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Investment Commentaries Investment Commentaries Presentation Transcript

  • LargeCap Growth I R2 Fund First Quarter 2010 Quarterly Commentary Ticker Investment Advisor Benchmark Morningstar Category Investment Objective PPUNX T. Rowe Price/Brown Advisory Russell 1000 Growth Index Large Growth Growth Economy & Market Overview Following a strong ending to 2009, nearly all major fixed income and equity markets continued to rally during the first quarter of 2010. Stocks had a bumpy ride, however, as global economic and political uncertainty led to a steep sell-off in February, followed by a significant upward surge in March. The markets remained supported throughout the quarter by the Federal Reserve's reaffirmed commitment to keeping the fed funds interest rate very low for "an extended period." 1 Economic data released during the quarter were mixed. On the positive side: The U.S. economy grew at an annualized rate of 5.6% for the fourth quarter of 2009, up from 2.2% in the third quarter (as measured by Real Gross Domestic Product, or Real GDP). 2 (Real GDP is the economy's total output of all goods and services, adjusted for price changes that may have occurred between the time periods being compared.) Corporate profitability continued to improve (with profits rising 8% in the fourth quarter of 2009 after climbing 10.8% the prior quarter) as businesses reduced costs and, in some cases, grew revenues. 3 Orders for durable goods increased for the third consecutive month in February,4 indicating that manufacturing was picking up steam. Americans responded somewhat optimistically to the positive economic news, showing slightly improved confidence toward the end of March 5 and spending more money than they had been expected to, given February's harsh weather. 6 However, the recovery's pace continued to be slowed by two critical and persistent headwinds: high unemployment and a still-fragile housing market. Though job losses appeared to stabilize, weak jobs growth kept the unemployment rate stuck at 9.7% throughout the quarter. Many economists attributed the stagnant jobs market to a surge in productivity, which increased at a rapid 6.9% annualized rate in the fourth quarter of 2009 (its third consecutive quarter of improvement). 7 Industry experts believe that at some point productivity gains alone will be insufficient to meet demand and businesses eventually will be forced to hire at a faster clip, but are uncertain as to when that breakpoint may occur. Meanwhile, the housing market sputtered. New residential sales dropped 2% month-over-month in February, while existing-home sales fell 0.6% during the same period.8 Though sales were higher on a year-over-year basis, the slump continued, even with tax incentives for first-time buyers extended through April 2010. It remains to be seen whether the end (on March 31) of the Federal Reserve's $1.25 trillion program to buy mortgage-backed securities (which has been credited with keeping mortgage rates at near-record lows and slowing the decline in home prices) will negatively impact the struggling industry. The overall U.S. stock market returned 5.9%, led by consumer discretionary, industrials and financials. Utilities and telecommunications lagged dramatically, posting negative returns. In this environment value outpaced growth, due to the higher concentration of strong-performing financial stocks and lower exposure to information technology (which performed modestly) in most value indexes. In terms of market capitalization, mid-caps led the way, followed closely by small-caps. 9 Greece's debt troubles and China's decision to begin unwinding its fiscal-stimulus program took a toll on international stocks during the quarter. Emerging markets, worried that China's action could stifle growth, delivered 2.4%, while developed markets returned just 0.9% amid concerns that Greece's financial issues could impact core European economies.10 Real estate investment trusts (REITs) returned 10.1% for the quarter to outperform the broad U.S. stock market. 11 Despite REITs' continued weak fundamentals, investors were drawn to the asset class by its attractive valuations and yields as well as by improved access to capital for commercial real estate transactions. Within fixed income, commercial mortgage-backed securities (CMBS) led returns, outperforming duration-adjusted U.S. Treasuries by 8.0%. Though CMBS delinquencies and faults rose during the period, demand for the high-yielding sector outstripped supply. High-yield corporate bonds followed CMBS, beating duration-adjusted Treasuries by 3.7%; investors reacted favorably not only to the income potential of high-yield bonds, but also the continuing decline in defaults (which dropped for the third straight month in February, to 12.7%). 12 Meanwhile, asset-backed securities and investment-grade corporate bonds also performed well, outpacing duration-adjusted Treasuries by nearly 1%. 13 Page 1 Not FDIC or NCUA insured May lose value • Not a deposit • No bank or credit union guarantee Not insured by any Federal government agency
