns the underlying security covered by any outstanding call
option. With respect to an outstanding put option, a 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. Each Fund engages 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. A
Fund 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. A Fund generally purchases or writes
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 the 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 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
Funds
may purchase and sell futures contracts of many types, including for example,
futures contracts covering indexes, financial instruments, and foreign
currencies. Funds 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. Funds 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. Funds may enter into futures contracts and related options
transactions both for hedging and non-hedging purposes.
Futures
Contracts. Funds
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 Fund usually liquidates 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, a 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.
Options
on Futures Contracts. 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. A 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
Each
Fund 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
Funds
may engage in spread trades, which typically represent a simultaneous purchase
and sale of two different contracts designed to capture the change in the
relationship in price between the two contracts. Spread transactions are
typically accompanied by lower margin requirements and lower volatility than an
outright purchase. Funds 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 Funds 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
Funds
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. Funds may also enter into options on
swap agreements (“swap options”).
Funds
may enter into swap transactions for any legal purpose consistent with its
investment objectives and policies, such as for the purpose of attempting to
obtain or preserve a particular return or spread at a lower cost than obtaining
a return or spread through purchases and/or sales of instruments in other
markets; to protect against currency fluctuations; as a duration management
technique; to protect against any increase in the price of securities a Fund
anticipates purchasing at a later date; to gain exposure to one or more
securities, currencies, or interest rates; to take advantage of perceived
mispricing in the securities markets; or to gain exposure to certain markets in
the most economical way possible.
Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or “swapped” between the parties are generally
calculated with respect to a “notional amount,” i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a “basket” of securities or commodities
representing a particular index.
•Interest
Rate Swaps. 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.
•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.
•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).
•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.
•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 (LIBOR), the Secured Overnight Financing Rate (SOFR), or
a similar reference rate, and is adjusted each period. Therefore, if interest
rates increase over the term of the swap contract, a Fund may be required to pay
a higher fee at each swap reset date.
•Credit
Default Swap Agreements. The “buyer” in a credit default contract is obligated
to pay the “seller” a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the full
notional value, or “par value,” of the reference obligation in exchange for the
reference obligation. A Fund may be either the buyer or seller in a credit
default swap transaction. If a Fund is a buyer and no event of default occurs,
the Fund will lose its investment and recover nothing. However, if an event of
default occurs, the Fund (if the buyer) will receive the full notional value of
the reference obligation that may have little or no value. As a seller, a Fund
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and five years, provided that there is no
default event. If an event of default occurs, the seller must pay the buyer the
full notional value of the reference obligation. In addition, collateral posting
requirements are individually negotiated and there is no regulatory requirement
that a counterparty post collateral to secure its obligations or a specified
amount of cash, depending upon the terms of the swap, under a credit default
swap. Furthermore, there is no requirement that a party be informed in advance
when a credit default swap agreement is sold. Accordingly, a Fund may have
difficulty identifying the party responsible for payment of its claims. The
notional value of credit default swaps with respect to a particular investment
is often larger than the total par value of such investment outstanding and, in
event of a default, there may be difficulties in making the required deliveries
of the reference investments, possibly delaying payments.
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.
•Investment
Pools. 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.
•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. Funds
may also use actual long and short futures positions to achieve the market
exposure(s) as contracts for differences. Funds may enter into swaps and
contracts for differences for investment return, hedging, risk management and
for investment leverage.
•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. Funds may engage in swap options for
hedging purposes or in an attempt to manage and mitigate credit and interest
rate risk. Funds 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 a Fund enters 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).
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 each Fund by the Internal Revenue Code may limit a Fund’s 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:
•the
frequency of trades and quotations,
•the
number of dealers and prospective purchasers in the marketplace,
•dealer
undertakings to make a market,
•the
nature of the security (including any demand or tender features),
and
•the
nature of the marketplace for trades (including the ability to assign or offset
a portfolio's rights and obligations relating to the investment).
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 a fund’s investment policies and restrictions (as stated in
the Prospectuses and this SAI) 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 a fund 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.
Limitations
on the Use of Futures, Options on Futures Contracts, and Swaps
All
Funds except the Diversified Real Asset Fund and the Global Multi-Strategy
Fund.
CFTC Rule 4.5 provides that an investment company does not meet the definition
of “commodity pool operator” under the CEA 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. Each Fund intends to
limit its use of futures contracts, options on futures contracts, and swaps to
the degree necessary to fall within one of the two exclusions. If a Fund is
unable to do so, it may incur expenses that are necessary to comply with the CEA
and the rules the CFTC has adopted under it.
Diversified
Real Asset Fund and Global Multi-Strategy Fund.
The Diversified Real Asset Fund and the Global Multi-Strategy Fund are each
deemed to be regulated “commodity pools” under the CEA and, as a result, may
invest in futures contracts, options on futures contracts, and swaps in excess
of the limitations imposed by the CFTC under Rule 4.5.
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.
Limits
or restrictions applicable to the counterparties with which the funds engage in
derivative transactions could also prevent the funds from using certain
instruments.
Environmental,
Social, and Governance Factors in the Selection of Portfolio
Securities
(Applicable
to all Funds or portions of the Funds, other than Bond Market Index Fund, Global
Multi-Strategy Fund, International Equity Index Fund, and Opportunistic
Municipal Fund. The below is not applicable to the Global Sustainable Listed
Infrastructure Fund as ESG Investing Risk is principal to the Fund and included
in the Fund's Prospectus.)
The
portfolio managers of the Funds consider one or more environmental, social,
and/or governance (“ESG”) factors along with other, non-ESG factors in making
investment decisions. The consideration of ESG factors is intended to further
the stated objective of the particular Funds. These ESG factors are generally no
more significant than other factors in the investment selection process, such
that ESG factors may not be determinative in deciding to include or exclude any
particular investment in the portfolio. By way of example, environmental factors
can include one or more of the following: climate change, natural resources,
pollution and waste, and environmental opportunities. Social factors can include
one or more of the following: human capital, product liability, stakeholder
opposition, and social opportunities. Governance factors can include corporate
governance and/or corporate behavior. Integration of ESG factors is qualitative
and subjective by nature. There is no guarantee that the criteria used, or
judgment exercised, will reflect the beliefs or values of any particular
investor. Further, there is no assurance that any strategy or integration of ESG
factors will be successful or profitable.
Further,
the portion of Diversified Real Asset Fund managed by Impax Asset Management
Limited and related to investments in natural resources considers climate as a
particular factor in its stock selection process. This consideration may impact
the investable universe, and may, under certain circumstances, detract from
investment performance.
Environmental,
Social, and Governance Factors in the Selection of Investment Advisors and Asset
Classes
The
Diversified Real Asset Fund is structured as an asset allocation fund, in which
PGI is responsible for selecting sub-advisors and investment teams within PGI
that, in turn, are responsible for selecting underlying investments. In
selecting sub-advisors, investment teams, and asset classes, the PGI asset
allocation team considers ESG factors. ESG factors are generally no more
significant than other factors in the selection process, such that ESG factors
may not be determinative in deciding to include or exclude any particular
sub-advisor, investment team, or asset class in the portfolio. Integration of
ESG factors is qualitative and subjective by nature. There is no guarantee that
the criteria used, or judgment exercised, will reflect the beliefs or values of
any particular investor. Further, there is no assurance that any strategy or
integration of ESG factors will be successful or profitable.
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
Some
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, SOFR, or a similar reference rate).
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
Some
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
Each
Fund 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
Each
Fund 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
Some
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
Each
Fund 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.
Each 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.
Each
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
Each
Fund may, but is 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, each 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.
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.
A
fund may obtain exposure to companies based or operated in China by investing
through legal structures known as variable interest entities (“VIEs”). VIEs are
not formally recognized under Chinese law and are subject to risks, such as the
risk that China could cease to allow VIEs, could impose new restrictions on
VIEs, or could deem the contractual arrangements of VIEs unenforceable. These
risks could limit or eliminate the remedies and rights available to VIEs and
their investors, such as a fund. If these risks materialize, the value of a
fund’s investments in VIEs could be adversely affected, and a fund could incur
significant losses with no available recourse.
Investments
in Stock Connect and Bond Connect
Funds
may invest in China A shares, which are shares of certain Chinese companies
listed and traded through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong
Kong Stock Connect programs (“Stock Connect”). Stock Connect is a securities
trading and clearing program established by Hong Kong Exchanges and Clearing
Limited, the Shanghai Stock Exchange (“SSE”), the Shenzhen Stock Exchange
(“SZSE”) and China Securities Depository and Clearing Corporation Limited, which
seeks to provide mutual stock market access between Mainland China and Hong
Kong. Trading through Stock Connect is subject to numerous restrictions and
risks that could impair the Fund’s ability to invest in or sell China A shares
and adversely affect the Fund’s performance, such as the following:
•China
A shares generally may not be sold, purchased or otherwise transferred other
than through Stock Connect in accordance with applicable rules, regulations, and
restrictions. Such securities may lose their eligibility, in which case they
presumably could be sold but could no longer be purchased through Stock Connect.
Market volatility and settlement difficulties in the China A share markets may
result in significant fluctuations in the prices and liquidity of the securities
traded on such markets. Further regulations or restrictions, such as limitations
on redemptions or suspension of trading, may adversely impact the
Fund.
•Stock
Connect is generally only available on business days when both the China and
Hong Kong markets are open and when banking services are available in both
markets on the corresponding settlement days. As a result, a Fund may not be
able trade when it would be otherwise attractive to do so, and the Fund may not
be able to dispose of its China A shares in a timely manner.
•Investing
in China A shares is subject to Stock Connect’s clearance and settlement
procedures, which could pose risks to the Fund. Certain requirements must be
completed before the market opening, or a Fund cannot sell the shares on that
trading day. Stock Connect also imposes quotas that limit aggregate net
purchases on an exchange on a particular day, and an investor cannot purchase
and sell the same security through Stock Connect on the same trading day. Once
the daily quota is reached, orders to purchase additional China A shares through
Stock Connect will be rejected. Such restrictions could limit a Fund’s ability
to sell its China A shares in a timely manner, or to sell them at
all.
•If
a Fund holds 5% or more of a China A share issuer’s total shares through Stock
Connect investments, the Fund must return any profits obtained from the purchase
and sale of those shares if both transactions occur within a six-month period.
All accounts managed by the Funds’ Advisor and/or its affiliates will be
aggregated for purposes of this 5% limitation, which makes it more likely that a
Fund’s profits may be subject to these limitations.
•Stock
Connect uses an omnibus clearing structure, and the Fund’s shares will be
registered in its custodian’s name on the Central Clearing and Settlement
System. This may limit the ability of the Fund’s advisor to effectively manage a
Fund, and may expose the Fund to the credit risk of its custodian or to greater
risk of expropriation. Investment in China A shares through Stock Connect may be
available only through a single broker that is an affiliate of the Fund’s
custodian, which may affect the quality of execution provided by such
broker.
