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Bringing order to chaos

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Title: Bringing order to chaos


1
Bringing order to chaos
Solving the investment puzzle
Speaker Name, Title
Principal Funds Distributor, Inc.
Date
2
Agenda
Bringing order to chaos
1
An introduction to Principal Funds
2
Bringing order to chaos
3
The SAM solution
3
Who is Principal Funds?
Bringing order to chaos
  • A leader in asset allocation
  • Fifth-largest manager of lifecycle funds
  • Formed by a merger of Principal Investors Fund
    and WM Group of Funds
  • 48 funds with more than 60 billion in assets (as
    of June 30, 2007)
  • Part of the Principal Financial Group

According to Financial Research Corporation (as
of June 30, 2007)
4
Principal Financial Group
Bringing order to chaos
FORTUNE 500 Company A leading global asset
manager Over 200 billion in assets A retirement
services leader Over 15 million clients
worldwide Among FORTUNE Magazines 100 best
places to work (2006 77 out of 100)
As of December 31, 2006.
5
History of Principal Funds
Today More than 60B in mutual fund and variable
trust assets as of 6/30/07.
1996 SAM Portfolios launched as registered mutual
funds
1987 Spectrum Asset Management founded preferred
securities specialists
2006 WM Advisors (now Edge Asset Management)
acquired
1941 First pension and institutional clients
2001 Principal LifeTime Funds launched PFG listed
on the New York Stock Exchange
1992 Post Advisory Group founded, high-yield bond
specialists
1879 Principal Financial Group founded as Bankers
Life
1990 Principal International founded to expand
global research coverage
1975 Columbus Circle founded, growth equities
specialists
1969 Principal Mutual Fund Family launched
1939 Principal Equity Income Fund launched (as
Composite Bond Stock Fund), one of the first 50
mutual funds in the US
As of June 30, 2007.
6
A powerful global manager
Bringing order to chaos
Principal Global Investors 221B in total assets
  • Includes four investment management boutiques
  • Total investment professionals 494

As of June 30, 2007, Principal Global Investors
had over 201billion in securities, real estate
and other assets under management. Principal
Global Investors, one of the primary asset
management divisions of Principal Financial
Group, consists of Principal Global Investors,
LLC Principal Real Estate Investors, LLC
Spectrum Asset Management, Inc. Post Advisory
Group, LLC Columbus Circle Investors Principal
Global Investors (Europe) Limited Principal
Global Investors (Singapore) Ltd Principal
Global Investors (Australia) Ltd and Principal
International, Inc., its subsidiaries and
affiliates, which provide product and advisory
solutions primarily for retirement plans,
institutional and high-net worth clients,
proprietary management divisions within the
parent company, and mutual funds.
7
Global reach
Asset management locations Principal Global
Investors Principal International Affiliates
Includes all affiliates including advisory
affiliates and subsidiaries
8
An impressive resume
Bringing order to chaos
38th largest institutional asset manager out of
784 worldwide 24th largest U.S. institutional
tax-exempt asset manager out of 784 4th largest
real estate investment manager out of
50 Manages assets for 10 of the 25 largest U.S.
pension funds Clients in 25 countries
Source Pensions Investments Magazine. Based
on assets as of December 31, 2006 published May
28, 2007. Pensions Investments Magazine.
Based on U.S. institutional tax-exempt assets as
of June 30, 2006 published October 16, 2006.
Pensions Investments Magazine. Based on PI
1,000 report on the largest pension plans dated
Jan. 25, 2007.
9
The Principal Due Diligence Program(sm)
Bringing order to chaos
10
Our core beliefs
Bringing order to chaos
Asset allocation drives investment
returns Superior stock selection and disciplined
risk management can provide consistent out
performance The use of multiple managers,
selected by a rigorous process, can enhance
diversification of an investment program
11
Bringing order to chaos
Challenges of the marketplace Diversification Ass
et Allocation
12
A chaotic environment
Bringing order to chaos
  • Uncertainty about the markets
  • Fear of what we cant control
  • Complexity
  • Lack of time
  • Indecision

1
2
3
4
5
13
Why is Asset Allocation important?
Bringing order to chaos
  • Factors determining a portfolios overall results

