Quarterly Commentary

Transcription

1 First Quarter 2016 Quarterly Commentary Ticker Inv Manager or Sub-Advisor Benchmark Morningstar Category Investment Objective PLLAX Principal Global Investors Russell 2000 Index Small Blend Small Company Economic Overview The global economy seems to be in the midst of a mild cyclical upturn after several quarters of slumping growth, falling profits, and credit stress. With the dollar off its peak and oil prices up from the lows, the extreme market volatility from early this year has diminished; markets have rebounded and the manufacturing sector seems to have found a bottom. In the U.S., job growth stayed consistently strong this quarter, with the March payroll report adding 215,000 plus job gains, a robust first-quarter average job growth of 209,000, and the unemployment rate up to 5.0%.1 Even as other economic indicators weakened, retail sales, durable goods orders, and construction spending suggest first-quarter GDP growth is less than 1%, with revisions likely boosted to 1.5% last quarter and 2.0% for the year. 2 Recent comments from Federal Reserve Chair Janet Yellen reaffirmed the ultra-easy and super slow pace of future rate hikes.3 The economy in China appears to have stopped weakening after 18 months of gradual stimulus and monetary easing. China's purchasing manager indices (PMIs) all grew higher in March, with official PMI at a nine-month high of 50.2, 4 while the Caixin PMI, which focuses on small and mid-sized companies, was up 1.7 points to The services PMI also picked up over a point to Price pressures are easing, a real positive after four plus years of deflation. 7 House prices are still rising across the country, housing starts are up and home sales are growing. 8 Despite the recent terror attacks and immigration problems, the greater European economy is enjoying the cyclical upturn. March PMIs grew more than expected, bringing the composite Eurozone PMI up to 53.7, consistent with almost 2% growth. The German PMI was flat at a robust level, while the French composite was up 1.8 points. Economic sentiment fell some, but from elevated levels. Retail sales stayed relatively healthy as household spending is leading the recovery. 9 Unemployment fell to 10.3% in February, and while still very high, that's the lowest since Loan demand is slowly rising, with lending standards easing and the central bank offering loans to banks that relend to the private sector at incredibly easy terms. One large economic area not yet enjoying the upturn is Japan. Its economy shrank in the fourth quarter and recent data hasn't offered much rebound hope. The closely watched Tankan confidence index for large manufacturers dropped from 12 to 6, the largest quarterly decline since the end of The Nikkei manufacturing PMI for March declined to 49.1 with new export orders at the lowest since January The labor market is still a bright spot with a very low jobless rate of 3.3%. With the huge market volatility in February, the yen rose and at the end of March was up over 10% against the dollar since bottoming last summer. Strong currency and poor data weighed on the Topix Index, down nearly 13% in the first quarter. 12 Small/Mid U.S. Equity U.S. mid-cap equities were up 2.2% for the quarter, outperforming U.S. small-caps (down 1.5%) and U.S. large-caps (up 1.0%). U.S. mid-caps and small-caps fell behind international equities in emerging markets, but beat international equities in developed markets (which returned 5.7% and -3.0%, respectively). 13 Within value, small-cap equities fell behind mid-caps, due primarily to stronger performance from stocks held in the industrial and energy sectors within the Russell MidCap Value Index (up 3.92%) compared to the Russell 2000 Value Index (up 1.70%). Similar to value, within growth, small-cap equities underperformed mid-caps, where better results from specific stocks in the health care and consumer staples sectors, along with a smaller weight to the health care sector, helped the Russell MidCap Growth Index (up 0.58%) versus the Russell 2000 Growth Index (down 4.68%). 14 Within mid-caps, value beat growth, due in large part to a larger weighting to the utilities sector within the Russell Mid-Cap Value Index, along with better performing stocks in the information technology sector. Similar to mid-caps, small-cap value outperformed small-cap growth. The majority of outperformance for the Russell 2000 Value Index was due to the stocks in the utilities sector performing better versus the utility stocks in the Russell 2000 Growth Index, as well as a smaller weighting in health care and a larger weighting in financials in the Russell 2000 Value Index versus the Russell 2000 Growth Index. 14 principalfunds.com Not FDIC or NCUA insured May lose value Not a deposit No bank or credit union guarantee Not insured by any Federal government agency Page 1