•China
A shares purchased through Stock Connect will be held via a book entry omnibus
account in the name of Hong Kong Securities Clearing Company Limited (“HKSCC”),
Hong Kong’s clearing entity, and not the Fund’s name as the beneficial owner.
Therefore, a Fund’s ability to exercise its rights as a shareholder and to
pursue claims against the issuer of China A shares may be limited. While Chinese
regulations and the Hong Kong Stock Exchange have issued clarifications and
guidance supporting the concept of beneficial ownership through Stock Connect,
the interpretation of beneficial ownership in China by regulators and courts may
continue to evolve.
•The
Fund’s investments in China A shares through Stock Connect are generally subject
to Chinese securities regulations and listing rules, among other restrictions.
The Fund will not benefit from access to Hong Kong investor compensation funds,
which are set up to protect against defaults of trades, when investing through
Stock Connect. Investments in China A shares may not be covered by the
securities investor protection programs of the exchanges and, without the
protection of such programs, will be subject to the risk of default by the
broker. If the depository of the SSE and the SZSE defaulted, a Fund may not be
able to recover fully its losses from the depository or may be delayed in
receiving proceeds as part of any recovery process.
•Fees,
costs and taxes imposed on foreign investors (such as the Fund) may be higher
than comparable fees, costs and taxes imposed on owners of other securities that
provide similar investment exposure. Trades using Stock Connect may also be
subject to various fees, taxes and market charges imposed by Chinese market
participants and regulatory authorities. Uncertainties in China’s tax rules
related to the taxation of income and gains from investments in China A shares
could result in unexpected tax liabilities for the Fund, and the withholding tax
treatment of dividends and capital gains payable to overseas investors currently
is unsettled.
•Because
trades of eligible China A shares on Stock Connect must be settled in Renminbi
(RMB), the Chinese currency, Funds investing through Stock Connect will be
exposed to RMB currency risks. The ability to hedge RMB currency risks may be
limited. The RMB is subject to exchange control restrictions, and the Fund could
be adversely affected by delays in converting currencies into RMB and vice
versa.
•Because
Stock Connect is in its early stages, the effect on the market for trading China
A shares with the introduction of numerous foreign investors is currently
unknown. Stock Connect is relatively new and may be subject to further
interpretation and guidance. There can be no assurance as to Stock Connect’s
continued existence or whether future developments regarding the program may
restrict or adversely affect the Fund’s investments or returns.
Funds
may also invest in China Interbank bonds traded on the China Interbank Bond
Market (“CIBM”) through the China - Hong Kong Bond Connect program (“Bond
Connect”). In China, the Hong Kong Monetary Authority Central Money Markets Unit
holds Bond Connect securities on behalf of investors (such as the Fund) in
accounts maintained with maintained with a China-based custodian (either the
China Central Depository & Clearing Co. or the Shanghai Clearing House).
Investments using Bond Connect are subject to risks similar to those described
above with respect to Stock Connect.
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. The United Kingdom (the "UK") departed the EU
on January 31, 2020 (commonly referred to as "Brexit"). As a result of Brexit,
the UK may be less stable than it had been in prior years, and investments in
the UK may be more volatile due to economic uncertainty and currency exchange
rate fluctuations. The impact of these actions by European countries, 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.
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 markets. 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
Each
Fund may invest a portion of its 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
Ratings. If the bond has been rated by only one of the rating agencies, that
rating will determine the bond's rating; if the bond is rated differently by the
rating agencies, the highest rating will be used; and if the bond has not been
rated by either of the rating agencies, those selecting such investments will
determine the bond's quality. 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
Each
Fund 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.
Investment
Company Securities
Securities
of other investment companies, including shares of closed-end investment
companies (including interval funds), unit investment trusts, various
exchange-traded funds (“ETFs”), and other open-end investment companies,
represent interests in professionally managed portfolios that may invest in a
variety of instruments. Certain types of investment companies, such as certain
closed-end investment companies, do not continuously offer their shares for sale
(like open-end investment companies) but instead issue a fixed number of shares
that trade on a stock exchange or over-the-counter at a premium or a discount to
their net asset value. An interval fund is a type of closed-end investment
company that is continuously offered at net asset value, is not listed on an
exchange, and only periodically offers to repurchase a limited amount of
outstanding shares from its shareholders. Investing in interval funds involves
liquidity risk, and the liquidity risk is even greater in interval funds that
invest in securities of companies with smaller market capitalizations,
derivatives, securities with substantial market and/or credit risk, or
securities that are themselves illiquid. Other types of investment companies,
such as ETFs, are continuously offered at net asset value but may also be traded
in the secondary market. ETFs are often structured to perform in a similar
fashion to a broad-based securities index. Investing in ETFs involves generally
the same risks as investing directly in the underlying instruments. Investing in
ETFs involves the risk that they will not perform in exactly the same fashion,
or in response to the same factors, as the index or underlying instruments.
Shares of ETFs may trade at prices other than NAV.
A
fund that invests in another investment company is subject to the risks
associated with direct ownership of the securities in which such investment
company invests. Fund shareholders indirectly bear their proportionate share of
the expenses of each such investment company, including its advisory and
administrative fees. The fund would also continue to pay its own advisory fees
and other expenses. Consequently, the fund and its shareholders would, in
effect, absorb two levels of fees with respect to investments in other
investment companies.
A
fund may invest in affiliated underlying funds, and those who manage such fund's
investments and their affiliates may earn different fees from different
underlying funds and may have an incentive to allocate more fund assets to
underlying funds from which they receive higher fees.
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
individual 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.
•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.
•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.
• Construction
Loan Notes are issued to provide construction financing for specific projects.
Permanent financing, the proceeds of which are applied to the payment of
construction loan notes, is sometimes provided by a commitment by the Government
National Mortgage Association (“GNMA”) to purchase the loan, accompanied by a
commitment by the Federal Housing Administration to insure mortgage advances
thereunder. In other instances, permanent financing is provided by commitments
of banks to purchase the loan. The Opportunistic Municipal Fund will only
purchase construction loan notes that are subject to GNMA or bank purchase
commitments.
•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.
•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.
Special
Considerations Relating to California Municipal Obligations
The
Opportunistic Municipal Fund invests in California municipal obligations and,
therefore, may be significantly impacted by political, economic, or regulatory
developments that affect issuers in California and their ability to pay
principal and interest on their obligations. The ability of issuers to pay
interest on, and repay principal of, California municipal obligations may be
affected by 1) amendments to the California Constitution and related statutes
that limit the taxing and spending authority of California government entities,
2) voter initiatives, 3) a wide variety of California laws and regulations,
including laws related to the operation of health care institutions and laws
related to secured interests in real property, and 4) the general financial
condition of the State of California and the California economy.
Taxable
Investments of the Municipal Funds
The
Opportunistic Municipal Fund may invest a portion of its assets, as described in
the Prospectus, in taxable short-term investments consisting of: obligations
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, domestic bank certificates of deposit and bankers’
acceptances, short-term corporate debt securities such as commercial paper, and
repurchase agreements (“Taxable Investments”). These investments must have a
stated maturity of one year or less at the time of purchase and must meet the
following standards: banks must have assets of at least $1 billion; commercial
paper must be rated at least “A” by S&P Global or “Prime” by Moody’s or, if
not rated, must be issued by companies having an outstanding debt issue rated at
least “A” by S&P Global or Moody’s; corporate bonds and debentures must be
rated at least “A” by S&P Global or Moody’s. Interest earned from Taxable
Investments is taxable to investors. When, in the opinion of the Fund’s Manager,
it is advisable to maintain a temporary “defensive” posture, the Opportunistic
Municipal Fund may invest without limitation in Taxable Investments. At other
times, the following investments will not exceed 20% of the Fund’s total assets:
Taxable Investments; Municipal Obligations that do not meet quality standards
required for the 80% portion of the portfolio; and Municipal Obligations, the
interest on which is treated as a tax preference item for purposes of the
federal individual alternative minimum tax.
Insurance
The
insured municipal obligations in which the Opportunistic Municipal Fund may
invest are insured under insurance policies that relate to the specific
municipal obligation in question. This insurance is generally non-cancelable and
will continue in force so long as the municipal obligations are outstanding, and
the insurer remains in business. The insured municipal obligations are generally
insured as to the scheduled payment of all installments of principal and
interest as they fall due.
The
insurance covers only credit risk and therefore does not guarantee the market
value of the obligations in a Fund’s investment portfolio or a Fund’s NAV. The
Fund’s NAV will continue to fluctuate in response to fluctuations in interest
rates. A Fund’s investment policy requiring investment in insured municipal
obligations will not affect the Fund’s ability to hold its assets in cash or to
invest in escrow-secured and defeased bonds or in certain short-term tax-exempt
obligations, or affect its ability to invest in uninsured taxable obligations
for temporary or liquidity purposes or on a defensive basis.
Pay-in-Kind
Securities
Each
Fund 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 Fund. Active trading may generate short-term gains (losses) for taxable
shareholders.
The
following Fund(s) had significant variation in portfolio turnover rates over the
two most recently completed fiscal years:
|
|
|
|
|
|
|
|
|
|
| |
Fund |
2023 Turnover |
2022 Turnover |
Comments |
Blue
Chip |
10.0% |
24.0% |
Turnover
was lower in 2023 relative to 2022 due to company-level decisions, with
the Advisor generally continuing to view portfolio holdings more favorably
than other companies in the opportunity
set. |
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.
•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.
•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.
•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
Each
Fund 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 to 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.
Each
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. A 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.
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.
Each
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.
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(a)(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 PGI as the Funds’ valuation designee, subject to the Board’s oversight. As
described above, some of the Funds have adopted investment restrictions that
limit investments in illiquid securities.
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 a
Fund 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 a 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 a 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.
Each
Fund 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 that 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 a 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. A 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 a 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. Each 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.
Special
Purpose Acquisition Companies (“SPACs”)
Each
Fund may invest in securities of special purpose acquisition companies (“SPACs”)
or similar special purpose entities that pool funds to seek potential
acquisition opportunities. Unless and until an acquisition is completed, a SPAC
or similar entity generally maintains assets (less a portion retained to cover
expenses) in a trust account comprised of U.S. government securities, money
market securities, and cash, and similar investments whose returns or yields may
be significantly lower than those of the Fund’s other investments. Because SPACs
and similar entities are in essence blank-check companies without an operating
history or ongoing business other than seeking acquisitions, the value of their
securities is particularly dependent on the ability of the entity’s management
to identify and complete a profitable acquisition, which may not occur. For
example, even if an acquisition or merger target is identified, the Fund may
elect not to participate in, or vote to approve, the proposed transaction.
