Principal Global Multi-Strategy Fund

Transcription

1 Principal Global Multi-Strategy Fund FIRST QUARTER 2016 Seeking to Address Portfolio Volatility with Alternative FUND GUIDE CLASS A: PMSAX CLASS C: PMSCX CLASS I: PSMIX CLASS P: PMSPX Principal Management Corporation, investment advisor of the Principal Global Multi-Strategy Fund, believes in building strategies that seek to help investors solve specific challenges and provide outcome-oriented solutions. Principal Management Corporation supplements its deep investment experience and asset allocation expertise with that of Cliffwater, 1 a premier advisory firm focused on alternative investment strategies (investment strategies not represented by the three traditional asset types of stocks, bonds, and cash). A MULTI-STRATEGY, MULTI-MANAGER APPROACH Our diversified approach to the selection and mix of alternative strategies takes into consideration a number of factors including expected return, beta (a measure of the volatility of an investment, or its likelihood to change sharply or quickly, in comparison to the market as a whole), and correlations (measures of how investments move in relation to each other) with stock and bond markets and seeks the long-term reduction of volatility. THE FUND SEEKS TO: Utilize multiple alternative strategies to help manage the effects of market volatility in an effort to provide some degree of downside protection (seeking to limit or reduce losses in the case of a decline in the value of an underlying investment). Leverage multiple managers, who are specialists in their field, in order to employ a comprehensive investment approach. Improve diversification (enhance the variety of investments within a portfolio) by adding strategies that have historically low correlation (have not been observed to move in lock step with one another). Access hedged strategies designed to reduce the risk of adverse price movements in an asset without the barriers of a traditional hedge fund structure available only to a limited number of accredited investors and requiring a large initial minimum investment that must be kept in the Fund for at least one year and is then subject to restricted withdrawals. PORTFOLIO ALLOCATIONS (as of 03/31/2016) Investment Advisor As investment advisor for the Fund, Principal Management Corporation seeks to meet the Principal Global Multi-Strategy objective and make necessary modifications in seeking to deliver performance. Consulting Sub-advisor Principal Management Corporation seeks to leverage Cliffwater s roughly 20 years of experience in institutional consulting on alternatives, gaining insight and sub-advisor recommendations, as well as monthly sub-advisor monitoring. 13% Global Macro and Managed Futures 15% Credit Long/Short 11% Credit Long/Short 10% 10% 17% Market Neutral Fixed Income Equity Long/Short Multi-Strategy Event Driven Convertible Arbitrage Dedicated Short Bias Equity Market Neutral Long/Short Equity Emerging Markets Managed Futures Global Macro Fixed Income Relative Value Event Driven 10% 15% Equity Long/Short May not reflect current allocations or sub-advisors. Percentages may not add up to 100% due to rounding. * CNH Partners, LLC, is a merger arbitrage, convertible arbitrage, and diversified arbitrage research affiliate of AQR. York Registered Holdings, L.P., manager of the event driven strategy, is an affiliate of York Capital Management. + Wellington Management Company LLP is a SEC-registered investment advisor and an independent and unaffiliated sub-advisor to Principal Funds. 1 Cliffwater is not affiliated with PMC and is a consulting sub-advisor for the Principal Global Multi-Strategy Fund. Asset allocation and diversification do not ensure a profit or protect against a loss.

