First Quarter 2016 Quarterly Commentary Ticker Inv Manager or Sub-Advisor Benchmark Morningstar Category Investment Objective CMNCX Edge Asset Management, Inc. Russell 3000 Index Large Blend Growth 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 49.7.5 The services PMI also picked up over a point to 53.8. 6 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 2011. 10 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 2012. 11 The Nikkei manufacturing PMI for March declined to 49.1 with new export orders at the lowest since January 2013.6 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 Large U.S. Equity U.S. large-cap equities returned 1.0% during the quarter, outperforming U.S. small-caps, but underperforming U.S. mid-caps (which returned -1.5% and 2.2%, respectively) as well as beating international equities in developed countries, but falling behind international equities in emerging markets (which respectively delivered -3.0% and 5.7%).13 From a style perspective, large-cap value equities outpaced large-cap growth equities (as measured by the Russell 1000 Value Index, which returned 1.64%, and the Russell 1000 Growth Index, which returned 0.74%). Large-cap value equities' outperformance was driven by the health care, utilities, and energy sectors. The smaller weighting to the health care sector and the larger weighting to the utilities sector in the Russell 1000 Value Index versus the Russell 1000 Growth Index contributed to the outperformance during the period. Within the health care and energy sectors, the stocks held within the Russell 1000 Value Index performed better than the stocks held within the Russell 1000 Growth Index. 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
Performance Contributors During last quarter: Positive Contributors Allocation to Xcel Energy (XEL) was a top contributor, marginally outperforming the high-returning utilities sector. Lack of allocation to Bank of America (BAC) contributed to relative performance, as the large diversified bank faced a challenging environment characterized by low global growth, slower than expected tightening by the Federal Reserve, and heightened market volatility. Allocation to Verizon Communications (VZ) contributed. During last 12 months: Allocation to NIKE, Inc. (NKE), a top consumer discretionary stock, contributed due to strong earnings growth with strong sales globally. Allocation to Starbucks Corp. (SBUX) contributed as the company continued to execute well operationally and financially. Allocation to Adobe (ADBE) contributed due to management's execution on its strategic transition to the cloud; subscription growth; and an increase in recurring revenue. During last quarter: Negative Contributors Allocation to McKesson Corp (MCK) detracted due to customer losses from mergers & acquisitions (M&A) in the industry and margin pressure resulting from weaker generic drug pricing. Allocation to Perrigo (PRGO) detracted, driven by underperformance from its branded consumer health care business. Lack of allocation to AT&T hurt relative performance; despite performing in line with its sector, not owning the benchmark's largest-weighted constituent in the outperforming telecommunication services sector detracted. During last 12 months: Allocation to McKesson Corp (MCK) detracted as it faced customer losses due to mergers & acquisitions (M&A) in the industry and margin pressure resulting from weaker generic drug pricing. Allocation to exploration & production company Devon Energy (DVN) detracted as depressed oil and gas prices challenged profitability across the energy sector. Being underweight to Facebook (FB) for most of the period detracted. Changes to the investment option's structure or portfolio: No material changes occurred in the portfolio structure. Page 2
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 Capital Appreciation Fund (C) (excl. sales charge) Capital Appreciation Fund (C) (incl. sales charge) QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception 0.44 0.44-0.15 10.46 9.49 5.89 11.16-0.56-0.56-1.10 10.46 9.49 5.89 11.16 Russell 3000 Index 0.97 0.97-0.34 11.15 11.01 6.90 - Large Blend Category 0.30 0.30-1.96 9.62 9.61 5.98 - Morningstar Percentile Ranking - - 35 42 59 56 - Total Funds in Category 1655 1655 1573 1398 1225 893 - Inception Date 03/01/2002 Ext. Perf. Inc. Date 11/24/1986 Total Inv. Exp Gross 1.65 Total Inv Exp Net 1.65 Waiver Date - Contractual Cap Date - Contingent Deferred Sales Charge Maximum Up-front Sales Charge 1.00 - 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
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 Capital Appreciation Fund (C) -0.29 0.97 98.51 0.94-0.48 11.27 22 14 2.99-2.42 97.80 101.44 Russell 3000 Index N/A N/A N/A N/A N/A N/A 22 14 3.06-2.39 100.00 100.00 5 Year 5 Year Capital Appreciation Fund (C) -1.06 0.96 98.65 0.79-1.06 12.23 36 24 2.98-2.68 93.80 100.60 Russell 3000 Index N/A N/A N/A N/A N/A N/A 37 23 3.18-2.66 100.00 100.00 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 (%) Apple Inc 3.48 Microsoft Corp 2.38 Verizon Communications Inc 2.06 Wells Fargo & Co 1.90 Johnson & Johnson 1.85 Exxon Mobil Corporation 1.59 Facebook Inc A 1.53 Alphabet Inc A 1.47 CVS Health Corp 1.38 Nike Inc B 1.37 Total % in Top 10 19.00 Page 4
Manager(s) Start Date Degree Alma Mater Daniel R. Coleman 05/19/2010 B.A. University of Washington Theodore Jayne 09/30/2015 B.A. Harvard University Fund Strategy The investment seeks to provide long-term growth of capital. The fund invests primarily in equity securities of companies with any market capitalization, but has a greater exposure to large market capitalization companies than small or medium market capitalization companies. It invests in equity securities with value and/or growth characteristics and constructs an investment portfolio that has a "blend" of equity securities with these characteristics. Investing in value equity securities is an investment strategy that emphasizes buying equity securities that appear to be undervalued. About Edge Asset Management, Inc. Edge Asset Management (Edge) is a leading equity, fixed income and asset allocation manager. The firm is headquartered in Seattle, Washington with an office in Irvine, California.Edge remains at the forefront of innovation with a heritage dating back to 1939, when it launched one of the first 50 mutual funds in the U.S. The firm also introduced one of the first target risk series of funds in the industry. Acquired by Principal Management Corporation (a member of the Principal Financial Group ) on December 31, 2006, Edge enjoys the focus of a boutique firm while leveraging the resources of a leading global organization. Page 5
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 800-222-5852. 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. 2016 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 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. The Russell 3000 Index is constructed to provide a comprehensive barometer of the broad market and accounts for nearly 98% of the total value of all equity traded on the U.S. exchanges. It measures the stocks that are also members of either the Russell 1000 or the Russell 2000 indexes. 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
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 50392-0001, principal.com 03/31/2016 #t16040102dk Page 7
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 13U.S. large-cap equities: Russell 1000 Index; U.S. mid-cap equities: Russell Midcap Index; U.S. small-cap equities: Russell 2000 Index; international emerging markets: MSCI Emerging Markets Index; international developed markets: MSCI EAFE Index principalfunds.com Principal Life Insurance Company, Des Moines, Iowa 50392-0001, principal.com 03/31/2016 #t16040102dk Page 8
Important Notes This report is not complete unless all pages, as noted below, are included. principalfunds.com Principal Life Insurance Company, Des Moines, Iowa 50392-0001, principal.com 03/31/2016 #t16040102dk Page 9