Moreover, an acquisition or merger once effected may prove unsuccessful and an
investment in the SPAC may lose value.
SPACs
are also subject to the following additional risks:
•The
risk that, in the case of SPACs used as an opportunity for startups to go public
without going through the traditional IPO process, such startups may become
publicly traded with potentially less due diligence than what is typical in a
traditional IPO through an underwriter and may not be experienced in facing the
challenges, expenses and risks of being a public company, including the
increased regulatory and financial scrutiny and the need to comply with
applicable governance and accounting requirements.
•SPAC
sponsors may have a potential conflict of interest to complete a deal that may
be unfavorable for other investors in the SPAC. For example, SPAC sponsors often
own warrants to acquire additional shares of the company at a fixed price, and
the exercise by the SPAC sponsor of its warrants may dilute the value of the
equity interests of other investors in the SPAC.
•Some
SPACs may pursue acquisitions only within certain industries or regions, which
may increase the volatility of their prices.
•Only
a thinly traded market for shares of or interests in a SPAC may develop, or
there may be no market at all, leaving the Fund unable to sell its interest in a
SPAC or to sell its interest only at a lower price. Investments in SPACs may
include private placements, including PIPEs, and, accordingly, may be considered
illiquid and/or be subject to restrictions on resale.
•Values
of investments in SPACs may be highly volatile and may depreciate significantly
over time.
Supranational
Entities
Each
Fund 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
Each
Fund 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 each Fund may purchase:
•U.S.
Government Securities - Securities issued or guaranteed by the U.S. government,
including treasury bills, notes, and bonds.
•U.S.
Government Agency Securities - Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government.
•U.S.
agency obligations include, but are not limited to, the Bank for Cooperatives,
Federal Home Loan Banks, and Federal Intermediate Credit Banks.
•U.S.
instrumentality obligations include, but are not limited to, the Export-Import
Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage
Association.
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality. Still others,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality.
•Bank
Obligations - Certificates of deposit, time deposits and bankers’ acceptances of
U.S. commercial banks having total assets of at least one billion dollars and
overseas branches of U.S. commercial banks and foreign banks, which in the
opinion of those managing the fund’s investments, are of comparable quality. A
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.
•Commercial
Paper - Short-term promissory notes issued by U.S. or foreign
corporations.
•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.
•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.
•Taxable
Municipal Obligations - Short-term obligations issued or guaranteed by state and
municipal issuers which generate taxable income.
U.S.
Government and U.S. Government-Sponsored Securities
U.S.
government securities refers to a variety of debt securities issued by or
guaranteed by the U.S. Treasury, such as Treasury bills, notes, and bonds and
mortgage-backed securities guaranteed by the Government National Mortgage
Association (Ginnie Mae), and are supported by the full faith and credit of the
United States meaning that the U.S. government is required to repay the
principal in the event of default. Others are supported by the right of the
issuer to borrow from the U.S. Treasury; others are supported by the
discretionary authority of the U.S. government to purchase the agency’s
obligations; and still others are supported only by the credit of the issuing
agency, instrumentality, or enterprise. The U.S. government does not guarantee
the market price of any U.S. government security.
Although
U.S. government-sponsored enterprises such as the Federal Home Loan Mortgage
Corporation (Freddie Mac) and the Federal National Mortgage Association
(Fannie Mae) may be chartered or sponsored by Congress, they are not funded by
Congressional appropriations, and their securities are not issued by the U.S.
Treasury nor supported by the full faith and credit of the U.S.
government.
U.S.
government securities and U.S. government-sponsored securities may be adversely
impacted by changes in interest rates or a default by or decline in the credit
rating of the applicable government-sponsored entity. There is no assurance that
the U.S. government would provide financial support to its agencies and
instrumentalities if not required to do so. In addition, certain
governmental entities have been subject to regulatory scrutiny regarding their
accounting policies and practices and other concerns that may result in
legislation, changes in regulatory oversight, and/or other consequences that
could adversely affect the credit quality, availability, or investment character
of securities issued by these entities. The value and liquidity of U.S.
government securities may be affected adversely by changes in the ratings of
those securities.
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. Typically, no income accrues on securities a Fund
has committed to purchase prior to the time delivery of the securities is
made.
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
PFI's
Board has overall responsibility for overseeing PFI's operations in accordance
with the 1940 Act, other applicable laws, and PFI's charter. Each Board Member
serves on the Boards of the following investment companies: Principal Funds,
Inc. (“PFI”), Principal Variable Contracts Funds, Inc. (“PVC”), Principal
Exchange-Traded Funds (“PETF”), and Principal Real Asset Fund (“PRA”), which are
collectively referred to in this SAI as the “Fund Complex.” Board Members who
are affiliated persons of any investment advisor, the principal distributor, or
the principal underwriter of the Fund Complex are considered “interested
persons” of the Funds (as defined in the 1940 Act) and are referred to in this
SAI as “Interested Board Members.” Board Members who are not Interested Board
Members are referred to as “Independent Board Members.”
Each
Board Member generally serves until the next annual meeting of shareholders or
until such Board Member’s earlier death, resignation, or removal. Independent
Board Members have a 72-year age limit and, for Independent Board Members
elected on or after September 14, 2021, a 72-year age limit or a 15-year term
limit, whichever occurs first. The Board may waive the age or term limits in the
Board’s discretion. The Board elects officers to supervise the day-to-day
operations of the Fund Complex. Officers serve at the pleasure of the Board, and
each officer has the same position with each investment company in the Fund
Complex.
The
Board meets in regularly scheduled meetings eight times throughout the year.
Board meetings may occur in-person, by telephone, or virtually. In addition, the
Board holds special meetings or informal conference calls to discuss specific
matters that may arise or require action between regular meetings. Independent
Board Members also meet annually to consider renewal of advisory
contracts.
The
Chairman of the Board is an interested person of the Fund Complex. The
Independent Board Members have appointed a Lead Independent Board Member whose
role is to review and approve, with the Chairman, each Board meeting’s agenda
and to facilitate communication between and among the Independent Board Members,
management, and the full Board. The Board’s leadership structure is appropriate
for the Fund Complex given its characteristics and circumstances, including the
number of portfolios, variety of asset classes, net assets, and distribution
arrangements. The appropriateness of this structure is enhanced by the
establishment and allocation of responsibilities among the following Committees,
which report their activities to the Board on a regular basis.
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Committee
and Independent Board Members |
Primary
Purpose and Responsibilities |
Meetings
Held During the Last Fiscal Year |
15(c)
Committee Karen
McMillan, Chair
Katharin
S. Dyer Fritz S. Hirsch Padelford L. Lattimer |
The
Committee’s primary purpose is to assist the Board in performing the
annual review of the Funds’ advisory and sub-advisory agreements pursuant
to Section 15(c) of the 1940 Act. The Committee is responsible for
requesting and reviewing related materials. |
6 |
Audit
Committee Victor
L. Hymes, Chair
Craig
Damos Frances P. Grieb Elizabeth A. Nickels
|
The
Committee’s primary purpose is to assist the Board by serving 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 facilitates communication among the independent registered
public accountants, PGI’s internal auditors, Fund Complex management, and
the Board. |
10 |
Executive
Committee Kamal
Bhatia, Chair Craig Damos Patrick G. Halter
|
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
Fund Complex’s business except the power to 1) issue stock, except as
permitted by law; 2) recommend to the shareholders any action that
requires shareholder approval; 3) amend the bylaws; or 4) approve any
merger or share exchange that does not require shareholder
approval. |
None |
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Committee
and Independent Board Members |
Primary
Purpose and Responsibilities |
Meetings
Held During the Last Fiscal Year |
Nominating
and
Governance
Committee Elizabeth
A. Nickels, Chair Craig Damos Fritz S. Hirsch Victor L.
Hymes
Karen
McMillan
|
The
Committee’s primary purpose is to oversee the structure and efficiency of
the Board and the committees. The Committee is responsible for evaluating
Board membership and functions, committee membership and functions,
insurance coverage, and legal matters. The Committee’s nominating
functions include selecting and nominating Independent Board Member
candidates for election to the Board. Generally, the Committee requests
nominee suggestions from Board Members and management. In addition, the
Committee considers candidates recommended by shareholders of the Fund
Complex. Recommendations should be submitted in writing to the Principal
Funds Complex Secretary, in care of the Principal Funds Complex, 711 High
Street, Des Moines, IA 50392. Such recommendations must include all
information specified in the Committee’s charter and must conform with the
procedures set forth in Appendix A thereto, which can be found at
https://secure02.principal.com/publicvsupply/GetFile?fm=MM13013&ty=VOP&EXT=.VOP.
Examples of such information include the nominee’s biographical
information; relevant educational and professional background of the
nominee; the number of shares of each Fund owned of record and
beneficially by the nominee and by the recommending shareholder; any other
information regarding the nominee that would be required to be disclosed
in a proxy statement or other filing required to be made in connection
with the solicitation of proxies for the election of board members;
whether the nominee is an “interested person” of the Funds as defined in
the 1940 Act; and the written consent of the nominee to be named as a
nominee and serve as a board member if elected.
When
evaluating a potential nominee for Independent Board Member, the Committee
may consider, among other factors: educational background; relevant
business and industry experience; whether the person is an “interested
person” of the Funds as defined in the 1940 Act; and whether the person is
willing to serve, and willing and able to commit the time necessary to
attend meetings and perform the duties of an Independent Board Member. In
addition, the Committee may consider whether a candidate’s background,
experience, skills and views would complement the background, experience,
skills and views of other Board Members and would contribute to the
diversity of the Board. The final decision is based on a combination of
factors, including the strengths and the experience an individual may
bring to the Board. The Board does not regularly use the services of
professional search firms to identify or evaluate potential candidates or
nominees. |
5 |
Operations
Committee Padelford
L. Lattimer, Chair Katharin S. Dyer Karen McMillan |
The
Committee’s primary purpose is to review and oversee the provision of
administrative and distribution services to the Fund Complex,
communications with the Fund Complex’s shareholders, and the Fund
Complex’s operations. |
6 |
Risk
oversight forms part of the Board’s general oversight of the Fund Complex. The
Board has appointed a Chief Compliance Officer who oversees the implementation
and testing of the Funds' compliance program and reports to the Board regarding
compliance matters for the Funds and principal service providers. As part of its
regular oversight functions, the Board, directly or through a committee,
interacts with and reviews reports from, among others: Fund Complex management,
sub-advisors, the Chief Compliance Officer, the independent registered public
accounting firm, and internal auditors for PGI or its affiliates, as
appropriate. The Board, with the assistance of management and PGI, reviews
investment policies and risks in connection with its review of Fund Complex
performance. In addition, as part of the Board’s periodic review of 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 has designated PGI as the
Funds’ valuation designee, as permitted by SEC Rule 2a-5, where PGI is
responsible for the day-to-day valuation and oversight responsibilities of the
Funds, subject to the Board’s oversight. PGI has established a Valuation
Committee to fulfill its oversight responsibilities as the Funds’ valuation
designee.
