-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sf6SH8VXAEzirsx4W91iBszz8ACHr3nOCGp6aBn6TeUFToOjkSYYmXe3BaGmR/GE Mik8mNmKASaDCBXmnsBC9g== 0000898745-06-000107.txt : 20060727 0000898745-06-000107.hdr.sgml : 20060727 20060727165313 ACCESSION NUMBER: 0000898745-06-000107 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20060727 DATE AS OF CHANGE: 20060727 EFFECTIVENESS DATE: 20060727 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCIPAL INVESTORS FUND INC CENTRAL INDEX KEY: 0000898745 IRS NUMBER: 000000000 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-59474 FILM NUMBER: 06985040 BUSINESS ADDRESS: STREET 1: PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 BUSINESS PHONE: 515-247-5476 MAIL ADDRESS: STREET 1: PRINCIPAL FINANCIAL GROUP STREET 2: 711 HIGH STREET CITY: DES MOINES STATE: IA ZIP: 50392-2080 FORMER COMPANY: FORMER CONFORMED NAME: PRINCIPAL SPECIAL MARKETS FUND INC DATE OF NAME CHANGE: 19930714 0000898745 S000006952 Bond & Mortgage Securities Fund C000018962 J Class PBMJX 0000898745 S000006992 Diversified International Fund C000019058 Class J PIIJX 0000898745 S000006994 Government & High Quality Bond Fund C000019069 Class J PGVJX 0000898745 S000006995 High Quality Intermediate-Term Bond Fund C000019078 Class J PHIJX 0000898745 S000006997 Inflation Protection Fund C000019085 Class J 0000898745 S000007013 International Emerging Markets Fund C000019145 Class J PIEJX 0000898745 S000007014 International Growth Fund C000019155 Class J PITJX 0000898745 S000007015 LargeCap Growth Fund C000019164 Class J PGLJX 0000898745 S000007016 LargeCap S&P 500 Index Fund C000019173 Class J PSPJX 0000898745 S000007017 LargeCap Value Fund C000019183 Class J PVLJX 0000898745 S000007075 MidCap Blend Fund C000019316 Class J PMBJX 0000898745 S000007076 Partners LargeCap Growth Fund C000019325 Class J PJPLX 0000898745 S000007077 Partners LargeCap Growth Fund I C000019332 Class J PLGJX 0000898745 S000007078 MidCap Growth Fund C000019341 Class J PMGJX 0000898745 S000007079 MidCap S&P 400 Index Fund C000019348 Class J PMFJX 0000898745 S000007080 MidCap Value Fund C000019355 Class J PMCJX 0000898745 S000007081 Money Market Fund C000019362 Class J PMJXX 0000898745 S000007084 Partners LargeCap Blend Fund C000019383 Class J PLBJX 0000898745 S000007085 Partners LargeCap Blend Fund I C000019392 Class J PPXJX 0000898745 S000007121 Partners LargeCap Growth Fund II C000019456 Class J PPLJX 0000898745 S000007122 Partners LargeCap Value Fund C000019464 Class J PLVJX 0000898745 S000007125 Partners MidCap Growth Fund C000019485 Class J PPQJX 0000898745 S000007170 Preferred Securities Fund C000019596 Class J PPSJX 0000898745 S000007172 Partners MidCap Value Fund C000019610 Class J PMVJX 0000898745 S000007175 Partners SmallCap Growth Fund I C000019631 Class J PSIJX 0000898745 S000007176 Partners SmallCap Growth Fund II C000019638 Class J PPMIX 0000898745 S000007178 Partners SmallCap Value Fund C000019653 Class J PCVJX 0000898745 S000007201 Principal LifeTime 2010 Fund C000019705 Class J PTAJX 0000898745 S000007202 SmallCap Growth Fund C000019713 Class J PSGJX 0000898745 S000007203 SmallCap S&P 600 Index Fund C000019720 Class J PSSJX 0000898745 S000007204 SmallCap Value Fund C000019727 Class J PSVJX 0000898745 S000007206 Ultra Short Bond Fund C000019739 Class J PUSJX 0000898745 S000007207 Principal LifeTime 2020 Fund C000019746 Class J PLFJX 0000898745 S000007208 Principal LifeTime 2030 Fund C000019755 Class J PLTJX 0000898745 S000007209 Principal LifeTime 2040 Fund C000019764 Class J PTDJX 0000898745 S000007210 Principal LifeTime 2050 Fund C000019774 Class J PFLJX 0000898745 S000007211 Principal LifeTime Strategic Income Fund C000019783 Class J PLSJX 0000898745 S000007212 Real Estate Securities Fund C000019791 Class J PREJX 0000898745 S000007213 Short-Term Bond Fund C000019800 Class J PHSJX 0000898745 S000007214 SmallCap Blend Fund C000019808 Class J PSBJX 497 1 fv208q-22.txt PIF J SHARE APPENDIX SUPPLEMENT DATED JULY 20, 2006 TO THE PRINCIPAL INVESTORS FUND, INC. PROSPECTUS CLASS J SHARES DATED MARCH 1, 2006 THE FOLLOWING INFORMATION IS AN UPDATE THROUGH JUNE 30, 2006, AND REPLACES SIMILAR INFORMATION FOUND IN THE PROSPECTUS DATED MARCH 1, 2006. APPENDIX A RELATED PERFORMANCE OF THE SUB-ADVISORS The following tables set forth historical information about client accounts managed by a Sub-Advisor that have investment objectives and strategies similar to those of the corresponding Fund the Sub-Advisor manages. These client accounts may consist of individuals, institutions and other mutual funds. This composite data is provided to illustrate the past performance of each Sub-Advisor in managing similar accounts and does not represent the performance of any Fund. On the following pages "composite performance" is shown for each Sub-Advisor with regard to all of those similarly managed accounts. The composite performance is computed based upon essentially the Sub-Advisor's asset weighted "average" performance with regard to such accounts. The composite performance information shown is based on a composite of all accounts of each Sub-Advisor (and its predecessor, if any) having substantially similar investment objectives, policies and strategies to the corresponding Fund. The composite results reflect the deduction of all fees and expenses actually incurred by the client accounts. If the composite results had been adjusted to reflect fees and expenses of the Principal Investors Fund, Inc., performance numbers shown would differ. Although the Principal Investors Fund, Inc. and client accounts comprising the composite indices (Related Accounts) have substantially similar investment objectives and policies in all material respects, you should not assume that the Principal Investors Fund, Inc. will have the same performance as the Related Accounts. For example, a Fund's future performance may be better or worse than the performance of its Related Accounts due to, among other things, differences in sales charge, expenses, asset sizes and cash flows between the Fund and its Related Accounts. Portions of the information below are based on data supplied by the Sub-Advisors and from statistical services, reports or other sources believed by the Manager to be reliable. However, such information has not been verified or audited by the Manager. Some of the accounts included in the composites are not mutual funds registered under the 1940 Act. Those accounts are not subject to investment limitations, diversification requirements and other restrictions imposed by the 1940 Act and the Internal Revenue Code. If such requirements were applicable to these accounts, the performance shown may have been lower. The following pages contain information on the historical performance of each of the Fund's. The date that these shares were first offered for sale is shown. The performance data should not be considered as an indication of future performance of any Fund or any Sub-Advisor. In addition, the effect of taxes is not reflected in the information below as it will depend on the investor's tax status. Current performance may be lower or higher than the performance data shown. FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - STABLE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 ---------------------------------------- ------------------------------------------------------------ MONEY MARKET FUND CLASS J (03/01/01) 1.85 3.27 1.41 1.16 N/A 1.33 2.20 0.20 0.01 0.53 Principal Global Investors Money Market Composite 3.74 Lehman Brothers U.S. Treasury Bellwethers 3 Month Index 2.20 4.01 2.36 2.25 3.85 2.41 3.08 1.30 1.15 1.78 4.45 6.20 4.91 5.33 5.53 5.38 SHORT-TERM BOND FUND CLASS J (03/01/01) PREVIOUSLY HIGH QUALITY SHORT-TERM BOND FUND 0.88 1.49 0.81 2.73 N/A 2.84 1.42 0.45 1.81 6.77 Principal Global Investors Limited Term Fixed Income Composite 5.02 Lehman Brothers Mutual Fund 1-5 Gov't/Credit Index 0.65 1.07 1.45 3.96 5.37 4.09 1.44 1.85 3.35 8.12 9.03 8.91 2.09 7.63 7.13 4.67 Morningstar Short-Term Bond Category Average 0.84 1.38 1.45 3.17 4.64 3.25 1.43 1.60 2.39 5.24 7.32 8.14 2.12 6.28 6.51 4.35 ULTRA SHORT BOND CLASS J (06/15/01) 2.19 3.54 2.35 2.65 N/A 2.66 2.14 1.74 2.18 3.12 6-Month LIBOR Index 2.35 4.29 2.58 2.49 4.23 2.50 3.33 1.47 1.32 2.06 5.00 6.76 5.44 5.89 5.94 5.81 Morningstar Ultra Short 1.84 3.22 2.03 2.47 4.14 2.52 2.49 1.24 1.56 2.73 5.77 6.72 4.45 5.08 6.18 6.14 Category Average ---------------------------------------- ------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - CONSERVATIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 1997 ------------------------------------------ --------------------------------------------------------- BOND & MORTGAGE SECURITIES FUND CLASS J (03/01/01) -1.07 -1.14 1.49 3.86 N/A 3.73 1.90 3.89 3.27 8.22 Principal Global Investors Multi Sector Fixed Income Composite 6.55 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.86 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 9.65 Morningstar Intermediate-Term Bond Category Average -0.72 -0.89 1.86 4.47 5.50 4.36 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 GOVERNMENT & HIGH QUALITY BOND FUND CLASS J (03/01/01) PREVIOUSLY GOVERNMENT SECURITIES FUND -0.70 -1.07 0.96 3.07 N/A 3.03 1.40 2.80 0.83 7.75 Principal Global Investors Mortgage Backed Securities Composite 5.79 Lehman Brothers -0.48 -0.41 2.10 4.67 6.07 Government/Mortgage Index 4.55 2.63 4.08 2.73 10.06 7.71 12.29 -0.54 8.72 9.54 Morningstar Intermediate Government Category Average -0.88 -0.98 1.26 3.85 5.17 3.72 1.90 3.39 2.15 9.07 6.84 10.76 -1.44 7.45 8.45 HIGH QUALITY INTERMEDIATE-TERM BOND FUND CLASS J (03/01/01) -0.96 -1.10 1.31 3.89 N/A 3.72 1.97 3.44 2.88 8.71 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.86 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 9.65 Morningstar Intermediate-Term Bond Category Average -0.72 -0.89 1.86 4.47 5.50 4.36 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 INFLATION PROTECTION FUND CLASS J (12/29/04) -1.31 -1.29 N/A N/A N/A 0.85 2.32 Lehman Brothers US Treasury TIPS Index -1.76 -1.64 3.76 7.00 N/A 0.67 2.84 8.46 8.39 16.56 7.89 13.18 2.63 3.95 Morningstar Inflation-Protected Bond Category Average -1.78 -1.95 2.77 5.78 5.15 0.16 1.97 7.61 7.63 15.72 7.83 13.16 3.18 4.85 3.76 PREFERRED SECURITIES FUND CLASS J (12/29/03) -1.20 -0.87 N/A N/A N/A 1.24 0.69 3.57 Spectrum Preferred Securities Composite 7.32 7.98 Merrill Lynch Preferred Hybrid Index -0.94 0.05 2.53 4.89 N/A 1.98 0.46 5.51 9.51 6.63 8.99 17.75 -4.68 7.37 Morningstar Intermediate-Term -0.72 -0.89 1.86 4.47 5.50 2.03 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 Bond Category Average ------------------------------------------ --------------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1996 ------ BOND & MORTGAGE SECURITIES FUND CLASS J (03/01/01) Principal Global Investors Multi Sector Fixed Income Composite Lehman Brothers 3.63 Aggregate Bond Index Morningstar 3.30 Intermediate-Term Bond Category Average GOVERNMENT & HIGH QUALITY BOND FUND CLASS J (03/01/01) PREVIOUSLY GOVERNMENT SECURITIES FUND Principal Global Investors Mortgage Backed Securities Composite Lehman Brothers 3.68 Government/Mortgage Index Morningstar 2.80 Intermediate Government Category Average HIGH QUALITY INTERMEDIATE-TERM BOND FUND CLASS J (03/01/01) Lehman Brothers 3.63 Aggregate Bond Index Morningstar 3.30 Intermediate-Term Bond Category Average INFLATION PROTECTION FUND CLASS J (12/29/04) Lehman Brothers US Treasury TIPS Index Morningstar 2.21 Inflation-Protected Bond Category Average PREFERRED SECURITIES FUND CLASS J (12/29/03) Spectrum Preferred Securities Composite Merrill Lynch Preferred Hybrid Index Morningstar 3.30 Intermediate-Term Bond Category Average ------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - MODERATE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 -------------------------------------------- ------- LARGECAP GROWTH FUND CLASS J (03/01/01) 0.99 10.06 11.67 -0.43 N/A -1.35 10.69 Columbus Circle Investors Large Capitalization Composite /(1)/ 11.81 1.98 8.90 Russell 1000 Growth Index -0.93 6.12 8.35 -0.76 5.42 -1.35 5.26 Morningstar Large Growth Category Average -1.34 6.83 8.83 -0.56 5.68 -0.95 6.46 LARGECAP S&P 500 INDEX FUND CLASS J (03/01/01) 2.28 7.77 10.17 1.36 N/A 1.03 4.01 Principal Global Investors S&P 500 Index Composite 7.94 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.17 4.91 Morningstar Large Blend Category Average 2.39 8.84 10.97 2.31 7.39 2.17 5.77 LARGECAP VALUE FUND CLASS J (03/01/01) 5.77 10.61 12.01 4.69 N/A 4.68 5.91 Principal Global Investors Large Cap Value Composite 8.88 Russell 1000 Value Index 6.56 12.10 15.70 6.90 10.85 6.69 7.05 Morningstar Large Value Category Average 4.70 10.28 13.37 4.94 8.54 4.99 5.88 MIDCAP VALUE FUND CLASS J (03/01/01) 3.83 9.98 15.50 8.95 N/A 9.55 12.13 Principal Global Investors Mid Cap Value Composite 10.15 Russell Midcap Value Index 7.02 14.26 22.10 13.01 13.59 13.00 12.65 Morningstar Mid-Cap Value Category Average 5.17 11.06 17.66 9.82 11.03 10.48 8.41 PARTNERS LARGECAP BLEND FUND CLASS J (03/01/01) 2.20 7.20 9.41 2.64 N/A 2.23 4.16 T. Rowe Price U.S. Structured Research Strategy /(//2//)//(3)/ 12.09 3.71 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.17 4.91 Morningstar Large Blend Category Average 2.39 8.84 10.97 2.31 7.39 2.17 5.77 PARTNERS LARGECAP BLEND FUND I CLASS J (03/01/01) 1.98 9.25 10.78 0.73 N/A 0.08 5.42 Goldman Sachs Enhanced Large Cap Composite /(//4//)/ 3.85 9.10 Wellington US Core Equity Total Composite /(//5//)/ 0.30 7.45 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.17 4.91 Morningstar Large Blend Category 2.39 8.84 10.97 2.31 7.39 2.17 5.77 Average -------------------------------------------- ------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2004 2003 2002 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------ LARGECAP GROWTH FUND 8.31 23.43 -28.97 CLASS J (03/01/01) Columbus Circle Investors Large Capitalization Composite /(1)/ Russell 1000 Growth 6.30 29.76 -27.88 -20.42 -22.42 33.16 38.71 30.49 23.12 Index Morningstar Large 7.64 28.55 -27.73 -23.63 -14.09 39.72 33.56 25.00 18.95 Growth Category Average LARGECAP S&P 500 INDEX 9.76 26.89 -22.97 FUND CLASS J (03/01/01) Principal Global Investors S&P 500 Index Composite S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average LARGECAP VALUE FUND 11.43 24.11 -13.72 CLASS J (03/01/01) Principal Global Investors Large Cap Value Composite Russell 1000 Value 16.49 30.03 -15.52 -5.59 7.02 7.35 15.63 35.18 21.64 Index Morningstar Large 12.91 28.40 -18.92 -5.37 5.47 6.63 13.10 27.01 20.79 Value Category Average MIDCAP VALUE FUND 15.67 26.80 -8.95 CLASS J (03/01/01) Principal Global Investors Mid Cap Value Composite Russell Midcap Value 23.71 38.06 -9.65 2.34 19.18 -0.11 5.09 34.37 20.26 Index Morningstar Mid-Cap 17.90 34.38 -12.91 6.40 16.82 7.78 3.92 26.04 20.50 Value Category Average PARTNERS LARGECAP 9.41 22.90 -17.17 BLEND FUND CLASS J (03/01/01) T. Rowe Price U.S. Structured Research Strategy /(//2//)//(3)/ S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average PARTNERS LARGECAP 10.03 26.74 -25.65 BLEND FUND I CLASS J (03/01/01) Goldman Sachs Enhanced Large Cap Composite /(//4//)/ Wellington US Core Equity Total Composite /(//5//)/ S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average ------------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ CCI began sub-advising the Fund on 01/05/05. The performance of the accounts represented in this composite does not reflect CCI's use of "estimated tracking error" in controlling investment risk, a tool CCI will use with the Fund under certain circumstances. Tracking error is a statistical estimate of the difference over the next twelve months between the Fund's return and the return of the Fund's benchmark or index. When employed, this risk control tool could increase or decrease, depending on market conditions, the return the Fund might otherwise achieve. / //(2)/ T. Rowe Price began sub-advising the Fund on 03/09/04 // /(//3//)// /The performance information provided by T. Rowe Associates, Inc. ("T. Rowe") is not that of a composite, but is the total return performance of the T. Rowe Price Capital Opportunity Fund (the "T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Blend Fund T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. The T. Rowe Fund's investment performance prior to May 1, 1999 reflects the T. Rowe Fund's prior investment program. It does not represent the historical performance of the Principal Partners LargeCap Blend Fund and should not be interpreted as indicative of its future performance. / //(//4//)/ Goldman Sachs began sub-advising the Fund on 12/16/02 / //(//5//)/ Wellington began sub-advising the Fund on 12/16/02
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - MODERATE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) YTD 1 YR 3 YR 5 YR 10 YR --------------------------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) -6.08 -2.90 3.18 N/A N/A GMO Growth Composite/(//1//)/ 5.38 -1.31 6.46 Russell 1000 Growth Index -0.93 6.12 8.35 -0.76 5.42 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 Morningstar Large Growth Category Average -1.34 6.83 8.83 -0.56 5.68 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) -3.78 3.63 7.50 -1.50 N/A T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ 10.23 Russell 1000 Growth Index -0.93 6.12 8.35 -0.76 5.42 Morningstar Large Growth Category Average -1.34 6.83 8.83 -0.56 5.68 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) -1.76 4.74 7.62 -0.63 N/A American Century Large Cap Growth Equity Composite 6.38 Russell 1000 Growth Index -0.93 6.12 8.35 -0.76 5.42 Morningstar Large Growth Category Average -1.34 6.83 8.83 -0.56 5.68 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) 5.12 9.58 12.56 5.91 N/A Russell 1000 Value Index 6.56 12.10 15.70 6.90 10.85 Morningstar Large Value Category Average 4.70 10.28 13.37 4.94 8.54 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) 2.92 11.34 18.41 10.16 N/A Neuberger Berman MidCap Value Composite 12.44 Russell Midcap Value Index 7.02 14.26 22.10 13.01 13.59 Morningstar Mid-Cap Value Category Average 5.17 11.06 17.66 9.82 11.03 --------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ GMO began sub-advising the Fund on 03/09/04 / //(//2//)/ T. Rowe began sub-advising the Fund on 08/24/04 ///(//3//)// /The performance information provided by T. Rowe Price Associates, Inc. ("T. Rowe Price") is not that of a composite, but is the total return performance of the T. Rowe Price Institutional Large Cap Growth Fund ("T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Growth Fund I T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. It does not represent the historical performance of the Principal Partners Equity Growth Fund and should not be interpreted as indicative of its future performance. ANNUAL TOTAL RETURNS* (YEAR ENDED LIFE DECEMBER 31) OF FUND 2005 2004 2003 ----------- --------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) 5.36 2.59 1.88 22.30 GMO Growth Composite/(//1//)/ Russell 1000 Growth Index 10.95 5.26 6.30 29.76 S&P 500 Index 13.08 4.91 10.87 28.67 Morningstar Large Growth Category Average 11.57 6.46 7.64 28.55 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) -2.02 6.69 8.13 22.57 T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ Russell 1000 Growth Index -1.35 5.26 6.30 29.76 Morningstar Large Growth Category Average -0.95 6.46 7.64 28.55 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) -0.86 4.00 8.41 24.91 American Century Large Cap Growth Equity Composite Russell 1000 Growth Index -1.35 5.26 6.30 29.76 Morningstar Large Growth Category Average -0.95 6.46 7.64 28.55 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) 6.41 4.48 12.41 26.23 Russell 1000 Value Index 6.69 7.05 16.49 30.03 Morningstar Large Value Category Average 4.99 5.88 12.91 28.40 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) 10.34 9.89 21.45 34.66 Neuberger Berman MidCap Value Composite Russell Midcap Value Index 13.00 12.65 23.71 38.06 Morningstar Mid-Cap Value Category Average 10.48 8.41 17.90 34.38 ----------- --------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ GMO began sub-advising the Fund on 03/09/04 / //(//2//)/ T. Rowe began sub-advising the Fund on 08/24/04 ///(//3//)// /The performance information provided by T. Rowe Price Associates, Inc. ("T. Rowe Price") is not that of a composite, but is the total return performance of the T. Rowe Price Institutional Large Cap Growth Fund ("T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Growth Fund I T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. It does not represent the historical performance of the Principal Partners Equity Growth Fund and should not be interpreted as indicative of its future performance. 2002 2001 2000 1999 --------------------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) GMO Growth Composite/(//1//)/ Russell 1000 Growth Index -27.88 -20.42 -22.42 33.16 S&P 500 Index -22.11 -11.88 -9.11 21.04 Morningstar Large Growth Category Average -27.73 -23.63 -14.09 39.72 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) -28.41 T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ Russell 1000 Growth Index -27.88 -20.42 -22.42 33.16 Morningstar Large Growth Category Average -27.73 -23.63 -14.09 39.72 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) -26.61 American Century Large Cap Growth Equity Composite Russell 1000 Growth Index -27.88 -20.42 -22.42 33.16 Morningstar Large Growth Category Average -27.73 -23.63 -14.09 39.72 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) -14.37 Russell 1000 Value Index -15.52 -5.59 7.02 7.35 Morningstar Large Value Category Average -18.92 -5.37 5.47 6.63 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) -10.75 Neuberger Berman MidCap Value Composite Russell Midcap Value Index -9.65 2.34 19.18 -0.11 Morningstar Mid-Cap Value Category Average -12.91 6.40 16.82 7.78 --------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ GMO began sub-advising the Fund on 03/09/04 / //(//2//)/ T. Rowe began sub-advising the Fund on 08/24/04 ///(//3//)// /The performance information provided by T. Rowe Price Associates, Inc. ("T. Rowe Price") is not that of a composite, but is the total return performance of the T. Rowe Price Institutional Large Cap Growth Fund ("T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Growth Fund I T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. It does not represent the historical performance of the Principal Partners Equity Growth Fund and should not be interpreted as indicative of its future performance. 1998 1997 1996 --------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) GMO Growth Composite/(//1//)/ Russell 1000 Growth Index 38.71 30.49 23.12 S&P 500 Index 28.58 33.36 22.96 Morningstar Large Growth Category Average 33.56 25.00 18.95 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ Russell 1000 Growth Index 38.71 30.49 23.12 Morningstar Large Growth Category Average 33.58 25.00 18.95 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) American Century Large Cap Growth Equity Composite Russell 1000 Growth Index 38.71 30.49 23.12 Morningstar Large Growth Category Average 33.58 25.00 18.95 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) Russell 1000 Value Index 15.63 35.18 21.64 Morningstar Large Value Category Average 13.10 27.01 20.79 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) Neuberger Berman MidCap Value Composite Russell Midcap Value Index 5.09 34.37 20.26 Morningstar Mid-Cap Value Category Average 3.92 26.04 20.50 --------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ GMO began sub-advising the Fund on 03/09/04 / //(//2//)/ T. Rowe began sub-advising the Fund on 08/24/04 ///(//3//)// /The performance information provided by T. Rowe Price Associates, Inc. ("T. Rowe Price") is not that of a composite, but is the total return performance of the T. Rowe Price Institutional Large Cap Growth Fund ("T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Growth Fund I T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. It does not represent the historical performance of the Principal Partners Equity Growth Fund and should not be interpreted as indicative of its future performance.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - AGGRESSIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 ------------------------------------------- ------- MIDCAP BLEND FUND CLASS J (03/01/01) 2.55 10.46 14.95 8.43 N/A 8.59 8.38 Principal Global Investors Mid Cap Blend Composite 11.08 Russell Midcap Index 4.84 13.66 19.87 9.92 12.06 9.83 12.65 Morningstar Mid-Cap Blend Category Average 4.45 12.12 16.38 8.05 10.78 8.53 9.21 MIDCAP GROWTH FUND CLASS J (03/01/01) 0.31 11.11 12.29 -3.95 N/A -3.76 12.32 Columbus Circle Investors Mid Capitalization Composite/(//1//)/ 12.19 15.88 6.26 12.31 Russell Midcap Growth Index 2.56 13.04 16.86 4.76 8.46 4.37 12.10 Morningstar Mid-Cap Growth Category Average 2.88 12.66 14.65 3.23 7.69 3.25 9.70 MIDCAP S&P 400 INDEX FUND CLASS J (03/01/01) 3.80 11.90 16.81 7.89 N/A 8.34 11.31 S&P MidCap 400 Index 4.24 12.98 18.14 9.29 13.82 9.64 12.55 Morningstar Mid-Cap Blend Category Average 4.45 12.12 16.38 8.05 10.78 8.53 9.21 PARTNERS MIDCAP GROWTH FUND CLASS J (03/01/01) 3.50 14.35 16.15 1.66 N/A 1.99 11.17 Russell Midcap Growth Index 2.56 13.04 16.86 4.76 8.46 4.37 12.10 Morningstar Mid-Cap Growth Category Average 2.88 12.66 14.65 3.23 7.69 3.25 9.70 PARTNERS SMALLCAP GROWTH FUND I CLASS J (03/01/01) 4.12 14.21 16.16 -0.22 N/A 1.30 4.56 Alliance Capital Small Cap Growth Composite/(//2//)/ 3.74 8.81 Russell 2000 Growth Index 6.07 14.58 16.27 3.49 4.12 4.63 4.15 Morningstar Small Growth Category Average 4.89 12.73 15.23 3.70 7.36 5.15 5.74 PARTNERS SMALLCAP GROWTH FUND II CLASS J (03/01/01) 5.64 13.00 15.30 3.26 N/A 3.62 6.05 Emerald Diversified Small Cap Growth Composite /(//4//)/ 4.37 7.92 Essex Small/Micro Cap Growth Composite/(5)/ 14.85 UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ 6.60 10.48 Russell 2000 Growth Index 6.07 14.58 16.27 3.49 4.12 4.63 4.15 Morningstar Small Growth Category 4.89 12.73 15.23 3.70 7.36 5.15 5.74 Average ------------------------------------------- ------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2004 2003 2002 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------ MIDCAP BLEND FUND 16.74 30.67 -9.30 CLASS J (03/01/01) Principal Global Investors Mid Cap Blend Composite Russell Midcap Index 20.22 40.08 -16.19 -5.63 8.25 18.23 10.09 29.01 19.00 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average MIDCAP GROWTH FUND 9.44 31.06 -41.07 CLASS J (03/01/01) Columbus Circle Investors Mid Capitalization Composite/(//1//)/ Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average MIDCAP S&P 400 INDEX 15.18 33.71 -16.07 FUND CLASS J (03/01/01) S&P MidCap 400 Index 16.47 35.59 -14.53 -0.60 17.51 14.72 19.11 32.25 19.20 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average PARTNERS MIDCAP GROWTH 11.23 47.14 -32.51 FUND CLASS J (03/01/01) Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average PARTNERS SMALLCAP 13.41 46.12 -41.11 GROWTH FUND I CLASS J (03/01/01) Alliance Capital Small Cap Growth Composite/(//2//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average PARTNERS SMALLCAP 9.92 43.35 -25.31 GROWTH FUND II CLASS J (03/01/01) Emerald Diversified Small Cap Growth Composite /(//4//)/ Essex Small/Micro Cap Growth Composite/(5)/ UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average ------------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ CCI began sub-advising the Fund on 01/05/05. The performance of the accounts represented in this composite does not reflect CCI's use of "estimated tracking error" in controlling investment risk, a tool CCI will use with the Fund under certain circumstances. Tracking error is a statistical estimate of the difference over the next twelve months between the Fund's return and the return of the Fund's benchmark or index. When employed, this risk control tool could increase or decrease, depending on market conditions, the return the Fund might otherwise achieve. / //(//2//)/ Alliance began sub-advising the Fund on 03/31/03 // /(//3//)/ UBS began sub-advising the Fund on 04/22/02 // /(//4//)/ Emerald Advisers Inc. began as co-sub-advisor on 09/01/04 // /(//5//)/ Essex Investment Management Company, LLC began as sub-advisor on 06/30/06
