Manager Profile


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Manager Profile

  1. 1. Global Diversified Income Portfolio Manager Profile Co-Sub-Advised by: and As part of the ongoing Principal Due Diligence Programsm, the Investment Services Department of Principal Life Insurance Company has created this Manager Profile. With this profile, we hope to provide you with an in-depth review of the qualitative factors that led to the selection and inclusion of this investment option in our line-up. Read further to obtain additional information relating to each sub-advisor’s organization, investment philosophy and process, and resources that define the investment strategy management of the Principal Global Diversified Income Portfolio.
  2. 2. Organization Principal Global Investors currently manages $41.0 billion in global equity assets as of December 31, 2009. The firm’s capabilities encompass large-cap, mid-cap and small-cap stocks in developed and emerging-equity markets worldwide. Principal Global Investors draws on a unified investment philosophy focused on independent fundamental research and superior stock selection. Principal Global Investors is a member of the Principal Financial Group®. Philosophy and process The investment philosophy of Principal Global Investors is based on the belief that stock selection is the most reliable and repeatable source of outperformance, or alpha generation. The firm believes that disciplined portfolio construction and the avoidance of unrewarded systematic risks is the key to consistency, or alpha preservation. The portfolio construction process employs a combination of systematically evaluating company fundamentals and in- depth original research. Principal Global Investors believes that superior stocks are characterized by companies with improving and sustainable business fundamentals, rising investor expectations and attractive relative valuations. To maximize global information advantages, Principal Global Investors employs a unique and powerful research process combining fundamental insights with systematic disciplines. The firm’s integrated Global Research Platform serves as a cornerstone of the research process. The Global Research Platform (GRP) contains complex stock evaluation tools providing a highly customized screening framework based on real time breadth of coverage and peer rankings encompassing more than 10,000 companies located around the world. These inputs and models include proprietary analysis and inputs as well as inputs from many of the world's most sophisticated and highly specialized independent research partners. As an information management tool, the GRP helps to make efficient use of analysts’ time as they focus on a condensed list of top ranked stocks, in which to conduct in-depth company due diligence. The global research analyst team is organized primarily by sector specialization and further by region. The analysts are focused on researching the top ranked stocks within their universe, consistent with the investment philosophy. The insights of the analysts are essential to understanding the business fundamentals at a company-specific and industry level. This forward-looking professional judgment includes qualitative considerations such as intangibles, event-driven opportunities, management credibility and the quality and transparency of company financial reporting. Data integrity and other drivers of quantitative ranks are evaluated with a sample list below: o Positive Fundamental Change – Analyze revenues, sales, operating margins, earnings potential, opportunities for positive surprise or continuation of relative improvement. Assess sustainability and identify potential risks. Review financial statements to assess funding, liquidity, capital risks that could impact sustainability. o Rising Investor Expectations – Analyze consensus expectations and assumptions. Review divergent views. Assess catalysts for positive/negative surprise and the timing of catalysts. Evaluate expectations and consider earnings estimate revision trends. o Attractive Relative Valuation – Assess attractiveness of relative valuation and evaluate valuation relative to expectations, peer group, history, and other top ranking competitors.
  3. 3. All portfolios are broadly diversified and aligned with characteristics similar to the benchmark. The firm’s approach is intended to provide consistency in style, while isolating stock selection as the primary driver of relative performance over time. Resources Principal Global Investors’ equity investment staff of 79 experienced professionals includes portfolio managers, research analysts, quantitative specialists, traders and associates. More than half of the firm’s professionals are dedicated to original company/industry research. The work of the analysts is free of the conflicts associated with investment banking and brokerage influences.
  4. 4. Organization Principal Global Investors’ dedicated real estate group, Principal Real Estate Investors, manages $33 billion in commercial real estate assets as of December 31, 2009. The firm’s capabilities include commercial mortgage-backed securities, real estate equity securities and a broad range of private-market real estate equity and debt alternatives. Principal Real Estate Investors is the fourth largest institutional real estate manager in the United States based on tax-exempt assets under management1. Philosophy and process Principal Real Estate Investors’ real estate securities portfolios are grounded in the view that equity investments represent long-term ownership stakes in operating businesses. The firm’s investment philosophy is based on the basic premise that gaps arise between stock market prices and long-term economic worth. In-depth fundamental research is used to identify these gaps and generate excess returns over time. Portfolio construction is primarily a bottom-up process, emphasizing fundamental research and individual stock selection. Principal Real Estate Investors’ depth of resources and experience in commercial real estate finance and investment provides input on asset quality, management caliber and market conditions. Principal Real Estate Investors also benefits from the public market equity research and trading efforts of Principal Global Investors. The investment team draws upon a variety of investment methods and tools within each region. However, they all share a common investment philosophy based on the following concepts: Superior stock selection is the key to superior returns; integrated fundamental research is the key to stock selection; and, disciplined portfolio construction is the key to return consistency. These concepts are implemented through regionally-integrated teams of portfolio managers and analysts and a strong reliance on Principal Global Investor’s Global Research Platform. The latter strategy has been utilized by Principal Global Investors in a variety of equity mandates. Principal Global Investor’s international equity analysts invest in REITs for the firm’s diversified international portfolios, and their insights are also available to Principal Real Estate Investors. Finally, Principal Real Estate Investors has introduced new portfolio management and risk-control tools to provide the team with up-to-date and in-depth evaluations of the portfolio’s risk characteristics. Resources The greatest strengths of Principal Real Estate Investors are its experienced staff and depth of resources. The company employs 167 real estate investment professionals based in the U.S., Australia and the U.K. These professionals are supported by a large, diverse staff of specialized real estate administration and operations personnel who provide in-depth coverage of over 60 metropolitan property markets. The company’s capabilities include a full range of private equity opportunities, ranging from opportunistic property development and redevelopment to conservative core strategies emphasizing stabilized, net-leased investments.