  • LargeCap Growth I R2 Fund Performance Contributors Positive Contributors During last quarter: Positive selection was led by the health care sector, where an overweight to Millipore Corp. was the strongest individual contributor. Sector weightings relative to the index also added to returns; an average 1.5% overweight to the industrial sector was the largest contributor, as this sector posted the strongest returns in the Russell 1000 Growth Index. Additionally, the portfolio's beta was considerably higher than that of the index (which means that relative to the index, the portfolio was poised to benefit more from upward movements in the market), which helped performance during a period of positive returns. During last 12 months: Stock selection was strong over the 12-month period, particularly in the information technology sector. In fact, six of the top 10 individual contributors were in the information technology sector. Sector-positioning relative to the Russell 1000 Growth Index also added to returns, led by an average 8% underweight to the consumer staples sector, as this defensive sector struggled during the period's strong market performance. Additionally, having a higher beta than that of the benchmark index greatly contributed to returns due to the market rally during the period. Negative Contributors During last quarter: Although stock selection was positive, there were areas of weakness, particularly in the consumer staples sector. Also, an average 2.5% overweight to the energy sector detracted from returns, as the energy sector posted the worst returns in the Russell 1000 Growth Index. Additionally, the portfolio's overweight to price momentum during the period detracted from relative performance. During last 12 months: Although overall stock selection was strong, it was negative in the consumer staples sector. Also detracting from relative returns was an average 2.5% overweight to the telecommunication services sector, as this sector struggled to keep up with the overall Russell 1000 Growth Index. Additionally, stocks held in the portfolio exhibited more volatility, on average, than stocks held in the index did during the period, which detracted from performance as well. Changes to the investment option's structure or portfolio: No material changes occurred in the portfolio structure. Page 2
  • LargeCap Growth I R2 Fund 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 www.principal.com, contact your representative of the Principal Financial Group®, or contact our client contact center at 1-800-547-7754. 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 (%) QTR YTD 1 Year 3 Year 5 Year 10 Year Since Inception Date 12/06/2000 as of 03/31/2010 Inception Ext. Perf. Inc. Date 12/06/2000 LargeCap Growth I R2 Fund 4.96 4.96 57.11 0.16 3.95 - -1.54 Total Inv. Exp Gross 1.49 Russell 1000 Growth Index 4.65 4.65 49.75 -0.78 3.42 -4.21 - Total Inv Exp Net 1.38 Large Growth Category 4.40 4.40 48.34 -1.90 2.93 -2.46 - Waiver Date 02/28/2011 Morningstar Percentile Ranking - - 11 23 28 - - Contractual Cap Date 02/28/2011 Total Funds in Category 1869 1869 1775 1547 1276 718 - Risk and Return Statistics Summary as of 03/31/2010 3 Year Return vs. Rank 5 Year Return vs. Risk Alpha Beta R2 Sharpe Info Ratio Std Alpha Beta R2 Sharpe Info Ratio Std Ratio Dev Ratio Dev LargeCap Growth I R2 Fund 1.53 1.10 96.05 0.04 0.19 22.89 0.68 1.09 95.16 0.15 0.12 18.48 Relative to Russell 1000 Growth Index Risk and return statistical data is provided by Markov Processes International (MPI). Percentile rankings are based on total returns in accordance with the appropriate Morningstar peer group. Please see Important Notes section for definitions of Risk and Return Statistics. Page 3
  • LargeCap Growth I R2 Fund Upside/Downside Capture Ratio Summary as of 03/31/2010 3 Year Upside/Downside Capture Ratio 5 Year Upside/Downside Capture Ratio # of Months Avg Returns % Market # of Months Avg Returns % Market Benchmark % Benchmark % Up Down Up Down Up Down Up Down Up Down Up Down LargeCap Growth I R2 Fund 21 15 4.75 -5.41 110.81 105.96 36 24 3.84 -3.66 107.23 104.56 Russell 1000 Growth Index 20 16 4.29 -5.11 100.00 100.00 33 27 3.59 -3.50 100.00 100.00 Top Ten Holdings as of 02/28/2010 Security Net Assets (%) Apple, Inc. 4.20 S&P FUTURE - MARCH 2010 3.94 Google, Inc. 3.66 Accenture PLC 2.47 Qualcomm, Inc. 2.43 Danaher Corporation 2.40 Schlumberger, Ltd. 2.28 MasterCard Incorporated A 2.17 Allergan, Inc. 1.98 Cisco Systems, Inc. 1.86 Total % in Top 10 27.38 Information is current as of the date noted. Keep in mind that portfolio holdings are subject to risk. Page 4