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - AGGRESSIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 -------------------------------------------- --------------------------------------------------- PARTNERS SMALLCAP VALUE FUND CLASS J (03/01/01) 5.11 6.69 16.35 10.74 N/A 11.93 6.62 16.81 36.62 -11.11 Ark Asset Small Cap Value Composite 16.13 Russell 2000 Value Index 10.44 14.61 21.01 13.09 13.26 14.21 4.71 22.25 46.02 -11.42 14.02 22.83 -1.49 Morningstar Small Value Category Average 7.13 12.64 19.35 12.34 12.32 13.73 6.13 20.58 42.71 -10.25 17.31 16.98 4.49 REAL ESTATE SECURITIES FUND CLASS J (03/01/01) 15.16 24.29 28.65 21.25 N/A 21.75 14.70 32.94 37.01 6.87 MSCI US REIT Index 13.08 19.65 26.20 19.37 15.09 20.55 12.52 31.49 36.74 3.64 12.83 26.81 -4.55 Morningstar Specialty - Real Estate Category Average 12.46 19.26 25.75 19.26 15.30 20.00 11.59 31.88 36.89 4.10 8.93 25.83 -3.35 SMALLCAP BLEND FUND CLASS J (03/01/01) 6.34 12.59 17.44 10.01 N/A 10.92 8.96 15.54 41.48 -17.85 Russell 2000 Index 8.21 14.58 18.70 8.50 9.05 9.65 4.55 18.33 47.25 -20.48 2.49 -3.02 21.26 Morningstar Small Blend Category Average 7.03 14.11 19.04 9.84 11.06 11.18 6.62 18.86 42.77 -16.17 8.41 12.84 18.18 SMALLCAP GROWTH FUND CLASS J (03/01/01) 5.77 13.41 14.05 -0.37 N/A 1.33 3.60 13.61 47.12 -39.83 Principal Global Investors Small Company Growth Composite 5.08 Russell 2000 Growth Index 6.07 14.58 16.27 3.49 4.12 4.63 4.15 14.31 48.53 -30.25 -9.23 -22.43 43.09 Morningstar Small Growth Category Average 4.89 12.73 15.23 3.70 7.36 5.15 5.74 12.09 45.00 -28.42 -9.02 -5.71 61.45 SMALLCAP S&P 600 INDEX FUND CLASS J (03/01/01) 7.17 12.81 19.09 9.69 N/A 10.66 6.55 21.24 36.58 -15.75 S&P SmallCap 600 Index 7.69 13.92 20.46 11.07 11.80 12.04 7.67 22.64 38.77 -14.63 6.54 11.80 12.40 Morningstar Small Blend Category Average 7.03 14.11 19.04 9.84 11.06 11.18 6.62 18.86 42.77 -16.17 8.41 12.84 18.18 SMALLCAP VALUE FUND CLASS J (03/01/01) 9.18 16.15 20.34 14.12 N/A 15.18 8.35 18.93 42.14 -3.49 Principal Global Investors Small Cap Value Composite 12.51 Russell 2000 Value Index 10.44 14.61 21.01 13.09 13.26 14.21 4.71 22.25 46.02 -11.42 14.02 22.83 -1.49 Morningstar Small Value Category 7.13 12.64 19.35 12.34 12.32 13.73 6.13 20.58 42.71 -10.25 17.31 16.98 4.49 Average -------------------------------------------- --------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1998 1997 1996 ---------------------- PARTNERS SMALLCAP VALUE FUND CLASS J (03/01/01) Ark Asset Small Cap Value Composite Russell 2000 Value -6.45 31.78 21.37 Index Morningstar Small -6.99 30.04 25.53 Value Category Average REAL ESTATE SECURITIES FUND CLASS J (03/01/01) MSCI US REIT Index -16.90 18.58 35.89 Morningstar Specialty -15.79 23.05 31.68 - Real Estate Category Average SMALLCAP BLEND FUND CLASS J (03/01/01) Russell 2000 Index -2.55 22.36 16.50 Morningstar Small -3.64 26.12 19.66 Blend Category Average SMALLCAP GROWTH FUND CLASS J (03/01/01) Principal Global Investors Small Company Growth Composite Russell 2000 Growth 1.23 12.95 11.26 Index Morningstar Small 4.49 18.19 19.99 Growth Category Average SMALLCAP S&P 600 INDEX FUND CLASS J (03/01/01) S&P SmallCap 600 -1.31 25.58 21.32 Index Morningstar Small -3.64 26.12 19.66 Blend Category Average SMALLCAP VALUE FUND CLASS J (03/01/01) Principal Global Investors Small Cap Value Composite Russell 2000 Value -6.45 31.78 21.37 Index Morningstar Small -6.99 30.04 25.53 Value Category Average ---------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - DYNAMIC FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 -------------------------------------------- ---------------------------------------------------- DIVERSIFIED INTERNATIONAL FUND CLASS J (03/01/01) 11.37 34.96 26.42 10.51 N/A 7.75 22.98 19.18 32.65 -17.17 Principal Global Investors International Large Cap Composite 9.01 Citigroup BMI Global ex-US Index 9.98 29.16 26.83 12.91 8.09 10.70 19.59 22.23 42.15 -13.81 -20.08 -12.04 28.75 Morningstar Foreign Large Blend Category Average 8.90 26.38 21.90 8.08 6.35 6.05 14.55 17.59 33.32 -16.91 -21.83 -16.02 40.08 INTERNATIONAL EMERGING MARKETS FUND CLASS J (03/01/01) 10.51 41.61 36.39 20.65 N/A 18.90 34.83 24.60 54.96 -7.72 Principal Global Investors International Emerging Markets Equity Composite 11.13 MSCI Emerging Markets Free Index - NDTR 7.16 35.47 34.29 21.17 N/A 18.28 30.31 25.56 55.82 -6.18 -2.61 Morningstar Diversified Emerging Markets Category Average 6.74 34.14 32.73 20.17 7.28 17.75 31.64 23.75 55.30 -5.90 -3.73 -31.11 71.86 INTERNATIONAL GROWTH FUND CLASS J (03/01/01) 10.39 30.77 26.04 11.51 N/A 9.10 21.41 21.58 37.37 -16.86 CITI World Ex-US BMI Growth Index 10.01 27.60 24.22 10.43 6.73 7.67 17.18 19.34 38.42 -16.97 -24.13 -17.97 36.58 Morningstar Foreign Large Growth Category 8.20 26.99 21.10 7.64 5.63 5.56 15.27 15.58 33.15 -19.15 -24.36 -20.88 52.48 Average -------------------------------------------- ---------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1998 1997 1996 ---------------------- DIVERSIFIED INTERNATIONAL FUND CLASS J (03/01/01) Principal Global Investors International Large Cap Composite Citigroup BMI Global 17.27 2.62 8.70 ex-US Index Morningstar Foreign 13.55 5.99 12.31 Large Blend Category Average INTERNATIONAL EMERGING MARKETS FUND CLASS J (03/01/01) Principal Global Investors International Emerging Markets Equity Composite MSCI Emerging Markets Free Index - NDTR Morningstar -27.03 -3.68 13.35 Diversified Emerging Markets Category Average INTERNATIONAL GROWTH FUND CLASS J (03/01/01) CITI World Ex-US BMI 19.63 3.91 8.41 Growth Index Morningstar Foreign 14.80 6.99 13.88 Large Growth Category Average ---------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. PERFORMANCE RESULTS - LIFETIME FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH JUNE 30, 2006) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 ------------------------------------------- --------------------------------------------------------- PRINCIPAL LIFETIME 2010 FUND CLASS J (06/15/01) 2.48 6.31 9.31 5.85 N/A 5.83 4.87 11.21 17.54 -5.26 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2000-2014 Category Average 1.38 4.02 6.24 4.18 5.91 4.24 3.88 6.78 13.47 -3.92 -0.39 2.73 8.72 13.31 PRINCIPAL LIFETIME 2020 FUND CLASS J (06/15/01) 3.16 8.68 10.98 6.43 N/A 6.39 6.95 11.57 20.52 -7.83 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2015-2029 Category Average 2.46 7.33 9.76 4.72 6.89 4.75 6.21 9.44 21.08 -11.01 -5.88 -3.93 15.14 20.01 PRINCIPAL LIFETIME 2030 FUND CLASS J (06/15/01) 3.52 10.04 11.89 6.04 N/A 6.09 7.66 11.92 22.14 -10.96 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2030+ Category Average 3.20 10.75 12.06 4.81 7.46 4.87 7.53 11.36 25.38 -15.61 -9.54 -8.02 19.26 23.59 PRINCIPAL LIFETIME 2040 FUND CLASS J (06/15/01) 3.56 10.78 12.39 6.06 N/A 6.13 7.97 12.11 22.74 -13.55 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2030+ Category Average 3.20 10.75 12.06 4.81 7.46 4.87 7.53 11.36 25.38 -15.61 -9.54 -8.02 19.26 23.59 PRINCIPAL LIFETIME 2050 FUND CLASS J (06/15/01) 3.72 11.58 12.80 5.04 N/A 5.17 8.25 11.54 24.51 -16.31 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2030+ Category Average 3.20 10.75 12.06 4.81 7.46 4.87 7.53 11.36 25.38 -15.61 -9.54 -8.02 19.26 23.59 PRINCIPAL LIFETIME STRATEGIC INCOME FUND CLASS J (06/15/01) 1.78 4.36 7.66 5.29 N/A 5.27 3.41 10.32 13.97 -2.63 S&P 500 Index 2.71 8.63 11.22 2.49 8.32 2.49 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index -0.72 -0.81 2.05 4.97 6.22 4.97 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Target-Date 2000-2014 1.38 4.02 6.24 4.18 5.91 4.24 3.88 6.78 13.47 -3.92 -0.39 2.73 8.72 13.31 Category Average ------------------------------------------- --------------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1997 1996 -------------- PRINCIPAL LIFETIME 2010 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 14.71 9.48 Target-Date 2000-2014 Category Average PRINCIPAL LIFETIME 2020 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 20.86 13.39 Target-Date 2015-2029 Category Average PRINCIPAL LIFETIME 2030 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 24.80 16.84 Target-Date 2030+ Category Average PRINCIPAL LIFETIME 2040 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 24.80 16.84 Target-Date 2030+ Category Average PRINCIPAL LIFETIME 2050 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 24.80 16.84 Target-Date 2030+ Category Average PRINCIPAL LIFETIME STRATEGIC INCOME FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 14.71 9.48 Target-Date 2000-2014 Category Average -------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. IMPORTANT NOTES TO THE APPENDIX 6 MONTH LIBOR (LONDON INTERBANK OFFERED RATE) INDEX is an average of the interest rate of U.S. dollar deposits, known as Eurodollars, of a stated maturity. CITIGROUP BROAD MARKET (BMI) GLOBAL EX-US INDEX is a float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with an available free float market cap of US$100 million and above. CITIGROUP WORLD EX-US BROAD MARKET (BMI) GROWTH INDEX is a float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with growth characteristics and an available free float market cap of US$100 million and above. LEHMAN BROTHERS AGGREGATE BOND INDEX is an unmanaged index of domestic, taxable fixed-income securities. The index covers the U.S. investment-grade bond market, with components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. LEHMAN BROTHERS GOVERNMENT/MORTGAGE INDEX is a combination of the unmanaged Lehman Government Index and the unmanaged Lehman Mortgage Backed Securities (MBS) Index. The Lehman Government Index includes all Government Bonds including, but not limited to, U.S. Treasury bonds and government-sponsored agency securities, with no maturity restrictions. The MBS Index includes all securitized mortgage pools by GNMA, FNMA and the FHLMC. LEHMAN BROTHERS MUTUAL FUND 1-5 GOVERNMENT/CREDIT INDEX is an unmanaged index composed of Treasury notes, agencies and corporate debt securities rated BBB or better, and with maturities between one year and five years. LEHMAN BROTHERS U.S. TREASURY BELLWETHERS 3 MONTH INDEX is composed of public obligations of the U.S. Treasury with a maturity of three months. LEHMAN BROTHERS U.S. TREASURY TIPS (TREASURY INFLATION PROTECTION SECURITIES) INDEX is an unmanaged index of inflation-protected U.S. Treasury securities that will mature in one year or longer. MERRILL LYNCH PREFERRED HYBRID INDEX an unmanaged index of investment grade, exchange-traded preferred stocks with outstanding market values of at least $30 million and at least one year to maturity. MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMF (EMERGING MARKETS FREE) INDEX is an unmanaged index that measures the stock returns of companies in 26 developing countries. MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) US REIT INDEX is a total-return index comprised of the most actively traded real estate investment trusts, and is designed to be a measure of real estate equity performance. MORNINGSTAR DIVERSIFIED EMERGING MARKETS CATEGORY AVERAGE is an average of the net asset value (NAV) returns of diversified emerging-markets mutual funds which invest in companies in developing nations. MORNINGSTAR FOREIGN LARGE BLEND CATEGORY AVERAGE is an average of the net asset value (NAV) returns of mutual funds that seek capital appreciation by investing in a variety of large international stocks. Large-cap foreign stocks have market capitalizations greater than $5 billion. The blend style is assigned to funds where neither growth nor value characteristics predominate. MORNINGSTAR FOREIGN LARGE GROWTH CATEGORY AVERAGE is an average of the net asset value (NAV) returns of mutual funds that seek capital appreciation by investing in large international stocks that are growth-oriented. Large-cap foreign stocks have market capitalizations greater than $5 billion. Growth is defined based on high price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE index. MORNINGSTAR INFLATION PROTECTED BOND CATEGORY primarily invest in fixed-income securities that increase coupon and/or principal payments at the rate of inflation. These bonds can be issued by any organization, but the U.S. Treasury is currently the largest issuer of these types of securities. Most of these portfolios buy bonds with intermediate- to long-term maturities. FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. MORNINGSTAR INTERMEDIATE-TERM BOND CATEGORY AVERAGE is an average of net asset value (NAV) returns of bond mutual funds that have average durations that are greater than 3.5 years and less than 6 years. MORNINGSTAR INTERMEDIATE GOVERNMENT CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that devote at least 90% of their bond holdings to government issues. These mutual funds have, on average, durations between 3.5 and 6 years. MORNINGSTAR LARGE BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on large companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries. MORNINGSTAR LARGE GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in large companies that are projected to grow faster than average. Most of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR LARGE VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on large companies that are less expensive than the market as a whole. They often come from the utilities, energy, financial, and cyclical sectors, and many pay above-average dividends. They also generally have more-stable stock prices. MORNINGSTAR MID-CAP BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on mid-size companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries. MORNINGSTAR MID-CAP GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that typically focus on mid-size companies that are projected to grow faster than average. Many of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR MID-CAP VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mid-cap value mutual funds that buy stocks mainly of medium-size companies that are cheap relative to their earnings potential. MORNINGSTAR SHORT-TERM BOND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in a variety of bonds, from the most creditworthy, such as Treasury bonds, to mortgages and corporates, and on rare occasions, even more speculative high-yield and emerging markets debt and which have durations between 1 and 3.5 years. MORNINGSTAR SMALL BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on small companies that are fairly representative of the overall stock market in terms of valuations. MORNINGSTAR SMALL GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in small companies that are projected to grow faster than average. Most of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR SMALL VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of small-cap value mutual funds that invest in less-popular companies at the smaller end of the size range and may focus on finding temporarily depressed stocks of companies working through business problems. MORNINGSTAR SPECIALTY - REAL ESTATE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest primarily in real-estate investment trusts (REITs) of various types. The performance of these mutual funds is less connected to the overall market than most other types of stock funds. MORNINGSTAR TARGET DATE CATEGORY portfolios provide diversified exposure to stocks, bonds, and cash for those investors who have a specific date in mind for retirement or another goal. These portfolios aim to provide investors with an optimal level of return and risk, based solely on the target date. These portfolios get more conservative as the goal date approaches by investing more in bonds and cash. Investment managers structure these portfolios differently; two funds with the same goal year may have different allocations to equities and therefore different levels of return and risk. MORNINGSTAR ULTRA-SHORT BOND CATEGORY AVERAGE is an average of the net asset value (NAV) returns of bond mutual funds that invest primarily in investment-grade U.S. fixed-income issues and have durations of less than one year. FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. RUSSELL 1000 GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. Companies included are large. RUSSELL 1000 VALUE INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Companies included are large. RUSSELL 2000 GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 2000 Index with higher price-to-book ratios and higher forecasted growth values. Companies included are medium-size to small. RUSSELL 2000 INDEX is an unmanaged index that measures the investment returns of the 2,000 smallest stocks in the Russell 3000 Index. Companies included are medium-size to small. RUSSELL 2000 VALUE INDEX is an unmanaged index that measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. RUSSELL MIDCAP INDEX is an unmanaged index that measures the investment returns of the 800 smallest stocks in the Russell 1000 Index. RUSSELL MIDCAP GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell MidCap Index with higher price-to-book ratios and higher forecasted growth rates. RUSSELL MIDCAP VALUE INDEX is an unmanaged market-capitalization-weighted index that measures the performance of those Russell Midcap companies with lower price-to-book value ratios and lower forecasted growth values. S&P 500 STOCK INDEX (S&P 500) is an unmanaged index of 500 widely-held stocks often used as a proxy for the domestic stock market. Included are the stocks of industrial, financial, utility and transportation companies. S&P MIDCAP 400 INDEX is an unmanaged index that includes approximately 10% of the capitalization of U.S. equity securities. These are comprised of stocks in the middle capitalization range. Any mid-sized stocks already included in the S&P 500 are excluded from this index. S&P SMALLCAP 600 INDEX is an unmanaged index that consists of 600 domestic stocks chosen for market size, liquidity and industry group representation. It is a market weighted index (stock price x shares outstanding), with each stock affecting the index in proportion to its market value. (C) 2004 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. FV 208 Q-22 This Supplement Must Be Preceded or Accompanied by a Current Prospectus. SUPPLEMENT DATED JUNE 16, 2006 TO THE PROSPECTUS FOR THE PRINCIPAL INVESTORS FUND, INC. CLASS J SHARES DATED MARCH 1, 2006 PARTNERS MIDCAP VALUE FUND Effective on or about June 30, 2006, Jacobs Levy Equity Management, Inc. ("Jacobs Levy") is an additional sub-advisor for the Partners MidCap Value Fund. Jacobs Levy Equity Management, Inc. provides investment advice based upon quantitative equity strategies. The firm focuses on detecting opportunities in the U.S. equity market and attempting to profit from them through engineered, risk-controlled portfolios. Based in Florham Park, New Jersey, Jacobs Levy is focused exclusively on the management of U.S. equity separate accounts for institutional clients and currently manages about $20 billion in assets. Day-to-day portfolio management is performed by the two founders of Jacobs Levy, Bruce Jacobs and Ken Levy. Mr. Jacobs and Mr. Levy are well-known for their research and academic publications on investment theory and practice. Together, they serve as portfolio managers for the portion of the Fund's portfolio allocated by the Manager to Jacobs Levy for management and are responsible for research, security selection, portfolio construction and trading. BRUCE JACOBS . Mr. Jacobs serves as co-chief investment officer, portfolio manager and co-director of research. Prior to co-founding Jacobs Levy in 1986, Dr. Jacobs was a First Vice President of the Prudential Insurance Company of America. Dr. Jacobs earned a BA from Columbia College, an MS in Operation Research and Computer Science from Columbia University, an MSIA from Carnegie Mellon University and an MA in Applied Economics and Ph.D. in Finance from the University of Pennsylvania's Wharton School. KEN LEVY, CFA . Mr. Levy serves as co-chief investment officer, portfolio manager and co-director of research. Prior to co-founding Jacobs Levy in 1986, Mr. Levy was Managing Director of a quantitative equity management affiliate of the Prudential Asset Management Company. He earned a BA in Economics from Cornell University, an MBA and an MA in Business Economics from the University of Pennsylvania's Wharton School and has completed all requirements short of the dissertation for a Ph.D. at Wharton. He has earned the right to use the Chartered Financial Analyst designation. PARTNERS SMALLCAP GROWTH FUND II Effective on or about June 30, 2006, Essex Investment Management Company, LLC ("Essex") is an additional sub-advisor for the Partners SmallCap Growth Fund II. Essex Investment Management Company, LLC ("Essex") is a Boston-based management firm which specializes in growth equity investments. Essex manages portfolios for corporations, endowments, foundations, municipalities, public funds, Taft-Hartley accounts, and private clients. Essex offers a range of growth equity strategies and employs proprietary fundamental research combined with active portfolio management. As of March 31, 2006, Essex had a total of $3.95 billion in assets under management. Day-to-day portfolio management is performed by Nancy B. Prial. NANCY B. PRIAL, CFA . Ms. Prial is a Portfolio Manager on the Essex Small-Micro Cap Growth and Small-Mid Cap Growth strategies. Prior to joining the firm, she spent four years at the Twentieth Century Division of American Century Investors. She began her investment career in 1984 at Frontier Capital Management as a fundamental analyst and portfolio manager. Ms. Prial graded from Bucknell University with a BS in Electrical Engineering and a BA in Mathematics. She also earned an MBA from Harvard Business School. Ms. Prial has earned the right to use the Chartered Financial Analyst designation. SUPPLEMENT DATED MAY 25, 2006 TO THE PRINCIPAL INVESTORS FUND, INC. CLASS J SHARES PROSPECTUS DATED MARCH 1, 2006 SMALLCAP BLEND FUND Effective March 20, 2006, Thomas Morabito, CFA, was named as the individual responsible for day-to-day fund management for the SmallCap Blend Fund, replacing Todd Sanders, CFA. THOMAS MORABITO, CFA . Mr. Morabito joined Principal in 2000 as the lead small-cap value portfolio manager. He has more than 12 years of analytical and portfolio management expertise. From 1994 until joining Principal, Mr. Morabito was a manager for INVESCO Management & Research. He received his MBA in Finance from Northeastern University and his BA in Economics from State University of New York. He has earned the right to use the Chartered Financial Analyst designation. Effective May 19, 2006, Phil Nordhus, was appointed as co-Portfolio Manager for the SmallCap Blend Fund. Going forward, Mr. Nordhus and Mr. Morabito are the individuals responsible for day-to-day fund management. PHIL NORDHUS, CFA. . Mr. Nordhus joined Principal in 1990 and was previously involved in corporate acquisitions and divestitures before moving to the equity group in 2000. Most recently, he has been involved in managing the small-cap portfolios and has responsibility for managing the small-cap analyst team. Mr. Nordhus earned an MBA from Drake University and a Bachelor's degree in Economics from Kansas State University. He has earned the right to use the Chartered Financial Analyst designation. SUPPLEMENT DATED APRIL 11, 2006 TO THE PRINCIPAL INVESTORS FUND, INC. PROSPECTUSES DATED MARCH 1, 2006 SMALLCAP BLEND FUND Effective March 20, 2006, Thomas Morabito, CFA, has been named as the individual responsible for day-to-day fund management for the SmallCap Blend Fund, replacing Todd Sanders, CFA. THOMAS MORABITO, CFA . Mr. Morabito joined Principal in 2000 as the lead small-cap value portfolio manager. He has more than 12 years of analytical and portfolio management expertise. From 1994 until joining Principal, Mr. Morabito was a manager for INVESCO Management & Research. He received his MBA in Finance from Northeastern University and his BA in Economics from State University of New York. He has earned the right to use the Chartered Financial Analyst designation. SUPPLEMENT DATED MARCH 20, 2006 TO THE PRINCIPAL INVESTORS FUND, INC. PROSPECTUSES DATED MARCH 1, 2006 At its March 13, 2006 meeting, the Board of Directors of Principal Investors Fund approved a reallocation of portfolio management responsibilities between Principal and the Manager with regard to the Principal LifeTime Funds. As described more fully below, Principal will be responsible for the asset allocation function with regard to the LifeTime Funds while the Manager will be responsible for choosing the funds in which the LifeTime Funds invest. PRINCIPAL LIFETIME 2010 PRINCIPAL LIFETIME 2020 PRINCIPAL LIFETIME 2030 PRINCIPAL LIFETIME 2040 PRINCIPAL LIFETIME 2050 The main strategies section for each of the above-named funds has been changed as follows: MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. The Manager and the Sub-Advisor, Principal, both provide investment advisory services to the Fund. The Manager has hired Principal to develop, implement, and monitor the strategic or long-term asset class targets and target ranges for the Fund. In deciding how to allocate the Fund's assets among several asset classes, Principal considers long-term asset class returns, volatility assumptions and the Fund's target time horizon. Principal is also responsible for employing an active rebalancing strategy that, within the target ranges, directs cash flows or Fund assets towards or away from asset classes that Principal determines to be attractive or unattractive over shorter time periods, so long as the target asset class ranges are not violated. The Manager is responsible for implementing the strategic asset allocation set by Principal. In this role, the Manager selects the underlying funds and their respective weights. The Manager is also responsible for monitoring the Sub-Advisor of each underlying fund and may, at any time, add or substitute underlying funds in which the Fund invests. Over time, shifts in the asset class targets and underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the asset class targets or underlying funds may also occur when market forces or Fund circumstances change allocations. In allocating Fund assets among the underlying funds, the Manager relies on a combination of quantitative measures, such as past performance and style consistency, and qualitative factors. Qualitative factors that the Manager considers include the fund advisor's organizational stability, investment experience, consistency of investment process, risk management processes, and information, trading and compliance systems. There are no minimum or maximum percentages in which the Fund must invest in a specific asset class or underlying fund. Principal intends to gradually shift the Fund's asset allocation so that within five to ten years after the target year, the Fund's asset allocation matches that of the Principal LifeTime Strategic Income Fund, a Fund that invests primarily in fixed income securities. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of Fund shareholders. PRINCIPAL LIFETIME STRATEGIC INCOME FUND The main strategies section for the above-named fund has been changed as follows: MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Most of the Fund's assets are invested in underlying funds which are intended primarily to give the Fund broad exposure to income-producing markets through their investments in fixed-income securities, "hybrid" securities - such as real estate and preferred securities, which may produce current income as well as capital gains - and dividend generating domestic and foreign stocks. The Manager and the Sub-Advisor, Principal, both provide investment advisory services to the Fund. The Manager has hired Principal to develop, implement, and monitor the strategic or long-term asset class targets and target ranges for the Fund. In deciding how to allocate the Fund's assets among several asset classes, Principal considers long-term asset class returns, volatility assumptions and the Fund's target time horizon. Principal is also responsible for employing an active rebalancing strategy that, within the target ranges, directs cash flows or Fund assets towards or away from asset classes that Principal determines to be attractive or unattractive over shorter time periods, so long as the target asset class ranges are not violated. The Manager is responsible for implementing the strategic asset allocation set by Principal. In this role, the Manager selects the underlying funds and their respective weights. The Manager is also responsible for monitoring the Sub-Advisor of each underlying fund and may, at any time, add or substitute underlying funds in which the Fund invests. In allocating Fund assets among the underlying funds, the Manager relies on a combination of quantitative measures, such as past performance and style consistency, and qualitative factors. Qualitative factors that the Manager considers include the fund advisor's: organizational stability, investment experience, consistency of investment process, risk management processes, and information, trading and compliance systems. Doug Loeffler is the individual currently responsible for the day-to-day management of the investment advisory services Principal Management Corporation provides to the six above-named Funds. DOUG LOEFFLER, CFA . Mr. Loeffler is a Vice President with Principal Management Corporation. He is the senior member of the Manager Research Team that is responsible for analyzing, interpreting and coordinating investment performance data and evaluation of the investment managers under the due diligence program. He is responsible for preparing periodic evaluation reports including both qualitative and quantitative analysis. Mr. Loeffler participates in the manager selection process and portfolio reviews. Joining Principal Management Corporation in 2004, he has 16 years of investment experience including 14 years in the mutual fund industry (Scudder and Founders Asset Management). His background includes quantitative analysis, fundamental analysis and portfolio management focusing on non-U.S. stocks. Mr. Loeffler earned an MBA in Finance at the University of Chicago and a degree in Economics from Washington State University. He has earned the right to use the Chartered Financial Analyst designation. PRINCIPAL INVESTORS FUND, INC. CLASS J This Prospectus describes a mutual fund organized by Principal Life Insurance Company/(R) /("Principal Life"). The date of this Prospectus is March 1, 2006. As with all mutual funds, neither the Securities and Exchange Commission ("SEC") nor any State Securities Commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. It is a criminal offense to represent otherwise. TABLE OF CONTENTS Fund Descriptions....................................................... Fixed Income Funds Money Market Fund..................................................... Short-Term Bond Fund f/k/a High Quality Short-Term Bond Fund.......... Ultra Short Bond Fund f/k/a Capital Preservation Fund ................. Conservative Funds Bond & Mortgage Securities Fund....................................... Government & High Quality Bond Fund f/k/a Government Securities Fund .. High Quality Intermediate-Term Bond Fund.............................. Inflation Protection Fund............................................. Preferred Securities Fund............................................. Moderate Funds LargeCap Growth Fund.................................................. LargeCap S&P 500 Index Fund........................................... LargeCap Value Fund................................................... MidCap Value Fund..................................................... Partners LargeCap Blend Fund.......................................... Partners LargeCap Blend Fund I........................................ Partners LargeCap Growth Fund......................................... Partners LargeCap Growth Fund I....................................... Partners LargeCap Growth Fund II...................................... Partners LargeCap Value Fund.......................................... Partners MidCap Value Fund............................................ Aggressive Funds MidCap Blend Fund..................................................... MidCap Growth Fund.................................................... MidCap S&P 400 Index Fund............................................. Partners MidCap Growth Fund........................................... Partners SmallCap Growth Fund I....................................... Partners SmallCap Growth Fund II...................................... Partners SmallCap Value Fund.......................................... Real Estate Securities Fund........................................... SmallCap Blend Fund................................................... SmallCap Growth Fund.................................................. SmallCap S&P 600 Index Fund........................................... SmallCap Value Fund................................................... Dynamic Funds Diversified International Fund........................................ International Emerging Markets Fund................................... International Growth Fund ............................................. Principal LifeTime Funds Principal LifeTime 2010 Fund.......................................... Principal LifeTime 2020 Fund.......................................... Principal LifeTime 2030 Fund.......................................... Principal LifeTime 2040 Fund.......................................... Principal LifeTime 2050 Fund.......................................... Principal LifeTime Strategic Income Fund.............................. 2 Principal Investors Fund 1-800-247-4123 General Information The Costs of Investing................................................. Certain Investment Strategies and Related Risks........................ Management, Organization and Capital Structure......................... Pricing of Fund Shares................................................. How to Buy Fund Shares................................................. How to Redeem (Sell) Shares............................................ How to Exchange Shares Among Principal Investors Funds................. Dividends and Distributions............................................ General Information About a Fund Account............................... Portfolio Holdings Information......................................... Financial Highlights................................................... Appendix A.............................................................. Additional Information.................................................. Principal Investors Fund 3 www.principal.com The Principal Investors Funds have been divided into categories. The working definition of each category is shown below: STABLE Investment options that historically have had lower earnings over longer periods of time and have not changed much in value over short periods of time as compared to the other categories. Examples are money market, some short-term bond and stable value investment options. CONSERVATIVE Investments, including government securities, mortgage-backed securities, and corporate bonds, that change in value as interest rates change. They are generally less volatile than stocks. MODERATE In general, these are stocks of large U.S. companies. In the past, they have been more volatile than corporate and government bonds. Balanced investments (that include both stocks and bonds) are also considered to be moderate investment options. AGGRESSIVE Although there are exceptions, these investments are generally stocks of small and medium-size U.S. companies. These investments can change in value very quickly over short time periods. DYNAMIC In general, theses are stocks of foreign companies. These investments have additional risks associated with foreign investing, such as currency risk, and can change in value very quickly over short-term periods. PRINCIPAL LIFETIME The Principal LifeTime Funds invest in a combination of Principal Investors Funds (the underlying funds). Each Principal LifeTime Fund may invest in the equity, fixed-income and money market funds and allocates its assets among the underlying funds according to an asset allocation strategy. The Principal LifeTime Strategic Income Fund is designed for investors already in retirement. Each of the other Principal LifeTime Funds seek to become increasingly conservative as the Fund approaches its target retirement date. For example: The Principal LifeTime 2030 Fund, with a target retirement year that is nearly 30 years away, has a relatively aggressive target asset allocation. The Principal LifeTime 2010 Fund, with a target retirement year that is less than ten years away, has a relatively conservative target asset allocation. 4 Principal Investors Fund 1-800-247-4123 FUND DESCRIPTIONS Principal Investors Fund, Inc. is comprised of many investment portfolios ("Funds"). Principal Management Corporation*, the "Manager" of each of the Funds, seeks to provide a broad range of investment approaches through the Principal Investors Fund. The Manager has selected a Sub-Advisor for each Fund based on the Sub-Advisor's experience with the investment strategy for which it was selected. The Sub-Advisor for each Fund is shown with the Fund's description on the following pages. The Sub-Advisors are: .. Alliance Capital Management, L.P. ("Alliance") .. AllianceBernstein Investment Research and Management ("Bernstein") .. American Century Investment Management, Inc. ("American Century") .. Ark Asset Management Co., Inc. ("Ark Asset") .. Barrow, Hanley, Mewhinney & Strauss, Inc. ("BHMS") .. BNY Investment Advisors ("BNY") .. Columbus Circle Investors ("CCI")* .. Emerald Advisers, Inc. ("Emerald") .. Goldman Sachs Asset Management LP ("GSAM") .. Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") .. Los Angeles Capital Management and Equity Research, Inc. ("LA Capital") .. Neuberger Berman Management Inc. ("Neuberger Berman") .. Principal Global Investors, LLC ("Principal")* .. Principal Real Estate Investors, LLC ("Principal - REI")* .. Spectrum Asset Management, Inc. ("Spectrum")* .. T. Rowe Price Associates, Inc. ("T. Rowe Price") .. Turner Investment Partners, Inc. ("Turner") .. UBS Global Asset Management (Americas) Inc. ("UBS Global AM") .. Wellington Management Company, LLP ("Wellington Management") * Principal Management Corporation, CCI, Principal, Principal - REI, Princor Financial Services Corporation ("Princor"), Principal Life and Spectrum are affiliates of Principal Life Insurance Company and with it are subsidiaries of Principal Financial Group, Inc. and members of the Principal Financial Group/(R)/. CLASS J SHARES Class J shares of each of these Funds are available through this Prospectus. This class is currently available only through registered representatives of: .. Princor who are also employees of Principal Life (These registered representatives are sales counselors of Principal Connection, a distribution channel used to directly market certain products and services of the companies of the Principal Financial Group.); .. Princor selling Class J shares as a result of certain plan or contract terminations; .. selected broker/dealers selling Class J shares in conjunction with the Principal Income IRA or 403(b) plans or health savings accounts; .. registered representatives of Princor and of selected broker/dealers selling Class J shares in conjunction with payroll deduction plans; and .. selected broker-dealers with which Princor has entered into a selling agreement. Class J shares are offered only: .. to individuals (and his/her spouse) who receive lump sum distributions from terminating retirement or employee welfare benefit plans or contracts sponsored by Principal Life; and .. to customers of Principal Connection. Class J shares of the MidCap Value, Preferred Securities and SmallCap Value Funds are available through Principal Passage, a fee-based brokerage account. Not all of the Funds are offered in every state. Please check with your financial advisor or our home office for state availability. Principal Investors Fund 5 www.principal.com For more information about Class J shares of the Funds, please call the Connection at 1-800-247-8000, extension 411. In the description for each Fund, there is important information about the Fund's: MAIN STRATEGIES AND RISKS These sections describe each Fund's investment objective and summarize how each Fund intends to achieve its investment objective. The Board of Directors may change a Fund's objective or the principal investment policies without a shareholder vote if it determines such a change is in the best interests of the Fund. If there is a material change to the Fund's investment objective or principal investment policies, you should consider whether the Fund remains an appropriate investment for you. There is no guarantee that a Fund will meet its objective. The sections also describe each Fund's primary investment strategies (including the type or types of securities in which the Fund invests), any policy of the Fund to concentrate in securities of issuers in a particular industry or group of industries and the main risks associated with an investment in the Fund. A fuller discussion of risks appears later in the Prospectus under the caption "Certain Investment Strategies and Related Risks." Each Fund may invest up to 100% of its assets in cash and cash equivalents for temporary defensive purposes in response to adverse market, economic or political conditions as more fully described under the caption "Certain Investment Strategies and Related Risks-Temporary Defensive Measures." Each Fund is designed to be a portion of an investor's portfolio. None of the Funds is intended to be a complete investment program. Investors should consider the risks of each Fund before making an investment and be prepared to maintain the investment during periods of adverse market conditions. INVESTMENT RESULTS A bar chart and a table are included with each Fund that has annual returns for a full calendar year. They show the Fund's annual returns and its long-term performance. The chart shows how the Fund's performance has varied from year-to-year. The table compares the Fund's performance over time to that of: .. a broad-based securities market index (An index measures the market price of a specific group of securities in a particular market or securities in a market sector. You cannot invest directly in an index. An index does not have an investment advisor and does not pay any commissions or expenses. If an index had expenses, its performance would be lower.); and .. an average of mutual funds with a similar investment objective and management style. The averages used are prepared by independent statistical services. A Fund's past performance is not necessarily an indication of how the Fund will perform in the future. Call the Principal Investors Fund at 1-800-247-4123 to get the current 7-day yield for the Money Market Fund. FEES AND EXPENSES The annual operating expenses for each Fund are deducted from that Fund's assets (stated as a percentage of Fund assets). Each Fund's operating expenses are shown with the description of the Fund and are stated as a percentage of Fund assets. A discussion of fees and expenses appears later in the Prospectus under the caption "The Costs of Investing." The description of each Fund includes examples of the costs associated with investing in the Fund. The examples are intended to help you compare the cost of investing in a particular Fund with the cost of investing in other mutual funds. The examples assume you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The examples also assume that your investment has a 5% total return each year and that the Fund's operating expenses remain the same. Your actual costs of investing in a particular Fund may be higher or lower than the costs assumed for purposes of the examples. NOTES: .. No salesperson, dealer or other person is authorized to give information or make representations about a Fund other than those contained in this Prospectus. Information or representations not contained in this Prospectus may 6 Principal Investors Fund 1-800-247-4123 not be relied upon as having been made by the Principal Investors Fund, a Fund, the Manager, any Sub-Advisor or Princor. .. Investments in these Funds are not deposits of a bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Principal Investors Fund 7 www.principal.com MONEY MARKET FUND The Fund seeks as high a level of current income as is considered consistent with preservation of principal and maintenance of liquidity. MAIN STRATEGIES The Fund invests its assets in a portfolio of high quality, short-term money market instruments. The investments are U.S. dollar denominated securities which the Sub-Advisor, Principal, believes present minimal credit risks. At the time the Fund purchases each security, it is an "eligible security" as defined in the regulations issued under the Investment Company Act of 1940, as amended. The Fund maintains a dollar weighted average portfolio maturity of 90 days or less. It intends to hold its investments until maturity. However, the Fund may sell a security before it matures: .. to take advantage of market variations; .. to generate cash to cover sales of Fund shares by its shareholders; or .. upon revised credit opinions of the security's issuer. The sale of a security by the Fund before maturity may not be in the best interest of the Fund. The sale of portfolio securities is usually a taxable event. The Fund does have an ability to borrow money to cover the redemption of Fund shares. It is the policy of the Fund to be as fully invested as possible to maximize current income. Securities in which the Fund invests include: .. securities issued or guaranteed by the U.S. government, including treasury bills, notes and bonds; .. securities issued or guaranteed by agencies or instrumentalities of the U.S. government. These are backed either by the full faith and credit of the U.S. government or by the credit of the particular agency or instrumentality; .. bank obligations including: . certificates of deposit which generally are negotiable certificates against funds deposited in a commercial bank; or . bankers acceptances which are time drafts drawn on a commercial bank, usually in connection with international commercial transactions. .. commercial paper which is short-term promissory notes issued by U.S. or foreign corporations primarily to finance short-term credit needs; .. corporate debt consisting of notes, bonds or debentures which at the time of purchase by the Fund has 397 days or less remaining to maturity; .. repurchase agreements under which securities are purchased with an agreement by the seller to repurchase the security at the same price plus interest at a specified rate. Generally these have a short maturity (less than a week) but may also have a longer maturity; and .. taxable municipal obligations which are short-term obligations issued or guaranteed by state and municipal issuers which generate taxable income. Among the certificates of deposit typically held by the Fund are Eurodollar and Yankee obligations which are issued in U.S. dollars by foreign banks and foreign branches of U.S. banks. Before the Sub-Advisor selects a Eurodollar or Yankee obligation, however, the foreign issuer undergoes the same credit-quality analysis and tests of financial strength as an issuer of domestic securities. MAIN RISKS As with all mutual funds, the value of the Fund's assets may rise or fall. Although the Fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in the Fund. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any security, the securities in which the Fund invests have associated risks. These include risks of: CREDIT RISK . Credit risk pertains to the issuer's ability to make scheduled principal or interest payments. This may reduce the Fund's stream of income and decrease the Fund's yield. 8 Principal Investors Fund 1-800-247-4123 INTEREST RATE RISK . The value of the Fund's shares is directly impacted by trends in interest rates. If interest rates rise, the value of debt securities generally will fall. REPURCHASE AGREEMENTS . The Fund may invest in repurchase agreements with commercial banks, brokers and dealers considered by the Sub-Advisor to be creditworthy. Default or insolvency of the other party is a potential risk to the Fund. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in securities issued by government-sponsored enterprises. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. EURODOLLAR AND YANKEE OBLIGATIONS . Eurodollar and Yankee obligations have risks similar to U.S. money market instruments, such as income risk and credit risk. Other risks of Eurodollar and Yankee obligations include the possibilities that: a foreign government will not let U.S. dollar-denominated assets leave the country; the banks that issue Eurodollar obligations may not be subject to the same regulations as U.S. banks; and adverse political or economic developments will affect investments in a foreign country. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking monthly dividends without incurring much principal risk. Principal Investors Fund 9 www.principal.com Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"0.53 "2003"0.01 "2004"0.2 "2005"2.2 LOGO Year-to-date return as of December 31, 2005 for Class J is 2.20%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '05 0.80% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '04 0.00%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J ................................. 1.20 1.08 Lehman Brothers U.S. Treasury Bellwethers 3 Month Index ........................... 3.08 2.20 Index performance does not reflect deductions for fees, expenses or taxes. To obtain the Fund's current yield, call 1-800-547-7754 *Lifetime results are measured from the date the Class J shares were first sold. (March 1, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.40% 12b-1 Fees* ....................... 0.25 Other Expenses..................... 0.50 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.15%
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ------------------------------------------------------------------------------------------------------------------ NUMBER OF YEARS YOU OWN YOUR SHARES ------------------------------------------------------------------------------------------------------------------ 1 3 5 10 1 3 5 10 CLASS J $217 $365 $633 $1,398 $117 $365 $633 $1,398
10 Principal Investors Fund 1-800-247-4123 SHORT-TERM BOND FUND The Fund seeks to provide current income. MAIN STRATEGIES The Fund invests primarily in short-term fixed-income securities. Under normal circumstances, the Fund maintains a dollar-weighted effective maturity of not more than three years. In determining the average effective maturity of the Fund's assets, the maturity date of a callable security or prepayable securities may be adjusted to reflect Principal's judgment regarding the likelihood of the security being called or prepaid. The Fund considers the term "bond" to mean any debt security. Under normal circumstances, it invests at least 80% of its assets in: .. securities issued or guaranteed by the U.S. government or its agencies or instrumentalities; .. debt securities of U.S. issuers rated in the three highest grades by Standard & Poor's Rating Service or Moody's Investors Service, Inc. or, if unrated, in the opinion of the Sub-Advisor, Principal, of comparable quality; and .. mortgage-backed securities representing an interest in a pool of mortgage loans. The rest of the Fund's assets may be invested in a variety of financial instruments, including securities in the fourth highest rating category or their equivalent. Securities in the fourth highest category are "investment grade." While they are considered to have adequate capacity to pay interest and repay principal, they do have speculative characteristics. Changes in economic and other conditions are more likely to affect the ability of the issuer to make principal and interest payments than is the case with issuers of higher rated securities. The Fund may invest up to 15% of its assets in below-investment-grade fixed-income securities. Fixed-income securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies. (please see "High Yield Securities" in the section of the prospectus entitled "Certain Investment Strategies and Related Risks) The Fund may enter into reverse repurchase agreements to attempt to enhance portfolio return and income. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a specified date and price. The Fund pays interest on this "secured financing" and attempts to make money on the difference between the financing rate and the interest it earns by investing the proceeds of the financing. While a reverse repurchase agreement is outstanding, the Fund will maintain cash and appropriate liquid assets to cover its obligation under the agreement. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. PORTFOLIO DURATION. . The average portfolio duration of the Fund normally is less than three years and is based on Principal's forecast for interest rates. Duration is a measure of the expected life of a fixed-income security that is used to determine the sensitivity of a security's price to changes in interest rates. For example, if the portfolio duration of the Fund is three years, a change of 1% in the market's yield results in a change of approximately 3% in the value of the Principal Investors Fund 11 www.principal.com Fund's securities. The longer a security's duration, the more sensitive it is to changes in interest rates. A Fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates. This may increase the volatility of the Fund. REVERSE REPURCHASE AGREEMENTS. . This strategy involves the risk that interest costs on money borrowed may exceed the return on securities purchased with the borrowed money. In addition, reverse repurchase agreements may increase the volatility of the Fund. HIGH YIELD SECURITIES . Fixed-income securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies. (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks") DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 110.8%. 12 Principal Investors Fund 1-800-247-4123 INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking diversification by investing in a fixed-income mutual fund. Principal Investors Fund 13 www.principal.com Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"6.77 "2003"1.81 "2004"0.45 "2005"1.42 LOGO Year-to-date return as of December 31, 2005 for Class J is 1.42%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02 3.08% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '04 -1.70%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 0.44 2.95 (AFTER TAXES ON DISTRIBUTIONS).... -0.69 1.65 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.28 1.74 Lehman Brothers Mutual Fund 1-5 Gov't/Credit Index ................ 1.44 4.38 Morningstar Short-Term Bond Category Average 1.43 3.45 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.40 12b-1 Fees......................... 0.50 Other Expenses..................... 0.28 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.27
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The 14 Principal Investors Fund 1-800-247-4123 Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 10 CLASS J $229 $403 $697 $1,534 $129 $403 $69
Principal Investors Fund 15 www.principal.com ULTRA SHORT BOND FUND F/K/A CAPITAL PERSERVATION FUND The Fund seeks current income while seeking capital preservation. MAIN STRATEGIES The Fund invests primarily in high quality, short-term fixed-income securities. Under normal circumstances, the Fund maintains a dollar-weighted effective maturity of not more than 2.5 years. In determining the average effective maturity of the Fund's assets, the maturity date of a callable security or prepayable securities may be adjusted to reflect Principal's judgment regarding the likelihood of the security being called or prepaid. The Fund considers the term "bond" to mean any debt security. Under normal circumstances, it invests at least 80% of its assets in: .. securities issued or guaranteed by the U.S. government or its agencies or instrumentalities; .. debt securities of U.S. issuers rated in the three highest grades by Standard & Poor's Rating Service or Moody's Investors Service, Inc. or, if unrated, in the opinion of the Sub-Advisor, Principal, of comparable quality; and .. mortgage-backed securities representing an interest in a pool of mortgage loans. The rest of the Fund's assets may be invested in a variety of financial instruments, including securities in the fourth highest rating category or their equivalent. Securities in the fourth highest category are "investment grade." While they are considered to have adequate capacity to pay interest and repay principal, they do have speculative characteristics. Changes in economic and other conditions are more likely to affect the ability of the issuer to make principal and interest payments than is the case with issuers of higher rated securities. In addition, though the Fund invests primarily in investment grade securities, Principal may invest up to 15% of the Fund's assets in high yield securities ("junk bonds") rated CCC or higher by Moody's or Standard & Poor's or, if unrated, determined by Principal to be of comparable quality. The Fund may enter into reverse repurchase agreements to attempt to enhance portfolio return and income. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a specified date and price. Reverse repurchase agreements are considered to be borrowings by the Fund and are subject to the Fund's restrictions on borrowing. The Fund pays interest on this "secured financing" and attempts to make money on the difference between the financing rate and the interest earned. Under unusual market or economic conditions, the Fund may invest up to 100% of its assets in cash and cash equivalents. During the fiscal year ended October 31, 2005, the average ratings of the Fund's assets, based on market value at each month-end, were as follows (all ratings are by Moody's):
21.63% in securities 21.77% in securities 0.00% in securities rated rated Aaa rated Baa Caa 12.84% in securities 4.64% in securities rated 0.00% in securities rated rated Aa Ba Ca 38.62% in securities 0.50% in securities rated rated A B
The above percentages for Aa, A and Baa rated securities include unrated securities in the amount of 0.18%, 0.43%, and 0.58%. respectively, which have been determined by the Manager to be of comparable quality. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. 16 Principal Investors Fund 1-800-247-4123 CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. PORTFOLIO DURATION. . The average portfolio duration of the Fund normally is less than one year and is based on Principal's forecast for interest rates. Duration is a measure of the expected life of a fixed-income security that is used to determine the sensitivity of a security's price to changes in interest rates. For example, if the portfolio duration of the Fund is three years, a change of 1% in the market's yield results in a change of approximately 3% in the value of the Fund's securities. The longer a security's duration, the more sensitive it is to changes in interest rates. A Fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates. This may increase the volatility of the Fund. HIGH YIELD SECURITIES . Fixed-income securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). REVERSE REPURCHASE AGREEMENTS. . This strategy involves the risk that interest costs on money borrowed may exceed the return on securities purchased with the borrowed money. In addition, reverse repurchase agreements may increase the volatility of the Fund. DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. Principal Investors Fund 17 www.principal.com ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 54.9%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking diversification by investing in a fixed-income mutual fund. 18 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since June 15, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"3.12 "2003"2.18 "2004"1.74 "2005"2.14 LOGO The year-to-date return as of December 31, 2005 for Class J is 2.14%. On July 29, 2004, the Fund converted to a money market fund. On May 27, 2005, the Fund converted to an ultra short term bond fund. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '05 0.74% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '04 0.23%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 1.15 2.45 (AFTER TAXES ON DISTRIBUTIONS..... 0.25 1.51 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.74 1.52 6-Month LIBOR Index .. 3.33 2.25 Morningstar Ultrashort Bond Category Average 2.49 2.35 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES
CLASS J Management Fees.................... 0.40 12b-1 Fees......................... 0.50 Other Expenses..................... 0.26 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.16 The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally paid by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percentage of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.20%.