2 PRINCIPAL GLOBAL MULTI-STRATEGY FUND Sub-Advisor Selection and Investment Process SELECTING THE SUB-ADVISORS Principal Management Corporation and Cliffwater implemented a robust process to select sub-advisors. Candidates are asked to complete a questionnaire providing detail of the criteria listed to the right. MANAGEMENT PROCESS Principal Management Corporation is the advisor and Cliffwater is the consulting sub-advisor for the Fund. As such, their responsibilities and process include: Establishing underlying asset classes and sub-advisors to manage each strategy. Rebalancing among individual strategies based on market and economic factors. Monitoring sub-advisors to ensure each is performing well against their stated benchmark or standard of performance measure. Evaluating and delivering additional asset class strategies that may provide added diversification and price appreciation (possible increase in the value of price over time) benefits. SELECTING AND WEIGHTING STRATEGIES IN THE FUND Cliffwater divides the hedge fund universe (alternative investments utilizing pooled funds that may use a number of different strategies to earn active return for investors) into the following sectors: Market Neutral Global Macro-Discretionary Credit/Distressed Global Macro-Systematic Equity Long/Short Multi-Strategy Event-Driven In designing sector weights (allocation to specific sectors relative to the index), the goal is to build a diversified portfolio that looks somewhat representative of the hedge fund universe, with the ultimate goal of building a portfolio that achieves the best possible risk-adjusted return (return adjusted to Sub-Advisor Selection Criteria Primary Criteria Additional Criteria Firm and Product Strategic Fit Track Record Assets Under Management Consultant Qualitative Input Investment Style Open/Minimum Account Size Performance Investment Philosophy/ Process Characteristics Management Fees Distribution Support Criteria are established and weighted as appropriate for the portfolio being constructed. Principal Management Corporation may deviate from specific criteria limitation based on the situation. factor in the amount of risk involved in producing that return). Our model portfolio sector weights come from a combination of a comprehensive top-down review (considering the overall market or economy first and then analyzing the details of individual companies) and bottom-up manager selection (focusing on a specific company before considering factors of the industry or overall economy) factors. The top-down analysis results in expected return and risk estimates for each of the hedge fund sectors. Each of the hedge fund sectors has embedded betas (potential exposure to equity, credit, and/or interest rate sensitive securities) that are a component of the expected return and risk estimates. Betas are calculated based on historical returns of the sector, then combined with Cliffwater s forward-looking return estimates to generate return/risk estimates. Alpha (a measure of performance on a risk-adjusted basis) return and risk are also estimated for each sector. Bottom-up considerations include conversations with managers to further evaluate where there are outsized opportunities in a particular sector that may lead to an adjustment (up or down) of the alpha return estimates for that sector. Additionally, client-specific or managerspecific considerations may cause changes in the sector weights. Finally, a manager s riskiness is factored in when determining weighting within a portfolio. Generally speaking, riskier managers or strategies receive lower weightings and less risky managers receive higher weightings. MANAGEMENT PROCESS Select Investable Alternative Develop Regular Capital Market Forecasts Construct Efficient Portfolio Design Multi-Strategy Alternative Structure Manager Search Process Monitor Fund Rules-Based Rebalancing Goal of efficient implementation Potential for increased return Diversified to help manage risk and offer opportunity for price appreciation The volatility of specific factors within the investment strategy in relation to the volatility of those factors in the overall market Risk, return, beta, and correlation Historical returns and correlations Forward looking returns forecast by multiple analysts Economic input 3 5 year forecast Target weights Target beta (the target volatility of the portfolio in relation to the volatility of the overall market) Seek to optimize return/unit of risk Low targeted financial asset correlations Account for sub-advisor risk and the ability of an asset to be quickly bought or sold without affecting the asset s price Select benchmarks Active strategies Single vs. multiple sub-advisors per strategy Identify and hire specialty sub-advisors Target weights Sub-advisor guidelines Quarterly PM calls Annual face-to-face meetings Rebalance within a defined range of the target weight Balance transaction costs and the need to stay aligned with the targeted asset allocation Utilize cash flows when possible Rebalance halfway back to target when needed 2

3 Principal Global Multi-Strategy Fund The Fund seeks to achieve long-term capital appreciation with an emphasis on positive total returns and relatively low volatility. A VOLATILITY-REDUCING OPTION THAT AIMS TO OFFER MANY LAYERS OF DIVERSIFICATION The Principal Global Multi-Strategy Fund is designed to provide the investment benefits of alternative strategies with the structural benefits of a mutual fund. The portfolio is designed to combine investment specialists and strategies into a single fund offering diversification by asset class, strategy, and manager. The Principal Global Multi-Strategy Fund is not a mutual fund that invests in other mutual funds. Each sleeve is a separately managed account managed according to the mandates of Principal and monitored regularly to ensure strict adherence to these mandates. AN INNOVATIVE FUND DESIGNED TO REDUCE BETAS The Fund s structure uses alternative strategies with the goal of reducing market risk, in seeking to limit overall volatility, while taking advantage of investment opportunities wherever and whenever they occur. By balancing the strategies within the Principal Global Multi-Strategy Fund, it is the investment manager s intention to optimize the shock absorption potential and create resiliency for any set of market conditions. ROLE OF ALTERNATIVE STRATEGIES IN A PORTFOLIO Managers of alternative strategies utilize unconventional tools such as derivatives (investments with prices derived from one or more underlying assets), leverage (investing assets over and above a fund s net assets into additional securities with the goal of generating larger returns from small pricing discrepancies), arbitrage (the simultaneous purchase and sale of an asset in order to profit from a difference in the price), and short selling (selling a security with the expectation that the price will fall, enabling an investor to profit from declining markets and securities prices) in conjunction with traditional financial assets (e.g., stocks and bonds). Thus, the