  • LargeCap Growth I R2 Fund Manager(s) Start Date Degree Alma Mater Robert W. Sharps 08/19/2004 M.B.A. University of Pennsylvania Mariateresa Monaco 06/02/2009 M.B.A. Massachusetts Institute of Technology Kenneth Mather Stuzin 07/14/2009 M.B.A. Columbia University Investment Strategy The investment seeks to maximize long-term capital appreciation. The fund invests primarily in growth-oriented equity securities of U.S. and, to a limited extent, foreign companies with large market capitalizations that exhibit strong growth and free cash flow potential. It normally invests at least 80% of net assets (plus any borrowings for investment purposes) in equity securities of companies with market capitalizations within the range of companies in the Russell 1000 Growth index at the time of purchase. About T. Rowe Price Associates, Inc. Founded in 1937, T. Rowe Price is a global investment management firm committed to providing investment management excellence, world-class service and guidance to institutional and individual investors worldwide. T. Rowe Price provides a broad array of proprietary mutual funds, sub-advisory investment services and separate account management for individual and institutional investors, retirement plans and financial intermediaries. Headquartered in Baltimore, Maryland, T. Rowe Price has offices in Buenos Aires, Hong Kong, London, Toronto, Sydney, Luxemburg, Stockholm, Singapore, Denmark, Amsterdam, Tokyo and Zurich.As of December 31, 2009, T. Rowe Price managed more than $391.3 billion in assets for some of the world's leading corporations, public retirement plans, foundations, endowments and individual clients. The investment management services span the full range of U.S. and non-U.S. equity, fixed-income and multi-asset-class investment styles. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency and fundamental research. The T. Rowe Price investment approach strives to achieve superior performance but is always mindful of the risks incurred relative to the potential rewards. About Brown Advisory Brown Advisory (Brown) was founded in 1993 as an investment management arm of Alex Brown & Sons, an investment bank founded in 1800. When Alex Brown & Sons was acquired by Bankers Trust, Brown became independently owned through an employee-led buyout in 1998. The firm is headquartered in Baltimore, with offices in Washington, Boston and London. Brown is employee-owned, and each of the 250 employees has an equity interest in the firm. With over $17 billion in client assets as of December 31, 2009, the firm strives to meet each investor's unique requirements through a broad array of investment styles and asset classes, including domestic equities, international equities, green equities, fixed income, private equity, real estate and other alternative assets. Page 5
  • Important Notes Insurance products and plan administrative services 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, 800-547-7754, member SIPC and/or independent brokers/dealers. 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. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation, and Principal Funds, Inc. are collectively referred to as Principal Funds. 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 downloaded from our site, by visiting www.principal.com, or by contacting us at 1.800.547.7754. Please 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 prospecuts. The operating expenses shown as part of the Total Investment Expense include voluntary expense limits and fee credit. © 2010 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. The manager of the Fund, Principal Management Corporation, invests between 10% and 40% of the Fund's assets in common stocks in an attempt to match or exceed the performance of the Fund's benchmark index for performance. Effective July 14, 2009, Brown Advisory was added as an additional sub-advisor. Performance results displayed reflect all sub-advisors managing this portfolio during the time periods displayed. Russell 1000 Growth Index is a market-capitalization weighted index of those firms in the Russell 1000 with higher price-to-book ratios and higher forecasted growth values. 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. 1 Source: Federal Open Market Committee, U.S. Federal Reserve 2 Source: U.S. Bureau of Economic Analysis, U.S. Department of Commerce 3 Source: Bureau of Economic Analysis, U.S. Dept of Commerce 4 Source: U.S. Census Bureau 5 Source: Conference Board 6 Source: U.S. Dept. of Commerce 7 Source: U.S. Bureau of Labor Statistics, U.S. Dept. of Labor 8 Source: U.S. Dept. of Housing and Urban Development; Nat'l Assoc. of Realtors 9 Source: Russell Indexes 10 Source: Emerging markets: MSCI EM Index; Developed international equity markets: MSCI EAFE Index 11 Source: MSCI US REIT Index Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com 03/2010 #t100412008z Page 7
  • Important Notes 12 Source: Moody's Investor Services, February Default Report, March 2010 13 Source: All bond sectors except high yield: Barclays Capital Aggregate Bond Index; high yield: Barclays Capital U.S. Corporate High Yield Index This report is not complete unless all pages, as noted below, are included. Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com 03/2010 #t100412008z Page 8