(expenses that are deducted from Fund assets) as of October 31, 2005 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Principal Investors Fund 19 www.principal.com Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $218 $368 $638 $1,409 $118 $368 $638 $1,409
20 Principal Investors Fund 1-800-247-4123 BOND & MORTGAGE SECURITIES FUND The Fund seeks to provide current income. MAIN STRATEGIES Under normal circumstances, the Fund invests at least 80% of its assets in intermediate maturity fixed-income or debt securities rated BBB or higher by Standard & Poor's Rating Service ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"). The Fund considers the term "bond" to mean any debt security. Under normal circumstances, the Fund invests in: .. securities issued or guaranteed by the U.S. government or its agencies or instrumentalities; .. mortgage-backed securities representing an interest in a pool of mortgage loans; .. debt securities and taxable municipal bonds rated, at the time of purchase, in one of the top four categories by S&P or Moody's or, if not rated, in the opinion of the Sub-Advisor, Principal, of comparable quality; and .. securities issued or guaranteed by the governments of Canada (provincial or federal government) or the United Kingdom payable in U.S. dollars. The rest of the Fund's assets may be invested in: .. preferred and common stock that may be convertible (may be exchanged for a fixed number of shares of common stock of the same issuer) or may be non-convertible; or .. securities rated less than the four highest grades of S&P or Moody's (i.e. less than investment grade (commonly known as "junk bonds")) but not lower than CCC- (S&P) or Caa (Moody's). The Fund may enter into reverse repurchase agreements to attempt to enhance portfolio return and income. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a specified date and price. The Fund pays interest on this "secured financing" and attempts to make money on the difference between the financing rate and the interest it earns by investing the proceeds of the financing. While a reverse repurchase agreement is outstanding, the Fund will maintain cash and appropriate liquid assets to cover its obligation under the agreement. The Fund may actively trade securities in an attempt to achieve its investment objective. During the fiscal year ended October 31, 2005, the average ratings of the Fund's assets, based on market value at each month-end, were as follows (all ratings are by Moody's):
59.35% in securities 14.61% in securities 0.56% in securities rated rated Aaa rated Baa Caa 5.95% in securities 3.30% in securities rated 0.06% in securities rated rated Aa Ba Ca 12.55% in securities 3.60% in securities rated 0.02% in securities rated rated A B C
The above percentages for Aaa, Baa, Ba and B rated securities includes 0.02%, 0.01%, 0.01%, and 0.03% respectively of unrated securities which have been determined by the manager to be of comparable quality. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: MUNICIPAL SECURITIES . Principal and interest payments of municipal securities may not be guaranteed by the issuing body and may be payable only from monies derived from a particular source. If the source does not perform as expected, principal and income payments may not be made on time or at all. In addition, the market for municipal securities is often thin and may be temporarily affected by large purchases and sales, including those of the Fund. General conditions in the financial markets and the size of a particular offering may also negatively affect the returns of a municipal security. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Principal Investors Fund 21 www.principal.com Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates. This may increase the volatility of the Fund. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation maybe chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. REVERSE REPURCHASE AGREEMENTS. . This strategy involves the risk that interest costs on money borrowed may exceed the return on securities purchased with the borrowed money. In addition, reverse repurchase agreements may increase the volatility of the Fund. PORTFOLIO DURATION. . The average portfolio duration of the Fund normally varies within a three- to six-year time frame based on Principal's forecast for interest rates. Duration is a measure of the expected life of a fixed-income security that is used to determine the sensitivity of a security's price to changes in interest rates. For example, if the portfolio duration of the Fund is three years, a change of 1% in the market's yield results in a change of approximately 3% in the value of the Fund's securities. The longer a security's duration, the more sensitive it is to changes in interest rates. A Fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. HIGH YIELD SECURITIES . Fixed-income securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. 22 Principal Investors Fund 1-800-247-4123 HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 202.1%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking diversification by investing in a fixed-income mutual fund. Principal Investors Fund 23 www.principal.com Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"8.22 "2003"3.27 "2004"3.89 "2005"1.9 LOGO The year-to-date return as of December 31, 2005 for Class J is 1.90%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02 4.03% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q2 '04 -2.50%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 0.91 4.35 (AFTER TAXES ON DISTRIBUTIONS) ... -0.24 2.99 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.59 2.89 Lehman Brothers Aggregate Bond Index . 2.43 5.54 Morningstar Intermediate-Term Bond Category Average...... 1.79 4.92 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees................... 0.54 12b-1 Fees........................ 0.50 Other Expenses*................... 0.48 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.52
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The 24 Principal Investors Fund 1-800-247-4123 Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 10 CLASS J $255 $480 $829 $1,813 $155 $480 $82$1
Principal Investors Fund 25 www.principal.com GOVERNMENT & HIGH QUALITY BOND FUND F/K/A GOVERNMENT SECURITIES FUND The Fund seeks to provide current income. MAIN STRATEGIES The Fund seeks to achieve its investment objective by investing primarily (at least 80% of its assets) in securities that are issued by the U.S. government, its agencies or instrumentalities. The Fund may invest in mortgage-backed securities representing an interest in a pool of mortgage loans. These securities are rated AAA by Standard & Poor's Corporation or Aaa by Moody's Investor Services, Inc. or, if unrated, determined by the Sub-Advisor, Principal, to be of equivalent quality. The Fund relies on the professional judgment of Principal to make decisions about the Fund's portfolio securities. The basic investment philosophy of Principal is to seek undervalued securities that represent good long-term investment opportunities. Securities may be sold when Principal believes they no longer represent good long-term value. The Fund may also hold cash and cash equivalents. The size of the Fund's cash position depends on various factors, including market conditions and purchases and redemptions of Fund shares. A large cash position could impact the ability of the Fund to achieve its objective but it also would reduce the Fund's exposure in the event of a market downturn and provide liquidity to make additional investments or to meet redemptions. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: U.S. GOVERNMENT SECURITIES . U.S. Government securities do not involve the degree of credit risk associated with investments in lower quality fixed-income securities. As a result, the yields available from U.S. Government securities are generally lower than the yields available from many other fixed-income securities. Like other fixed-income securities, the values of U.S. Government securities change as interest rates fluctuate. Fluctuations in the value of the Fund's securities do not affect interest income on securities already held by the Fund, but are reflected in the Fund's price per share. Since the magnitude of these fluctuations generally is greater at times when the Fund's average maturity is longer, under certain market conditions the Fund may invest in short-term investments yielding lower current income rather than investing in higher yielding longer term securities. INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. Prepayments, unscheduled principal payments, may result from voluntary prepayment, refinancing or foreclosure of the underlying 26 Principal Investors Fund 1-800-247-4123 mortgage. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates and potentially increasing the volatility of the Fund. In addition, prepayments may cause losses on securities purchased at a premium (dollar amount by which the price of the bond exceeds its face value). At times, mortgage-backed securities may have higher than market interest rates and are purchased at a premium. Unscheduled prepayments are made at par and cause the Fund to experience a loss of some or all of the premium. DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 542.3%. INVESTOR PROFILE The Fund may be an appropriate for investors seeking diversification by investing in a fixed-income mutual fund. Principal Investors Fund 27 www.principal.com Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"7.75 "2003"0.83 "2004"2.8 "2005"1.4 LOGO The year-to-date return as of December 31, 2005 for Class J is 1.40%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '02 3.11% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q2 '04 -1.78%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 0.41 3.49 (AFTER TAXES ON DISTRIBUTIONS).... -0.66 2.13 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.26 2.16 Lehman Brothers Government/Mortgage Index................. 2.63 5.13 Morningstar Intermediate Government Category Average .............. 1.90 4.46 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.40 12b-1 Fees......................... 0.50 Other Expenses..................... 0.28 ---- TOTAL FUND OPERATING EXPENSES 1.18
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The 28 Principal Investors Fund 1-800-247-4123 Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 10 CLASS J $220 $375 $649 $1,432 $120 $375 $64$1
Principal Investors Fund 29 www.principal.com HIGH QUALITY INTERMEDIATE-TERM BOND FUND The Fund seeks to provide current income. MAIN STRATEGIES The Fund invests primarily in intermediate term fixed-income securities rated A or higher by Standard & Poor's Rating Service ("S&P") or Moody's Investors Service, Inc. ("Moody's"). Under normal circumstances, the Fund maintains a dollar-weighted effective maturity of greater than three and less than ten years. In determining the average effective maturity of the Fund's assets, the maturity date of a callable security or prepayable securities may be adjusted to reflect Principal's judgment regarding the likelihood of the security being called or prepaid. The Fund considers the term "bond" to mean any debt security. Under normal circumstances, the Fund invests at least 80% of its assets in: .. securities issued or guaranteed by the U.S. government or its agencies or instrumentalities; .. mortgage-backed securities representing an interest in a pool of mortgage loans; .. debt securities and taxable municipal bonds rated, at the time of purchase, in one of the top three categories by S&P or Moody's or, if not rated, in the opinion of the Sub-Advisor, Principal, of comparable quality; and .. securities issued or guaranteed by the governments of Canada (provincial or federal government) or the United Kingdom payable in U.S. dollars. The rest of the Fund's assets may be invested in: .. common stock and preferred stock that may be convertible (may be exchanged for a fixed number of shares of common stock of the same issuer) or may be non-convertible; or .. securities rated less than the three highest grades of S&P or Moody's but not lower than BBB- (S&P) or BAA3 (Moody's) (i.e. less than investment grade). Under unusual market or economic conditions, the Fund may invest up to 100% of its assets in cash and cash equivalents. The Fund may enter into reverse repurchase agreements to attempt to enhance portfolio return and income. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a specified date and price. Reverse repurchase agreements are considered to be borrowings by the Fund and are subject to the Fund's restrictions on borrowing. The Fund pays interest on this "secured financing" and attempts to make money on the difference between the financing rate and the interest earned. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: MUNICIPAL SECURITIES . Principal and interest payments of municipal securities may not be guaranteed by the issuing body and may be payable only from monies derived from a particular source. If the source does not perform as expected, principal and income payments may not be made on time or at all. In addition, the market for municipal securities is often thin and may be temporarily affected by large purchases and sales, including those of the Fund. General conditions in the financial markets and the size of a particular offering may also negatively affect the returns of a municipal security. REVERSE REPURCHASE AGREEMENTS. . This strategy involves the risk that interest costs on money borrowed may exceed the return on securities purchased with the borrowed money. In addition, reverse repurchase agreements may increase the volatility of the Fund. PORTFOLIO DURATION. . The average portfolio duration of the Fund normally varies within a three- to six-year time frame based on Principal's forecast for interest rates. Duration is a measure of the expected life of a fixed-income security that is used to determine the sensitivity of a security's price to changes in interest rates. For example, if the portfolio duration of the Fund is three years, a change of 1% in the market's yield results in a change of approximately 3% in the value of the Fund's securities. The longer a security's duration, the more sensitive it is to changes in interest rates. A Fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a Fund with a shorter average portfolio duration. 30 Principal Investors Fund 1-800-247-4123 INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation maybe chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates. This may increase the volatility of the Fund. DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 177.4%. Principal Investors Fund 31 www.principal.com INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking diversification by investing in a fixed-income mutual fund. 32 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"8.71 "2003"2.88 "2004"3.44 "2005"1.97 LOGO The year-to-date return as of December 31, 2005 for Class J is 1.97%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02 4.46% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q2 '04 -2.47%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 0.98 4.32 (AFTER TAXES ON DISTRIBUTIONS).... -0.03 2.84 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.65 2.81 Lehman Brothers Aggregate Bond Index . 2.43 5.54 Morningstar Intermediate-Term Bond Category Average...... 1.79 4.92 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.40% 12b-1 Fees........................... 0.50 Other Expenses*...................... 0.62 ---- TOTAL FUND OPERATING EXPENSES 1.52% Expense Reimbursement ............... 0.17 ---- NET EXPENSES 1.35% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.35%.
EXAMPLE Principal Investors Fund 33 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ------------------------------------------------------------------------------------------------------------------ NUMBER OF YEARS YOU OWN YOUR SHARES ------------------------------------------------------------------------------------------------------------------ 1 3 5 10 1 3 5 10 CLASS J $237 $461 $810 $1,796 $137 $461 $810 $1,796
34 Principal Investors Fund 1-800-247-4123 INFLATION PROTECTION FUND The Fund seeks to provide current income and real (after-inflation) total returns. MAIN STRATEGIES Under normal circumstances, the Fund invests primarily in inflation protected debt securities. Inflation protected debt securities are designed to provide a "real rate of return" - a return after adjusting for the impact of inflation. Inflation - a rise in the general price level - erodes the purchasing power of an investor's portfolio. For example, if an investment provides a "nominal" total return of 8% in a given year and inflation is 3% during that period, the inflation-adjusted, or real, return is 5%. The investment's inflation adjustment is based on a designated inflation index (such as the Consumer Price Index for Urban Consumers) and typically is applied monthly to the principal of the security. The fixed coupon rate of the security is based on the adjusted principal so that as inflation increases, both the principal value and the interest payments increase. Because this inflation adjustment feature is designed to mitigate a major risk, inflation protected debt securities typically have lower nominal yields than conventional fixed-rate debt securities. The Fund may invest in: .. inflation protected debt securities issued by the U.S. Treasury and U.S. Government sponsored entities as well as inflation protected debt securities issued by corporations; .. inflation protected debt securities issued by foreign governments and corporations that are linked to a non-U.S. inflation rate; .. floating rate notes; .. adjustable rate mortgages; .. derivative instruments, such as options, futures contracts or swap agreements, or in mortgage- or asset-backed securities; and .. commodity-linked derivative instruments, including swap agreements, commodity options, futures, and options on futures. The Fund invests primarily in investment grade securities, but may invest up to 15% of the Fund's assets in high yield securities ("junk bonds") rated CCC or higher by Moody's or Standard & Poor's or, if unrated, determined by the Sub-Advisor, Principal, to be of comparable quality. The Fund may invest up to 20% of its assets in securities denominated in foreign currencies. The Fund will normally hedge at least 75% of its exposure to foreign currency to reduce the risk of loss due to fluctuations in currency exchange rates. The Fund may enter into reverse repurchase agreements to attempt to enhance portfolio return and income. Under a reverse repurchase agreement, the Fund sells securities and agrees to repurchase them at a specified date and price. The Fund pays interest on this "secured financing" and attempts to make money on the difference between the financing rate and the interest it earns by investing the proceeds of the financing. While a reverse repurchase agreement is outstanding, the Fund will maintain cash and appropriate liquid assets to cover its obligation under the agreement. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: U.S. GOVERNMENT SECURITIES . U.S. Government securities do not involve the degree of credit risk associated with investments in lower quality debt securities. As a result, the yields available from U.S. Government securities are generally lower than the yields available from many other debt securities. REVERSE REPURCHASE AGREEMENTS. . This strategy involves the risk that interest costs on money borrowed may exceed the return on securities purchased with the borrowed money. In addition, reverse repurchase agreements may increase the volatility of the Fund. Principal Investors Fund 35 www.principal.com INTEREST RATE CHANGES . The value of the debt securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of the securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of the securities. To the extent that changes in interest rates reflect changes in inflation, this risk may be mitigated. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. MORTGAGE-BACKED SECURITIES . Mortgage-backed securities are subject to prepayment risk. Prepayments, unscheduled principal payments, may result from voluntary prepayment, refinancing or foreclosure of the underlying mortgage. When interest rates decline, significant unscheduled prepayments may result. These prepayments must then be reinvested at lower rates. Prepayments may also shorten the effective maturities of these securities, especially during periods of declining interest rates. On the other hand, during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities, subjecting them to the risk of decline in market value in response to rising interest rates and potentially increasing the volatility of the Fund. In addition, prepayments may cause losses on securities purchased at a premium (dollar amount by which the price of the bond exceeds its face value). At times, mortgage-backed securities may have higher than market interest rates and are purchased at a premium. Unscheduled prepayments are made at par and cause the Fund to experience a loss of some or all of the premium. PORTFOLIO DURATION . The average portfolio duration of the Fund normally varies between three and six years and is based on the Sub-Advisor's forecast for interest rates. Duration is a measure of the expected life of a debt security that is used to determine the sensitivity of a security's price to changes in interest rates. For example, if the portfolio duration of the Fund is six years, a change of 1% in the market's yield results in a change of approximately 6% in the value of the Fund's securities. The longer a security's duration, the more sensitive it is to changes in interest rates. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration. HIGH YIELD SECURITIES . Debt securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). DERIVATIVE INSTRUMENTS . The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional instruments. Derivatives are subject to a number of risks including liquidity, interest rate, market, and credit risk. They also involve the risk of mispricing or improper valuation, the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index, and the risk of default or bankruptcy of the other party to the agreement. Gains or losses involving some futures, options, swaps, and other derivatives may be substantial - in part because a relatively small price movement in these securities may result in an immediate and substantial gain or loss for the Fund. COMMODITY-LINKED DERIVATIVE INSTRUMENTS . The use of commodity-linked derivative instruments may subject the Fund to greater volatility than investments in traditional securities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity. 36 Principal Investors Fund 1-800-247-4123 HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. FOREIGN EXPOSURE . Foreign securities can involve additional risks relating to political, economic or regulatory conditions in foreign countries. All of these factors can make foreign investments more volatile than U.S. investments. SECTOR RISK . The Fund is subject to sector risk; that is, the possibility that a certain sector may under perform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to a particular sector or a particular issuer, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector or issuer. DEFLATION . If inflation is negative, the principal and coupon payment may be adjusted lower. INVESTOR PROFILE The Fund may be an appropriate investment for investors who want their income and principal investments to keep pace with inflation over time. Principal Investors Fund 37 www.principal.com Principal has been the Fund's Sub-Advisor since December 29, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2005"2.32 LOGO The year-to-date return as of December 31, 2005 for Class J is 2.32%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2' 05 2.88% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q1 '05 -0.58%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 1.34 1.64 (AFTER TAXES ON DISTRIBUTIONS).... -0.40 -0.10 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.86 0.40 Lehman Brothers US Treasury TIPS Index/(1)/ ........... 2.84 2.84 Lehman Brothers Global Real: U.S. TIPS Index 2.84 3.22 Morningstar Long-Term Government Category Average .............. 3.29 3.26 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (December 29, 2004). **This index is now the benchmark against which the Fund measures its performance. The Manager and the portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees.......................... 0.40% 12b-1 Fees............................... 0.50 Other Expenses (estimated) .............. 3.34 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 4.24% Expense Reimbursement ................... 3.09 ---- NET EXPENSES 1.15% * Other Expenses include: Reverse Repurchase Agreement Interest Expense 1.02 The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.15%.
38 Principal Investors Fund 1-800-247-4123 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $217 $956 $1,861 $4,185 $117 $956 $1,861 $4,185
Principal Investors Fund 39 www.principal.com PREFERRED SECURITIES FUND The Fund seeks to provide current income. MAIN STRATEGIES The Fund invests primarily in preferred securities of U.S. companies rated BBB or higher by Standard & Poor's Rating Service ("S&P") or Moody's Investor Service, Inc. ("Moody's") or, if unrated, of comparable quality in the opinion of the Sub-Advisor, Spectrum. Under normal circumstances, the Fund invests at least 80% of its assets in preferred securities. The Fund focuses primarily on the financial services (i.e., banking, insurance and commercial finance), Real Estate Investment Trust (i.e. REIT) and utility industries. The rest of the Fund's assets may be invested in: .. common stocks; .. debt securities; and .. securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. Preferred securities generally pay fixed rate dividends (though some are adjustable rate) and typically have "preference" over common stock in the payment of dividends and the liquidation of a company's assets - preference means that a company must pay dividends on its preferred securities before paying any dividends on its common stock, and the claims of preferred securities holders are ahead of common stockholders' claims on assets in a corporate liquidation. Holders of preferred securities usually have no right to vote for corporate directors or on other matters. The market value of preferred securities is sensitive to changes in interest rates as they are typically fixed-income securities - the fixed-income payments are expected to be the primary source of long-term investment return. Preferred securities share many investment characteristics with bonds; therefore, the risks and potential rewards of investing in the Fund are more similar to those associated with a bond fund than a stock fund. Spectrum seeks to build a diversified portfolio within the context of the eligible universe of preferred securities. For a security to be considered for the Fund, Spectrum will assess the credit risk within the context of the yield available on the preferred. The yield needs to be attractive in comparison to the rating, expected credit trend and senior debt spread of the same issuer. Spectrum considers features such as call protection, subordination and option adjusted spreads to ensure that the selected issue provides a sufficient yield to justify its inclusion in the portfolio. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: TAXABLE PREFERRED SECURITIES . Taxable preferred securities are a comparatively new asset class. Taxable preferred securities are typically issued by corporations, generally in the form of interest-bearing notes or preferred securities, or by an affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The taxable preferred securities market consists of both fixed and adjustable coupon rate securities that are either perpetual in nature or have stated maturity dates. Taxable preferred securities are typically junior and fully subordinated liabilities of an issuer or the beneficiary of a guarantee that is junior and fully subordinated to the other liabilities of the guarantor. Taxable preferred securities have some characteristics of equity due to their subordinated position in an issuer's capital structure and ability to defer payments (along with any payments on preferred and common stock) without causing a default. SECTOR RISK . It may be difficult to spread the Fund's assets across a wide range of industry groups, which may subject the Fund to industry concentration risk despite adequate company diversification. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. 40 Principal Investors Fund 1-800-247-4123 NON-DIVERSIFIED COMPANY . The Fund is a non-diversified company, as defined in the Investment Company Act of 1940, as amended, which means that a relatively high percentage of assets of the Fund may be invested in the obligations of a limited number of issuers. The value of the shares of the Fund may be more susceptible to a single economic, political or regulatory occurrence than the shares of a diversified investment company. INTEREST RATE CHANGES . The value of fixed-income securities held by the Fund may be affected by factors such as changing interest rates. When interest rates rise, the value of fixed-income securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of fixed-income securities. Some fixed-income investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by the Fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. U.S. GOVERNMENT SPONSORED ENTERPRISES . The Fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. INVESTOR PROFILE The Fund may be an appropriate investment for investors who are seeking dividends to generate income or to be reinvested for growth and are willing to accept fluctuations in the value of the investment. Principal Investors Fund 41 www.principal.com Spectrum has been the Sub-Advisor since the Fund's inception date on May 1, 2002. Class J shares were added to the Fund on December 29, 2003. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2004"3.57 "2005"0.69 LOGO The year-to-date return as of December 31, 2005 for Class J shares is 0.69%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '04 3.90% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q2 '04 -5.45%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) -0.27 2.16 (AFTER TAXES ON DISTRIBUTIONS) ... -1.83 0.52 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 0.13 0.91 Merrill Lynch Preferred Stock Hybrid Index/(1)/............ 0.46 2.96 Lehman Brothers Aggregate Bond Index . 2.43 3.38 Morningstar Intermediate-Term Bond Category Average...... 1.79 2.90 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (December 29, 2003). ///(1)/ This index is now the benchmark against which the Fund measures its performance. The Manager and the portfolio manager believe this Index is more representative of the investment approach employed by the Fund. The new index is made up solely of exchange-listed, investment grade preferred securities.
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005*
CLASS J Management Fees.................... 0.75% 12b-1 Fees......................... 0.50 Other Expenses .................... 0.38 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.63% Expense Reimbursement ............. 0.03 ---- NET EXPENSES 1.60% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.60%.
