Quarterly Commentary

Transcription

1 Third Quarter 2015 Quarterly Commentary Ticker Inv Manager or Sub-Advisor Benchmark Morningstar Category Investment Objective PSSNX Principal Global Investors Standard & Poor's 600 Stock Index Small Blend Small Company Economic Overview The anticipated September rate raise by the Federal Reserve (the Fed) was at the center of third quarter economic commentary and debate. While the decision was to wait for further economic information, Janet Yellen indicated on September 24th that she was in favor of a rate hike later this year. 1 The argument over the timing of a rate boost largely centers on two key measures of U.S. economic growth: inflation and unemployment. The Fed's dual mandate to keep inflation low and to maintain full employment appears to be conceptually competing. Full employment can tend to boost wages, and therefore the underlying rate of inflation. Solely considering the 5.1% unemployment rate at the end of September, which is at the low end of the Fed's estimations for non-inflationary rate of inflation, suggests an urgency to raise rates.2 Waiting until inflation is actually rising would result in the Fed having to more aggressively raise rates based on the theory that interest rates have a lagging impact on economic growth. The counter argument is that inflation has shown no temptation to rise, and, with the decline in oil prices over the past year, the Consumer Price Index is close to zero, rising only 0.2% year over year. 2 A strong dollar is also a factor in keeping inflation low. Once those factors begin to diminish, inflation should begin to gradually rise, according to Ms. Yellen. 1 The health of international economies also has a large influence on the value of the U.S. dollar and weighs on import prices. While growth in the U.S. continues, with its most recent report showing gross domestic product (GDP) at 3.9%, the same cannot be said of overseas economies. 2 Most dramatically, the Chinese economy has shown a deceleration of growth, far below its target of 7%. In response, the Chinese Central Bank moved to devalue the Yuan. The People's Bank of China called the 2% devaluation a one-time fix, though the market reacted as if this was a beginning of a more protracted currency move. The political implications were obvious to the markets, and it began a world-wide sell off of equities. For the quarter, the S&P 500 fell 6.4% bringing the return for 2015 down to a loss of 5.3%. 3 Globally, investors were hit harder, as the MSCI world index, excluding the U.S., fell over 10.5%. 4 This severe reaction was also fueled by European growth, which continues to limp along. The Volkswagon scandal at the end of September also created a huge gap in the strongest economy in Europe. While the Fed concerns itself principally with the U.S. economy, the implications of rising rates on the rest of the world can't be completely ignored. In fact, Christine Lagarde, CEO of the International Monetary Fund suggested that the Fed not rush its decision to raise interest rates due in part to concerns about the impact on emerging market economies, many of whom are languishing already.5 Small/Mid U.S. Equity U.S. mid-cap equities were down 8.01% for the quarter, outperforming U.S. small-caps (down 11.92%) and underperforming U.S. large-caps (down 6.83%). U.S. mid-caps outperformed international equities in developed markets and in emerging markets (which returned % and %, respectively), while U.S. small-caps underperformed international equities in developed markets but outpaced international equities in emerging markets. 6 Within value, small-cap equities fell behind mid-caps, due primarily to stronger performance from stocks held in the utilities and consumer discretionary sectors within the Russell MidCap Value Index (down 8.04%) compared to the Russell 2000 Value Index (down 10.73%). Within growth, again mid-cap equities outperformed small-caps, where better results from specific stocks in the consumer discretionary and industrial sectors, along with a smaller weight to the health care sector, helped mid-caps in the Russell MidCap Growth Index (down 7.99%) versus the stocks in the Russell 2000 Growth Index (down 13.06%). 7 Within mid-caps, growth slightly beat value, due in large part to a smaller weighting to the energy sector (the worst performing sector in both indices) within the Russell Mid-Cap Growth Index, along with better performing stocks in the industrial sector. Unlike mid-caps, small-cap value outperformed small-cap growth. The majority of outperformance for the Russell 2000 Value Index was due to a larger weighting in the financial sector and smaller weighting to the health care sector versus the Russell 2000 Growth Index.7 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 Small-Cap S&P 600 Index was in line with the S&P 600 index. One of the ten economic sectors in the index posted positive returns, with the consumer staples and utilities sectors providing the best returns. Central Garden & Pet Co., ABIOMED, Inc., and IPC Healthcare Inc. contributed. During last 12 months: Small-Cap S&P 600 Index was in line with the S&P 600 Index. Seven of the ten economic sectors in the index posted positive returns, with the utilities and healthcare sectors providing the largest positive returns. ABIOMED, Inc., Dycom Industries, Inc., and Universal Insurance Holdings contributed. During last quarter: Negative Contributors The materials and energy sectors posted the worst returns. Approach Resources Inc., Bonanza Creek Energy, Inc., and Penn Virginia Corp. detracted. During last 12 months: The materials and energy sectors recorded the worst returns. Swift Energy Co., GT Advanced Technologies Inc., and Penn Virginia Corp detracted. 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. For more performance information, including most recent month-end performance, visit contact your representative of the Principal Financial Group, or contact our participant contact center at 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 09/30/2015 QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception SmallCap S&P 600 Index R2 Fund Standard & Poor's 600 Stock Index Small Blend Category Morningstar Percentile Ranking Total Funds in Category Inception Date 12/06/2000 Ext. Perf. Inc. Date 12/06/2000 Total Inv. Exp Gross 0.93 Total Inv Exp Net 0.93 Waiver Date - Contractual Cap Date - 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. Page 3