2 Performance Contributors During last quarter: Positive Contributors Allocation to Highwoods Properties, a real estate investment trust (REIT) that owns and manages primarily office properties in the southeastern U.S., contributed as economic strength in core markets allowed for continued improvement in leasing activity. Mid-America Apartment Communities, a REIT that owns and operates apartment communities in the Sunbelt states, contributed due to improved rental rates and occupancy. Allocation to Office Depot, a leading retailer of office products, contributed as a result of renewed optimism regarding the pending merger with Staples. During last 12 months: Allocation to CubeSmart, an operator of self-storage facilities contributed due to the company's higher occupancy and rental rates, driven by further industry consolidation and favorable supply/demand balance. Allocation to Mid-America Apartment Communities, a real estate investment trust (REIT) that owns and operates apartment communities in Sunbelt states, contributed due improved rental rates and occupancy. PRA Health Sciences, which conducts clinical trials for the biotechnology and pharmaceutical industries, contributed due to continued solid bookings for new business and improved operating margins. During last quarter: Negative Contributors Allocation to ARRIS International, a provider of set-top boxes, modems and other capital equipment to telecommunication and cable service providers, detracted due to news that its recent acquisition of Pace will take longer to accrue than initially expected. Allocation to NetScout Systems detracted as a result of telecom service provider customers slowing orders amid concerns about economic weakness. Allocation to Plantronics, a leading manufacturer of headsets for voice and music, detracted due to sales being negatively impacted by macroeconomic weakness in the energy sector and various international markets, as well as the U.S. dollar strength making products more expensive and less competitive outside the U.S. During last 12 months: Allocation to Qorvo, which manufactures semiconductors and related components for use in wireless devices such as smartphones, detracted due to declined growth expectations for the newest phone release from its largest customer, Apple. Allocation to SUPERVALU, a food retailer and wholesaler, detracted amid concerns that food price deflation would constrain profitability. Allocation to NetScout Systems, which provides software and hardware that monitors and manages network performance for telecom and cable service providers, detracted as a result of investors concerns over the recently closed merger with a large competitor, Tektronix. Changes to the investment option's structure or portfolio: No material changes occurred in the portfolio structure. Page 2

3 Performance Investment results shown represent historical performance and do not guarantee future results. Investment returns and principal values fluctuate with changes in interest rates and other market conditions so the value, when redeemed may be worth more or less than original costs. Current performance may be lower or higher than the performance data shown. The gross fund expense figure does not reflect any waivers or caps on the mutual fund. Performance shown reflects the application of net expenses of the fund. For more performance information, including most recent month-end performance, visit principalfunds.com, or contact your financial representative of The Principal. In situations where the net and gross fund expense figures are different, the investment manager has contractually agreed to limit the investment option's expense. Differences may also be shown due to the investment manager choosing to pay certain expenses that would normally be payable by the fund. The gross fund expense figure does not reflect any waivers or caps on the mutual fund. Performance shown reflects the application of net expenses of the fund. Average Annual Total Returns (%) as of 03/31/2016 QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception SmallCap A Fund (excl. sales charge) SmallCap A Fund (incl. sales charge) Russell 2000 Index Small Blend Category Morningstar Percentile Ranking Total Funds in Category Inception Date 06/28/2005 Ext. Perf. Inc. Date 12/06/2000 Total Inv. Exp Gross 1.28 Total Inv Exp Net 1.28 Waiver Date - Contractual Cap Date - Contingent Deferred Sales Charge 1.00 Maximum Up-front Sales Charge 5.50 Past performance is no guarantee of future results. Market indices have been provided for comparison purposes only. They are unmanaged and do not reflect fees or expenses. Individuals cannot invest directly in an index. These calculated returns reflect the historical performance of the oldest share class of the fund, adjusted to reflect a portion of the fees and expenses of this share class. For time periods prior to inception date of the fund, predecessor performance is reflected. Please see the fund's prospectus for more information on specific expenses, and the fund's most recent shareholder report for actual date of first sale. Expenses are deducted from income earned by the fund. As a result, dividends and investment results will differ for each share class. Page 3

4 Statistics Summary as of 03/31/2016 Risk and Return Statistics Summary Upside/Downside Capture Ratio Alpha Beta R2 Sharpe Info Std # of Months Avg Returns % Benchmark % Ratio Ratio Dev Up Down Up Down Up Down 3 Year 3 Year SmallCap A Fund Russell 2000 Index N/A N/A N/A N/A N/A N/A Year 5 Year SmallCap A Fund Russell 2000 Index N/A N/A N/A N/A N/A N/A Risk and return statistical data is calculated by Morningstar, Inc. Please see Important Notes section for definitions of Risk and Return Statistics. Top Ten Holdings as of 02/29/2016 Security Net Assets (%) Highwoods Properties Inc 2.56 Cooper Tire & Rubber Co 1.94 CubeSmart 1.90 Mid-America Apartment Communities Inc 1.76 Vail Resorts Inc 1.74 Prestige Brands Holdings Inc 1.60 EMCOR Group Inc 1.56 Caleres Inc 1.51 First Industrial Realty Trust Inc 1.49 Rite Aid Corp 1.44 Total % in Top Page 4