42 Principal Investors Fund 1-800-247-4123 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ------------------------------------------------------------------------------------------------------------------ NUMBER OF YEARS YOU OWN YOUR SHARES ------------------------------------------------------------------------------------------------------------------ 1 3 5 10 1 3 5 10 CLASS J $263 $511 $883 $1.930 $163 $511 $883 $1.930
Principal Investors Fund 43 www.principal.com LARGECAP GROWTH FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks and other equity securities of large capitalization companies with strong earnings growth potential. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000 Growth Index (as of December 31, 2005 this range was between approximately $898 million and $371.7 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Sub-Advisor, CCI, uses a bottom-up approach (focusing on individual stock selection rather than forecasting stock market trends) in its selection of individual securities that it believes have an above average potential for earnings growth. Selection is based on fundamental analysis of a company relative to other companies with the focus being on CCI's assessment of current and future sales growth and operating margins. Companies meeting these criteria typically have progressed beyond the development stage and are focused on growing the business. Up to 25% of Fund assets may be invested in foreign securities. CCI places strong emphasis on companies it believes are guided by high quality management teams with a proven ability to execute. In addition, the Fund attempts to identify and emphasize those companies that are market leaders possessing the ability to control pricing and margins in their respective industries. CCI constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization growth-oriented stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 44 Principal Investors Fund 1-800-247-4123 CCI became the Fund's Sub-Advisor on January 5, 2005. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-28.97 "2003"23.43 "2004"8.31 "2005"10.69 LOGO The year-to-date return as of December 31, 2005 for Class J is 10.69%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '04 10.37% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '02-15.79%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 9.69 -1.69 (AFTER TAXES ON DISTRIBUTIONS).... 9.69 -1.72 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 6.30 -1.45 Russell 1000 Growth Index ................ 5.26 -1.30 Morningstar Large Growth Category Average .............. 6.46 -0.84 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.55 12b-1 Fees........................... 0.50 Other Expenses....................... 0.43 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.48
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 45 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $251 $468 $808 $1,768 $151 $468 $808 $1,768
46 Principal Investors Fund 1-800-247-4123 LARGECAP S&P 500 INDEX FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies that compose the Standard & Poor's ("S&P") 500 Index. The Sub-Advisor, Principal, attempts to mirror the investment performance of the Index by allocating the Fund's assets in approximately the same weightings as the S&P 500. The S&P 500 is an unmanaged index of 500 common stocks chosen to reflect the industries of the U.S. economy and is often considered a proxy for the stock market in general. Each stock is weighted by its market capitalization which means larger companies have greater representation in the Index than smaller ones. As of December 31, 2005, the market capitalization range of the Index was between approximately $665 million and $370.3 billion. Over the long-term, Principal seeks a very close correlation between performance of the Fund, before expenses, and that of the S&P 500. It is unlikely that a perfect correlation of 1.00 will be achieved. The Fund uses an indexing strategy and is not managed according to traditional methods of "active" investment management. Active management would include buying and selling securities based on economic, financial and investment judgement. Instead, the Fund uses a passive investment approach. Rather than judging the merits of a particular stock in selecting investments, Principal focuses on tracking the S&P 500. Principal may also use stock index futures as a substitute for the sale or purchase of securities. It does not attempt to manage market volatility, use defensive strategies or reduce the effect of any long-term periods of poor stock performance. The correlation between Fund and Index performance may be affected by the Fund's expenses, changes in securities markets, changes in the composition of the Index and the timing of purchases and sales of Fund shares. The Fund may invest in futures and options, which could carry additional risks such as losses due to unanticipated market price movements and could also reduce the opportunity for gain. Because of the difficulty and expense of executing relatively small stock trades, the Fund may not always be invested in the less heavily weighted S&P 500 stocks. At times, the Fund's portfolio may be weighted differently from the S&P 500, particularly if the Fund has a small level of assets to invest. In addition, the Fund's ability to match the performance of the S&P 500 is affected to some degree by the size and timing of cash flows into and out of the Fund. The Fund is managed to attempt to minimize such effects. Principal reserves the right to omit or remove any of the S&P 500 stocks from the Fund if it determines that the stock is not sufficiently liquid. In addition, a stock might be excluded or removed from the Fund if extraordinary events or financial conditions lead Principal to believe that it should not be a part of the Fund's assets. Principal may also elect to omit any S&P 500 stocks from the Fund if such stocks are issued by an affiliated company. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's equity securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth stocks typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. Principal Investors Fund 47 www.principal.com VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital, willing to accept the potential for volatile fluctuations in the value of investments and preferring a passive, rather than active, management style. NOTE: "Standard & Poor's 500"and "S&P 500/(R)/" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed by the Manager. The Fund is not sponsored, endorsed, sold or promoted by Standard and Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund. 48 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-22.97 "2003"26.89 "2004"9.76 "2005"4.01 LOGO The year-to-date return as of December 31, 2005 for Class J is 4.01%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 14.93% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -17.49%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.01 0.67 (AFTER TAXES ON DISTRIBUTIONS).... 2.81 0.34 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.22 0.54 S&P 500 Index ........ 4.91 1.84 Morningstar Large Blend Category Average 5.77 1.82 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.15 12b-1 Fees........................... 0.50 Other Expenses....................... 0.21 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 0.86
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 49 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $188 $274 $477 $1,061 $88 $274 $477 $1,061
50 Principal Investors Fund 1-800-247-4123 LARGECAP VALUE FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stock and other equity securities of large capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000 Value Index (as of December 31, 2005 this range was between approximately $563 million and $371.7 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. Up to 25% of Fund assets may be invested in foreign securities. The Fund invests in stocks that, in the opinion of the Sub-Advisor, Principal, are undervalued in the marketplace at the time of purchase. Value stocks are often characterized by below average price/earnings ratios (P/E) and above average dividend yields relative to the overall market. Securities for the Fund are selected by consideration of the quality and price of individual issuers rather than forecasting stock market trends. The selection process focuses on four key elements: .. determination that a stock is selling below its fair market value; .. early recognition of changes in a company's underlying fundamentals; .. evaluation of the sustainability of fundamental changes; and .. by monitoring a stock's behavior in the market, evaluation of the timeliness of the investment. The equity investment philosophy of Principal is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization value stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Principal Investors Fund 51 www.principal.com ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 181.1%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks, but who prefer investing in companies that appear to be considered undervalued relative to similar companies. 52 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-13.72 "2003"24.11 "2004"11.43 "2005"5.91 LOGO The year-to-date return as of December 31, 2005 for Class J is 5.91%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 14.93% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -15.25%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS (BEFORE TAXES).. 4.91 3.96 (AFTER TAXES ON DISTRIBUTIONS).... 4.27 3.66 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 3.65 3.34 Russell 1000 Value Index ................ 7.05 6.00 Morningstar Large Value Category Average 5.88 4.46 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.45 12b-1 Fees........................... 0.50 Other Expenses....................... 0.36 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.31
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 53 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $233 $415 $718 $1,579 $133 $415 $718 $1,579
54 Principal Investors Fund 1-800-247-4123 MIDCAP VALUE FUND The Fund seeks long-term growth of capital. The Manager has selected Principal and BHMS as Sub-Advisors to the Fund. MAIN STRATEGIES The Fund invests primarily in common stocks of medium capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with medium market capitalizations (those with market capitalizations similar to companies in the Russell Midcap Value Index (as of December 31, 2005, this range was between approximately $563 million and $18.1 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. Up to 25% of Fund assets may be invested in foreign securities. The portion of Fund assets managed by Principal is invested in stocks that, in the opinion of Principal, are undervalued in the marketplace at the time of purchase. This value orientation emphasizes buying stocks at less than their inherent value and avoiding stocks whose price has been artificially built up. Value stocks are often characterized by below average price/earnings ratios (P/E) and above average dividend yields. The Fund's investments are selected primarily on the basis of fundamental security analysis, focusing on the company's financial stability, sales, earnings, dividend trends, return on equity and industry trends. The Fund often invests in stocks considered temporarily out of favor. Investors often over react to bad news and do not respond quickly to good news. This results in undervalued stocks of the type held by this Fund. The equity investment philosophy of Principal is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. The BHMS investment strategy emphasizes low P/E ratios, low price to book ratios and high dividend yields, which should offer protection in a declining market environment. In a rising market environment, BHMS expects these securities to benefit from growth in profitability and earnings. The firm conducts its own market research and believes that individual stock selection is more important than sector weightings. BHMS normally does not time the market for short-term gains. The Manager may, from time-to-time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to: the investment capacity of each Sub-Advisor, portfolio diversification, volume of net cash flows, fund liquidity, investment performance, investment strategies, changes in each Sub-Advisor's firm or investment professionals or changes in the number of Sub-Advisors. Ordinarily, reallocations of Fund assets among Sub-Advisors will generally occur as a Sub-Advisor liquidates assets in the normal course of portfolio management and with net new cash flows; however, at times reallocations may occur by transferring assets in kind or in cash among Sub-Advisors. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. As with all mutual Principal Investors Fund 55 www.principal.com funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. VALUE STOCKS . The Fund's potential investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. ACTIVE PORTFOLIO TRADING . A Sub-Advisor may actively trade Fund securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 167.8%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the potential for short-term fluctuations in the value of investments. 56 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. BHMS was added as an additional Sub-Advisor on July 13, 2005. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-8.95 "2003"26.8 "2004"15.67 "2005"12.13 LOGO The year-to-date return as of December 31, 2005 for Class J is 12.13%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 14.64% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -12.89%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 11.17 9.72 (AFTER TAXES ON DISTRIBUTIONS).... 6.76 8.29 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 8.47 7.76 Russell Midcap Value Index ................ 12.65 12.84 Morningstar Mid-Cap Value Category Average 8.41 10.29 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.65 12b-1 Fees......................... 0.50 Other Expenses..................... 0.26 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.41
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 57 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $244 $446 $771 $1,691 $144 $446 $771 $1,691
58 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP BLEND FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund pursues its investment objective by investing primarily in equity securities of U.S. companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with large market capitalizations (those with market capitalizations within the range of companies in the Standard & Poor's 500 Stock Index ("S&P 500 Index") (as of December 31, 2005 this range was between approximately $665 million and $370.3 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The market capitalization of companies in the Fund's portfolio and the S&P 500 Index will change over time, and the Fund will not automatically sell or cease to purchase a stock of a company it already owns just because the company's market capitalization grows or falls outside of the index range. In addition, the Fund has the ability to purchase stocks whose market capitalization falls below the range of companies in the S&P 500 Index. The Fund's Sub-Advisor, T. Rowe Price, uses a disciplined portfolio construction process whereby it weights each sector approximately the same as the S&P 500 Index. Individual holdings within each sector, and their weights within the portfolio, can vary substantially from the S&P 500 Index. A team of T. Rowe Price equity analysts is directly responsible for selecting stocks for the Fund. Analysts select stocks from the industries they cover based on rigorous fundamental analysis that assesses the quality of the business franchise, earnings growth potential for the company, and stock valuation. The Fund seeks to take full advantage of the analysts' focused expertise in their industries. A team of portfolio managers supervises the analysts and has the responsibility for the overall structure of the Fund and coordinating Fund investments. They also oversee the quantitative analysis that helps the analysts manage their industry-specific portfolios. In pursuing its investment objective, the Fund's management has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when T. Rowe Price believes a security could increase in value for a variety of reasons, including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Fund will generally remain fully invested (less than 5% cash reserves) and will be sector neutral when compared to the S&P 500 Index. While the majority of assets will be invested in large-capitalization U.S. common stocks, small- and mid-capitalization stocks and foreign stocks (up to 25% of total assets) may also be purchased in keeping with Fund objectives. Securities may be sold for a variety of reasons, such as to secure gains, limit losses, or redeploy assets into more promising opportunities. Futures and options contracts may be bought or sold for any number of reasons, including: to manage exposure to changes in interest rates and foreign currencies; as an efficient means of increasing or decreasing fund overall exposure to a specific part or broad segment of the U.S. or a foreign market; in an effort to enhance income; to protect the value of portfolio securities; and to serve as a cash management tool. Call or put options may be purchased or sold on securities, financial indices, and foreign currencies. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's equity securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: Principal Investors Fund 59 www.principal.com STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation, making returns more dependent on market increases and decreases. Growth stocks may therefore be more vulnerable than non-growth stocks to market changes. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. SECTOR RISK . The Sub-Advisor may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in an aggressively managed portfolio of common stocks, but who prefer investing in larger, established companies. 60 Principal Investors Fund 1-800-247-4123 T. Rowe Price became the Sub-Advisor to the Fund effective March 9, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-17.17 "2003"22.9 "2004"9.41 "2005"4.16 LOGO The year-to-date return as of December 31, 2005 for Class J is 4.16%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 14.02% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -15.63%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.16 2.00 (AFTER TAXES ON DISTRIBUTIONS).... 2.31 1.61 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.78 1.65 S&P 500 Index ........ 4.91 1.84 Morningstar Large Blend Category Average 5.77 1.39 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.75 12b-1 Fees......................... 0.50 Other Expenses..................... 0.24 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.49
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 61 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $252 $471 $813 $1,779 $152 $471 $813 $1,779
62 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP BLEND FUND I The Fund seeks long-term growth of capital. The Manager has selected GSAM and Wellington Management as Sub-Advisors to the Fund. MAIN STRATEGIES The Fund seeks its objective through investment in a broadly diversified portfolio of large cap and blue chip equity investments representing all major sectors of the U.S. economy. Under normal market conditions, the Fund invests at least 80% of its assets (not including securities lending collateral and any investment of that collateral) in common stocks of companies with large market capitalizations (those with market capitalizations similar to companies in the S&P 500 Index (as of December 31, 2005, the range was between approximately $665 million and $370.3 billion)) measured at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. Up to 25% of Fund assets may be invested in foreign securities. GSAM evaluates investments using quantitative models that evaluate companies' fundamental characteristics to identify those stocks expected to outperform and underperform the index. This proprietary multifactor model has been rigorously tested within the large cap universe in which the Fund invests. GSAM seeks to outperform the index by overweighting those stocks that are attractive according to the multifactor model and underweighting stocks that appear unattractive. GSAM seeks a broad representation in the major sectors of the U.S. economy. GSAM also uses a proprietary risk model that seeks to create a portfolio that maintains risk, style, capitalization and industry characteristics similar to the S&P 500 Index, as well as similar earnings growth and dividend yield characteristics. GSAM seeks to add value from stock selection rather than sector rotation or market timing strategies. GSAM seeks to outperform the S&P 500 Index by overweighting stocks that are more likely to outperform the benchmark while underweighting stocks that it believes will lag the Index. GSAM seeks to add value from stock selection rather than sector rotation strategies or market timing. Its approach is to combine traditional fundamental analysis with sophisticated quantitative modeling and to carefully construct and manage the risk in the portfolio. Wellington Management employs a two-fold investment approach that combines top-down sector analysis and bottom-up security selection. Macro-economic data including Gross Domestic Product ("GDP") growth rates, employment gains, as well as the outlook for inflation and interest rates, is considered to identify sectors and industries Wellington Management believes will grow faster than the economy over the next 12 to 18 months. Wellington Management then selects portfolio investments on the basis of fundamental analysis, which it utilizes to identify those securities that provide the potential for long-term growth of capital. Fundamental analysis involves assessing a company and its business environment, management, balance sheet, income statement, anticipated earnings and dividends and other related measures of value. When selecting securities of issuers domiciled outside the U.S., Wellington Management also monitors and evaluates the economic and political climate and the principal securities markets of the country in which each company is located. Securities are sold when the investment has achieved its intended purpose, or because it is no longer considered attractive. The Manager may, from time-to-time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to: the investment capacity of each Sub-Advisor, portfolio diversification, volume of net cash flows, fund liquidity, investment performance, investment strategies, changes in each Sub-Advisor's firm or investment professionals, or changes in the number of Sub-Advisors. Ordinarily, reallocations of Fund assets among Sub-Advisors will generally occur as a Sub-Advisor liquidates assets in the normal course of portfolio management and with net new cash flows; however, at times reallocations may occur by transferring assets in cash or in kind among Sub-Advisors. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's equity securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. Principal Investors Fund 63 www.principal.com As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks, but who prefer investing in larger, established companies. 64 Principal Investors Fund 1-800-247-4123 Goldman Sachs and Wellington Management became Sub-Advisors to the Fund on December 16, 2002 The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-25.65 "2003"26.74 "2004"10.03 "2005"5.42 LOGO The year-to-date return as of December 31, 2005 for Class J is 5.42%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 14.11% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -17.73%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 4.42 -0.32 (AFTER TAXES ON DISTRIBUTIONS).... 4.32 -0.40 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 3.00 -0.29 S&P 500 Index ........ 4.91 1.84 Morningstar Large Blend Category Average 5.77 1.82 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results for the index(es) shown are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.45 12b-1 Fees........................... 0.50 Other Expenses....................... 0.25 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.20
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 65 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $222 $381 $660 $1,455 $122 $381 $660 $1,455
66 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP GROWTH FUND The Fund seeks to achieve long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stock of U.S. companies, with a focus on growth stocks. Growth stocks are issues (or securities) that the Sub-Advisor, GMO, believes are fast-growing and whose earnings are believed to likely increase over time. Growth in earnings may lead to an increase in the price of the stock. The Sub-Advisor invests mainly in large companies, although investments can be made in companies of any size. Under normal market conditions, the Fund invests at least 80% of its assets in equity securities of companies with large market capitalizations. The Fund typically makes equity investments in companies chosen from among the 1,000 U.S. exchange-listed companies with the largest market capitalization. Market capitalization is defined as total current market value of a company's outstanding common stock. In addition, the Fund may invest up to 25% of its assets in foreign securities, including American Depository Receipts (ADRs), at the time of purchase. When deciding whether to buy or sell stocks for the Fund, GMO considers, among other factors, a company's valuation, financial strength, competitive position in its industry, projected future earnings, cash flows and dividends. In addition to the main investment strategies described above, GMO may make other investments, such as investments in preferred stocks, convertible securities and debt instruments. These investments may be subject to other risks as described later in this prospectus and/or the Statement of Additional Information. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization growth-oriented stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. INTEREST RATE CHANGES . Changes in interest rates may adversely affect the value of an investor's securities. When interest rates rise, the value of preferred securities will generally fall. Conversely, a drop in interest rates will generally cause an increase in the value of preferred securities. Some investments give the issuer the option to call, or redeem, its securities before their maturity date. If an issuer calls its security during a time of declining interest rates, the Fund may have to reinvest the proceeds in securities with lower rates. In addition, the Fund's appreciation may be limited by issuer call options having more value during times of declining interest rates. Principal Investors Fund 67 www.principal.com INVESTOR PROFILE The Fund may be an appropriate investment for investors who are seeking long-term growth and are willing to accept the potential for short-term, volatile fluctuations in the value of their investment. This Fund is designed as a long-term investment with growth potential. 68 Principal Investors Fund 1-800-247-4123 GMO became the Sub-Advisor to the Fund effective March 9, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2003"22.3 "2004"1.88 "2005"2.59 LOGO The year-to-date return as of December 31, 2005 for Class J is 2.59%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 11.30% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '04-5.62%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 1.59 8.52 (AFTER TAXES ON DISTRIBUTIONS).... 1.49 8.18 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 1.13 7.31 Russell 1000 Growth Index ................ 5.26 13.23 S&P 500 Index ........ 4.91 14.39 Morningstar Large Growth Category Average .............. 6.46 14.01 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (December 30, 2002).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees....................... 1.00% 12b-1 Fees............................ 0.50 Other Expenses........................ 0.63 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.13% Expense Reimbursement ................ 0.38 ---- NET EXPENSES 1.75% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.75%.
EXAMPLE Principal Investors Fund 69 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $278 $624 $1,103 $2,427 $178 $624 $1,103 $2,427
70 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP GROWTH FUND I The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund seeks to maximize long-term capital appreciation by investing primarily in growth-oriented equity securities of U.S. and, to a limited extent, foreign companies that exhibit strong growth and free cash flow potential. These companies are generally characterized as "growth" companies. Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of companies with market capitalizations within the range of companies in the Russell 1000 Growth Index (as of December 31, 2005, this range was between approximately $898 million and $371.7 billion) at the time of purchase. The Fund's investments in foreign companies will be limited to 25% of its total assets. The Fund may also purchase futures and options, in keeping with Fund objectives. The Sub-Advisor, T. Rowe Price, generally looks for companies with an above-average rate of earnings and cash flow growth and a lucrative niche in the economy that gives them the ability to sustain earnings momentum even during times of slow economic growth. As a growth investor, T. Rowe Price believes that when a company increases its earnings faster than both inflation and the overall economy, the market will eventually reward it with a higher stock price. In pursuing its investment objective, the Sub-Advisor has the discretion to purchase some securities that do not meet its normal investment criteria, as described above, when it perceives an unusual opportunity for gain. These special situations might arise when the Sub-Advisor believes a security could increase in value for a variety of reasons, including a change in management, an extraordinary corporate event, or a temporary imbalance in the supply of or demand for the securities. The Fund may sell securities for a variety of reasons, such as to secure gains, limit losses, or redeploy assets into more promising opportunities. The Fund may actively trade securities in an attempt to achieve its investment objective. Futures and options contracts may be bought or sold for any number of reasons, including: to manage exposure to changes in interest rates and foreign currencies; as an efficient means of increasing or decreasing fund overall exposure to a specific part or broad segment of the U.S. or a foreign market; in an effort to enhance income; to protect the value of portfolio securities; and to serve as a cash management tool. Call or put options may be purchased or sold on securities, financial indices, and foreign currencies. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization growth-oriented stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation, making returns more dependent on market increases and decreases. Growth stocks may therefore be more vulnerable than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments Principal Investors Fund 71 www.principal.com may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 66.5%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 72 Principal Investors Fund 1-800-247-4123 T. Rowe Price became Sub-Advisor to the Fund on August 24, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-28.41 "2003"22.57 "2004"8.13 "2005"6.69 LOGO The year-to-date return as of December 31, 2005 for Class J is 6.69%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 11.89% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -17.00%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 5.69 -1.44 (AFTER TAXES ON DISTRIBUTIONS).... 4.87 -1.61 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.30 -1.26 Russell 1000 Growth Index ................ 5.26 -1.30 Morningstar Large Growth Category Average .............. 6.46 -0.84 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.74 12b-1 Fees......................... 0.50 Other Expenses..................... 0.41 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.65
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 73 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $268 $520 $897 $1,955 $168 $520 $897 $1,955
74 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP GROWTH FUND II The Fund seeks long-term growth of capital. MAIN STRATEGIES Under normal markets, the Fund invests at least 80% of its assets in equity securities of companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000 Growth Index (as of December 31, 2005, the range was between approximately $898 million and $371.7 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Sub-Advisor, American Century, selects stocks of companies they believe will increase in value over time using a growth investment strategy they developed. This strategy looks for companies with earnings and revenues that are not only growing, but growing at a successively faster, or accelerating, pace. Accelerating growth is shown, for example, by growth that exhibits a higher positive rate of change this quarter than last or this year than the year before. It also includes companies whose growth rates, although still negative, are less negative than prior periods. The American Century strategy is based on the premise that, over the long-term, the stocks of companies with accelerating earnings and revenues have a greater than average chance to increase in value. American Century uses a bottom-up approach to select securities to buy for the Fund. This means that American Century makes its investment decisions based on the business fundamentals of the individual companies, rather than on economic forecasts or the outlook for industries or sectors. Using its extensive database, American Century tracks financial information for thousands of companies to identify trends in the companies' earnings and revenues. This information is used to help American Century select or hold the securities of companies they believe will be able to sustain accelerating growth and sell the securities of companies whose growth begins to slow down. American Century does not attempt to time the market. Instead, under normal market conditions, it intends to keep the Fund essentially fully invested in securities regardless of the movement of stock prices generally. When American Century believes it is prudent, the Fund may invest a portion of its assets in convertible debt securities, equity-equivalent securities, foreign securities, short-term securities, non-leveraged futures contracts and options and other similar securities. Futures contracts, a type of derivative security, can help the Fund's cash assets remain liquid while performing more like stocks. In addition, up to 25% of Fund assets may be invested in foreign securities. The Manager has selected BNY as Sub-Advisor for the Fund's "cash buffer." The cash buffer is the receptacle for daily cash flows received as a direct result of transactions (purchases and redemptions) placed by shareholders. BNY will invest the Fund's cash buffer in S&P 500 Index futures contracts with a nominal value equal to the underlying cash buffer account (i.e., no leverage employed). The Manager believes that, over the long term, this strategy will enhance the investment performance of the Fund. The Manager will, from time to time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to the volume of net cash flows and Fund liquidity. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization growth-oriented stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. Principal Investors Fund 75 www.principal.com GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The Fund may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The Fund may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the Fund. However, the Fund's performance could be worse than if the Fund had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; using them could lower Fund total return; and the potential loss from the use of futures can exceed a Fund's initial investment in such contracts. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 76 Principal Investors Fund 1-800-247-4123 American Century has been the Fund's Sub-Advisor since December 6, 2000. BNY was added as an additional Sub-Advisor on March 1, 2006. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-26.61 "2003"24.91 "2004"8.41 "2005"4 LOGO The year-to-date return as of December 31, 2005 for Class J is 4.00%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 12.15% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -16.52%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.00 -0.58 (AFTER TAXES ON DISTRIBUTIONS).... 2.82 -0.70 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.18 -0.52 Russell 1000 Growth Index ................ 5.26 -1.30 Morningstar Large Growth Category Average .............. 6.46 -0.84 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES
CLASS J Management Fees.................... 1.00% 12b-1 Fees......................... 0.50 Other Expenses..................... 0.50 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.00% Expense Reimbursement ............. 0.25 ---- NET EXPENSES 1.75% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.75%.