Each
Board Member has significant prior senior management and/or board experience.
Board Members are selected and retained 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 Board Member, a demonstrated willingness to take an independent
and questioning view of management. In addition to these general qualifications,
the Board seeks members who build upon the Board’s diversity. Below 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 Board
Member. As required by rules adopted under the 1940 Act, the Independent Board
Members select and nominate all candidates for Independent Board Member
positions.
Independent
Board Members
Craig
Damos. Mr.
Damos has served as an Independent Board Member of the Fund Complex since 2008.
Since 2011, Mr. Damos has served as the President of C.P. Damos Consulting, LLC
(doing business as Craig Damos Consulting). He has also served as a director of
the employees’ stock ownership plan of the Baker Group since 2020. Mr. Damos
served as President and Chief Executive Officer of Weitz Company from 2006 to
2010; Vertical Growth Officer of Weitz Company from 2004 to 2006; and Chief
Financial Officer of Weitz Company from 2000 to 2004. From 2005 to 2008, Mr.
Damos served as a director of West Bank. Through his education, employment
experience, and experience as a board member, Mr. Damos is experienced with
financial, accounting, regulatory, and investment matters.
Katharin
S. Dyer. Ms.
Dyer has served as an Independent Board Member of the Fund Complex since 2023.
She is the founder and Chief Executive Officer of PivotWise, a firm providing
strategic advice focused on digital transformation. Ms. Dyer currently serves as
a director of Liquidity Services and the Grameen Foundation. She previously
served as a director of Providence Health from 2019 to 2021, Noora Health from
2018 to 2021, YWCA of Nashville and Middle Tennessee from 2016 to 2022, and CARE
from 2001 to 2013. She was formerly employed by IBM Global Services as a Global
Partner and a member of the senior leadership team from 2016 to 2018. Ms. Dyer
was a member of the Global Management Team at American Express Company from 2013
to 2015. Through her education, employment experience, and experience as a board
member, Ms. Dyer is experienced with financial, information and digital
technology, investment, and regulatory matters.
Frances
P. Grieb. Ms.
Grieb has served as an Independent Board Member of the Fund Complex since 2023.
Ms. Grieb currently serves as a director of First Interstate BancSystem, Inc.
and the National Advisory Board of the College of Business at the University of
Nebraska at Omaha. She is a member of the American Institute of Certified Public
Accountants and the National Association of Corporate Directors. From 2014 to
2022, she served as a director of Great Western Bancorp, Inc. Ms. Grieb is a
retired partner having served in various leadership roles at Deloitte LLP from
1982 to 2010. Ms. Grieb is a retired Certified Public Accountant. Through her
education, employment experience, and experience as a board member, Ms. Grieb is
experienced with financial, accounting, investment, and regulatory
matters.
Fritz
S. Hirsch. Mr.
Hirsch has served as an Independent Board Member of the Fund Complex since 2005.
From 2011 to 2015, Mr. Hirsch served as CEO of MAM USA. He served as President
and Chief Executive Officer of Sassy, Inc. from 1986 to 2009, and Chief
Financial Officer of Sassy, Inc. from 1983 to 1985. Through his education,
employment experience, and experience as a board member, Mr. Hirsch is
experienced with financial, accounting, regulatory, and investment
matters.
Victor
L. Hymes. Mr.
Hymes has served as an Independent Board Member of the Fund Complex since 2020.
He currently serves as Founder, Chief Executive Officer, and Chief Investment
Officer of Legato Capital Management, LLC. Over the past thirty years, Mr. Hymes
has served in the roles of CEO, COO, CIO, portfolio manager, and other senior
management positions with investment management firms, including Zurich Scudder
Investments, Inc., Goldman, Sachs & Co., and Kidder, Peabody & Co. Mr.
Hymes has served on numerous boards and has chaired four investment committees
over the past two decades. Through his education, employment experience, and
experience as a board member, Mr. Hymes is experienced with financial,
accounting, regulatory, and investment matters.
Padelford
L. Lattimer. Mr.
Lattimer has served as an Independent Board Member of the Fund Complex since
2020. He currently serves as Managing Partner for TBA Management Consulting LLC.
For more than twenty years, Mr. Lattimer served in various capacities at
financial services companies, including as a senior managing director for TIAA
Cref Asset Management (2004-2010), First Vice President at Mellon Financial
Corporation (2002-2004), and in product management roles at Citibank
(2000-2002). Through his education, employment experience, and experience as a
board member, Mr. Lattimer is experienced with financial, regulatory, and
investment matters.
Karen
McMillan. Ms.
McMillan has served as an Independent Board Member of the Fund Complex since
2014. Ms. McMillan is the founder and owner of Tyche Consulting LLC. She served
as a Managing Director of Patomak Global Partners, LLC from 2014 to 2021. From
2007 to 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 to 1999, she
served in various roles as counsel at the SEC, Division of Investment
Management, including as Assistant Chief Counsel. Through her professional
education, experience as an attorney, and experience as a board member, Ms.
McMillan is experienced in financial, investment, and regulatory
matters.
Elizabeth
A. Nickels. Ms.
Nickels has served as an Independent Board Member of the Fund Complex since
2015. From 2000 to 2022, Ms. Nickels served as a director of SpartanNash. From
2008 to 2017, she served as a director of the not-for-profit Spectrum Health
System; 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, employment experience, and experience as a board member,
Ms. Nickels is experienced with financial, accounting, and regulatory
matters.
Interested
Board Members
Kamal
Bhatia. Mr.
Bhatia has served as Chair of the Fund Complex since 2023. He has also served as
President and Chief Executive Officer of the Fund Complex since 2019. Mr. Bhatia
serves as Senior Executive Managing Director - Global Head of Investments for
Principal®
Asset Management. From 2019 to 2023, he served as a Senior Executive Director
and Chief Operating Officer of Principal®
Asset Management. Mr. Bhatia joined Principal®
in 2019 and serves as a director of numerous Principal®
affiliates.
From 2011 to 2019, he was a Senior Vice President for Oppenheimer Funds. Mr.
Bhatia is a CFA®
charter holder. Through his education and experience, Mr. Bhatia is experienced
with financial, marketing, regulatory, and investment matters.
Patrick
G. Halter. Mr.
Halter has served as a Board Member of the Fund Complex since 2017. Mr. Halter
also serves as President and Chief Executive Officer for Principal®
Asset Management. He also serves as a director of numerous Principal®
affiliates. Mr. Halter joined Principal®
in 1984 and has held various other positions since joining Principal®.
Through his education and employment experience, Mr. Halter is experienced with
financial, accounting, regulatory, and investment matters.
Kenneth
A. McCullum. Mr.
McCullum has served as a Board Member of the Fund Complex since 2023. Mr.
McCullum has served as Executive Vice President and Chief Risk Officer for
Principal®
since 2023. Prior to that, he served as Senior Vice President and Chief Risk
Officer for Principal®
from 2020 to 2023 and Vice President and Chief Actuary for Principal®
from 2015 to 2020. From 2013 to 2015, Mr. McCullum was an Executive Vice
President responsible for business development at Delaware Life Insurance
Company. He served as a Senior Vice President for the life annuity business at
Sun Life from 2010 to 2013. Mr. McCullum is a Fellow of the Society of Actuaries
and is a Member of the American Academy of Actuaries. Through his education and
experience, Mr. McCullum is experienced with financial, accounting, regulatory,
and investment matters.
Additional
Information Regarding Board Members and Officers
The
following tables present additional information regarding the Board Members and
Fund Complex officers, including their principal occupations, which, unless
specific dates are shown, are of more than five years duration. For each Board
Member, the tables also include information concerning other directorships held
in reporting companies under the Securities Exchange Act of 1934 or registered
investment companies under the 1940 Act.
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INDEPENDENT
BOARD MEMBERS |
Name,
Address, and Year of Birth |
Board
Positions Held with Fund Complex |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios Overseen in Fund Complex |
Other Directorships Held
During Past 5 Years |
Craig
Damos 711 High Street Des Moines, IA 50392 1954 |
Lead
Independent Board Member (since 2020) Director, PFI and
PVC (since 2008) Trustee, PETF (since 2014) Trustee, PRA (since
2019) |
President,
C.P. Damos Consulting, LLC (consulting services)
|
126 |
None |
Katharin
S. Dyer 711 High Street Des Moines, IA 50392 1957 |
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Founder
and Chief Executive Officer, PivotWise (consulting
services); Global Partner, IBM (technology company)
from 2016-2018 |
126 |
Liquidity
Services, Inc. (2020-present) |
Frances
P. Grieb 711 High Street Des Moines, IA 50392 1960 |
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Retired |
126 |
First
Interstate BancSystem, Inc. (2022-present); Great
Western Bancorp, Inc. and Great Western Bank
(2014-2022) |
Fritz
S. Hirsch 711 High Street Des Moines, IA 50392 1951 |
Director,
PFI and PVC (since 2005) Trustee, PETF (since 2014) Trustee, PRA
(since 2019) |
Interim
CEO, MAM USA (manufacturer of infant and juvenile products) from February
2020-October 2020 |
126 |
MAM
USA (2011-present)
|
Victor
L. Hymes 711 High Street Des Moines, IA 50392 1957 |
Director,
PFI and PVC (since 2020) Trustee, PETF and PRA (since
2020) |
Founder,
CEO, CIO, Legato Capital Management, LLC (investment management
company) |
126 |
None |
Padelford
L. Lattimer 711 High Street Des Moines, IA 50392 1961 |
Director,
PFI and PVC (since 2020) Trustee, PETF and PRA (since
2020) |
Managing
Partner, TBA Management Consulting LLC (management consulting and staffing
company) |
126 |
None |
Karen
McMillan 711 High Street Des Moines, IA 50392 1961 |
Director,
PFI and PVC (since 2014) Trustee, PETF (since 2014) Trustee, PRA
(since 2019) |
Founder/Owner,
Tyche Consulting LLC (consulting services); Managing
Director, Patomak Global Partners, LLC (financial
services consulting) from 2014-2021 |
126 |
None |
Elizabeth
A. Nickels 711 High Street Des Moines, IA 50392 1962 |
Director,
PFI and PVC (since 2015) Trustee, PETF (since 2015) Trustee, PRA
(since 2019) |
Retired |
126 |
SpartanNash
(2000-2022) |
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INTERESTED
BOARD MEMBERS |
Name,
Address, and Year of Birth |
Positions
Held with Fund Complex |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios Overseen in Fund Complex |
Other Directorships Held
During Past 5 Years |
Kamal
Bhatia 711 High Street Des Moines, IA 50392 1972 |
Director
and Chair, PFI and PVC (since 2023) Trustee and Chair,
PETF and PRA (since 2023) Chief Executive Officer and
President (since 2019)
|
Principal
Financial Group*
Senior
Executive Managing Director - Global Head of Investments – Principal Asset
Management (since 2023)
Senior
Executive Director and Chief
Operating
Officer – Principal Asset
Management
(2019-2023)
President
– Principal Funds (2019-2020)
OppenheimerFunds,
Inc.