return on these strategies tends to be driven by the manager s actions (trading strategies) rather than by market forces. A goal of the Principal Global Multi-Strategy Fund is to provide volatility dampening alongside more risky long-only holdings (undervalued investments). This may provide the assurance that investors are looking for in seeking to insulate their portfolio in case of market shocks, while allowing them to participate in some portion of the equity market s performance given the equity beta embedded in the Fund. THE POWER OF COMPOUNDING It was Albert Einstein who said, The compounding of interest is the eighth wonder of the world. This chart illustrates the performance of $100 invested in the S&P 500 over the last 30 years compared to $100 invested in a hypothetical investment with the same average annualized return (9.55 percent), but with half of the volatility. As you can see at the end of the 30-year time period, due to compounding, that hypothetical investment is worth 36 percent more! This illustrates the benefit of a lower-volatility portfolio. LOWER VOLATILITY CAN LEAD TO GREATER OUTCOMES S&P 500 Hypothetical $1,800 $1,600 $1,400 $1, Year Period Ending 12/31/2015 $1,689 36% $1,239 $1,000 $800 $600 $400 $200 $ Source: Ned Davis Research Group, The performance labeled as Hypothetical depicts the same annual returns as that of the S&P 500 but with half the volatility level of the S&P 500 (as measured by standard deviation). This illustration does not show the performance of any product. Investors may not invest directly in an index. 3

4 PRINCIPAL GLOBAL MULTI-STRATEGY FUND Principal Global Multi-Strategy Fund Sub-Advisors Carefully selected specialists in their field Portfolio Construction Consultant and Ongoing Portfolio Advisor An independent advisory firm specializing in hedged strategies. Founded in 1971, Cliffwater is a recognized leader in hedge fund advisory with over $28 billion in direct hedge fund assets and 30 hedge fund clients, including large public pension systems, endowments, and private pensions. They have 40 highly experienced investment professionals, 16 of whom are full-time individuals in the hedge fund group. MULTI-STRATEGY Risk Reducer/Diversifier MARKET NEUTRAL FIXED INCOME Risk Reducer/Diversifier EQUITY LONG/SHORT Return Enhancer + Strategy: Allocation to nine underlying hedge fund strategies, which fall into three broad categories: Arbitrage (the simultaneous purchase and sale of an asset in order to profit from a difference in the price), Equity (comprised of equity investments, which are are generally considered a riskier asset class than bonds and cash, and have historically provided higher returns), and Macro (bases its holdings such as long and short positions in various equity, fixed income, currency, and futures markets primarily on overall economic and political views of various countries). 2 Dynamically adjusted based on an ongoing evaluation of market liquidity (the ability of an asset to be quickly bought or sold without affecting the asset s price), opportunity set, and correlations among strategies. This strategy utilizes macro and specific issue-level fundamental and technical relative value (a method of determining an asset s value that takes into account the value of similar assets) analysis. Employs fundamental bottom-up research, actively seeking mispriced opportunities with specific catalysts. This strategy pursues a diversified fixedincome arbitrage approach to investing in three underlying strategies: rates, corporate credit, and structured credit products. A quantitative equity long/short strategy (taking long positions in stocks that are expected to appreciate and short positions in stocks that are expected to decline, thus seeking to profit from stock gains in the long positions and price declines in the short positions). Generates alpha*** through active stock selection based on a proprietary Dynamic Alpha model. Targets a beta of 0.4 to the S&P 1500 index. Combines Wellington s longonly U.S. Alpha product (a combination of eight underlying equity portfolios), overlaid with a blended hedging strategy consisting of a short index futures position accounting for 40 percent of the portfolio value and the use of options to mitigate tail risk (the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution) on the remaining 60 percent. Selects investments using a fundamental approach, and seeks to consistently and significantly outperform the market by diversifying active risk, but not alpha. Targets a 0.4 beta to U.S. equity markets over the long-term. This strategy is intended to provide exposure to hedge fund strategies. Purpose Within GMS: Provide a core set of hedge fund exposures. Because of its diversification across many hedge fund styles and types of securities, it can represent a large allocation within the Fund. To provide a dedicated, more focused fixedincome, market-neutral exposure. To provide equity alpha within all capitalizations of the U.S. equity market. Provide access to Wellington s fundamental, bottom-up stock picking skills combined with a futures/option strategy that is expected to enhance the risk/ reward ratio of the portfolio. This Strategy Is Expected to Perform Well in: Markets that reward moderate risktaking. AQR s strategy is designed to capitalize on market mis-pricings by being willing to take on certain exposures that the market ignores. Markets that reward good issue selection in credit, and/or environments where global central bank policies are diverging, allowing the sub-advisor to make profitable trades in global currency and rates markets. A market where stock price performance is well-diversified and not highly correlated. Fundamental-driven (driven by qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a company, security or currency) equity markets. This Strategy Is Expected to Lag in: A strong upward bull market (a financial market of a group of securities in which prices are rising or are expected to rise), and may not do well if the markets are very risk-averse. Environments when most central banks are coordinating fiscal and monetary policy. Markets driven by macro-events where equity fundamentals are ignored by the market. Markets driven by macro-events where equity fundamentals are ignored by the market. 4 Betas measure the sensitivity of a portfolio to its market benchmark. If a portfolio s beta is 1.10, it is expected to move up or down 1.10 times that of the benchmark. A beta of 0.5 means the portfolio is expected to move up or down by half the amount of the benchmark. * Cliffwater does not directly manage fund assets. ** CNH Partners, LLC, is a merger arbitrage, convertible arbitrage, and diversified arbitrage research affiliate of AQR. *** Alpha measures the difference between a portfolio s actual return and what was expected based on its market risk. **** Tracking error is expressed as a percentage that shows how closely a portfolio follows the index to which it is benchmarked. The lower the tracking error, the closer the portfolio follows the benchmark.