(expenses that are deducted from Fund assets) as of October 31, 2005 EXAMPLE Principal Investors Fund 77 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $278 $599 $1,051 $2,304 $178 $599 $1,051 $2,304
78 Principal Investors Fund 1-800-247-4123 PARTNERS LARGECAP VALUE FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in undervalued equity securities of companies among the 750 largest by market capitalization that the Sub-Advisor, Bernstein, believes offer above-average potential for growth in future earnings. Under normal market conditions, the Fund generally invests at least 80% of its assets in companies with large market capitalizations (those with market capitalizations similar to companies in the Russell 1000 Value Index (as of December 31, 2005, this range was between approximately $563 million and $371.7 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund may invest up to 25% of its assets in securities of foreign companies. Bernstein employs an investment strategy, generally described as "value" investing, that involves seeking securities that: .. exhibit low financial ratios (particularly stock price-to-book value (liquidation value), but also stock price-to-earnings and stock price-to-cash flow); .. can be acquired for less than what Bernstein believes is the issuer's intrinsic value; or .. whose price appears attractive relative to the value of the dividends expected to be paid by the issuer in the future. Value oriented investing entails a strong "sell discipline" in that it generally requires the sale of securities that have reached their intrinsic value or a target financial ratio. Value oriented investments may include securities of companies in cyclical industries during periods when such securities appear to Bernstein to have strong potential for capital appreciation or securities of "special situation" companies. A special situation company is one that Bernstein believes has potential for significant future earnings growth but has not performed well in the recent past. These situations include companies with management changes, corporate or asset restructuring or significantly undervalued assets. For Bernstein, identifying special situation companies and establishing an issuer's intrinsic value involves fundamental research about such companies and issuers. The Manager has selected BNY as Sub-Advisor for the Fund's "cash buffer." The cash buffer is the receptacle for daily cash flows received as a direct result of transactions (purchases and redemptions) placed by shareholders. BNY will invest the Fund's cash buffer in S&P 500 Index futures contracts with a nominal value equal to the underlying cash buffer account (i.e., no leverage employed). The Manager believes that, over the long term, this strategy will enhance the investment performance of the Fund. The Manager will, from time to time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to the volume of net cash flows and Fund liquidity. MAIN RISKS The Fund is subject to the risk that its principal market segment, large capitalization value stocks, may underperform compared to other market segments or to the equity markets as a whole. The value of the Fund's securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. Principal Investors Fund 79 www.principal.com FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks but who prefer investing in companies that appear to be considered undervalued relative to similar companies. 80 Principal Investors Fund 1-800-247-4123 Bernstein has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-14.37 "2003"26.23 "2004"12.41 "2005"4.48 LOGO The year-to-date return as of December 31, 2005 for Class J is 4.48%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 15.40% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -18.69%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.48 5.99 (AFTER TAXES ON DISTRIBUTIONS) ... 2.82 5.73 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 3.15 5.14 Russell 1000 Value Index................ 7.05 6.00 Morningstar Large Value Category Average 5.88 4.46 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees................... 0.78 12b-1 Fees........................ 0.50 Other Expenses.................... 0.26 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.54
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 81 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $257 $486 $839 $1,834 $157 $486 $839 $1,834
82 Principal Investors Fund 1-800-247-4123 PARTNERS MIDCAP VALUE FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks of medium capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with a medium market capitalization (those with market capitalizations similar to companies in the Russell Midcap Value Index (as of December 31, 2005, this range was between approximately $563 million and $18.1 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. Companies may range from the well-established and well known to the new and unseasoned. The Fund may invest up to 25% of its assets in securities of foreign companies. The stocks are selected using a value oriented investment approach by Neuberger Berman, the Sub-Advisor. Neuberger Berman identifies value stocks in several ways. Factors it considers in identifying value stocks may include: .. strong fundamentals, such as a company's financial, operational and competitive positions; .. consistent cash flow; and .. a sound earnings record through all phases of the market cycle. Neuberger Berman may also look for other characteristics in a company, such as a strong position relative to competitors, a high level of stock ownership among management, and a recent sharp decline in stock price that appears to be the result of a short-term market overreaction to negative news. Neuberger Berman believes that, over time, securities that are undervalued are more likely to appreciate in price and are subject to less risk of price decline than securities whose market prices have already reached their perceived economic value. This approach also involves selling portfolio securities when Neuberger Berman believes they have reached their potential, when the securities fail to perform as expected or when other opportunities appear more attractive. The Fund may purchase securities issued as part of, or a short period after, companies' initial public offerings and may at times dispose of those shares shortly after their acquisition. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. MEDIUM CAPITALIZATIONS . Companies with medium capitalizations may have a limited operating history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. Principal Investors Fund 83 www.principal.com INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth and willing to accept short-term fluctuations in the value of investments. 84 Principal Investors Fund 1-800-247-4123 Neuberger Berman has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-10.75 "2003"34.66 "2004"21.45 "2005"9.89 LOGO The year-to-date return as of December 31, 2005 for Class J is 9.89%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '03 14.36% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -14.59%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 8.89 10.80 (AFTER TAXES ON DISTRIBUTIONS).... 7.25 10.08 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 7.47 9.24 Russell Midcap Value Index ................ 12.65 12.84 Morningstar Mid-Cap Value Category Average 8.41 10.29 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.00 12b-1 Fees......................... 0.50 Other Expenses..................... 0.35 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.85
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 85 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $288 $582 $1,001 $2,169 $188 $582 $1,001 $2,169
86 Principal Investors Fund 1-800-247-4123 MIDCAP BLEND FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks and other equity securities of medium capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with medium market capitalizations (those with market capitalizations similar to companies in the Russell MidCap Index (as of December 31, 2005, this range was between approximately $563 million and $18.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. In selecting securities for investment, the Sub-Advisor, Principal, looks at stocks with value and/or growth characteristics and constructs an investment portfolio that has a "blend" of stocks with these characteristics. In managing the assets of the Fund, Principal does not have a policy of preferring one of these categories to the other. The value orientation emphasizes buying stocks at less than their inherent value and avoiding stocks whose price has been artificially built up. The growth orientation emphasizes buying stocks of companies whose potential for growth of capital and earnings is expected to be above average. Principal considers the quality and price of individual issuers rather than forecasting stock market trends in its selection of individual securities. Selection is based on fundamental analysis of a company relative to other companies with the focus being on Principal's estimation of forward-looking rates of return. Up to 25% of Fund assets may be invested in foreign securities. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. The Fund may purchase securities issued as part of, or a short period after, companies' initial public offerings and may at times dispose of those shares shortly after their acquisition. MAIN RISKS The Fund is subject to the risk that its principal market segment, medium capitalization stocks, may underperform compared to other market segments or to the equity markets as a whole. Because different types of stocks tend to shift in and out of favor depending on market and economic conditions, the Fund's performance may sometimes be lower or higher than that of other types of funds. The value of the Fund's equity securities may fluctuate on a daily basis. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or Principal Investors Fund 87 www.principal.com technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the potential for short-term fluctuations in the value of investments. 88 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-9.3 "2003"30.67 "2004"16.74 "2005"8.38 LOGO The year-to-date return as of December 31, 2005 for Class J is 8.38%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 13.87% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02-9.42%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 7.38 8.94 (AFTER TAXES ON DISTRIBUTIONS).... 6.56 8.53 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 5.89 7.75 Russell Midcap Index . 12.65 9.82 Morningstar Mid-Cap Blend Category Average 9.21 8.94 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.65 12b-1 Fees........................... 0.50 Other Expenses....................... 0.28 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.43
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 89 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $246 $452 $782 $1,713 $146 $452 $782 $1,713
90 Principal Investors Fund 1-800-247-4123 MIDCAP GROWTH FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks of medium capitalization companies with strong earnings growth potential. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with medium market capitalizations (those with market capitalizations similar to companies in the Russell Midcap Growth Index (as of December 31, 2005, this range was between approximately $996 million and $18.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Sub-Advisor, CCI, uses a bottom-up approach in its selection of individual securities that it believes have an above average potential for earnings growth. Selection is based on fundamental analysis of a company relative to other companies with the focus being on CCI's assessment of current and future sales growth and operating margins. Up to 25% of Fund assets may be invested in foreign securities. CCI focuses its stock selections on established companies that it believes to have sustainable competitive advantages and reasonable stock prices. It then constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over-and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. Principal Investors Fund 91 www.principal.com ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 233.8%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 92 Principal Investors Fund 1-800-247-4123 CCI became the Fund's Sub-Advisor on January 5, 2005. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-41.07 "2003"31.06 "2004"9.44 "2005"12.32 LOGO The year-to-date return as of December 31, 2005 for Class J is 12.32%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 16.80% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '02-28.52%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 11.32 -4.20 (AFTER TAXES ON DISTRIBUTIONS).... 11.32 -4.20 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 7.36 -3.52 Russell Midcap Growth Index ................ 12.10 4.29 Morningstar Mid-Cap Growth Category Average .............. 9.70 2.71 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.65 12b-1 Fees........................... 0.50 Other Expenses....................... 0.43 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.58
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 93 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $261 $499 $860 $1,878 $161 $499 $860 $1,878
94 Principal Investors Fund 1-800-247-4123 MIDCAP S&P 400 INDEX FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies that compose the Standard & Poor's ("S&P") MidCap 400 Index. The Sub-Advisor, Principal, attempts to mirror the investment performance of the Index by allocating the Fund's assets in approximately the same weightings as the S&P MidCap 400. The S&P MidCap 400 is an unmanaged index of 400 common stocks of medium sized U.S. (and some Canadian) companies. Each stock is weighted by its market capitalization which means larger companies have greater representation in the Index than smaller ones. As of December 31, 2005, the market capitalization range of the Index was between approximately $423.4 million and $14.6 billion. Over the long-term, Principal seeks a very close correlation between performance of the Fund, before expenses, and that of the S&P MidCap 400. It is unlikely that a perfect correlation of 1.00 will be achieved. The Fund uses an indexing strategy and is not managed according to traditional methods of "active" investment management. Active management would include buying and selling securities based on economic, financial and investment judgement. Instead, the Fund uses a passive investment approach. Rather than judging the merits of a particular stock in selecting investments, Principal focuses on tracking the S&P MidCap 400. Principal may also use stock index futures as a substitute for the sale or purchase of securities. It does not attempt to manage market volatility, use defensive strategies or reduce the effect of any long-term periods of poor stock performance. The correlation between Fund and Index performance may be affected by the Fund's expenses, changes in securities markets, changes in the composition of the Index and the timing of purchases and sales of Fund shares. The Fund may invest in futures and options, which could carry additional risks such as losses due to unanticipated market price movements and could also reduce the opportunity for gain. Because of the difficulty and expense of executing relatively small stock trades, the Fund may not always be invested in the less heavily weighted S&P MidCap 400 stocks. At times, the Fund's portfolio may be weighted differently from the S&P MidCap 400, particularly if the Fund has a small level of assets to invest. In addition, the Fund's ability to match the performance of the S&P MidCap 400 is affected to some degree by the size and timing of cash flows into and out of the Fund. The Fund is managed to attempt to minimize such effects. Principal reserves the right to omit or remove any of the S&P MidCap 400 stocks from the Fund if it determines that the stock is not sufficiently liquid. In addition, a stock might be excluded or removed from the Fund if extraordinary events or financial conditions lead Principal to believe that it should not be a part of the Fund's assets. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. Principal Investors Fund 95 www.principal.com GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. VALUE STOCKS . The Fund's potential investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital, willing to accept the potential for volatile fluctuations in the value of investments and preferring a passive, rather than active, management style. NOTE: "Standard & Poor's MidCap 400" and "S&P MidCap 400" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed by the Manager. The Fund is not sponsored, endorsed, sold or promoted by Standard and Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund. 96 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-16.07 "2003"33.71 "2004"15.18 "2005"11.31 LOGO The year-to-date return as of December 31, 2005 for Class J is 11.31%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 17.14% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -16.87%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 10.31 8.39 (AFTER TAXES ON DISTRIBUTIONS).... 9.54 8.02 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 7.57 7.18 S&P MidCap 400 Index . 12.55 9.74 Morningstar Mid-Cap Blend Category Average 9.21 8.94 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.15 12b-1 Fees......................... 0.50 Other Expenses..................... 0.34 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 0.99
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 97 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $201 $315 $547 $1,213 $101 $315 $547 $1,213
98 Principal Investors Fund 1-800-247-4123 PARTNERS MIDCAP GROWTH FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks and other equity securities of U.S. companies with strong earnings growth potential. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with medium market capitalizations (those with market capitalizations similar to companies in the Russell Midcap Growth Index (as of December 31, 2005 this range was between approximately $996 million and $18.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund invests in securities of companies that are diversified across economic sectors. It attempts to maintain sector concentrations that approximate those of its current benchmark, the Russell Midcap Growth Index. The Fund is not an index fund and does not limit its investment to the securities of issuers in the Russell Midcap Growth Index. The Fund may invest up to 25% of its assets in securities of foreign companies. The Sub-Advisor, Turner, selects stocks that it believes have strong earnings growth potential. Turner invests in companies with strong earnings dynamics, and sells those with deteriorating earnings prospects. Turner believes forecasts for market timing and sector rotation are unreliable and introduce an unacceptable level of risk. As a result, under normal market conditions the Fund is fully invested. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. Principal Investors Fund 99 www.principal.com ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 185.7%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 100 Principal Investors Fund 1-800-247-4123 Turner has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-32.51 "2003"47.14 "2004"11.23 "2005"11.17 LOGO The year-to-date return as of December 31, 2005 for Class J is 11.17%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 18.99% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '02-18.88%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 10.17 1.47 (AFTER TAXES ON DISTRIBUTIONS).... 10.05 1.44 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 6.78 1.25 Russell Midcap Growth Index ................ 12.10 4.29 Morningstar Mid-Cap Growth Category Average .............. 9.70 2.71 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.00 12b-1 Fees......................... 0.50 Other Expenses..................... 0.39 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.89
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 101 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $292 $594 $1,021 $2,212 $192 $594 $1,021 $2,212
102 Principal Investors Fund 1-800-247-4123 PARTNERS SMALLCAP GROWTH FUND I The Fund seeks long-term growth of capital. MAIN STRATEGIES Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with small market capitalizations (those with market capitalizations equal to or smaller than the greater of: 1) $2.5 billion or 2) the highest market capitalization of the companies in the Russell 2000 Growth Index (as of December 31, 2005, the range was between approximately $607 million and $4.4 billion)) at the time of purchase. The Fund seeks to reduce risk by diversifying among many companies and industries. In addition, the Fund may invest up to 25% of its assets in securities of foreign companies. The Sub-Advisor, Alliance, employs a disciplined investment strategy when selecting growth stocks. Using fundamental research and quantitative analysis, it looks for fast-growing companies with above average sales and competitive returns on equity relative to their peers. In doing so, Alliance analyzes such factors as: .. Financial condition (such as debt to equity ratio) .. Market share and competitive leadership of the company's products .. Earning growth relative to competitors .. Market valuation in comparison to a stock's own historical norms and the stocks of other small-cap companies Alliance follows a disciplined selling strategy and may sell a stock when it fails to perform as expected or when other opportunities appear more attractive. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. SECTOR RISK . The Sub-Advisor may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some Principal Investors Fund 103 www.principal.com investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 104 Principal Investors Fund 1-800-247-4123 Alliance became Sub-Advisor to the Fund on March 29, 2003. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-41.11 "2003"46.12 "2004"13.41 "2005"4.56 LOGO Year-to-date return as of December 31, 2005 for Class J is 4.56%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 20.00% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02-23.64%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.56 0.59 (AFTER TAXES ON DISTRIBUTIONS).... 3.56 0.59 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.31 0.51 Russell 2000 Growth Index ................ 4.15 3.85 Morningstar Small Growth Category Average .............. 5.74 4.60 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.10% 12b-1 Fees......................... 0.50 Other Expenses..................... 0.61 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.21% Expense Reimbursement ............. 0.16 ---- NET EXPENSES 2.05% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 2.05%.
EXAMPLE Principal Investors Fund 105 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $308 $673 $1,168 $2,530 $208 $673 $1,168 $2,530
106 Principal Investors Fund 1-800-247-4123 PARTNERS SMALLCAP GROWTH FUND II The Fund seeks long-term growth of capital. The Manager has selected UBS Global AM and Emerald as Sub-Advisors to the Fund. MAIN STRATEGIES The Fund pursues its investment objective by investing primarily in equity securities. Under normal market conditions, the Fund invests at least 80% of its assets in equity securities of companies with small market capitalizations (those with market capitalizations equal to or smaller than the greater of 1) $2.5 billion or 2) the highest market capitalization of the companies in the Russell 2000 Growth Index (as of December 31, 2005, this range was between approximately $607 million and $4.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund may invest up to 25% of its assets in securities of foreign companies. UBS Global AM seeks to invest in companies that possess dominant market positions or franchises, a major technical edge, or a unique competitive advantage. To this end, UBS Global AM considers earnings revision trends, positive stock price momentum, efficient use of shareholder equity and sales acceleration when selecting securities. The Fund may also invest in securities of emerging growth companies which are companies that UBS Global AM expects to experience above average earnings or cash flow growth or meaningful changes in underlying asset values. Investments in equity securities may include common stock and preferred stock. Utilizing fundamental analysis, Emerald seeks to invest in the common stock of companies with distinct competitive advantages, strong management teams, leadership positions, high revenue and earnings growth rates versus peers, differentiated growth drivers and limited sell-side research. The Manager may, from time-to-time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to: the investment capacity of each Sub-Advisor, portfolio diversification, volume of net cash flows, fund liquidity, investment performance, investment strategies, changes in each Sub-Advisor's firm or investment professionals, or changes in the number of Sub-Advisors. Ordinarily, reallocations of Fund assets among Sub-Advisors will generally occur as a Sub-Advisor liquidates assets in the normal course of portfolio management and with net new cash flows; however, at times reallocations may occur by transferring assets in cash or in kind among Sub-Advisors. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. Principal Investors Fund 107 www.principal.com SECTOR RISK . UBS Global AM may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As UBS Global AM allocates more of the Fund's portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries . INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 108 Principal Investors Fund 1-800-247-4123 UBS Global AM became the Fund's Sub-Advisor on April 22, 2002. Emerald was added as an additional Sub-Advisor on September 1, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-25.31 "2003"43.35 "2004"9.92 "2005"6.05 LOGO The year-to-date return as of December 31, 2005 for Class J is 6.05%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 20.59% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02 -14.09%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 5.05 2.82 (AFTER TAXES ON DISTRIBUTIONS).... 4.15 2.52 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.44 2.39 Russell 2000 Growth Index ................ 4.15 3.85 Morningstar Small Growth Category Average .............. 5.74 4.60 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.00% 12b-1 Fees......................... 0.50 Other Expenses..................... 0.64 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.14% Expense Reimbursement ............. 0.09 ---- NET EXPENSES 2.05% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 2.05%.
EXAMPLE Principal Investors Fund 109 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $317 $670 $1,149 $2,472 $217 $670 $1,149 $2,472
110 Principal Investors Fund 1-800-247-4123 PARTNERS SMALLCAP VALUE FUND The Fund seeks long-term growth of capital. The Manager has selected Ark Asset and LA Capital as Sub-Advisors to the Fund. MAIN STRATEGIES The Fund invests primarily in common stocks of small capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in companies with small market capitalizations (those with market capitalizations similar to companies in the Russell 2000 Value Index (as of December 31, 2005, this range was between approximately $38 million and $3.5 billion) or $2 billion, whichever is greater,) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund may invest up to 25% of its assets in securities of foreign corporations. The Sub-Advisor, Ark Asset, purchases securities for the Fund that it considers to be attractive equity investments that are consistent with its investment philosophy of maintaining a diversified investment portfolio. Ark Asset seeks to minimize risk by generally allocating Fund assets among economic or industry sectors to within 5 percentage points of that economic sector's percentage weighting (on an absolute basis) of the Russell 2000 Index. In selecting securities for the Fund, Ark Asset combines a systematic quantitative approach with traditional fundamental analysis. Ark Asset uses proprietary computer models that incorporate data from several sources to identify those companies whose securities present what it believes to be favorable investment opportunities relative to the securities of other companies. Ark Asset uses both a "Valuation Model" as well as an "Earnings Trend Model" in analyzing potential securities in which to invest. Ratings from both models are combined to develop an overall rating for each security under review. Stocks with the highest overall rating are considered for inclusion in the Fund's portfolio and undergo a thorough fundamental analysis. Ark Asset considers selling a stock in the Fund's portfolio if it becomes less attractive because of deteriorating current fundamentals or declining earnings expectations. The Sub-Advisor, LA Capital, employs a quantitative approach in selecting securities it believes are favored in the current market environment. The firm's proprietary Dynamic Alpha Model seeks to identify investor preferences for specific risk characteristics by analyzing valuation, income statement, balance sheet, industry and market-based factors. Expected returns are calculated for a universe of small capitalization securities based on a security's exposure, and the Model's expected return for each factor. The portion of the Fund's assets managed by LA Capital are diversified across industries, common risk factors and companies. Through an optimization process, LA Capital seeks to control portfolio risks and implementation costs while striving to generate consistent results versus the Russell 2000 Value Index. Portfolio returns and risks are monitored daily by the investment team. Each month, the firm's Portfolio Review Committee formally reviews the portfolio for compliance with investment objectives and guidelines. The Manager may, from time-to-time, reallocate Fund assets among the Sub-Advisors. The decision to do so may be based on a variety of factors, including but not limited to: the investment capacity of each Sub-Advisor, portfolio diversification, volume of net cash flows, fund liquidity, investment performance, investment strategies, changes in each Sub-Advisor's firm or investment professionals, or changes in the number of Sub-Advisors. Ordinarily, reallocations of Fund assets among Sub-Advisors will generally occur as a Sub-Advisor liquidates assets in the normal course of portfolio management and with net new cash flows; however, at times reallocations may occur by transferring assets in cash or in kind among Sub-Advisors. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: Principal Investors Fund 111 www.principal.com STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. VALUE STOCKS . The Fund's potential investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the potential for volatile fluctuations in the value of investments. 112 Principal Investors Fund 1-800-247-4123 Ark Asset has been Sub-Advisor to the Fund since its inception on March 1, 2001. LA Capital was added as an additional Sub-Advisor on September 1, 2004. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-11.11 "2003"36.62 "2004"16.81 "2005"6.62 LOGO The year-to-date return as of December 31, 2005 for Class J is 6.62%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 19.16% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -21.07%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 5.63 12.07 (AFTER TAXES ON DISTRIBUTIONS).... 4.41 11.63 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 5.34 10.44 Russell 2000 Value Index ................ 4.71 13.44 Morningstar Small Value Category Average 6.13 13.40 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.00% 12b-1 Fees......................... 0.50 Other Expenses..................... 0.55 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.05% Expense Reimbursement ............. 0.10 ---- NET EXPENSES 1.95% The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 1.95%.