Asset allocation does not guarantee a profit or
protect against a loss. Source G.P. Brinson,
L.R. Hood and G.L. Beebower, Determinants of
Portfolio Performance Financial Analysts
Journal, January/February 1995.
14
Is there a pattern here?
Past performance is not a guarantee of future
results. Source Ibbotson Associates. Small value
stocks are represented by the Russell 2000 Growth
Index large value stocks are represented by the
SP 500/Barra Value Index large growth stocks
are represented by the SP 500/Barra Growth
Index mid-cap stocks are represented by the SP
MidCap 400 Index foreign stocks are represented
by the MSCI EAFE Index REITs are represented by
the NAREIT ALL REIT Index high yield bonds are
represented by the Lehman Brothers High-Yield
Index investment-grade bonds are represented by
the Lehman Brothers Aggregate Bond Index. This
material has been obtained from sources
considered reliable. No guarantee can be made as
to its accuracy. Indices are unmanaged and one
cannot invest directly in an index.
15
Smoothing out the ride
Past performance is not a guarantee of future
results. Source Ibbotson Associates. The
diversified portfolio consists of an equal
weighting of each asset class shown. This
material has been obtained from sources
considered reliable. No guarantee can be made as
to its accuracy. Indices are unmanaged and one
cannot invest directly in an index.
16
Spreading out your risk
Bringing order to chaos
  • Diversification
  • Asset Allocation
  • Professional money management

Asset allocation/diversification does not
guarantee a profit or protect against a loss.
Investing in real estate, small-cap,
international, and high-yield investment
options involves additional risks. Please see
the prospectus for more complete
information about these risks.
17
Expanding market appeal
Bringing order to chaos
  • Growth of asset allocation products

0
Source Strategic Insight (Simfund), U.S.-based
open-ended funds, excluding variable annuities.
2006 data from January through November 2006.
18
They go by many names
Bringing order to chaos
Their investment processes also vary
substantially.
Lifestyle, Life Stage, or Life Cycle Funds
Target Date Funds
Target Risk Funds
Asset Allocation Funds
19
The SAM solution
Bringing order to chaos
The above represents sample allocations for each
of the five SAM Portfolios. These are provided
for illustrative purposes only and may not
reflect current portfolio allocations. Investing
in Fund of Funds may involve higher costs than
investing in an individual mutual fund that
doesnt invest in other mutual funds.
20
Asset Allocation the SAM Way
The right diversified portfolio Active 3-step
investment process Personalize your plan through
your financial advisor
21
Five highly diversified portfolios
Bringing order to chaos
Represents sample allocations only. Current
allocations will differ. Equity investment
options involve greater risk, including
heightened volatility, than fixed-income
investments. Fixed-income investment options are
subject to interest rate risk, and their value
will decline as interest rates rise.
International investing involves increased risks
due to currency fluctuations, political or social
instability, and differences in accounting
standards.
22
Balanced portfolio diversification
Bringing order to chaos
Up to15 Asset Classes
15 Asset Classes
Represents sample allocations only. Current
allocations will differ. Equity investment
options involve greater risk, including
heightened volatility, than fixed-income
investments. Fixed-income investment options are
subject to interest rate risk, and their value
will decline as interest rates rise.
International investing involves increased risks
due to currency fluctuations, political or social
instability, and differences in accounting
standards.
23
SAMs 3-step process for active asset allocation
Bringing order to chaos
Step 2 Tactical
Step 3 Tactical
Step 1 Strategic
Allocations illustrated above may not reflect
current portfolio compositions.
24
SAM process Step 1
Setting equity and fixed-income targets
25
SAM process Step 2
Developing investment outlookDetermining desired
risk
Strategic Growth
Conservative Growth
Balanced
Maximum risk
Conservative Balanced
Flexible Income
Minimum risk
26
Constructing each portfolios asset mix
SAM process Step 3
Portfolio C 55/45
Portfolio B 60/40
Portfolio A 60/40
Portfolio Composition Equity/Fixed Income Mix
Fixed Income Assets
63
20
63
Govt Mtge
20
38
20
Corporate
7
25
7
High Yield
Equity Assets
62
69
71
Large-Cap
18
7
10
Small-Cap
76
35
50
Growth
24
65
50
Value
10.7
10.7
10.7
Expected Risk
Risk is measured by standard deviation.
Standard deviation measures the historical
fluctuation of returns around the arithmetic
average return of the investment. The higher the
standard deviation (as one measure of risk), the
greater the variability of the investment
returns.
27
Does it work?
Bringing order to chaos
  • 10-year record as of July 2006
  • Managed through a variety of market cycles
  • Proof statement Active vs. Passive

1
Active Management
Passive Management
Team continually monitors and reallocates the SAM
Portfolios in response to changing economic and
market conditions.
Portfolios rebalanced quarterly or annually back
to a static allocation.
  • For the following illustration
  • Charts are based on historical performance and
    reflect activity for the given time frame. Active
    asset allocation may not always provide better
    performance.
  • Additional funds have been added to the SAM
    Portfolios that have the potential to add to or
    detract from performance.