5 CREDIT LONG/SHORT Return Enhancer EVENT DRIVEN Return Enhancer GLOBAL MACRO AND MANAGED FUTURES Diversifier An absolute return-oriented (the return that an asset achieves over a certain period of time) credit strategy utilizing Loomis Sayles investment platform and process to identify a broad range of investment opportunities. Targets yield curve (a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates), credit spread (the spread between Treasury securities and non-treasury securities that are identical in all respects except for quality rating), and currency opportunities. Seeks to provide absolute return and prudent investment and risk management. This strategy will focus on corporate and government credits in emerging markets with an emphasis on investment-grade and high yield securities. This includes fundamental long/short ideas, distressed debt, event-driven trades, new issuance, yield plays, basis trades (trades that aim to profit from perceived mispricing of similar securities), and relative value trades. This strategy will be long-biased with a concentrated portfolio of 30 to 60 issuers in corporate and sovereign emerging market debt. This strategy will focus on liquid, largecap equities and will consist of ~20 to 100 positions. It will invest in both largecap risk arbitrage and special situation investments (investments made due to particular circumstances involving a security rather than the underlying fundamentals of the security or some other investment rationale). It will not invest in distressed debt due to the liquidity challenges of those situations. This strategy will be long-biased, and the equity beta of the portfolio is expected to range from 0.4 to 0.6. Most of the short positions will be market indices and put options (options contracts giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time), although short positions in large-cap liquid equities may also be included. Systematic price-based trend model comprised of 12 sub-models designed to take advantage of trend-following momentum. Dynamic risk models overlay specific strategies and help adjust position size based on the relative attractiveness of the current environment. Integrate proprietary models and risk models into a single strategy in order to provide attractive absolute and riskadjusted returns. Geographically, a majority of this strategy is expected to be based in the United States, with other exposures to Europe and Asia. Provide credit selection skills and exposure across credit sectors: high yield, investment-grade convertibles (bonds that can be converted into a predetermined amount of the company s equity at certain times during its life, usually at the discretion of the bondholder), securitized (a financial instrument created by combining financial assets and marketing different tiers of the repackaged assets to investors), and global. Provide emerging market credit exposure, expected to complement the Loomis strategy, which focuses more on global developed market credits. Provide additional diversification, enhance the event-driven exposure (exposure that attempts to take advantage of events such as mergers and restructurings that can result in the short-term mispricing of a company s stock), and support the Fund s equity beta. Provide dynamically changing exposures to asset classes, commodities (basic goods that are exchanged such as grains, gold, beef, oil, and natural gas), currencies, or other risk factors based on predictions of macroeconomic considerations and/or price movements. A market with tightening credit spreads, since they typically have a net long exposure to credit, or when credit spreads are changing. A market with tightening credit spreads, since they typically have a net long exposure to credit, or when credit spreads are changing. Positive equity and credit markets and benefits from deal activity (such as mergers and new companies spun off from parent companies). Adverse market conditions for stocks and bonds. A market characterized by widening credit spreads, or when spreads move in tandem. A market characterized by widening credit spreads, or when spreads move in tandem. Negative equity and credit markets, and when deal/restructuring activity is low. A market that is directionless and has no lasting trends. + Wellington Management Company LLP is a SEC-registered investment advisor and an independent and unaffiliated sub-advisor to Principal Funds. 2 Arbitrage include Convertible Arbitrage, Event Driven, and Fixed-Income Relative Value. Equity include Dedicated Short Bias, Equity Market Neutral, Long/Short Equity, and Emerging Markets (Equity). Macro include Global Macro, Managed Futures, and Emerging Markets (Macro). York Registered Holdings, L.P., manager of the event driven strategy, is an affiliate of York Capital Management. As of December 31, May not reflect current allocations or sub-advisors. 5