Senior
Vice President (2011-2019) |
126 |
None |
Patrick
G. Halter 711 High Street Des Moines, IA 50392 1959 |
Director,
PFI and PVC (since 2017) Trustee, PETF (since 2017) Trustee, PRA
(since 2019) |
Principal
Financial Group*
President
and Chief Executive Officer – Principal Asset Management (since
2022)
President
– Principal Global Asset Management (2020-2022)
Chief
Executive Officer and President – Principal Global Investors, LLC
(2018-2020) |
126 |
None |
Kenneth
A. McCullum 711 High Street Des Moines, IA
50392 1964
|
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Principal
Financial Group*
Executive
Vice President and Chief Risk
Officer
(since 2023)
Senior
Vice President and Chief Risk Officer (2020-2023)
Vice
President and Chief Actuary (2015-2020) |
126 |
None |
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FUND
COMPLEX OFFICERS |
Name,
Address, and Year of Birth |
Position(s)
Held with Fund Complex |
Principal
Occupation(s)
During
Past 5 Years |
George
Djurasovic
711
High Street Des Moines, IA 50392
1971 |
Vice
President and General Counsel (since 2023) |
Principal
Financial Group*
Vice
President and General Counsel – Principal Asset Management (since
2022)
Artisan
Partners Limited Partnership
Global
Chief Compliance Officer (2013-2022) |
Calvin
Eib 711 High Street Des Moines, IA 50392 1963 |
Assistant
Tax Counsel (since 2023) |
Principal
Financial Group*
Counsel
(2021)
Transamerica
Tax
Counsel (2016-2021) |
Beth
Graff 711 High Street Des Moines, IA 50392 1968 |
Vice
President and Assistant Controller
(since
2021) |
Principal
Financial Group*
Director
– Fund Accounting (since 2016)
|
Gina
L. Graham 711 High Street Des Moines, IA
50392 1965 |
Treasurer
(since 2016) |
Principal
Financial Group*
Vice
President and Treasurer (since 2016)
|
Megan
Hoffmann 711 High Street Des Moines, IA
50392 1979 |
Vice
President and Controller (since 2021) |
Principal
Financial Group*
Director
– Accounting (since 2020)
Assistant
Director – Accounting (2017-2020)
|
Laura
B. Latham 711 High Street Des Moines, IA
50392 1986 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2018-2023) |
Principal
Financial Group*
Counsel
(since 2018)
|
Diane
K. Nelson 711 High Street Des Moines, IA
50392 1965 |
AML
Officer (since 2016) |
Principal
Financial Group*
Chief
Compliance Officer/AML Officer (since 2015)
|
Tara
Parks 711 High Street Des Moines, IA 50392 1983 |
Vice
President and Assistant Controller
(since
2021) |
Principal
Financial Group*
Director
– Accounting (since 2019)
ALPS
Fund Services
Tax
Manager (2011-2019) |
Deanna
Y. Pellack 711 High Street Des Moines, IA
50392 1987 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2022-2023) |
Principal
Financial Group*
Counsel
(since 2022)
The
Northern Trust Company
Vice
President (2019-2022)
Second
Vice President (2014-2019) |
Sara
L. Reece 711 High Street Des Moines, IA
50392 1975 |
Vice
President and Chief Operating Officer
(since
2021)
Vice
President and Controller (2016-2021) |
Principal
Financial Group*
Managing
Director – Global Fund Ops (since 2021)
Director
– Accounting (2015-2021)
|
Teri
R. Root 711 High Street Des Moines, IA 50392 1979 |
Chief
Compliance Officer (since 2018)
|
Principal
Financial Group*
Chief
Compliance Officer – Funds (since 2018)
Vice
President (since 2015)
|
Michael
Scholten 711 High Street Des Moines, IA
50392 1979 |
Chief
Financial Officer (since 2021) |
Principal
Financial Group*
Assistant
Vice President and Actuary (since 2021)
Chief
Financial Officer – Funds/Platforms (2015-2021)
|
Adam
U. Shaikh
711
High Street
Des
Moines, IA 50392
1972 |
Vice
President and Assistant General Counsel
(since
2023)
Assistant
Secretary (since 2022)
Assistant
Counsel (2006-2023) |
Principal
Financial Group*
Assistant
General Counsel (since 2018) |
|
|
|
|
|
|
|
| |
FUND
COMPLEX OFFICERS |
Name,
Address, and Year of Birth |
Position(s)
Held with Fund Complex |
Principal
Occupation(s)
During
Past 5 Years |
John
L. Sullivan 711 High Street
Des
Moines, IA 50392 1970 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2019-2023) |
Principal
Financial Group*
Assistant
General Counsel (since 2023)
Counsel
(2019-2023)
Prior
thereto, Attorney in Private Practice |
Dan
L. Westholm 711 High Street Des Moines, IA
50392 1966 |
Assistant
Treasurer (since 2006) |
Principal
Financial Group*
Assistant
Vice President – Treasury (since 2013)
|
Beth
C. Wilson 711 High Street Des Moines, IA
50392 1956 |
Vice
President and Secretary (since 2007) |
Principal
Financial Group*
Director
and Secretary – Funds (since 2007)
|
Jared
A. Yepsen 711 High Street Des Moines, IA
50392 1981 |
Assistant
Tax Counsel (since 2017) |
Principal
Financial Group*
Assistant
General Counsel (since 2023)
Counsel
(2015-2023)
|
|
| |
*The
reference to Principal Financial Group includes positions held by the
Interested Board Member / Fund Complex Officer, including as an officer,
employee, and/or director, with affiliates or subsidiaries of Principal
Financial Group. The titles set forth in this SAI are each Interested
Board Member's / Fund Complex Officer’s title with Principal Workforce,
LLC. |
Board
Member Ownership of Securities
The
following tables set forth the dollar range of the equity securities of Funds
included in this SAI, and aggregate dollar range of the equity securities of the
funds in the Fund Complex, that were beneficially owned by the Board Members as
of December 31, 2022. As of that date, Board Members did not own shares of the
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 Interested Board Members are eligible to participate in
an employee benefit program that invests in the Fund Complex. Board Members who
beneficially owned shares of the series of PVC 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Fund |
Damos |
Dyer(1) |
Grieb(1) |
Hirsch |
Hymes |
Lattimer |
McMillan |
Nickels |
Blue
Chip |
E |
A |
A |
C |
A |
B |
E |
E |
Diversified
Real Asset |
E |
A |
A |
C |
A |
B |
A |
A |
Global
Multi-Strategy |
A |
A |
A |
A |
A |
B |
A |
A |
Spectrum
Preferred and Capital Securities Income |
E |
A |
A |
A |
A |
A |
A |
A |
Total
Fund Complex |
E |
A |
A |
E |
E |
C |
E |
E |
(1)Appointment
effective January 26, 2023
|
|
|
|
|
|
|
|
|
|
| |
Interested
Board Members |
Fund |
Bhatia(1) |
Halter |
McCullum(1) |
Diversified
Real Asset(2) |
E |
A |
A |
Origin
Emerging Markets(2) |
D |
A |
A |
Total
Fund Complex |
E |
E |
E |
(1)Appointment
effective January 26, 2023
(2)Ownership
through participation in an Employee Benefit Plan
Board
Member and Officer Compensation
The
Fund Complex does not pay any remuneration to its officers or to any Board
Members listed above as Interested Board Members. The Board annually considers a
proposal to reimburse PGI 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
Independent Board Member received compensation for service as a member of the
Boards of all investment companies in the Fund Complex based on a schedule that
takes into account an annual retainer amount, the number of meetings attended,
and expenses incurred. Board Member compensation and related expenses are
allocated to each of the Funds based on the net assets of each relative to
combined net assets of the Fund Complex.
The
following table provides information regarding the compensation received by the
Independent Board Members from
the Funds included in this SAI and from the Fund Complex during the fiscal year
ended August 31, 2023. On that date, there were 4 investment companies in the
Fund Complex. The Fund Complex does not provide retirement benefits or pensions
to any of the Board Members.
|
|
|
|
|
|
|
| |
Board
Member |
Funds
in this SAI |
Fund
Complex |
Craig
Damos |
$56,776 |
$392,250 |
Katharin
S. Dyer(1) |
$33,782 |
$233,250 |
Frances
P. Grieb(1) |
$33,998 |
$234,750 |
Fritz
S. Hirsch |
$48,635 |
$336,000 |
Victor
L. Hymes |
$50,620 |
$349,750 |
Padelford
L. Lattimer |
$49,712 |
$343,500 |
Karen
McMillan |
$50,260 |
$347,250 |
Elizabeth
A. Nickels |
$50,803 |
$351,000 |
(1)Appointment
effective January 26, 2023.
INVESTMENT
ADVISORY AND OTHER SERVICES
Investment
Advisors
Principal
Global Investors, LLC (doing business as Principal®
Asset Management) (“PGI”), an indirect subsidiary of Principal Financial Group,
Inc. (“Principal®”),
serves as the manager for the Funds. Principal Management Corporation,
previously an affiliate of PGI, served as manager to the Funds prior to its
merger with and into PGI on May 1, 2017.
PGI
directly makes decisions to purchase or sell securities for each Fund, except
for those Funds or portions of Funds for which PGI has retained a sub-advisor to
provide such services, as described below.
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 (except on the Capital Securities Fund).
Sub-Advisor: BlackRock
Financial Management, Inc. (“BlackRock”)
is an indirect wholly-owned subsidiary of BlackRock, Inc.
Sub-Sub-Advisor:
BlackRock International Limited is
an indirect wholly-owned subsidiary of BlackRock, Inc.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: ClearBridge
Investments (North America) Pty Limited (“ClearBridge”)
is an indirect wholly-owned subsidiary of Franklin Resources, Inc.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: CoreCommodity
Management, LLC (“CoreCommodity”)
is a wholly-owned subsidiary of CoreCommodity Capital, LLC. CoreCommodity is
controlled by its senior management, which owns 100% of the voting interest and
50% of the economic interest through various subsidiaries. The other 50%
economic interest in CoreCommodity is held by a subsidiary of Jeffries Financial
Group Inc. (NYSE: JEF).