28
Balanced Portfolio (Class A at NAV) 12/31/99
6/30/07
Active vs. Passive Asset Allocation
Source Morningstar, Inc. Based on an initial
investment of 10,000 at NAV (net asset value) on
12/31/99 and no withdrawals. Performance assumes
the reinvestment of all dividends and capital
gains. If sales charges had been applied,
performance results would be lower. Investment
results shown represent historical performance
and do not guarantee future results. Your
investment's returns and principal values will
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 shown. For more information,
including the most recent month-end performance,
visit www.principalfunds.com, call your financial
professional, or call 800-222-5852. A maximum
up-front sales charge of 5.5 may apply. See the
prospectus for details. Fixed-income investment
options are subject to interest rate risk, and
their value will decline as interest rates rise.
29
Average Annual Total Returns
Class A Shares as of June 30, 2007
Investment results shown represent historical
performance and do not guarantee future results.
Your investment's returns and principal values
will 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 shown. For more information,
including the most recent month-end performance,
visit www.principalfunds.com, call your financial
professional, or call 800-247-4123. A maximum
up-front sales charge of 5.5 (4.5 for the
Flexible Income Portfolio only) may apply. See
the prospectus for details. Performance listed
with sales charge reflects the maximum sales
charge. Where gross and net expense ratios
differ, Principal Management Corporation has
contractually agreed to limit the investment
options expenses. Expense limits apply through
2/28/08. Differences also may be due to Principal
Management Corporations decision to pay (through
2/28/08) certain expenses that would normally be
payable by the fund. Returns displayed are based
on net total investment expense.
1 Performance assumes reinvestment of all
dividends and capital gains. The following
Portfolios benefited from agreements to limit the
Portfolios expenses during certain time periods
Flexible Income, Balanced, Conservative Growth,
and Strategic Growth Portfolios (1996 to 1999)
Conservative Balanced Portfolio (1996 to 2003). 2
As of 8/1/00, the Income Portfolio became the
Conservative Balanced Portfolio, and the
Portfolios objectives and strategies changed.
This information should be considered when
reviewing past performance. Please see the
prospectus for detailed information.
30
What sets SAM apart?
Bringing order to chaos
31
Benefits to you
Bringing order to chaos
  • One fund many asset classes
  • One purchase fewer fees and minimums
  • One statement and one year-end 1099
  • Easy to implement
  • Objective investment decisions
  • More time to spend on whats really important
    your goals

The SAM PortfoliosThe sophistication of a
managed account with the simplicity of a mutual
fund
32
Summary
Bringing order to chaos
  • An introduction to Principal Funds
  • A trusted partner
  • Bringing order to chaos
  • Diversification and Allocation are key
  • The SAM solution
  • A powerful process

33
This presentation provides commentary by
Principal Funds Distributor, Inc. and should not
be considered individualized investment
advice. Before investing, you should carefully
consider a funds investment objectives, risks,
charges, and expenses. Contact your financial
professional, visit www.principalfunds.com, or
call 800-222-5852 to obtain a prospectus
containing this and other information. Read the
prospectus carefully before investing. A mutual
fund's share price and investment return will
vary with market conditions, and the principal
value of an investment when you sell your shares
may be more or less than the original cost. Past
performance is not a guarantee of future results.
Asset allocation/diversification does not
guarantee a profit or protect against a loss.
Investing in real estate, small-cap,
international, and high-yield investment options
involves additional risks. Please see the
prospectus for more complete information about
these risks. Principal Investors Fund, Inc. is
distributed by Principal Funds Distributor, Inc.,
member of the Principal Financial Group.
Principal Funds Distributor, Principal
Shareholder Services, Principal Management
Corporation, and Principal Investors Fund, Inc.
are collectively referred to as Principal Funds.
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