6 PRINCIPAL GLOBAL MULTI-STRATEGY FUND Alternatives Seek to Address Market Risk THE ROLE OF CORRELATION Recent events have shown that correlations of asset classes (statistical measurement of how asset classes move in relation to each other) increase in down markets. The figure below shows the correlations of various asset class returns compared to the S&P 500 in up months (positive 5 percent or more) and down months (negative 5 percent or more). Asset class betas (the volatility of asset classes in comparison to the market as a whole) are more likely to behave like equity beta (the volatility of equity investments in comparison to the market as a whole) in down months compared to up months. In fact, the correlations at least doubled across the asset classes shown, effectively reducing the originally designed diversification benefits. Correlation Has Jumped in Down Markets Up Market (5 percent or more) Down Market (5 percent or more) January December 2015 Correlations of Traditional Assets to the S&P 500 Small Caps International Stocks Interntational Emerging High Yield Corpate Gold REITs TIPs The example is for illustration purposes only and does not reflect any mutual funds or indices. Does not represent performance of any Principal Fund. Source: Morningstar. The traditional asset classes represented here are Small Caps, represented by Russell 2000 ; International Stocks, represented by MSCI EAFE; International Emerging, represented by MSCI EM GR; High Yield Corporate, represented by BofAML US HY Master II TR; Gold, represented by S&P GSCI Gold; and TIPS, represented by BarCap US Treasury TIPS. Time period for TIPS is Past performance does not guarantee future results. Asset allocation and diversification do not ensure a profit or protect against a loss. An investor cannot invest directly in an index. Index performance does not reflect the deduction of fund fees and charges. ALTERNATIVE STRATEGIES MAY HELP REDUCE MARKET RISK Significant market downturns may not only cost investors money but time as well. Depending on the size of the downturn and the subsequent rate of return, it could take several months or years to recover. To help obtain long-term wealth is to actively manage risk, not manage returns. By seeking to decrease the severity of the downside, investors may have a greater opportunity to meet their investment goals. Alternative strategies generally seek to: Help enhance returns by reducing the impact of the downside. Achieve a higher level of diversification with a low beta solution. Minimize volatility across market cycles. To reduce market risk, we believe investors should consider looking beyond traditional asset classes and beyond traditional strategies as well. Diversifying away from long-only risk requires non-directional alternative strategies that are designed to succeed across market cycles. The goal is to maintain the long-term growth opportunities of being a long-only investor, with less volatility. 6

7 Alternatives May Help Increase Consistency EXHIBITING LOW VOLATILITY The individuality of the portfolio manager s process, philosophy, and strategy may help drive lower correlation with other financial asset returns, which may help lower a traditional portfolio s volatility over time. For example, the 20-year historical performance of a hypothetical blend of index performance, representing a multi-strategy approach using alternative strategies, generated significantly lower volatility than both broad domestic and international stocks. Average Annual Return 11% 9% 7% 5% A Multi-Strategy Approach Using Alternatives (represented by index performance) Exhibited Historically Lower Volatility and Comparable Returns A Multi-Strategy Approach Using Alternatives May Decrease Risk and Provide Comparable Returns 3% Annualized Standard Deviation 20-Year Period Ending 12/31/2015 n Alternative n U.S. Stocks n International Stocks Illustration does not reflect the performance of any Principal Fund and does not take into account costs associated with investment. Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index. Source: Morningstar. Calculations are based on historical index performance. Alternative is represented by 40% Hedge Fund Research, Inc. (HFRI) Equity Hedge (Total) Index; 25% HFRI Macro (Total) Index; 20% HFRI ED: Distressed/Restructuring Index; 5% HFRI EH: Equity Market Neutral Index; 5% HFRI Event-Driven (Total) Index; 5% HFRI RV: Fixed Income-Corporate Index. Index performance shown does not reflect the Fund s actual benchmark which is the HFRI Fund-of-Funds Composite Index. The traditional asset classes represented here are U.S Stocks, represented by the S&P 500, an index of the 500 large-cap common stocks used as a proxy for the stock market; International Stocks is represented by MSCI EAFE, measuring stock returns in developed economies outside of North America. PERFORMANCE POTENTIAL IN A VARIETY OF MARKETS A multi-strategy approach represented by a hypothetical blend of alternative strategies has historically provided lower volatility and a more consistent return pattern or sequence of returns. Consider that these strategies utilize techniques that have allowed them the potential to profit in declining markets through short sales as well as through investments in assets that are lowly or negatively correlated to traditional assets (core asset classes such as equities, fixed income, cash, real estate, and international holdings). This potential for some degree of downside protection can be important to portfolio value over time. A Multi-Strategy Approach Using Alternatives Seeks Downside Protection and the Opportunity to Participate in Up Markets Dollar Value Alternative U.S. Stocks International Stocks $25,000 $20,000 $15,000 $10,000 $5,000 12/31/2000 Tech Bubble Burst (09/00-09/02) Alternative : +3% U.S. Stocks: -42% Financial Crisis (11/07-02/09) Alternative : -20% U.S. Stocks: -51% 2007 Year Value of a $10,000 Investment 15-Year Period Ending 12/31/ /31/2015 $22,225 $20,800 $16,841 Source: Zephyr StyleADVISOR. Alternatives is represented by 40% Hedge Fund Research, Inc. (HFRI) Equity Hedge (Total) Index; 25% HFRI Macro (Total) Index; 20% HFRI ED: Distressed/Restructuring Index; 5% HFRI EH: Equity Market Neutral Index; 5% HFRI Event-Driven (Total) Index; 5% HFRI RV: Fixed Income-Corporate Index. The traditional asset classes represented here are U.S. Stocks, represented by S&P 500 and International Stocks, represented by MSCI EAFE. Index performance shown does not reflect the Fund s actual benchmark which is the HFRI Fund-of-Funds Composite Index. Illustration does not reflect the performance of any Principal Fund and does not take into account costs associated with investment. Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index. Past performance does not guarantee future results. Asset allocation and diversification do not ensure a profit or protect against a loss. To illustrate the multi-strategy approach, the charts above show alternative strategies as represented by a hypothetical blend of index performance. Outcomes would have varied, and may have been less favorable, had different percentages of these indices been used for these illustrations. 7

8 PRINCIPAL GLOBAL MULTI-STRATEGY FUND Types of Alternative There are numerous types of alternative strategies available, and when used as a complement to traditional asset allocation, they can: Provide a different source of alpha that may increase portfolio returns for a given level of risk. Potentially lower the standard deviation* or historic volatility of a portfolio at a given level of return. The Principal Global Multi-Strategy Fund diversifies across multiple managers and alternative strategies seeking to reduce the risk associated with using any one manager and aiming to help portfolios produce more consistent, less volatile return patterns. Alternatives in Practice Market Neutral that intend to earn positive returns regardless of market direction by reducing the risk of adverse stock or bond market price movements. Equity Long/Short that buy securities believed to be undervalued and sell short securities believed to be overvalued. Multi-Strategy Combine several (or all) strategy types, to gain the flexibility to change strategy weights depending on market opportunities, and provide a greater level of diversification. Event Driven that attempt to profit from events or big news stories in the marketplace, while incurring a modest level of market risk. Global Macro that seek returns by dynamically changing exposures to asset classes, commodities, currencies, or other risk factors through trend following, fundamental research, or both. Alternative investment strategies such as arbitrage, leverage, derivatives, and shorting securities may magnify risk. In addition, securities such as bonds, equities, commodities, international and emerging market securities, and currencies may be used to implement the investment strategy. These investments are subject to risks associated with market and interest rate movements. THE MISUNDERSTOOD ALTERNATIVE Investors often perceive alternative strategies to be riskier than traditional investments. However, many multi-strategy alternative portfolios are designed specifically to hedge (or manage) market risk, enhance return, or a combination of both. They have targeted lower volatility than domestic and international stocks historically, but investors do need to consider that they carry additional risks associated with short selling and leverage strategies. SOPHISTICATED INVESTMENT TECHNIQUES Short selling Selling a security with the expectation that the price will fall, enabling an investor to profit from declining markets and securities prices. Leverage Investing assets over and above a fund s net assets into additional securities to generate large returns from small pricing discrepancies. Unconstrained strategies Managers are given the liberty to seek what they perceive to be the best investment ideas regardless of geography, capitalization structure, valuation, or credit quality. Alternative investment strategies such as leverage and shorting securities may magnify risk. These investments are subject to risks associated with market and interest rate movements. *Standard deviation measures a portfolio s volatility of returns, or level of absolute risk. 8

9 Potential Benefits of Alternative INVESTING WITH ALTERNATIVES We believe the anticipated volatility reduction and return enhancement potential offered by alternative strategies can benefit many investors. Many individuals cannot invest in alternative strategies through traditional hedge funds due to the significant investment minimums, substantial performance fees, and strict investor qualifications. Traditional hedge funds are not constrained by the same regulations as traditional mutual funds and, as such, may have the potential to deliver greater investment performance, particularly through the use of greater leverage. Nevertheless, their high minimums and fees, extended lock-up periods, and lack of transparency can be restrictive for the average investor. The Principal Global Multi-Strategy Fund seeks to provide individual investors with the potential benefits of alternative investments and the potential advantages of registered mutual funds. This