4 Statistics Summary as of 09/30/2015 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 S&P 600 Index R2 Fund Standard & Poor's 600 Stock Index N/A N/A N/A N/A N/A N/A Year 5 Year SmallCap S&P 600 Index R2 Fund Standard & Poor's 600 Stock 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 08/31/2015 Security Net Assets (%) Russell 2000 Mini Sep Toro Co 0.59 Amsurg Corp 0.57 Abiomed Inc 0.54 MarketAxess Holdings Inc 0.51 j2 Global Inc 0.48 Curtiss-Wright Corp 0.47 Microsemi Corp 0.46 Piedmont Natural Gas Co 0.46 Pool Corp 0.46 Total % in Top Page 4

5 Manager(s) Start Date Degree Alma Mater Thomas L. Kruchten 03/01/2011 B.A. University of Northern Iowa Investment Strategy The investment seeks long-term growth of capital. The fund normally invests at least 80% of its net assets, plus any borrowings for investment purposes, in equity securities of companies that compose the Standard & Poor's ("S&P") SmallCap 600 Index at the time of each purchase. The index is designed to represent U.S. equities with risk/return characteristics of the small cap universe. The fund invests in index futures and equity ETFs on a daily basis to gain exposure to the index in an effort to minimize tracking error relative to the benchmark. About Principal Global Investors Principal Global Investors - a member of the Principal Financial Group - uses a unified investment philosophy and process that seeks to 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 Insurance products and plan administrative services, if applicable, are provided by Principal Life Insurance Company. Principal mutual funds are part of the Principal Funds, Inc. series. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities sold or services offered by a Princor Registered Representative are offered through Princor Financial Services Corp, , member SIPC and/or independent brokers/dealers. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group, Des Moines, IA Certain investment options may not be available in all states or U.S. commonwealths. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation, and Principal Funds, Inc. are collectively referred to as Principal Funds. Investors should carefully consider a mutual 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 principal.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. Small-cap and mid-cap investment options are subject to more fluctuation in value and may have additional risks than other investment options with stocks of larger, more stable companies. Each index based investment option is invested in the stocks or bonds of the index it tracks. Performance of indexes reflects the unmanaged results for the market segment the selected stocks or bonds represent. There is no assurance an index based investment option will match the performance of the index tracked. 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 S&P SmallCap 600 is a trademark of The McGraw-Hill Companies, Inc. and has been licensed for use by Principal Life Insurance Company and Principal Management Corporation. The product is not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the product. Standard & Poor's 600 Stock Index is a small cap index that consists of 600 domestic stocks chosen for market size, liquidity, and industry group representation. 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. 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. 1The Wall Street Journal Principal Life Insurance Company, Des Moines, Iowa , principal.com 09/2015 #t oq Page 7

8 Important Notes 2St. Louis Federal Reserve 3Factset 4MSCI 5Rueters 6 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 7 U.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. Principal Life Insurance Company, Des Moines, Iowa , principal.com 09/2015 #t oq Page 8