Fund(s): a
portion of the assets of Diversified Real Asset (commodities sleeve and,
indirectly through a Cayman subsidiary, commodity derivatives)
Sub-Advisor: Delaware
Investments Fund Advisers (“DIFA”) is
an indirect wholly-owned subsidiary of Macquarie Group Limited and operates as
part of Macquarie Asset Management, the asset management division of Macquarie
Group Limited.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: Gotham
Asset Management, LLC ("Gotham") is
wholly-owned by Gotham Asset Management Holdings, LP (“GAMH”). Joel Greenblatt
and Robert Goldstein control Gotham through their control of GAMH and as
Managing Principals of Gotham.
Fund(s): a
portion of the assets of Global Multi-Strategy
Sub-Advisor: Graham
Capital Management, L.P. ("Graham") is
majority-owned by KGT Investment Partners, L.P., which is principally owned by
Graham’s founder, Kenneth Tropin, and members of Mr. Tropin’s
family.
Fund(s):
a
portion of the assets of Global Multi-Strategy
Sub-Advisor: Impax
Asset Management Limited (“Impax”)
is a wholly-owned subsidiary of Impax Asset Management Group plc, which is
publicly traded on the Alternative Investment Market of the London Stock
Exchange as “IPX.”
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: Loomis,
Sayles & Company, L.P. (“Loomis Sayles”)
is a subsidiary of Natixis Investment Managers, LLC, which is part of Natixis
Investment Managers, an international asset management group based in Paris,
France.
Fund(s): a
portion of the assets of Global Multi-Strategy
Sub-Advisor: Los
Angeles Capital Management LLC ("Los Angeles Capital")
is a California limited liability company. It is owned by key employees through
its parent holding companies, LACM Holdings, Inc. and LACM Equity LLC
(collectively, the “Parent Company”). Thomas D. Stevens, Chairman, holds a
controlling equity interest in the Parent Company.
Fund(s): a
portion of the assets of Global Multi-Strategy
Sub-Advisor: Newton
Investment Management North America LLC
(“NIMNA,
LLC”)
is an indirect subsidiary of The Bank of New York Mellon Corporation ("BNY
Mellon"), a banking and financial services company. NIMNA LLC is part of ‘The
Newton Investment Management Group, which is used to collectively describe a
group of affiliated companies that provide investment advisory services under
the brand name ‘Newton’ or ‘Newton Investment Management.’ Investment advisory
services are provided in United States by NIMNA LLC and in the United Kingdom by
Newton Investment Management Limited (NIM). Both firms are indirect subsidiaries
of BNY Mellon.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: Nuveen
Asset Management, LLC (“Nuveen Asset Management”)
is
an investment advisor registered with the SEC, whose sole managing member is
Nuveen Funds Advisors, LLC. Nuveen Asset Management is an indirect subsidiary of
Teachers Insurance and Annuity Association of America, which constitutes the
ultimate principal owner of Nuveen Asset Management.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: Origin
Asset Management LLP (doing
business as Principal Origin)
(“Origin”) is
an indirect majority-owned subsidiary of Principal Financial Services, Inc., an
affiliate of PGI, and a member of Principal®.
Fund(s): Origin
Emerging Markets
Sub-Advisor: Pictet
Asset Management SA
(“Pictet”)
is
the asset management arm of the Pictet Group, which is owned by eight managing
partners.
Fund(s): a
portion of the assets of Diversified Real Asset
Sub-Advisor: Principal
Real Estate Investors, LLC (doing
business as Principal Real Estate)
("Principal-REI") is
an
indirect subsidiary of Principal Financial Group, Inc.
Fund(s): Global
Sustainable Listed Infrastructure and a portion of the assets of Diversified
Real Asset
Sub-Advisor: Sound
Point Capital Management, LP ("Sound Point"),
Stephen
Ketchum, five principals of Stone Point Capital LLC, Dyal Capital Partners II
(A), LP, a third-party permanent capital fund managed by the Dyal Capital
division of Blue Owl Capital Inc., and Assured Guaranty Ltd., through one or
more subsidiaries, together own 100% of the equity of the General Partner and
the Sub-Advisor with Dyal, the Stone Point principals, and Assured Guaranty
owning minority stakes.
Fund(s): a
portion of the assets of Global Multi-Strategy
Sub-Advisor: Spectrum
Asset Management, Inc. ("Spectrum")
is an indirect subsidiary of Principal Financial Group, Inc.
Fund(s): Capital
Securities and Spectrum Preferred and Capital Securities Income
Sub-Advisor: Wellington
Management Company LLP (“Wellington”)
is owned by the partners of Wellington Management Group LLP, a Massachusetts
limited liability partnership.
Fund(s): a
portion of the assets of Diversified Real Asset and a portion of the assets of
Global Multi-Strategy
Sub-Advisor: Westchester
Capital Management, LLC ("Westchester")
is 100% owned by its sole member, Virtus Partners, Inc. (“VPI”). VPI is 100%
owned by Virtus Investment Partners, Inc. (NASDAQ: VRTS)
(“VIP”).
Fund(s): a
portion of the assets of Global Multi-Strategy
Affiliated
Persons of the Registrant Who are Affiliated Persons of the Advisor
For
information about affiliated persons of the Registrant who are also affiliated
persons of PGI or affiliated advisors, see the Interested Board Members and Fund
Complex Officers tables in the “Leadership Structure and Board”
section.
Codes
of Ethics
The
Registrant, PGI, PFD, and each of the sub-advisors have adopted Codes of Ethics
(“Codes”) under Rule 17j-1 of the 1940 Act. PGI and the sub-advisors have each
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 the Funds from
using that information for their personal benefit. Except in limited
circumstances, the Code for PGI and the Registrant prohibits portfolio managers
from personally trading securities that are held or traded in the actively
managed portfolios for which they are responsible. Certain sub-advisors have
adopted Codes that do not permit personnel subject to such Code to invest in
securities that may be purchased or held by a Fund. However, other sub-advisors’
Codes do permit, subject to conditions, personnel subject to the Code to invest
in securities that may be purchased or held by a Fund. The Registrant’s Board
reviews reports at least annually regarding the operation of the Code of Ethics
of the Registrant, PGI, PFD, and each sub-advisor. A copy of the Registrant’s
Code will be provided upon request, which may be made by contacting the
Registrant.
Management
Agreement
Under
the terms of the Management Agreement with the Registrant, PGI, the investment
advisor, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates, for providing investment advisory
services and specified other services. The management fee schedule for each Fund
is as follows (expressed as a percentage of average net assets).
|
|
|
|
|
|
|
| |
Fund |
All
Assets |
|
Bond
Market Index |
0.14 |
% |
|
Capital
Securities |
0.00 |
% |
(1) |
International
Equity Index |
0.25 |
| |
(1)The
table reflects that PGI is absorbing all expenses of the Fund. You should be
aware, however, that the Fund is an integral part of “wrap-fee” programs,
including those sponsored by registered investment advisors and broker-dealers
unaffiliated with the Fund. Participants in these programs pay a “wrap” fee to
the wrap-free program’s sponsor (“Sponsor”). You should carefully read the
wrap-fee brochure provided to you by your Sponsor or your registered investment
advisor. The brochure is required to include information about the fees charged
to you by the Sponsor and the fees the Sponsor paid to your registered
investment advisor.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
First
$500
Million |
Next
$500
Million |
Next
$500
Million |
Over $1.5
Billion |
Edge
MidCap |
0.65% |
0.63% |
0.61% |
0.60% |
Global
Sustainable Listed Infrastructure |
0.75 |
0.73 |
0.71 |
0.70 |
International
Small Company |
1.00 |
0.98 |
0.96 |
0.95 |
Opportunistic
Municipal |
0.44 |
0.42 |
0.40 |
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
First $500
Million |
Next $500
Million |
Next $500
Million |
Next $500
Million |
Next
$1 Billion |
Over
$3 Billion |
Diversified
Real Asset |
0.80% |
0.78% |
0.76% |
0.75% |
0.74% |
0.73% |
Origin
Emerging Markets |
0.99 |
0.97 |
0.95 |
0.94 |
0.93 |
0.92 |
Small-MidCap
Dividend Income |
0.79 |
0.77 |
0.75 |
0.74 |
0.73 |
0.72 |
|
|
|
|
|
|
|
|
|
|
| |
Fund |
First $2
Billion |
Next $2
Billion |
Over $4
Billion |
Global
Multi-Strategy |
1.36% |
1.30% |
1.25% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
First $500
Million |
Next $500
Million |
Next $500
Million |
Next $500
Million |
Next
$1 Billion |
Next
$7 Billion |
Over
$10 Billion |
Blue
Chip |
0.65% |
0.63% |
0.61% |
0.60% |
0.59% |
0.58% |
0.57% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
First $500
Million |
Next $500
Million |
Next $500
Million |
Next $500
Million |
Next
$1 Billion |
Next
$2 Billion |
Next
$2 Billion |
Next
$3 Billion |
Over
$10 Billion |
Spectrum
Preferred and Capital Securities Income |
0.75% |
0.73% |
0.71% |
0.70% |
0.69% |
0.68% |
0.67% |
0.66% |
0.65% |
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 each Fund with the SEC; compensation of personnel, officers, and
Board Members who are 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 Funds. 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 Classes A, C, J, Institutional, R-1, R-3, R-4, R-5, R-6, and
S shares, including qualifying shares of the Funds for sale in states and other
jurisdictions. PGI is also responsible for providing certain shareholder and
administrative services to Classes R-1, R-3, R-4, and R-5 shares pursuant to a
Service Agreement and an Administrative Services Agreement.
Contractual
Limits on Total Annual Fund Operating Expenses
PGI
has contractually agreed to limit Fund expenses (excluding interest expense,
expenses related to fund investments, acquired fund fees and expenses, and tax
reclaim recovery expenses and other extraordinary expenses) on certain share
classes of certain of the Funds. The reductions and reimbursements are in
amounts that maintain total operating expenses at or below certain limits. The
limits are expressed as a percentage of average daily net assets attributable to
each respective class on an annualized basis. Subject to applicable expense
limits, the Funds may reimburse PGI for expenses incurred during the current
fiscal year.