table highlights the similarities and differences among these investment options, including redemption and pricing. There are benefits and constraints for each investment strategy. Seeking to Benefit From the Best of Both Worlds Feature Typical Mutual Funds Hedge Funds Principal Global Multi-Strategy Fund Daily redemption Yes No Yes* Transparency Yes No Yes Low minimums Yes No Yes Low fees Yes No Yes Use of leverage No Yes Yes** Use of short selling No Yes Yes Invest in non-traditional assets No Yes Yes Focus on absolute returns No Yes Yes Typical mutual funds invest in diversified holdings such as stocks, bonds, and short-term debt, but do not employ strategies like leverage, short selling, non-traditional assets or a focus on absolute return. Hedge Funds refer to a limited partnership of investors that uses alternative methods in hopes of realizing large capital gains. There are other mutual funds available to investors, besides the Principal Global Multi-Strategy Fund, that also have similar features to hedge funds. *Daily access to funds is priced at the end of day NAV. **Up to 33 percent of assets due to regulatory limits. Investment risk may be magnified with the use of these alternative strategies. Past performance does not guarantee future results. Asset allocation and diversification do not ensure a profit or protect against a loss. Investors should review the fund prospectus for more information regarding the objective, risks, fluctuation of principal, or return, as well as the benefits and constraints of investing in traditional strategies or the Principal Global Multi-Strategy Fund. UTILIZING ALTERNATIVE STRATEGIES IN INVESTOR PORTFOLIOS Portfolio allocations are typically tailored to investor needs, risk profiles, and other considerations. Determining how to allocate to alternative strategies can be approached in the same fashion. For investors most concerned with reducing risk, for example, an allocation to alternatives could be taken from the riskiest part of the portfolio typically the equity holdings. For those who may be more interested in enhancing returns, alternative strategies could be funded from the fixed-income allocation. Market volatility is a key retirement risk that investors face. Alternative strategies may help enhance portfolio outcomes and may increase investors likelihood of successfully achieving their retirement goals and sustaining their lifestyle to and through retirement. 9

10 PRINCIPAL GLOBAL MULTI-STRATEGY FUND Implementing Alternative ALTERNATIVE STRATEGIES CAN alternative strategies to a balanced portfolio during COMPLEMENT TRADITIONAL PORTFOLIOS the past ten years, which provided investors with a A diversified portfolio that seeks to optimally significant down market. combines a number of alternative investment In the hypothetical illustration below, adding strategies designed to reduce market risk can be used alternative strategies to a traditional portfolio to enhance traditional asset allocation. The chart achieved a substantial reduction of risk with an Alternative below shows the effect Can of adding Reduce an Risk allocation and of Enhance Return Alternative Can Reduce Risk and Enhance Return increasing allocation. ternative Can Reduce Risk and Enhance Return tive Can Reduce Risk and Enhance Return Portfolio Return (%) Portfolio Return (%) Portfolio Portfolio Return Return (%) (%) A Multi-Strategy Approach Using Alternatives May Reduce Risk Alternative Can Reduce Risk and Enhance Return % Alternative % Return, % Risk Risk (%) (%) Risk (%) Source: Zephyr StyleADVISOR. Calculations are Risk (%) Risk based (%) on historical index performance. The example is for illustration purposes only and does not reflect any mutual funds or indices. Does not represent performance 7.0 of any Principal Fund % 30% 28% 35% 8% 20% 32% 40% 20% Alternative 5.72% Return, 8.47% Risk 9% 10% 36% 10% Alternative 5.96% Return, 8.89% Risk % 10% 40% 50% 0% Alternative 6.20% Return, 9.34% Risk 10-Year Period Ending 12/31/2015 U.S. Stocks U.S. Bonds Alternative International Stocks Past performance does not guarantee future results. An investor cannot invest directly into an index. Index performance shown does not reflect the Fund s actual benchmark, which is the HFRI Fund-of-Funds Composite Index. Risk is measured by standard deviation. 6.5 The traditional asset classes represented here are U.S. Stocks, represented by S&P 500; International Stocks, represented by MSCI EAFE and U.S. Bonds, represented by Barclays Capital U.S. Aggregate. Alternatives is represented by 40% Hedge Fund Research, Inc. (HFRI) Equity Hedge (Total) Index; 25% HFRI Macro (Total) Index; 20% HFRI ED: Distressed/Restructuring Index; 5% HFRI EH: Equity Market Neutral Index; 5% HFRI Event-Driven (Total) Index; 5% HFRI RV: Fixed Income-Corporate Index. Alternative strategies utilize alternative 6.0 investment strategies such as arbitrage, leverage, derivatives, and shorting securities in addition to traditional investments. Investment risk may be magnified with the use of these alternative strategies. In addition, securities such as bonds, equities, commodities, international and emerging market securities, and currencies are used to implement the investment strategy. These investments are subject to risks associated with market and interest rate movements. The investment is considered non-diversified which may make it more susceptible to price volatility 5.5if the objective is not met. Due to the nature of the investment process, investors should not expect significant outperformance during market rallies. To illustrate the multi-strategy approach, the chart above shows alternative strategies as represented by a hypothetical blend of index performance. Outcomes would have varied, and may have been less favorable, had different percentages of these indices been used for this illustration. 10