EXAMPLE Principal Investors Fund 113 www.principal.com This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $298 $631 $1,093 $2,370 $198 $631 $1,093 $2,370
114 Principal Investors Fund 1-800-247-4123 REAL ESTATE SECURITIES FUND The Fund seeks to generate a total return. MAIN STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in equity securities of companies principally engaged in the real estate industry. For purposes of the Fund's investment policies, a real estate company has at least 50% of its assets, income or profits derived from products or services related to the real estate industry. Real estate companies include real estate investment trusts and companies with substantial real estate holdings such as paper, lumber, hotel and entertainment companies. Companies whose products and services relate to the real estate industry include building supply manufacturers, mortgage lenders and mortgage servicing companies. Real estate investment trusts ("REITs") are corporations or business trusts that are permitted to eliminate corporate level federal income taxes by meeting certain requirements of the Internal Revenue Code. REITs are characterized as: .. equity REITs, which primarily own property and generate revenue from rental income; .. mortgage REITs, which invest in real estate mortgages; and .. hybrid REITs, which combine the characteristics of both equity and mortgage REITs. In selecting securities for the Fund, the Sub-Advisor, Principal - REI, focuses on equity REITs. The Fund may invest up to 25% of its assets in securities of foreign real estate companies. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SECTOR RISK . Because the Fund invests at least 80% of its net assets in securities of companies principally engaged in the real estate industry, the Fund is also subject to sector risk; that is, the possibility that the real estate sector may underperform other sectors or the market as a whole. As more of the Fund's portfolio holdings to the real estate sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. The share price of the Fund may fluctuate more widely than the value of shares of a fund that invests in a broader range of industries. Securities of real estate companies are subject to securities market risks as well as risks similar to those of direct ownership of real estate. These include: .. declines in the value of real estate .. risks related to general and local economic conditions .. dependency on management skills .. heavy cash flow dependency .. possible lack of available mortgage funds .. overbuilding .. extended vacancies in properties .. increases in property taxes and operating expenses .. changes in zoning laws .. expenses incurred in the cleanup of environmental problems .. casualty or condemnation losses .. changes in interest rates Principal Investors Fund 115 www.principal.com In addition to the risks listed above, equity REITs are affected by the changes in the value of the properties owned by the trust. Mortgage REITs are affected by the quality of the credit extended. Both equity and mortgage REITs: .. may not be diversified with regard to the types of tenants (thus subject to business developments of the tenant(s)); .. may not be diversified with regard to the geographic locations of the properties (thus subject to regional economic developments); and .. are subject to cash flow dependency of its tenants. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. INVESTOR PROFILE The Fund may be an appropriate investment for investors who seek a total return, want to invest in companies engaged in the real estate industry and accept the potential for volatile fluctuations in the value of investments. 116 Principal Investors Fund 1-800-247-4123 Principal-REI has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"6.87 "2003"37.01 "2004"32.94 "2005"14.7 LOGO The year-to-date return as of December 31, 2005 for Class J is 14.70%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '04 17.36% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q2 '04 -7.48%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 13.70 20.65 (AFTER TAXES ON DISTRIBUTIONS).... 12.53 19.35 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 9.46 17.56 MSCI US REIT Index ... 12.52 19.82 Morningstar Specialty - Real Estate Category Average .............. 11.59 19.39 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.85 12b-1 Fees......................... 0.50 Other Expenses..................... 0.28 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.63
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 117 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $266 $514 $887 $1,933 $166 $514 $887 $1,933
118 Principal Investors Fund 1-800-247-4123 SMALLCAP BLEND FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks of small capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with small market capitalizations (those with market capitalizations similar to companies in the Russell 2000 Index (as of December 31, 2005, this range was between approximately $26 million and $4.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund may invest up to 25% of its assets in securities of foreign companies. In selecting securities for investment, the Sub-Advisor, Principal, looks at stocks with value and/or growth characteristics and constructs an investment portfolio that has a "blend" of stocks with these characteristics. In managing the assets of the Fund, Principal does not have a policy of preferring one of these categories to the other. The value orientation emphasizes buying stocks at less than their investment value and avoiding stocks whose price has been artificially built up. The growth orientation emphasizes buying stocks of companies whose potential for growth of capital and earnings is expected to be above average. The equity investment philosophy of Principal is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. Principal may purchase securities issued as part of, or a short period after, companies' initial public offerings ("IPOs"), and may at times dispose of those shares shortly after their acquisition. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. Principal Investors Fund 119 www.principal.com GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the potential for volatile fluctuations in the value of investments. 120 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-17.85 "2003"41.48 "2004"15.54 "2005"8.96 LOGO The year-to-date return as of December 31, 2005 for Class J is 8.96%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 19.68% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -16.33%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 7.96 10.69 (AFTER TAXES ON DISTRIBUTIONS).... 6.95 10.25 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 6.40 9.27 Russell 2000 Index ... 4.55 8.90 Morningstar Small Blend Category Average 6.62 10.76 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.75 12b-1 Fees......................... 0.50 Other Expenses..................... 0.25 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.50
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 121 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $253 $474 $818 $1,791 $153 $474 $818 $1,791
122 Principal Investors Fund 1-800-247-4123 SMALLCAP GROWTH FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks of small capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with small market capitalizations (those with market capitalizations similar to companies in the Russell 2000 Growth Index (as of December 31, 2005, the range was between approximately $607 million and $4.4 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The equity investment philosophy of Principal, the Sub-Advisor, is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in Principal Investors Fund 123 www.principal.com those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 181.7%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the risks of investing in common stocks that may have greater risks than stocks of companies with lower potential for earnings growth. 124 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-39.83 "2003"47.12 "2004"13.61 "2005"3.6 LOGO The year-to-date return as of December 31, 2005 for Class J is 3.60%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 29.92% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -24.26%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 2.63 0.29 (AFTER TAXES ON DISTRIBUTIONS).... 1.49 -0.43 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.74 -0.01 Russell 2000 Growth Index ................ 4.15 3.85 Morningstar Small Growth Category Average .............. 5.74 4.60 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF
CLASS J Management Fees.................... 0.75 12b-1 Fees......................... 0.50 Other Expenses..................... 0.34 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.59
October 31, 2005 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 125 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $262 $502 $866 $1,889 $162 $502 $866 $1,889
126 Principal Investors Fund 1-800-247-4123 SMALLCAP S&P 600 INDEX FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies that compose the Standard & Poor's ("S&P") SmallCap 600 Index. The Sub-Advisor, Principal, attempts to mirror the investment performance of the Index by allocating the Fund's assets in approximately the same weightings as the S&P SmallCap 600 Index. The S&P SmallCap 600 is an unmanaged index of 600 domestic stocks chosen for market size, liquidity and industry group representative. Each stock is weighted by its market capitalization which means larger companies have greater representation in the Index than smaller ones. As of December 31, 2005, the market capitalization range of the Index was between approximately $46 million and $3.7 billion. Over the long-term, Principal seeks a very close correlation between performance of the Fund, before expenses, and that of the S&P SmallCap 600. It is unlikely that a perfect correlation of 1.00 will be achieved. The Fund uses an indexing strategy and is not managed according to traditional methods of "active" investment management. Active management would include buying and selling securities based on economic, financial and investment judgement. Instead, the Fund uses a passive investment approach. Rather than judging the merits of a particular stock in selecting investments, Principal focuses on tracking the S&P SmallCap 600. Principal may also use stock index futures as a substitute for the sale or purchase of securities. It does not attempt to manage market volatility, use defensive strategies or reduce the effect of any long-term periods of poor stock performance. The correlation between Fund and Index performance may be affected by the Fund's expenses, changes in securities markets, changes in the composition of the Index and the timing of purchases and sales of Fund shares. The Fund may invest in futures and options, which could carry additional risks such as losses due to unanticipated market price movements and could also reduce the opportunity for gain. Because of the difficulty and expense of executing relatively small stock trades, the Fund may not always be invested in the less heavily weighted S&P SmallCap 600 stocks. At times, the Fund's portfolio may be weighted differently from the S&P SmallCap 600, particularly if the Fund has a small level of assets to invest. In addition, the Fund's ability to match the performance of the S&P SmallCap 600 is affected to some degree by the size and timing of cash flows into and out of the Fund. The Fund is managed to attempt to minimize such effects. Principal reserves the right to omit or remove any of the S&P SmallCap 600 stocks from the Fund if it determines that the stock is not sufficiently liquid. In addition, a stock might be excluded or removed from the Fund if extraordinary events or financial conditions lead Principal to believe that it should not be a part of the Fund's assets. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. Principal Investors Fund 127 www.principal.com GROWTH STOCKS . Because growth securities typically do not make dividend payments to shareholders, investment returns are based on capital appreciation making returns more dependent on market increases and decreases. Growth stocks may therefore be more volatile than non-growth stocks to market changes. VALUE STOCKS . The Fund's potential investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital, willing to accept the potential for volatile fluctuations in the value of investments and preferring a passive, rather than active, management style. NOTE: "Standard & Poor's SmallCap 600" and "S&P SmallCap 600" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed by the Manager. The Fund is not sponsored, endorsed, sold or promoted by Standard and Poor's and Standard & Poor's makes no representation regarding the advisability of investing in the Fund. 128 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-15.75 "2003"36.58 "2004"21.24 "2005"6.55 LOGO The year-to-date return as of December 31, 2005 for Class J is 6.55%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 19.38% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -18.78%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 5.55 10.23 (AFTER TAXES ON DISTRIBUTIONS).... 5.12 9.90 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.02 8.78 S&P SmallCap 600 Index 7.67 11.64 Morningstar Small Blend Category Average 6.62 10.76 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.15 12b-1 Fees......................... 0.50 Other Expenses..................... 0.35 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.00
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 129 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $202 $318 $552 $1,225 $102 $318 $552 $1,225
130 Principal Investors Fund 1-800-247-4123 SMALLCAP VALUE FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests primarily in common stocks of small capitalization companies. Under normal market conditions, the Fund invests at least 80% of its assets in common stocks of companies with small market capitalizations (those with market capitalizations similar to companies in the Russell 2000 Value Index (as of December 31, 2005, this range was between approximately $38 million and $3.5 billion)) at the time of purchase. Market capitalization is defined as total current market value of a company's outstanding common stock. The Fund may invest up to 25% of its assets in securities of foreign companies. The equity investment philosophy of the Sub-Advisor, Principal, is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage its stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS The Fund's share price may fluctuate more than that of funds primarily invested in stocks of mid-sized and large companies and may underperform as compared to the securities of larger companies. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. VALUE STOCKS . Investment in value stocks carries the risk that the market will not recognize a security's intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as companies in more developed countries. INITIAL PUBLIC OFFERINGS ("IPOS") . The Fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in Principal Investors Fund 131 www.principal.com those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 133.7%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital and willing to accept the potential for volatile fluctuations in the value of investments. 132 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-3.49 "2003"42.14 "2004"18.93 "2005"8.35 LOGO The year-to-date return as of December 31, 2005 for Class J is 8.35%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 22.94% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -16.38%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 7.35 14.75 (AFTER TAXES ON DISTRIBUTIONS).... 5.11 13.21 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 5.29 12.11 Russell 2000 Value Index ................ 4.71 13.44 Morningstar Small Value Category Average 6.13 13.40 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001).
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 0.75 12b-1 Fees......................... 0.50 Other Expenses..................... 0.31 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.56
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 133 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $259 $493 $850 $1,856 $159 $493 $850 $1,856
134 Principal Investors Fund 1-800-247-4123 DIVERSIFIED INTERNATIONAL FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests in a portfolio of equity securities of companies domiciled in any of the nations of the world. The Fund invests in securities of: .. companies with their principal place of business or principal office outside the U.S.; .. companies for which the principal securities trading market is outside the U.S.; and .. companies, regardless of where their securities are traded, that derive 50% or more of their total revenue from goods or services produced or sales made outside the U.S. The Fund has no limitation on the percentage of assets that are invested in any one country or denominated in any one currency. However, under normal market conditions, the Fund intends to have at least 80% of its assets invested in companies in at least three different countries. One of those countries may be the U.S. though currently the Fund does not intend to invest in equity securities of U.S. companies. Investments may be made anywhere in the world. Primary consideration is given to securities of corporations of Western Europe, North America and Australasia (Australia, Japan and Far East Asia). Changes in investments are made as prospects change for particular countries, industries or companies. The equity investment philosophy of Principal, the Sub-Advisor, is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. The Fund may actively trade securities in an attempt to achieve its investment objective. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as companies in more developed countries. FOREIGN EXCHANGE CONTRACTS . Because foreign securities generally are denominated in foreign currencies, the value of the net assets of the Fund as measured in U.S. dollars will be affected by changes in exchange rates. To protect against future uncertainties in foreign currency exchange rates, the Fund is authorized to enter into certain foreign Principal Investors Fund 135 www.principal.com currency exchange transactions. In addition, the Fund's foreign investments may be less liquid and their price more volatile than comparable investments in U.S. securities. Settlement periods may be longer for foreign securities and portfolio liquidity may be affected. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs, which may have an adverse impact on the Fund's performance and may increase taxable distributions. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 202.7%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital in markets outside of the U.S. who are able to assume the increased risks of higher price volatility and currency fluctuations associated with investments in international stocks which trade in non-U.S. currencies. 136 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-17.17 "2003"32.35 "2004"19.18 "2005"22.98 LOGO The year-to-date return as of December 31, 2005 for Class J is 22.98%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q4 '03 17.41% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -18.93%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 21.98 6.19 (AFTER TAXES ON DISTRIBUTIONS).... 21.17 5.96 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 15.08 5.30 Citigroup BMI Global ex-US Index**......... 19.59 9.85 MSCI EAFE (Europe, Australia, Far East) Index - ND ........... 13.54 4.55 Morningstar Foreign Large Blend Category Average .............. 14.55 4.82 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001). **This index is now the benchmark against which the Fund measures its performance. The Manager and the portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees...................... 0.90 12b-1 Fees........................... 0.50 Other Expenses....................... 0.29 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.69
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 137 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $272 $533 $918 $1,998 $172 $533 $918 $1,998
138 Principal Investors Fund 1-800-247-4123 INTERNATIONAL EMERGING MARKETS FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund seeks to achieve its objective by investing in common stocks of companies in emerging market countries. For this Fund, the term "emerging market country" means any country which is considered to be an emerging country by the international financial community (including the International Bank for Reconstruction and Development (also known as the World Bank) and the International Financial Corporation). These countries generally include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most nations located in Western Europe. Investing in many emerging market countries is not feasible or may involve unacceptable political risk. Principal, the Sub-Advisor, focuses on those emerging market countries that it believes have strongly developing economies and markets which are becoming more sophisticated. Under normal conditions, at least 80% of the Fund's assets are invested in emerging market country equity securities. The Fund invests in securities of: .. companies with their principal place of business or principal office in emerging market countries; .. companies for which the principal securities trading market is an emerging market country; or .. companies, regardless of where their securities are traded, that derive 50% or more of their total revenue from either goods or services produced in emerging market countries or sales made in emerging market countries. MAIN RISKS As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. FOREIGN INVESTING . Foreign markets may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments, may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. EMERGING MARKET COUNTRIES . Investments in emerging market countries involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, certain economic problems. These may include: high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of debt, balance of payments and trade difficulties, and extreme poverty and unemployment. FOREIGN EXCHANGE CONTRACTS . Because foreign securities generally are denominated in foreign currencies, the value of the net assets of the Fund as measured in U.S. dollars will be affected by changes in exchange rates. To protect against future uncertainties in foreign currency exchange rates, the Fund is authorized to enter into certain foreign currency exchange transactions. In addition, the Fund's foreign investments may be less liquid and their price more volatile than comparable investments in U.S. securities. Settlement periods may be longer for foreign securities and portfolio liquidity may be affected. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. Principal Investors Fund 139 www.principal.com INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking long-term growth of capital in securities of emerging market countries who are able to assume the increased risks of higher price volatility and currency fluctuations associated with investments in international stocks which trade in non-U.S. currencies. 140 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since December 6, 2000. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-7.72 "2003"54.96 "2004"24.6 "2005"34.83 LOGO Year-to-date return as of December 31, 2005 for Class J is 34.83%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 21.53% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02-16.22%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 33.83 18.56 (AFTER TAXES ON DISTRIBUTIONS).... 30.43 17.64 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 22.85 16.01 MSCI Emerging Markets Free Index - NDTR** .. 34.00 18.64 MSCI Emerging Markets Free Index - ID ...... 30.31 16.29 Morningstar Diversified Emerging Markets Category Average .............. 31.64 18.17 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001) ///*//*// /This index is now the benchmark against which the Fund measures its performance. The Manager and portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees....................... 1.35 12b-1 Fees............................ 0.50 Other Expenses........................ 0.37 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 2.22
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: Principal Investors Fund 141 www.principal.com
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $325 $694 $1,190 $2,554 $225 $694 $1,190 $2,554
142 Principal Investors Fund 1-800-247-4123 INTERNATIONAL GROWTH FUND The Fund seeks long-term growth of capital. MAIN STRATEGIES The Fund invests in common stocks and other securities of companies domiciled in any of the nations of the world. The Fund invests in securities listed on foreign or domestic securities exchanges, securities traded in foreign or domestic over-the-counter markets and depositary receipts. It purchases securities of: .. companies with their principal place of business or principal offices outside the U.S.; .. companies for which the principal securities trading market is outside the U.S.; or .. companies, regardless of where their securities are traded, that derive 50% or more of their total revenue from either goods or services produced or sales made outside the U.S. The Sub-Advisor, Principal, selects securities for the Fund based on its own global investment research. The research program is focused on three key criteria: .. business franchise - considering factors such as the company's relationship with its suppliers and customers, the degree of rivalry with competitors as well as the exposure to regulatory and technological risk; .. quality of management - assessing the company's management on its ability to execute current business plans, manage the capital invested in the business as well as the level of transparency with respect to strategy and operations; and .. business valuation - determining the private market or "true business value" of the firm. Principal's qualitative analysis is complemented by disciplined valuation techniques. These include proprietary models as well as conventional market measurements and industry specific models of relative value. This analytical framework ensures consistency and transparency throughout the research process. Portfolios are constructed and managed within predetermined guidelines that are regularly monitored by Principal. The equity investment philosophy of Principal is based on the belief that superior stock selection is the key to consistent out-performance. Superior stock selection is achieved by a combination of systematically evaluating company fundamentals and in-depth original research. Principal focuses on four critical drivers of stock performance: improving business fundamentals, sustainable competitive advantages, rising investor expectations, and attractive relative valuation. To leverage our stock selection skills as the primary drivers of relative performance, Principal seeks to maximize global information advantages and neutralize unintended portfolio risks. Principal focuses its stock selections on established companies that it believes have a sustainable competitive advantage. Principal constructs a portfolio that is "benchmark aware" in that it is sensitive to the sector (companies with similar characteristics) and security weightings of its benchmark. However, the Fund is actively managed and prepared to over- and/or under-weight sectors and industries differently from the benchmark. MAIN RISKS As with any security, the securities in which the Fund invests have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of the Fund's shares is effected by changes in the value of the securities it owns. The prices of equity securities held by the Fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. FOREIGN INVESTING . Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. Emerging market countries and companies doing business in emerging market countries may not have the same range of opportunities as more developed countries companies in more developed countries. Principal Investors Fund 143 www.principal.com FOREIGN EXCHANGE CONTRACTS . Because foreign securities generally are denominated in foreign currencies, the value of the net assets of the Fund as measured in U.S. dollars will be affected by changes in exchange rates. To protect against future uncertainties in foreign currency exchange rates, the Fund is authorized to enter into certain foreign currency exchange transactions. In addition, the Fund's foreign investments may be less liquid and their price more volatile than comparable investments in U.S. securities. Settlement periods may be longer for foreign securities and portfolio liquidity may be affected. SMALL AND MEDIUM CAPITALIZATIONS . Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. ACTIVE PORTFOLIO TRADING . The Fund may actively trade securities in an attempt to achieve its investment objective. The financial highlights table at the end of this Prospectus shows the Fund's turnover rate during recent fiscal years. A portfolio turnover rate of 200%, for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the year. A high turnover rate may increase the Fund's trading costs and may have an adverse impact on the Fund's performance. The annualized portfolio turnover rate for the Fund for the twelve month period ended October 31, 2005 was 139.5%. INVESTOR PROFILE The Fund may be an appropriate investment for investors seeking growth of capital in markets outside of the U.S. who are able to assume the increased risks of higher price volatility and currency fluctuations associated with investments in international stocks which trade in non-U.S. currencies. 144 Principal Investors Fund 1-800-247-4123 Principal became the Sub-Advisor to the Fund on November 1, 2002. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-16.86 "2003"37.37 "2004"21.58 "2005"21.41 LOGO The year-to-date return as of December 31, 2005 for Class J is 21.41%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 18.05% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -21.48%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 20.41 7.85 (AFTER TAXES ON DISTRIBUTIONS).... 18.04 6.96 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 14.43 6.44 CITI World Ex-US BMI Growth Index**........ 17.18 6.57 MSCI EAFE (Europe, Australia, Far East) Index - ND ........... 13.54 4.55 Morningstar Foreign Large Growth Category Average .............. 15.27 4.22 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (March 1, 2001). ** This index is now the benchmark against which the Fund measures its performance. The Manager and the portfolio manager believe it better represents the universe of investment choices open to the Fund under its investment philosophy. The index formerly used is also shown.
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
CLASS J Management Fees.................... 1.00 12b-1 Fees......................... 0.50 Other Expenses..................... 0.38 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.88
EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Principal Investors Fund 145 www.principal.com Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ----------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ----------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $291 $591 $1,016 $2,201 $191 $591 $1,016 $2,201
146 Principal Investors Fund 1-800-247-4123 PRINCIPAL LIFETIME 2010 FUND The Fund seeks a total return consisting of long-term growth of capital and current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Over time, shifts in the allocations to the underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the underlying fund allocations may also occur when market forces change allocations in ways the Sub-Advisor, Principal, considers likely to help the Fund achieve its investment objective. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that are intended to generate current income (see table below), the Fund is more subject to the risks associated with an investment in fixed-income securities than to those associated with an investment in equity securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. Principal intends to gradually shift the Fund's allocation among the underlying funds so that within five to ten years after the year 2010, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of the Funds' shareholders. MAIN RISKS The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. The Fund's broad diversification is designed to cushion severe losses in any one investment sector and moderate the Fund's overall price swings. However, the Fund's share prices will fluctuate as the prices of the underlying funds rise or fall with changing market conditions. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: INTEREST RATE CHANGES . The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. HIGH YIELD SECURITIES . Fixed-income securities in which an underlying fund may invest that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). Principal Investors Fund 147 www.principal.com U.S. GOVERNMENT SPONSORED ENTERPRISES . An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. STOCK MARKET VOLATILITY . The prices of equity securities held by an underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. FOREIGN INVESTING . The underlying funds may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. SMALL AND MEDIUM CAPITALIZATIONS . The underlying funds may invest in small and medium capitalization companies. Companies with small capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. HEDGING STRATEGIES . The underlying funds may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The underlying funds may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the underlying funds and, therefore, the Fund. However, the Fund's performance could be worse than if the underlying funds had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; use of them by the underlying funds could lower Fund total return; and the potential loss from the use of futures can exceed an underlying fund's initial investment in such contracts. INITIAL PUBLIC OFFERINGS ("IPOS") . An underlying fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INVESTOR PROFILE The Fund may be an appropriate investment for investors expecting to retire around the year 2010 or fund a cashflow need in the year 2010. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds:
Bond & Mortgage 34.7% Partners LargeCap Growth 4.2% Securities II Disciplined LargeCap 10.7 Partners LargeCap Value 5.6 Blend International Growth 5.5 Preferred Securities 9.1 LargeCap Growth 4.5 Real Estate Securities 8.5 LargeCap Value 3.1 SmallCap S&P 600 Index 4.5 Money Market 9.6
148 Principal Investors Fund 1-800-247-4123 Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.70%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. Principal Investors Fund 149 www.principal.com Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-5.26 "2003"17.54 "2004"11.21 "2005"4.87 LOGO The year-to-date return as of December 31, 2005 for Class J is 4.87%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 8.49% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -5.65%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 3.87 5.91 (AFTER TAXES ON DISTRIBUTIONS).... 3.15 5.41 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 2.70 4.83 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Conservative Allocation Category Average .............. 3.05 3.65 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005*
Management Fees ...... 0.1225% 12b-1 Fees............ 0.5000 Other Expenses........ 0.1100 ------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.7325% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class A shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
EXAMPLE 150 Principal Investors Fund 1-800-247-4123 This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $175 $234 $407 $909 $75 $234 $407 $909
Principal Investors Fund 151 www.principal.com PRINCIPAL LIFETIME 2020 FUND The Fund seeks a total return consisting of long-term growth of capital and current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Over time, shifts in the allocations to the underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the underlying fund allocations may also occur when market forces change allocations in ways the Sub-Advisor, Principal, considers likely to help the Fund achieve its investment objective. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that invest in equity securities (see table below), the Fund is more subject to the risks associated with an investment in equity securities than to those associated with an investment in fixed income securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. Principal intends to gradually shift the Fund's allocation among the underlying funds so that within five to ten years after 2020, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of the Funds' shareholders. MAIN RISKS The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. The Fund's broad diversification is designed to cushion severe losses in any one investment sector and moderate the Fund's overall price swings. However, the Fund's share prices will fluctuate as the prices of the underlying funds rise or fall with changing market conditions. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: STOCK MARKET VOLATILITY . The prices of equity securities held by an underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . The underlying funds may invest in small and medium capitalization companies. Companies with small or medium capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. SECTOR RISK . The underlying funds may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to an underlying fund that allocates more of its portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. 152 Principal Investors Fund 1-800-247-4123 FOREIGN INVESTING . The underlying funds may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The underlying funds may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The underlying funds may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the underlying funds and, therefore, the Fund. However, the Fund's performance could be worse than if the underlying funds had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; use of them by the underlying funds could lower Fund total return; and the potential loss from the use of futures can exceed an underlying fund's initial investment in such contracts. INITIAL PUBLIC OFFERINGS ("IPOS") . An underlying fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INTEREST RATE CHANGES . The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. HIGH YIELD SECURITIES . Fixed-income securities that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). U.S. GOVERNMENT SPONSORED ENTERPRISES . An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. INVESTOR PROFILE The Fund may be an appropriate investment for investors expecting to retire around the year 2020 or fund a cashflow need in the year 2020. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds:
Bond & Mortgage 25.2% Partners LargeCap Value 7.4% Securities Disciplined LargeCap 17.0 Partners SmallCap Growth 1.5 Blend III International Growth 9.7 Preferred Securities 9.8 LargeCap Growth 6.3 Real Estate Securities 8.8 LargeCap Value 4.3 SmallCap S&P 600 Index 2.4 Partners LargeCap 6.0 SmallCap Value 1.6 Growth II
Principal Investors Fund 153 www.principal.com Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.75%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. 154 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-7.83 "2003"20.52 "2004"11.57 "2005"6.95 LOGO The year-to-date return as of December 31, 2005 for Class J is 6.95%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 10.21% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -7.88%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 5.95 6.38 (AFTER TAXES ON DISTRIBUTIONS).... 5.14 5.90 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.07 5.26 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Moderate Allocation Category Average .............. 5.29 3.99 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees ...... 0.1225 12b-1 Fees............ 0.5000 Other Expenses........ 0.1100 ------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.7325 *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class A shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