The
operating expense limits and the agreement terms are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Contractual
Limits on Total Annual Fund Operating Expenses |
Fund |
A |
C |
Inst. |
Expiration |
Blue
Chip |
N/A |
N/A |
0.66% |
12/30/2024 |
Diversified
Real Asset |
1.20% |
N/A |
0.83% |
12/30/2024 |
Edge
MidCap |
1.10% |
N/A |
0.77% |
12/30/2024 |
Global
Multi-Strategy |
N/A |
N/A |
1.43% |
12/30/2024 |
Global
Sustainable Listed Infrastructure |
N/A |
N/A |
0.88% |
12/30/2024 |
International
Equity Index |
N/A |
N/A |
0.31% |
12/30/2024 |
International
Small Company |
N/A |
N/A |
1.08% |
12/30/2024 |
Opportunistic
Municipal |
0.84% |
N/A |
0.56% |
12/30/2024 |
Origin
Emerging Markets |
1.45% |
N/A |
1.05% |
12/30/2024 |
Small-MidCap
Dividend Income |
1.12% |
1.87% |
0.85% |
12/30/2024 |
For
Capital Securities Fund, PGI has agreed contractually to limit the Fund’s
expenses attributable to Class S shares by paying expenses normally payable by
the Fund (excluding interest expense, expenses related to fund investments,
acquired fund fees and expenses, and tax reclaim recovery expenses and other
extraordinary expenses) to maintain a total level of operating expenses
(expressed as a percent of average net assets on an annualized basis) not to
exceed 0.00%. It
is expected that the expense limit will continue permanently (and in any event,
at least through December 30, 2024); however, PFI and PGI, the parties to the
agreement, may mutually agree to terminate the expense limit.
Contractual
Limits on Other Expenses
PGI
has contractually agreed to limit the expenses identified as “Other Expenses”
related to certain share classes of certain of the Funds by paying, if
necessary, expenses normally payable by the Fund (excluding interest expense,
expenses related to fund investments, acquired fund fees and expenses, and tax
reclaim recovery expenses and other extraordinary expenses) to maintain “Other
Expenses” (expressed as a percent of average net assets on an annualized basis)
at or below certain limits.
The
other expenses limits and the agreement terms are as follows:
|
|
|
|
|
|
|
| |
Contractual
Limits on Other Expenses |
Fund |
R-6 |
Expiration |
Diversified
Real Asset |
0.02% |
12/30/2024 |
Edge
MidCap |
0.02% |
12/30/2024 |
Global
Multi-Strategy |
0.02% |
12/30/2024 |
International
Equity Index |
0.04% |
12/30/2024 |
International
Small Company |
0.04% |
12/30/2024 |
Small-MidCap
Dividend Income |
0.02% |
12/30/2024 |
Contractual
Management Fee Waivers
PGI
has contractually agreed to waive a portion of certain Fund’s management fees.
The fee waiver will reduce the Fund’s management fees by the amounts listed
below:
|
|
|
|
|
|
|
| |
Contractual
Management Fee Waivers |
Fund |
Waiver |
Expiration |
Blue
Chip |
0.030% |
12/30/2024 |
Bond
Market Index |
0.015% |
12/30/2024 |
Limits
on Distribution Fees and/or Service (12b-1) Fees
Effective
January 1, 2021, Principal Funds Distributor, Inc. has voluntarily agreed to
limit the distribution fees attributable to Class J, reducing the Funds’
distribution fees for Class J shares by 0.020%.* This voluntary waiver may be
revised or terminated at any time without notice to shareholders.
*
For the period from December 31, 2016 to December 31, 2020, the voluntary waiver
was 0.030%.
Management
Fees Paid
Management
fees paid for investment management services (before any waivers/reimbursements
from PGI) during the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
| |
Management
Fees Paid for Periods Ended August 31 (amounts in thousands) |
Fund |
2023 |
2022 |
2021 |
Blue
Chip |
$51,176 |
$57,901 |
$53,203 |
Bond
Market Index |
3,393 |
1,323 |
1,489 |
Capital
Securities |
— |
— |
— |
Diversified
Real Asset |
29,831(1)(2) |
36,917(1)(2) |
29,866(1) |
Edge
MidCap |
600 |
3,481 |
5,639 |
Global
Multi-Strategy |
6,635(1) |
8,180(1) |
10,276(1) |
Global
Sustainable Listed Infrastructure |
98(3) |
N/A |
N/A |
International
Equity Index |
2,685 |
2,816 |
2,941 |
International
Small Company |
6,905 |
9,944 |
11,220 |
Opportunistic
Municipal |
579 |
839 |
735 |
Origin
Emerging Markets |
24,130 |
31,158 |
31,024 |
Small-MidCap
Dividend Income |
8,984 |
8,826 |
10,676 |
Spectrum
Preferred and Capital Securities Income |
40,611 |
51,413 |
55,300 |
(1)Consolidated
financial statement; see "Basis for Consolidation" in Notes to Financial
Statements.
(2)Class
R-5 shares discontinued operations and converted to Class R-6 shares on January
13, 2023.
(3)Period
from September 22, 2022, date operations commenced, through August 31,
2023.
Management
Fees Waived
For
the following Funds, PGI waived a portion of the management fee during the
periods indicated as follows:
|
|
|
|
|
|
|
|
|
|
| |
Management
Fees Waived for Periods Ended August 31 (amounts in
thousands) |
Fund |
2023 |
2022 |
2021 |
Blue
Chip |
$2,598 |
$3,315 |
$3,864 |
Bond
Market Index |
364 |
142 |
160 |
Diversified
Real Asset |
685 |
2,306 |
1,854 |
Edge
MidCap |
17 |
249 |
407 |
Global
Multi-Strategy |
62 |
205 |
258 |
Opportunistic
Municipal |
25 |
100 |
88 |
Expenses
Reimbursed
For
the following Funds, PGI reimbursed certain expenses during the periods
indicated as follows:
|
|
|
|
|
|
|
|
|
|
| |
Expenses
Reimbursed for Periods Ended August 31 (amounts in thousands) |
Fund |
2023 |
2022 |
2021 |
Blue
Chip |
$478 |
$— |
$— |
Capital
Securities |
481 |
555 |
524 |
Diversified
Real Asset |
1,041 |
798 |
901 |
Edge
MidCap |
85 |
32 |
40 |
Global
Multi-Strategy |
672 |
471 |
642 |
Global
Sustainable Listed Infrastructure |
65(1) |
— |
— |
International
Equity Index |
335 |
259 |
288 |
International
Small Company |
95 |
14 |
13 |
Opportunistic
Municipal |
62 |
55 |
38 |
Origin
Emerging Markets |
249 |
50 |
21 |
Small-MidCap
Dividend Income |
401 |
311 |
708 |
(1)Period
from September 22, 2022, date operations commenced, through August 31,
2023.
Sub-Advisory
Agreements for the Funds
PGI
(and not the Funds) pays the sub-advisors fees determined pursuant to a
sub-advisory agreement with each sub-advisor, including those sub-advisors that
are at least 95% owned, directly or indirectly, by PGI or its affiliates
(“Wholly-Owned Sub-Advisors”) and the sub-advisors for the Funds listed in the
tables below. Fees paid to sub-advisors are individually negotiated between PGI
and each sub-advisor and may vary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Aggregate
Fees Paid to Sub-Advisors (other than Wholly-Owned Sub-Advisors and
Origin) for Fiscal Years Ended August 31 (dollar amounts in
thousands) |
Fund |
2023 |
2022 |
2021 |
| Dollar
Amount |
Percent of
Average Daily Net Assets |
Dollar
Amount |
Percent of
Average Daily Net Assets |
Dollar
Amount |
Percent of
Average Daily Net Assets |
Diversified
Real Asset |
$8,409 |
0.25% |
$9,952 |
0.27% |
$7,587 |
0.27% |
Global
Multi-Strategy |
2,854 |
0.76 |
3,406 |
0.79 |
4,211 |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fees
Paid to Origin for Fiscal Years Ended August 31 (dollar amounts in
thousands) |
Fund |
2023 |
2022 |
2021 |
| Dollar
Amount |
Percent of
Average Daily Net Assets |
Dollar
Amount |
Percent of
Average Daily Net Assets |
Dollar
Amount |
Percent of
Average Daily Net Assets |
Origin
Emerging Markets |
$8,967 |
0.36% |
$11,902 |
0.39% |
$11,288 |
0.37% |
Custodian
The
custodian of the portfolio securities and cash assets of the Funds and the
Cayman Subsidiaries 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.
Securities
Lending Agent
The
Bank of New York Mellon serves as the securities lending agent for the Funds.
Information regarding securities lending during the Funds’ fiscal year ended
August 31, 2023 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Gross
income (including from cash collateral reinvestment) |
Fees
paid to securities lending agent from a revenue split |
Fees
paid for any cash collateral management service that are not included in
revenue split |
Administrative
fees not included in revenue split |
Indemnification
fees not included in revenue split |
Net
rebate paid to borrower |
Other
fees not included in revenue split |
Aggregate
fees/ compensation |
Net
income from securities lending |
Blue
Chip |
$ |
24,044 |
| $ |
330 |
| $— |
$— |
$— |
$ |
20,748 |
| $— |
$ |
21,078 |
| $ |
2,966 |
|
Bond
Market Index |
490,843 |
| 13,458 |
| — |
— |
— |
356,199 |
| — |
369,657 |
| 121,186 |
|
Capital
Securities |
621,804 |
| 21,373 |
| — |
— |
— |
408,046 |
| — |
429,418 |
| 192,386 |
|
Diversified
Real Asset |
1,101,361 |
| 21,960 |
| — |
— |
— |
881,743 |
| — |
903,703 |
| 197,658 |
|
Edge
MidCap |
3,741 |
| 38 |
| — |
— |
— |
3,359 |
| — |
3,398 |
| 344 |
|
Global
Sustainable Listed Infrastructure |
1,117 |
| 37 |
| — |
— |
— |
747 |
| — |
784 |
| 333 |
|
International
Equity Index |
639,806 |
| 12,312 |
| — |
— |
— |
516,645 |
| — |
528,958 |
| 110,848 |
|
International
Small Company |
446,115 |
| 8,030 |
| — |
— |
— |
365,802 |
| — |
373,831 |
| 72,284 |
|
Origin
Emerging Markets |
130,852 |
| 13,701 |
| — |
— |
— |
(6,162) |
| — |
7,539 |
| 123,312 |
|
Small-MidCap
Dividend Income |
33,782 |
| 363 |
| — |
— |
— |
30,146 |
| — |
30,509 |
| 3,273 |
|
Spectrum
Preferred and Capital Securities Income |
3,772,985 |
| 105,437 |
| — |
— |
— |
2,718,460 |
| — |
2,823,897 |
| 949,087 |
|
The
services provided by The Bank of New York Mellon, as securities lending agent
for the Funds, include: coordinating, with the Funds, the selection of
securities to be loaned; negotiating loan terms; monitoring the value of
securities loaned and corresponding collateral, marking to market daily;
coordinating collateral movements; monitoring dividends; and transferring,
recalling, and arranging the return of loaned securities to the Funds upon loan
termination.
INTERMEDIARY
COMPENSATION
Additional
Payments to Intermediaries.
Shares
of the Funds are sold primarily through intermediaries, such as brokers,
dealers, investment advisors, banks, trust companies, pension plan consultants,
retirement plan administrators, and insurance companies.