  5. 5. Organization Spectrum Asset Management offers specialized expertise in the management of preferred securities. Spectrum Asset Management is an affiliate of Principal Global Investors, with $9.2 billion in assets under management as of December 31, 2009. The firm was founded in 1987 and is based in Stamford, Conn. Spectrum's clients include insurance companies, corporations, retirement plans, charitable trusts and financial institutions in the United States and abroad. Philosophy and process Spectrum Asset Management’s specialized approach in the management of preferred securities provides a prudent alternative for clients who seek diversification opportunities and attractive total rates of return relative to traditional fixed-income securities, such as corporate, asset-backed and government securities. Its approach is well suited to clients seeking lower volatility and a higher-quality alternative to high-yield corporate bonds. Spectrum’s success is the result of capitalizing on inefficiencies found in the preferred market while emphasizing dividend yields of hybrid preferred securities, which are generally among the highest-yielding investment-grade securities in the U.S. capital markets. Spectrum’s intermediate-duration strategy emphasizes a rigorous credit approach to identifying superior investment alternatives. Primary emphasis is placed on investment-grade hybrid preferred securities offering attractive risk- adjusted yield premiums. Macroeconomic analysis is conducted to identify those economic sectors that are the most attractive in the near- and long-term future. Spectrum’s research efforts are supplemented by direct access to rating agency services/industry analysts at major investment banks and the extensive credit research capabilities of Principal Global Investors. Attractive issues reflect credit ratings that are steady or improving and offer a premium yield given the ratings and credit trends relative to other preferred securities. Features such as call protection, subordination or option-adjusted spreads are assessed to ensure sufficient yield premium to justify their inclusion in the portfolio. Portfolio construction results in a well-diversified selection of utility, financial and industrial securities. When market conditions warrant, the portfolio may be hedged to manage interest-rate risk to a targeted duration. Spectrum’s hedges frequently utilize liquid CBOT-listed Treasury options and futures. The portfolio holds 275 to 400 separate issues with an average quality rating of BBB+. Annual turnover generally ranges between 50% and 80%. Resources Spectrum’s proprietary research is supplemented by direct access to rating agency services, industry analysts at major investment banks and the extensive research resources of Principal Global Investors. Research conducted by Principal Global Investors’ core group of 18 credit analysts makes a unique contribution to Spectrum’s preferred securities research by providing in-depth coverage of over 800 major bond issues. Their analysis of issuers is made available to the preferred securities research team via the internally developed, real-time bond information tracking system at Principal Global Investors.