5 Manager(s) Start Date Degree Alma Mater Phil Nordhus 05/19/2006 M.B.A. Drake University Brian W. Pattinson 07/20/2011 M.B.A. University of Iowa Fund Strategy The investment seeks long-term growth of capital. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies with small market capitalizations at the time of purchase. For this fund, companies with small market capitalizations are those with market capitalizations within the range of companies comprising the Russell 2000(R) Index (as of December 31, 2015, this range was between approximately $15.0 million and $6.4 billion ). About Principal Global Investors Principal Global Investors - a member of the Principal Financial Group - uses a unified investment philosophy and process that emphasize independent fundamental research and superior stock selection. The firm's capabilities encompass large-, mid-, and small-cap stocks in developed and emerging markets worldwide. Page 5

6 Important Notes Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds. Investors should carefully consider a fund's investment objectives, risks, charges, and expenses prior to investing. A prospectus, or summary prospectus if available, containing this and other information can be obtained by contacting a financial professional, visiting principalfunds.com, or calling Read the prospectus carefully before investing. The value of the investment options will fluctuate so that when redeemed, shares or units may be worth more or less than the original cost. Returns shown for periods of less than one year are not annualized. All returns displayed here are after Total Investment Expense of the investment option. Any operating expenses of a mutual fund or underlying mutual fund that are part of net Total Investment Expense are obtained from the mutual fund's most recent prospectus. The operating expenses shown as part of the Total Investment Expense include voluntary expense limits and fee credit Morningstar, Inc. All Rights Reserved. Part of the mutual fund data contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Formerly known as SmallCap Blend Fund. Small-cap and mid-cap stocks may have additional risks, including greater price volatility. These calculated returns reflect the historical performance of the oldest share class of the fund, adjusted to reflect a portion of the fees and expenses of this share class. For time periods prior to inception date of the fund, predecessor performance is reflected. Please see the fund's prospectus for more information on specific expenses, and the fund's most recent shareholder report for actual date of first sale. Expenses are deducted from income earned by the fund. As a result, dividends and investment results will differ for each share class. Russell 2000 Index consists of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the Russell 3000 total market capitalization. Extended Performance Inception Date (Ext. Perf. Inc. Date) - Inception date of the oldest share class of the fund, or underlying fund of the Separate Account. About Principal Financial Group The Principal Financial Group (The Principal ) is a leading global financial company offering businesses, individuals and institutional clients a wide range of financial products and services. Our range of products and services includes retirement solutions, life and health insurance, wellness programs, and investment and banking products through our diverse family of financial services companies and national network of financial professionals. Page 6

7 Important Notes Risk and Return Statistics: Alpha - The difference between an investment's actual returns and its expected performance, given its level of risk (as measured by beta). Beta - An investment's sensitivity to market movements. R-squared - Ranges from 0 to 100 and reveals how closely an investment's returns track those of a benchmark index. Standard Deviation - Measures how much an investment's returns are likely to fluctuate. Sharpe Ratio - Measures how an investment balances risks and rewards. The higher the Sharpe ratio, the better the investment's historical risk-adjusted performance. Information Ratio - A risk-adjusted measure commonly used to evaluate an active manager's involvement skill. It's defined as the manager's excess return divided by the variability or standard deviation of the excess return. Up-Market Capture Ratio - A statistical measure of an investment option's performance relative to a comparative index in months in which that index has risen. An up-market capture ratio of greater than 100 would indicate that the investment option performed better than the comparative index during months in which the index had risen over a specified time period. Down-Market Capture Ratio - A statistical measure of an investment option's performance relative to a comparative index in months in which that index has fallen. A down-market capture ratio of greater than 100 would indicate that the investment option performed worse than the comparative index during months in which the index had fallen over a specified time period. 1Bureau of Labor Statistics, 4/1/16 2Bureau of Economic Analysis, PGI Internal estimates based on historical statistics 3Associated Press, 2/10/16 4Bloomberg, 3/31/16 principalfunds.com Principal Life Insurance Company, Des Moines, Iowa , principal.com 03/31/2016 #t dk Page 7

8 Important Notes 5Market Watch, 4/1/16 6The Fiscal Times, 3/ 31/16 7CNBC, 3/31/16 8Bloomberg, 3/17/16 9Market Watch, 3/22/16 10Financial Times, 4/4/16 11Associated Press, 3/31/16 12BBC,3/29/16 principalfunds.com Principal Life Insurance Company, Des Moines, Iowa , principal.com 03/31/2016 #t dk Page 8

9 Important Notes 13 U.S. mid-cap stocks: Russell Midcap Index; U.S. small-cap stocks: Russell 2000 Index; U.S. large-cap stocks: Russell 1000 Index; international developed markets: MSCI EAFE Index; international emerging markets: MSCI Emerging Market Index 14U.S. mid-cap growth stocks: Russell Midcap Growth Index; U.S. mid-cap value stocks: Russell Midcap Value Index; U.S. small-cap growth stocks: Russell 2000 Growth Index; U.S. small-cap value stocks: Russell 2000 Value Index This report is not complete unless all pages, as noted below, are included. principalfunds.com Principal Life Insurance Company, Des Moines, Iowa , principal.com 03/31/2016 #t dk Page 9