In
addition to payments pursuant to 12b-1 plans, 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 Funds will reimburse PGI or
its affiliates for making such payments; in others, the Funds make such payments
directly to intermediaries.
For
Classes R-1, R-3, R-4, and R-5 shares, such compensation is generally paid out
of the Service Fees and Administrative Services Fees that are disclosed in the
Prospectus as Other Expenses. Such compensation is generally based on the
average asset value of Fund shares for the relevant share class held by clients
of the intermediary.
In
addition, PGI or its affiliates pay, without reimbursement from the Funds,
compensation from their own resources, to certain intermediaries that support
the distribution of shares of the Funds or provide services to Fund
shareholders. In addition, PGI or its affiliates pay, without reimbursement from
the Funds, 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 vary by share class and by Fund.
Principal
Life Insurance Company is one such intermediary that provides services relating
to Fund shares held in employee benefit plans, and it is typically paid all of
the Service Fees and Administrative Services Fees pertaining to such
plans.
Plan
recordkeepers, who may have affiliated financial intermediaries that sell shares
of the Funds, may be paid additional amounts. In addition, some financial
intermediaries or their affiliates receive compensation from PGI or its
affiliates 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 a Fund over
another investment, or to recommend one share class of a Fund over another share
class. Ask your Financial Professional or visit your intermediary’s website for
more information about the total amounts paid to them by PGI and its affiliates,
and by sponsors of other investment companies your Financial Professional may
recommend to you.
Your
intermediary may charge you additional fees other than those disclosed in the
Prospectus. Ask your Financial Professional about any fees and commissions they
charge.
Although
a Fund may use brokers who sell shares of the Funds to effect portfolio
transactions, the sale of shares is not considered as a factor by the Fund’s
sub-advisors when selecting brokers to effect portfolio
transactions.
As
of December 1, 2023, 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. |
G.A.
Repple & Company |
Private
Client Services LLC |
ADP
Broker Dealer Inc |
GBM
International Inc |
Procyon
Advisors, LLC |
AIG
SunAmerica |
Global
Retirement Partners LLC |
Prudential
Retirement Services |
Alight
Financial Solutions LLC |
Goldman
Sachs & Co. |
Purshe
Kaplan Sterling Investments, Inc. |
American
Century Investments |
ICMA-Retirement
Corp. |
Putnam
Investors Services |
American
United Life Insurance Co. |
Insight
Wealth Partners LLC |
Raymond
James & Associates, Inc. |
Ameriprise
Financial Services |
J.P.
Morgan Securities, Inc. |
Raymond
James Financial Services, Inc. |
Ameritas
Investments Corp |
Janney
Montgomery Scott |
RBC
Capital Markets Corp. |
Ascensus |
John
Hancock Life Insurance Company of New York |
Reliance
Trust Company |
AXOS
Clearing LLC |
John
Hancock Life Insurance Company USA |
Retirement
Clearinghouse |
Baird |
John
Hancock Trust Co. |
Robert
W. Baird & Co. |
Benefit
Plan Administrators |
July
Business Services LLC |
Rockefeller
Financial LLC |
Benefit
Solutions |
Kestra
Investment Services, LLC |
Sammons
Institutional Group |
Benefit
Trust Company |
Lincoln
Retirement Services Co. |
Sanctuary
Securities, Inc |
Bolton
Global Capital |
LPL
Financial Corporation |
Standard
Insurance Company |
BNY
Mellon NA |
Massachusetts
Mutual Life Insurance Company |
Stifel
Nicolaus & Company, Inc. |
Broadridge
Business Process Outsourcing, LLC |
Mercer
HR Services, LLC |
T.
Rowe Price Retirement Plan Services |
California
Capital Management |
Merrill
Lynch |
TD
Ameritrade Inc |
Cambridge
Investment Research Inc. |
Merrill
Lynch, Pierce, Fenner & Smith, Inc. |
TD
Ameritrade Trust Company |
Canterbury
Consulting Inc |
Merrill
Lynch, Retirement Group |
Ten
Capital Wealth Advisors, LLC |
Cetera
Advisor Networks LLC |
MidAtlantic
Capital Corporation |
Thrivent
Financial for Lutherans |
Charles
Schwab & Co., Inc. |
Midland
National Life Insurance Company |
TIAA-CREF |
Charles
Schwab Trust Bank |
Minnesota
Life Insurance Company |
Total
Administrative Services Corporation |
Citigroup
Global Markets Inc. |
Morgan
Stanley Smith Barney LLC |
Triad
Advisors, Inc. |
Columbia
Management Investment |
National
Financial Services |
UBS
Financial Services, Inc. |
Advisers,
LLC |
Nationwide
Financial Services, Inc. |
US
Bancorp Investments |
Commonwealth
Financial Network |
Nationwide
Investment Services Corp |
VALIC
Retirement Services Company |
Concentrum
Wealth Management |
Newport
Group, The |
Vanguard
Brokerage Services |
CPI
Qualified Consultants |
NFP
Retirement Inc |
Vanguard
Group, The |
Edward
Jones |
Northwestern
Mutual Investment Services |
Voya
Institutional Plan Services, LLC |
Empower
Annuity Insurance Company |
OneDigital
Investment Advisors |
Voya
Institutional Trust Co. |
of
America |
Oppenheimer
& Co. |
Wealth
Enhancement Advisory Svcs LLC |
Empower
Financial Services Inc |
Osaic,
Inc. |
Wells
Fargo Advisors, LLC |
ePlan
Services, Inc. |
Pensionmark
Financial Group LLC |
Wells
Fargo Bank, N.A. |
Equitable
Financial Life Insurance Co |
Pershing
LLC |
Wells
Fargo Clearing Services LLC |
Fidelity
Investment Institutional Operations Co. |
Plan
Administrators, Inc. |
Wells
Fargo Community Bank Advisors |
Fortem
Financial Group LLC |
Principal
Bank |
Western
International Securities Inc |
Four
Peaks Planning And Investments |
Principal
Life Insurance Company |
Woodbury
Financial Services |
FSC
Securities Corporation |
Principal
Securities, Inc. |
|
The
preceding list is subject to change at any time without notice. Any additions,
modifications, or deletions to the financial intermediaries identified in this
list that have occurred since the date noted above are not reflected. To obtain
a current list, 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 each of 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 a 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 a
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 August 31, 2023 due to
research services provided by such brokers. The table also indicates the
commissions paid to such brokers as a result of these portfolio
transactions.
|
|
|
|
|
|
|
| |
Fund |
Amount
of Transactions because of Research Services Provided |
Related
Commissions Paid |
Blue
Chip |
$1,722,939,618 |
$380,580 |
Diversified
Real Asset |
1,181,166,705 |
808,259 |
Edge
MidCap |
33,619,013 |
11,308 |
Global
Multi-Strategy |
232,798,885 |
95,314 |
Global
Sustainable Listed Infrastructure |
15,016,052 |
8,615 |
International
Equity Index |
434,635,642 |
214,412 |
International
Small Company |
488,874,601 |
322,031 |
Origin
Emerging Markets |
2,960,406,161 |
586,448 |
Small-MidCap
Dividend Income |
583,838,569 |
277,795 |
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 PGI affiliate in connection with such
underwritings. In addition, for underwritings where a sub-advisor affiliate or
PGI participates as a principal underwriter, certain restrictions may apply that
could, among other things, limit the amount of securities that a 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 Board 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 a 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; must be consistent
with the investment objective, investment strategy, and risk profile of the
Fund; and no brokerage commission or fee (except for customary transfer fees),
or other remuneration may be paid in connection with the transaction. The Board
will receive quarterly reports on these 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 will receive quarterly reports on these
transactions.
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 a 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
following table shows the brokerage commissions paid during the periods
indicated.
|
|
|
|
|
|
|
|
|
|
| |
Total
Brokerage Commissions Paid for Periods Ended August 31 |
Fund |
2023 |
2022 |
2021 |
Blue
Chip |
$676,534 |
$1,124,327 |
$753,316 |
Bond
Market Index |
6,550 |
3,100 |
1,113 |
Capital
Securities |
— |
— |
— |
Diversified
Real Asset |
1,949,929 |
2,790,121 |
2,070,760 |
Edge
MidCap |
22,898 |
143,600 |
233,178 |
Global
Multi-Strategy |
229,490 |
214,062 |
265,244 |
Global
Sustainable Listed Infrastructure |
19,207 |
N/A |
N/A |
International
Equity Index |
411,944 |
145,622 |
168,042 |
International
Small Company |
836,811 |
1,136,409 |
1,015,533 |
Opportunistic
Municipal |
— |
529 |
860 |
Origin
Emerging Markets |
1,425,797 |
1,255,281 |
1,875,966 |
Small-MidCap
Dividend Income |
450,627 |
321,101 |
1,035,762 |
Spectrum
Preferred and Capital Securities Income |
184,867 |
208,830 |
175,793 |
Primary
reasons for changes in several Funds’ brokerage commissions for the three years
were changes in commission rates; changes in Fund size; changes in market
conditions; changes in money managers of certain Funds; and implementation of
investment strategies. In some cases, such events required substantial portfolio
restructurings, resulting in increased securities transactions and brokerage
commissions.
In
particular, primary reasons for changes in brokerage commissions for those Funds
with relatively greater variations for the three years were, in part: for the
International Equity Index Fund, increased trading volumes and increased
portfolio turnover for 2023 when compared to 2022.
Brokerage
commissions from the portfolio transactions effected for the Funds were paid to
brokers affiliated with PGI or such Fund's sub-advisors for the fiscal years
ended August 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker |
2023 Fund's
Total Commissions Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Spectrum
Preferred and Capital Securities Income |
| Spectrum
Asset Management |
SAMI
Brokerage LLC |
$176,543 |
95.50% |
98.96% |
Total |
$176,543 |
95.50% |
98.96% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker |
2022 Fund's
Total Commissions Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Spectrum
Preferred and Capital Securities Income |
| Spectrum
Asset Management |
SAMI
Brokerage LLC |
$82,547 |
39.53% |
95.82% |
Total |
$82,547 |
39.53% |
95.82% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker |
2021 Fund's
Total Commissions Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Spectrum
Preferred and Capital Securities Income |
| Spectrum
Asset Management |
SAMI
Brokerage LLC |
$74,814 |
42.56% |
89.50% |
Total |
$74,814 |
42.56% |
89.50% |
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 August 31, 2023.
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Holdings
of Securities of Principal Funds, Inc. Regular Brokers and
Dealers |
Fund |
Broker
or Dealer |
Holdings
(in
thousands) |
Bond
Market Index |
Bank
of Montreal |
$1,374 |
| Bank
of New York Mellon Corp/The |
2,573 |
| Barclays
PLC |
4,400 |
| Citigroup
Inc |
9,926 |
|