11 Start the Conversation SPEAK WITH YOUR FINANCIAL PROFESSIONAL Discussing alternative strategies with your financial professional can help you understand the role these strategies can play in your portfolio. The table below describes how you may benefit from alternative strategies. Potential Investors Investors wanting to utilize alternative strategies but who can t meet the minimum investment or who may not be comfortable with a traditional hedge fund structure Investors searching for opportunities to generate returns with less volatility Investors seeking to maintain a balanced portfolio, but reduce some market volatility Investors desiring some degree of downside protection to volatile markets TRANSFORMING CHALLENGES INTO OPPORTUNITIES The Principal Global Multi-Strategy Fund takes a multi-manager, multi-strategy approach to alternative strategies in order to deliver the potential for performance and downside protection across market cycles. Making these strategies available within a mutual fund brings the benefits of alternatives to all investors. The Fund offers: An innovative solution that may provide downside protection. Management and oversight by experienced professionals. Wide diversification potential of alternative investments. Absolute performance potential. THE RIGHT TIME FOR ALTERNATIVE STRATEGIES Investors have experienced a bumpy ride over the past decade due to challenging markets, disastrous events, and global economic conditions. Ask your financial professional about the benefits and risks of using alternative strategies, and how managing downside risk may enable you to be more successful in reaching your long-term financial goals. 11

12 PRINCIPAL GLOBAL MULTI-STRATEGY FUND PERFORMANCE (as of 03/31/2016) Average Annual Total Returns Year-To-Date 1-Year 3-Year Since Inception (10/24/2011) Expense Ratio (Gross/Net) Class A (Excluding Sales Charge) -0.29% -3.35% 1.81% 2.70% 2.43% / 1.99% Class A (Including Sales Charge) -4.03% -6.94% 0.52% 1.82% 2.43% / 1.99% Class I -0.19% -3.04% 2.18% 3.06% 2.11% / 1.67% Hedge Fund Research, Inc. Fund-of-Funds Composite Index 3, % -5.11% 1.97% Returns represent past performance and do not guarantee future results. Share price, principal value, and return will vary and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. For the most recent month-end performance, visit principalfunds.com. A maximum sales charge of 3.75% may apply for Class A shares. Performance reflects this maximum sales charge when a sales charge is indicated. Performance assumes reinvestment of all dividends and capital gains. Where gross and net expense ratios differ, Principal Management Corporation has contractually agreed to limit the investment option s expense. Expense limits apply through 12/30/2016. Returns displayed are based on net total investment expense. 3 The Hedge Fund Research, Inc. Fund of Funds Composite Index is an equal-weighted index composed of over 650 constituent fund of funds, including both domestic and offshore funds. 4 Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index. % TOTAL MONTHLY RETURN FOR SHARE CLASS A (Excluding Sales Charge) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD % TOTAL MONTHLY RETURN FOR SHARE CLASS I Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD This Fund uses alternative strategies such as arbitrage, leverage, derivatives and shorting securities. Long/short investing does not guarantee lower risk associated with equity markets, capitalization, sector swings or other factors and may have higher turnover with additional tax consequences. Short selling risks include investment loss and added costs to cover short positions. International investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Use of alternative strategies may magnify risk. Securities such as bonds, equities, international and emerging market securities, and currencies are subject to risks associated with market and interest rate movements. The Fund is non-diversified and may be more susceptible to price volatility if the Fund does not meet its objective. Investors should not expect significant outperformance during market rallies. Additional risks are included in the Fund s prospectus. Asset allocation and diversification do not ensure a profit or protect against a loss. Class I & P shares are available only to eligible investors including, but not limited to, various institutional/platform, certain mutual fund wrap or asset allocation program investors. Carefully consider a fund s objectives, risks, charges, and expenses. Contact your financial professional or visit principalfunds.com for a prospectus, or summary prospectus if available, containing this and other information. Please read it carefully before investing. Investing involves risk, including possible loss of principal. Principal Funds are distributed by Principal Funds Distributor, Inc Principal Financial Services, Inc. MM /2016 t wd