  6. 6. Organization Guggenheim Investment Management, LLC (“GIM”) was founded in 2001, to manage high-yield corporate bond and bank loan credit strategies. As of December 31, 2009, GIM manages and sub-advises approximately $15 billion for institutional clients in separately managed accounts, structured vehicles and commingled funds. Most of the assets under management are for sophisticated investors in longer-term strategies. Philosophy and process GIM is a fundamental bottom-up manager specializing in non-investment-grade corporate securities and organized around industry verticals which place a high degree of importance on industry expertise. GIM believes that its extensive industry knowledge enables the firm to identify investment themes in industry sectors or companies, which are then extensively analyzed and ultimately implemented by obtaining exposures at the best point within a capital structure. GIM’s investment philosophy is implemented through two critical elements: (1) providing downside protection and (2) maintaining a yield advantage. The downside protection for our high-yield portfolio is primarily achieved by consistent adherence to our concentrated bottom-up fundamental credit analysis. The yield advantage is maintained through contrarian investing (a portfolio of higher-yielding issues) with a focus on middle-market companies. Downside Protection — GIM’s credit team provides a 360-degree perspective of each company, including factors such as yield potential, industry position, recent events, analyst’s interpretations, technical analysis and prior experience with the specific company or comparable companies. The mathematics suggest that if the portfolio goes down 30% (from 100 to 70), it takes a 43% increase to get back to above breakeven (30 / 70 = 42.8%). Yield Advantage — The value of compounding interest is critical for all fixed-income investments. By definition, the total rate of return of a fixed-income investment is the compounded value of interest payments plus the present value of the principal repayment. Approximately 90% of the return associated with high-yield bonds, over a 3-to-5-year market cycle, is the value of interest payments. Having a 1% to 2% yield advantage in the portfolio, as compared to the performance benchmark, provides a buffer to difficult periods — such as during 2002 or 2008. It is important to note that the yield advantage is the result of purchasing issues that are out-of-favor, rather than through taking additional risk of default. Over time, there historically has been a substantial yield premium associated with investing in middle-sized issues (as shown in a June 30, 2009 Credit Suisse report showing an ongoing interest differential based on the size of the high-yield bond issue). In essence, GIM’s strategy is to avoid, or at least minimize, the risk associated with operating, environmental or regulatory elements while investing in higher-yielding middle-market companies. Resources GIM’s greatest strength is their professional staff of 82 individuals: 52 investment professionals, 7 legal professionals, 13 operations personnel and 10 administrative staff. Investment professionals include credit research analysts, portfolio managers and traders. The analysts focus on company/industry research and work directly with our staff of legal professionals. GIM utilizes data tools such as BlackRock Solutions and Wall Street Office to support the trading and operations teams.
  7. 7. Organization Tortoise Capital Advisors, L.L.C. (Tortoise) is an investment manager specializing in listed energy infrastructure, such as pipeline and power companies. As of December 31, 2009, Tortoise had approximately $2.8 billion of assets under management. The firm was founded in 2002 and is headquartered in Leawood, Kansas (a suburb of Kansas City, Missouri). Philosophy and process Tortoise focuses on the energy infrastructure sector, primarily investing in Master Limited Partnerships (MLPs). The firm typically invests in companies that transport, store, process and distribute crude oil, refined petroleum products (gasoline, diesel and jet fuel) and natural gas. These companies effectively connect areas of energy supply with areas of demand. MLPs tend to generate a stable, high current yield and consistent growth from long-lived, critical assets operated by strong management teams. Tortoise seeks to identify and invest in MLPs that generate stable, fee-based revenues with attractive growth prospects and controlled risk. Tortoise follows a long-term, buy-and-hold philosophy with low turnover in its effort to achieve a portfolio characterized by high current yield, high growth and low volatility. Tortoise’s security selection process includes an assessment of the overall attractiveness of the specific segment in which a company is involved, the company’s competitive position within that segment, potential commodity price risk, supply and demand, regulatory considerations, the stability and potential growth of the company’s cash flows and the company’s management track record. Tortoise’s investment process includes the following three steps: 1. Emphasize higher quality MLPs with good growth prospects and reasonable liquidity 2. Select MLPs with strong management teams 3. Employ a proprietary valuation model to construct portfolio weightings While primary responsibility for monitoring, review and analysis of individual securities is spread among various individual members of the investment management team, all portfolio management decisions and reviews are based on a team approach. Resources Tortoise has a staff of 32 employees, including a 20-person investment team with deep experience in the MLP midstream sector. The five members of Tortoise’s Investment Committee have, on average, over 23 years of investment experience. Tortoise relies primarily on internally generated research to support their deep, fundamental approach to investing. The firm has developed proprietary financial, risk and valuation models which they utilize to analyze historical results, forecast future cash flows, assess risk and assess relative value. In addition, the firm supplements its research through broker, company and third- party research.
  8. 8. FOR MORE INFORMATION For more information, please visit our web site or call your Corporate Center Contact. Before investing in mutual funds, investors should carefully consider the investment objectives, risks, charges and expenses of the funds. This and other information is contained in the free prospectus, which can be obtained from your local representative, by visiting or by contacting us at 1-800-547-7754, or visiting or by contacting us at 1-800-222-5852. Please read the prospectus carefully before investing. Investment options are subject to investment risk. Shares or unit values will fluctuate and investments, when redeemed, may be worth more or less than their original cost. 1 Pensions & Investments magazine annual survey of real estate managers, September 29, 2008. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Neither the principal of the bond investment options nor their yields are guaranteed by the U.S. government. International and global investment options are subject to additional risk due to fluctuating exchange rates, foreign accounting and financial policies, and other economic and political environments. Fixed-income and asset allocation investment options that invest in mortgage securities are subject to increased risk due to real estate exposure. Principal Financial Group, Des Moines, Iowa 50392-0001, Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, 800-547-7754, member SIPC and/or independent broker/dealers. Securities sold by a Princor® Registered Representative are offered through Princor. Principal Funds Distributor, Princor, and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392. Certain investment options may not be available in all states or U.S. commonwealths. PJ 1046 | 02/2010 # t10021101yj