* Principal Investors Fund 155 www.principal.com EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES -------------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES -------------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $175 $234 $407 $909 $75 $234 $407 $909
156 Principal Investors Fund 1-800-247-4123 PRINCIPAL LIFETIME 2030 FUND The Fund seeks a total return consisting of long-term growth of capital and current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Over time, shifts in the allocations to the underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the underlying fund allocations may also occur when market forces change allocations in ways the Sub-Advisor, Principal, considers likely to help the Fund achieve its investment objective. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that invest in equity securities (see table below), the Fund is more subject to the risks associated with an investment in equity securities than to those associated with an investment in fixed income securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. Principal intends to gradually shift the Fund's allocation among the underlying funds so that within five to ten years after 2030, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of the Funds' shareholders. MAIN RISKS The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. The Fund's broad diversification is designed to cushion severe losses in any one investment sector and moderate the Fund's overall price swings. However, the Fund's share prices will fluctuate as the prices of the underlying funds rise or fall with changing market conditions. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: STOCK MARKET VOLATILITY . The prices of equity securities held by an underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . The underlying funds may invest in small and medium capitalization companies. Companies with small or medium capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. SECTOR RISK . The underlying funds may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to an underlying fund that allocates more of its portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. Principal Investors Fund 157 www.principal.com FOREIGN INVESTING . An underlying fund may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The underlying funds may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The underlying funds may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the underlying funds and, therefore, the Fund. However, the Fund's performance could be worse than if the underlying funds had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; use of them by the underlying funds could lower Fund total return; and the potential loss from the use of futures can exceed an underlying fund's initial investment in such contracts. INITIAL PUBLIC OFFERINGS ("IPOS") . An underlying fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. INTEREST RATE CHANGES . The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. HIGH YIELD SECURITIES . Fixed-income securities in which an underlying fund may invest that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). U.S. GOVERNMENT SPONSORED ENTERPRISES . An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. INVESTOR PROFILE The Fund may be an appropriate investment for investors expecting to retire around the year 2030 or fund a cashflow need in the year 2030. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds:
Bond & Mortgage 19.0% Partners LargeCap Value 9.3% Securities Disciplined LargeCap 19.4 Partners SmallCap Growth 2.0 Blend III International Growth 12.0 Preferred Securities 5.3 LargeCap Growth 7.5 Real Estate Securities 8.2 LargeCap Value 5.2 SmallCap S&P 600 Index 2.9 Partners LargeCap 7.1 SmallCap Value 2.1 Growth II
158 Principal Investors Fund 1-800-247-4123 Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.74%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. Principal Investors Fund 159 www.principal.com Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-10.96 "2003"22.14 "2004"11.92 "2005"7.66 LOGO The year-to-date return as of December 31, 2005 for Class J is 7.66%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 11.29% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -10.18%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 6.66 5.97 (AFTER TAXES ON DISTRIBUTIONS).... 5.88 5.57 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.59 4.96 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Moderate Allocation Category Average .............. 5.29 3.99 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. * Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005*
Management Fees ...... 0.1225% 12b-1 Fees............ 0.5000 Other Expenses........ 0.1700 ------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.7925% Expense Reimbursement 0.0425 ------ NET EXPENSES 0.7500% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class A shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
160 Principal Investors Fund 1-800-247-4123 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $177 $248 $435 $976 $77 $248 $435 $976
Principal Investors Fund 161 www.principal.com PRINCIPAL LIFETIME 2040 FUND The Fund seeks a total return consisting of long-term growth of capital and current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Over time, shifts in the allocations to the underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the underlying fund allocations may also occur when market forces change allocations in ways the Sub-Advisor, Principal, considers likely to help the Fund achieve its investment objective. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that invest in equity securities (see table below), the Fund is more subject to the risks associated with an investment in equity securities than to those associated with an investment in fixed income securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. Principal intends to gradually shift the Fund's allocation among the underlying funds so that within five to ten years after 2040, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of the Funds' shareholders. MAIN RISKS The net asset value of the Fund's shares is affected by changes in the value of the securities it owns. The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. The Fund's broad diversification is designed to cushion severe losses in any one investment sector and moderate the Fund's overall price swings. However, the Fund's share prices will fluctuate as the prices of the underlying funds rise or fall with changing market conditions. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of an underlying fund's shares is affected by changes in the value of the securities it owns. The prices of equity securities held by the underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . An underlying fund may invest in small and medium capitalization companies. Companies with small or medium capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. SECTOR RISK . The underlying funds may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to an 162 Principal Investors Fund 1-800-247-4123 underlying fund that allocates more of its portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. FOREIGN INVESTING . The underlying funds may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The underlying funds may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The underlying funds may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the underlying funds and, therefore, the Fund. However, the Fund's performance could be worse than if the underlying funds had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; use of them by the underlying funds could lower Fund total return; and the potential loss from the use of futures can exceed an underlying fund's initial investment in such contracts. INITIAL PUBLIC OFFERINGS ("IPOS") . An underlying fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. FIXED-INCOME RISKS .. Interest rate changes. The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. .. Credit risk. Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. .. High yield securities. Fixed-income securities in which an underlying fund may invest that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). .. U.S. Government Sponsored Enterprises. An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. INVESTOR PROFILE The Fund may be an appropriate investment for investors expecting to retire around the year 2040 or fund a cashflow need in the year 2040. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds
Bond & Mortgage 13.3% Partners LargeCap Value 10.9% Securities Disciplined LargeCap 22.1 Partners SmallCap Growth 2.5 Blend III International Growth 12.7 Preferred Securities 3.7 LargeCap Growth 8.9 Real Estate Securities 5.2 LargeCap Value 6.1 SmallCap S&P 600 Index 3.6 Partners LargeCap 8.4 SmallCap Value 2.6 Growth II
Principal Investors Fund 163 www.principal.com Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.73%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. 164 Principal Investors Fund 1-800-247-4123 Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-13.55 "2003"22.74 "2004"12.11 "2005"7.97 LOGO The year-to-date return as of December 31, 2005 for Class J is 7.97%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 12.11% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE:Q3 '02 -12.28%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 6.97 6.01 (AFTER TAXES ON DISTRIBUTIONS).... 6.34 5.70 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 4.79 5.05 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Moderate Allocation Category Average .............. 5.29 3.99 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005*
Management Fees ...... 0.1225% 12b-1 Fees............ 0.5000 Other Expenses........ 0.2500 ------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.8725% Expense Reimbursement 0.1225 ------ NET EXPENSES 0.7500% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class A shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
Principal Investors Fund 165 www.principal.com EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ------------------------------------------------------------------------------------------------------------------ NUMBER OF YEARS YOU OWN YOUR SHARES ------------------------------------------------------------------------------------------------------------------ 1 3 5 10 1 3 5 10 CLASS J $177 $264 $470 $1,062 $77 $264 $470 $1,062
166 Principal Investors Fund 1-800-247-4123 PRINCIPAL LIFETIME 2050 FUND The Fund seeks a total return consisting of long-term growth of capital and current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). The underlying funds are intended to give the Fund broad exposure to the domestic and foreign equity and fixed-income markets. Over time, shifts in the allocations to the underlying funds will be designed to accommodate investors progressing from asset accumulation years to income-generation years; shifts in the underlying fund allocations may also occur when market forces change allocations in ways the Sub-Advisor, Principal, considers likely to help the Fund achieve its investment objective. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that invest in equity securities (see table below), the Fund is more subject to the risks associated with an investment in equity securities than to those associated with an investment in fixed income securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. Principal intends to gradually shift the Fund's allocation among the underlying funds so that within five to ten years after 2050, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. At that time, the Fund may be combined with the Principal LifeTime Strategic Income Fund if the Board of Directors determines that the combination is in the best interests of the Funds' shareholders. MAIN RISKS The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. The Fund's broad diversification is designed to cushion severe losses in any one investment sector and moderate the Fund's overall price swings. However, the Fund's share prices will fluctuate as the prices of the underlying funds rise or fall with changing market conditions. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: STOCK MARKET VOLATILITY . The net asset value of an underlying fund's shares is affected by changes in the value of the securities it owns. The prices of equity securities held by the underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. SMALL AND MEDIUM CAPITALIZATIONS . The underlying funds may invest in small and medium capitalization companies. Companies with small or medium capitalizations are often companies with a limited operation history. Such companies may have been created in response to cultural, economic, regulatory or technological developments. Such developments can have significant impact or negative effect on smaller capitalization companies securities which may be more volatile in price than larger company securities, especially over the short-term. SECTOR RISK . The underlying funds may group companies with similar characteristics into broad categories called sectors. Therefore, the Fund is also subject to sector risk; that is, the possibility that a certain sector may underperform other sectors or the market as a whole. As the Sub-Advisor allocates more of the Fund's portfolio holdings to an underlying fund that allocates more of its portfolio holdings to a particular sector, the Fund's performance will be more susceptible to any economic, business or other developments that generally affect that sector. Principal Investors Fund 167 www.principal.com FOREIGN INVESTING . The underlying funds may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries, as well as less public information about foreign investments may negatively impact the Fund's portfolio. Dividends and other income payable on foreign securities may be subject to foreign taxes. Some investments may be made in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. HEDGING STRATEGIES . The underlying funds may use futures, options, swaps and other derivative instruments to "hedge" or protect the portfolio from adverse movements in securities prices and interest rates. The underlying funds may also use a variety of currency hedging techniques, including forward currency contracts, to manage exchange rate risk. The Sub-Advisor believes the use of these instruments will benefit the underlying funds and, therefore, the Fund. However, the Fund's performance could be worse than if the underlying funds had not used such instruments if the Sub-Advisor's judgment proves incorrect. Futures contracts and options may not always be successful hedges; their prices can be highly volatile; use of them by the underlying funds could lower Fund total return; and the potential loss from the use of futures can exceed an underlying fund's initial investment in such contracts. INITIAL PUBLIC OFFERINGS ("IPOS") . The underlying fund's purchase of shares issued in IPOs exposes it to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. The market for IPO issuers has been volatile and share prices of certain newly-public companies have fluctuated in significant amounts over short periods of time. In addition, the Sub-Advisor cannot guarantee continued access to IPO offerings, and may at times dispose of those shares shortly after their acquisition. FIXED-INCOME RISKS .. Interest rate changes. The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. .. Credit risk. Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. .. High yield securities. Fixed-income securities in which an underlying fund may invest that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks"). .. U.S. Government Sponsored Enterprises. An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. INVESTOR PROFILE The Fund may be an appropriate investment for investors expecting to retire around the year 2050 or fund a cashflow need in the year 2050. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds:
Bond & Mortgage 6.6% Partners LargeCap Value 12.2% Securities Disciplined LargeCap 25.2 Partners SmallCap Growth 3.0 Blend III International Growth 15.8 Preferred Securities 2.2 LargeCap Growth 9.8 Real Estate Securities 2.3 LargeCap Value 6.6 SmallCap S&P 600 Index 4.0 Partners LargeCap 9.2 SmallCap Value 3.1 Growth II
168 Principal Investors Fund 1-800-247-4123 Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.73%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. Principal Investors Fund 169 www.principal.com Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-16.31 "2003"24.51 "2004"11.54 "2005"8.25 LOGO The year-to-date return as of December 31, 2005 for Class J is 8.25%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 13.07% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02-14.88%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 7.25 4.90 (AFTER TAXES ON DISTRIBUTIONS).... 6.72 4.64 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 5.00 4.11 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Large Blend Category Average 5.77 2.15 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005
Management Fees* ..... 0.1225% 12b-1 Fees............ 0.5000 Other Expenses........ 0.59 ---- TOTAL ANNUAL FUND OPERATING EXPENSES 1.2125% Expense Reimbursement 0.4625 ------ NET EXPENSES 0.7500% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class J shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
* 170 Principal Investors Fund 1-800-247-4123 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ------------------------------------------------------------------------------------------------------------------ NUMBER OF YEARS YOU OWN YOUR SHARES ------------------------------------------------------------------------------------------------------------------ 1 3 5 10 1 3 5 10 CLASS J $177 $331 $614 $1,421 $77 $331 $614 $1,421
Principal Investors Fund 171 www.principal.com PRINCIPAL LIFETIME STRATEGIC INCOME FUND The Fund seeks current income. MAIN STRATEGIES To pursue its goal, the Fund invests in shares of other Funds of the Principal Investors Fund (the "underlying funds"). Most of the Fund's assets are invested in underlying funds which are intended primarily to give the Fund broad exposure to income-producing markets through their investments in fixed-income securities, "hybrid" securities - such as real estate and preferred securities, which may produce current income as well as capital gains - and dividend-generating domestic and foreign stocks. The Fund may also invest in underlying funds which invest primarily in growth equity securities. In deciding how to allocate the Fund's assets among the underlying funds at any time, Principal considers long-term asset class returns and volatility assumptions. There are no minimum or maximum percentages in which the Fund must invest in any underlying fund. Because the Fund invests primarily in underlying funds that are intended to generate current income (see table below), the Fund is subject to the risk of interest rate changes and credit risks associated with fixed-income securities. At any time, Principal may add or substitute underlying funds in which the Fund invests. MAIN RISKS The Fund's investments are concentrated in the underlying funds and, as a result, the Fund's performance is directly related to their performance. The Fund's ability to meet its investment objective depends on the ability of the underlying funds to achieve their investment objectives. Consequently, the Fund is subject to the particular risks of the underlying funds in the proportions in which the Fund invests in them. As with all mutual funds, as the values of the Fund's assets rise or fall, the Fund's share price changes. If you sell your shares when their value is less than the price you paid, you will lose money. As with any security, the securities in which the underlying funds invest have associated risks. These include risks of: INTEREST RATE CHANGES . The value of fixed-income securities held by an underlying fund may be affected by factors such as changing interest rates, credit rating, and effective maturities. When interest rates fall, the price of a bond rises and when interest rates rise, the price declines. CREDIT RISK . Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations than higher quality and shorter maturity bonds. Bonds held by an underlying fund may be affected by unfavorable political, economic, or governmental developments that could affect the repayment of principal or the payment of interest. HIGH YIELD SECURITIES . Fixed-income securities in which an underlying fund may invest that are not investment grade are commonly referred to as junk bonds or high yield securities. These securities offer a higher yield than other, higher rated securities, but they carry a greater degree of risk and are considered speculative by the major credit rating agencies (please see "High Yield Securities" in the section of the Prospectus entitled "Certain Investment Strategies and Related Risks") U.S. GOVERNMENT SPONSORED ENTERPRISES . An underlying fund may invest in debt and mortgage-backed securities issued by government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or corporation may be chartered or sponsored by the United States government, their securities are neither issued nor guaranteed by the United States Treasury. EQUITY SECURITY RISKS .. Stock market volatility. The net asset value of the underlying fund shares is affected by change in the value of the securities it owns. The net asset value of the underlying fund shares is effected by changes in the value of the securities it owns. The prices of equity securities held by an underlying fund may decline in response to certain events including those directly involving issuers of these securities, adverse conditions affecting the general 172 Principal Investors Fund 1-800-247-4123 economy, or overall market declines. In the short term, stock prices can fluctuate dramatically in response to these factors. .. Foreign investing. The underlying funds may invest in foreign securities. Foreign markets and currencies may not perform as well as U.S. markets. Political and economic uncertainty in foreign countries may negatively impact the portfolios of underlying funds. An underlying fund may make investments in instruments denominated in currencies other than the U.S. dollar that will fluctuate in value as a result of changes in the currency exchange rate. .. Small and Medium Capitalizations. The underlying funds may invest in small and medium capitalization companies. Companies with small capitalizations are often companies with a limited operation history. Smaller capitalization companies securities may be more volatile in price than larger company securities, especially over the short-term. .. Hedging strategies. Use of forward foreign currency exchange contracts, currency or index futures or other derivatives involves risks. .. Initial Public Offerings ("IPOs"). An underlying fund's purchase of shares issued in IPOs exposes an underlying fund to the additional risks associated with companies that have little operating history as public companies, as well as to the risks inherent in those sectors of the market where these new issuers operate. INVESTOR PROFILE The Fund may be an appropriate investment for investors in retirement. UNDERLYING FUND ALLOCATION As of October 31, 2005, the Fund's assets were allocated among the following underlying funds:
Bond & Mortgage 38.1% Partners LargeCap Growth 2.2% Securities II Disciplined LargeCap 5.6 Partners LargeCap Value 2.9 Blend International Growth 4.0 Preferred Securities 10.6 LargeCap Growth 2.4 Real Estate Securities 6.5 LargeCap Value 1.6 SmallCap S&P 600 Index 2.1 Money Market 24.0
Based on this allocation, the weighted average of the total account operating expenses of the underlying funds is 0.67%. The combined total expenses for the Fund may be higher or lower depending on the allocation of its assets among the underlying funds. Principal Investors Fund 173 www.principal.com Principal has been the Fund's Sub-Advisor since March 1, 2001. The bar chart below shows how the Fund's total return has varied year-by-year. The table below shows performance of the Fund over time (along with the returns of a broad-based market index and an index of funds with similar investment objectives for reference). This information may help provide an indication of the Fund's risks. Past performance does not indicate future results. YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
"2002"-2.63 "2003"13.97 "2004"10.32 "2005"3.41 LOGO The year-to-date return as of December 31, 2005 for Class J is 3.41%. HIGHEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q2 '03 6.83% LOWEST RETURN FOR A QUARTER DURING THE PERIOD OF THE BAR CHART ABOVE: Q3 '02-3.63%
AVERAGE ANNUAL TOTAL RETURNS (%) FOR THE PERIOD ENDED DECEMBER 31, 2005
PAST 1 YEAR LIFE OF FUND* CLASS J (BEFORE TAXES) 2.41 5.45 (AFTER TAXES ON DISTRIBUTIONS).... 1.41 4.86 (AFTER TAXES ON DISTRIBUTIONS AND SALE OF SHARES)... 1.71 4.37 S&P 500 Index ........ 4.91 2.17 Lehman Brothers Aggregate Bond Index . 2.43 5.71 Morningstar Conservative Allocation Category Average .............. 3.05 3.65 Index performance does not reflect deductions for fees, expenses or taxes. After-tax returns are calculated using the historical highest individual federal marginal income-tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on the investor's tax situation and may differ from those shown. The after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements such as 401(k) plans or individual retirement accounts. *Lifetime results are measured from the date the Class J shares were first sold (June 15, 2001)
FEES AND EXPENSES OF THE FUND The Class J shares of the Fund are sold without a front-end sales charge. If Class J shares are redeemed within 18 months of purchase, a contingent deferred sales charge of 1.00% may be imposed on the shares sold. ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS) AS OF OCTOBER 31, 2005*
CLASS J Management Fees ...... 0.1225% 12b-1 Fees............ 0.5000 Other Expenses........ 0.1500 ------ TOTAL ANNUAL FUND OPERATING EXPENSES 0.7725% Expense Reimbursement 0.0225 ------ NET EXPENSES 0.7500% *The Manager has contractually agreed to limit the Fund's expenses and, if necessary, pay expenses normally payable by the Fund through the period ending February 28, 2007. The expense limit will maintain a total level of operating expenses (expressed as a percent of average net assets attributable to Class A shares on an annualized basis) not to exceed 0.75%. The Fund, as a shareholder in the underlying funds, indirectly bears its pro rate share of the operating expenses incurred by each underlying fund. As of October 31, 2005, the operating expenses of the underlying funds ranged from 0.15% to 1.00%. The Fund's investment return is net of the underlying funds' operating expenses.
174 Principal Investors Fund 1-800-247-4123 EXAMPLE This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be:
IF YOU SELL YOUR SHARES IF YOU DO NOT SELL YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- NUMBER OF YEARS YOU OWN YOUR SHARES ---------------------------------------------------------------------------------------------------------------------- 1 3 5 10 1 3 5 10 CLASS J $177 $244 $427 $955 $77 $244 $427 $955
Principal Investors Fund 175 www.principal.com THE COSTS OF INVESTING FEES AND EXPENSES OF THE FUNDS The Class J shares of the Funds are sold without a front-end sales charge. There is no sales charge on shares purchased with reinvested dividends or other distributions. ONE-TIME FEES .. If you sell your Class J shares within 18 months of purchase, a contingent deferred sales charge (CDSC) may be imposed on the shares sold. The CDSC, if any, is determined by multiplying by 1.00% the lesser of the market value at the time of redemption or the initial purchase price of the shares sold. . The CDSC is not imposed on shares: . that were purchased pursuant to the Small Amount Force Out program (SAFO); . redeemed due to a shareholder's death or disability (as defined in the Internal Revenue Code); . redeemed from retirement plans to satisfy minimum distribution rules under the Internal Revenue Code; . sold using a periodic withdrawal plan (up to 10% of the value of the shares (as of the last business day of December of the prior year) subject to a CDSC without paying the CDSC); or . that were purchased through the Principal Income IRA; or . that were purchased through Principal Passage. .. A redemption fee* of 1.00% is charged on redemptions of $30,000 or more if the shares were purchased within 30 days of the redemption. The fee does not apply to redemptions made: through a periodic withdrawal plan; due to a shareholder's death or disability (as defined in the Internal Revenue Code); or to satisfy minimum distribution rules imposed by the Internal Revenue Code. The fee is calculated as a percentage of market value of the shares redeemed at the time of the shares are redemption. .. An exchange fee* of 1.00% is charged on exchanges of $30,000 or more among the Funds if the shares were purchased within 30 days of the exchange. The fee is calculated as a percentage of market value of the shares exchanged at the time of the exchange. * Neither the redemption nor the exchange fee applies to shares redeemed/exchanged from the Money Market Fund. The Funds do not pay any fees other than those described below and do not pay any other expenses. ONGOING FEES Ongoing fees reduce the value of each share. Because they are ongoing, they increase the cost of investing in the Funds. Each Principal LifeTime Fund, as a shareholder in the underlying fund, bears its pro rata share of the management fees incurred by each underlying fund. The investment return of each Principal LifeTime Fund is net of the underlying funds' management fee. Each of the Funds pays ongoing fees to the Manager and others who provide services to the Fund. These fees include: .. Management Fee - Through the Management Agreement with the Fund, the Manager has agreed to provide investment advisory services and corporate administrative services to the Funds. .. Distribution Fee - Each of the Funds has adopted a distribution plan under Rule 12b-1 of the Investment Company Act of 1940 for its Class J shares. Under the plan, the Class J shares of each Fund pays a distribution fee based on the average daily net asset value (NAV) of the Fund. These fees pay distribution and other expenses for the sale of Fund shares and for services provided to shareholders. Because they are ongoing fees, over time they will increase the cost of your investment and may cost you more than paying other types of sales charges. .. Transfer Agent Fee - The Manager has entered into a Transfer Agency Agreement with the Fund under which the Manager provides transfer agent services to the Class J shares of the Fund. These services are currently provided at cost. .. Portfolio Accounting Services - The Manager has entered into an agreement with the Fund under which the Manager supplies portfolio accounting services. Currently, there is no charge for these services. 176 Principal Investors Fund 1-800-247-4123 Class J shares of the Funds also pay expenses of registering and qualifying shares for sale, the cost of producing and distributing reports and prospectuses to Class J shareholders and the cost of shareholder meetings held solely for Class J shares. The Manager registers Class J shares with the states and the Fund pays the cost associated with this activity under the terms of the Transfer Agency Agreement for Class J Shares. Due to the low level of assets of certain Funds, the state registration fees have a dramatic impact on the Class J share expense ratios of those Funds. As the assets increase, it is expected that this expense will become a relatively small portion of the overall Fund's operating expenses for this class. The Manager has agreed to pay the state registration expenses, and if necessary other Fund expenses, on an interim basis in order to lower the total operating expense ratio for certain of the Fund's Class J shares. Therefore, the Transfer Agency Agreement for Class J shares has been amended to reflect the Manager's agreement to pay expenses of the Fund. However, the Manager reserves the right to be reimbursed for any expenses paid on behalf of the Fund if the Fund's expenses are less than the limit agreed to by the Fund. Principal Investors Fund 177 www.principal.com CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS The information in this section does not directly apply to the Principal LifeTime Funds. It does apply to the underlying funds in which the LifeTime Funds invest. The Statement of Additional Information (SAI) contains additional information about investment strategies and their related risks. SECURITIES AND INVESTMENT PRACTICES MARKET VOLATILITY . Equity securities include common stocks, preferred stocks, convertible securities, depositary receipts, rights and warrants. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. The value of a company's stock may fall as a result of factors directly relating to that company, such as decisions made by its management or lower demand for the company's products or services. A stock's value may also fall because of factors affecting not just the company, but also companies in the same industry or in a number of different industries, such as increases in production costs. The value of a company's stock may also be affected by changes in financial markets that are relatively unrelated to the company or its industry, such as changes in interest rates or currency exchange rates. In addition, a company's stock generally pays dividends only after the company invests in its own business and makes required payments to holders of its bonds and other debt. For this reason, the value of a company's stock will usually react more strongly than its bonds and other debt to actual or perceived changes in the company's financial condition or prospects. Stocks of smaller companies may be more vulnerable to adverse developments than those of larger companies. Fixed-income securities include bonds and other debt instruments that are used by issuers to borrow money from investors. The issuer generally pays the investor a fixed, variable or floating rate of interest. The amount borrowed must be repaid at maturity. Some debt securities, such as zero coupon bonds, do not pay current interest, but are sold at a discount from their face values. INTEREST RATE CHANGES . Fixed-income securities are sensitive to changes in interest rates. In general, fixed-income security prices rise when interest rates fall and fall when interest rates rise. Longer term bonds and zero coupon bonds are generally more sensitive to interest rate changes. CREDIT RISK . Fixed-income security prices are also affected by the credit quality of the issuer. Investment grade debt securities are medium and high quality securities. Some bonds, such as lower grade or "junk" bonds, may have speculative characteristics and may be particularly sensitive to economic conditions and the financial condition of the issuers. REPURCHASE AGREEMENTS AND LOANED SECURITIES Although not a principal investment strategy, each of the Funds may invest a portion of its assets in repurchase agreements. Repurchase agreements typically involve the purchase of debt securities from a financial institution such as a bank, savings and loan association or broker-dealer. A repurchase agreement provides that the Fund sells back to the seller and that the seller repurchases the underlying securities at a specified price on a specific date. Repurchase agreements may be viewed as loans by a Fund collateralized by the underlying securities. This arrangement results in a fixed rate of return that is not subject to market fluctuation while the Fund holds the security. In the event of a default or bankruptcy by a selling financial institution, the affected Fund bears a risk of loss. To minimize such risks, the Fund enters into repurchase agreements only with large, well-capitalized and well-established financial institutions. In addition, the value of the securities collateralizing the repurchase agreement is, and during the entire term of the repurchase agreement remains, at least equal to the repurchase price, including accrued interest. Each of the Funds may lend its portfolio securities to unaffiliated broker-dealers and other unaffiliated qualified financial institutions. REVERSE REPURCHASE AGREEMENTS A Fund may use reverse repurchase agreements to obtain cash to satisfy unusually heavy redemption requests or for other temporary or emergency purposes without the necessity of selling portfolio securities, or to earn additional income on portfolio securities, such as Treasury bills or notes. In a reverse repurchase agreement, a Fund sells a portfolio security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase the instrument at a particular price and time. While a reverse repurchase agreement is outstanding, a Fund will maintain 178 Principal Investors Fund 1-800-247-4123 cash and appropriate liquid assets to cover its obligation under the agreement. The Fund will enter into reverse repurchase agreements only with parties that the Sub-Advisor deems creditworthy. Using reverse repurchase agreements to earn additional income involves the risk that the interest earned on the invested proceeds is less than the expense of the reverse repurchase agreement transaction. This technique may also have a leveraging effect on the Fund, although the Fund's intent to segregate assets in the amount of the repurchase agreement minimizes this effect. CURRENCY CONTRACTS The Funds may each enter into forward currency contracts, currency futures contracts and options, and options on currencies for hedging purposes and not as a principal investment strategy. A forward currency contract involves a privately negotiated obligation to purchase or sell a specific currency at a future date at a price set in the contract. A Fund will not hedge currency exposure to an extent greater than the aggregate market value of the securities held or to be purchased by the Fund (denominated or generally quoted or currently convertible into the currency). Hedging is a technique used in an attempt to reduce risk. If a Fund's Sub-Advisor hedges market conditions incorrectly or employs a strategy that does not correlate well with the Fund's investment, these techniques could result in a loss. These techniques may increase the volatility of a Fund and may involve a small investment of cash relative to the magnitude of the risk assumed. In addition, these techniques could result in a loss if the other party to the transaction does not perform as promised. There is also a risk of government action through exchange controls that would restrict the ability of the Fund to deliver or receive currency. FORWARD COMMITMENTS Although not a principal investment strategy, each of the Funds may enter into forward commitment agreements. These agreements call for the Fund to purchase or sell a security on a future date at a fixed price. Each of these Funds may also enter into contracts to sell its investments either on demand or at a specific interval. WARRANTS Each of the Funds may invest in warrants though none of the Funds use such investments as a principal investment strategy. A warrant is a certificate granting its owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price. HIGH YIELD SECURITIES The Bond & Mortgage Securities Fund may invest in debt securities rated lower than BBB by S&P or Baa by Moody's or, if not rated, determined to be of equivalent quality by the Manager or the Sub-Advisor. Such securities are sometimes referred to as high yield or "junk bonds" and are considered speculative. The Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040 and Principal LifeTime 2050 and Principal LifeTime Strategic Income Funds may invest in underlying funds that may invest in such securities. Investment in high yield bonds involves special risks in addition to the risks associated with investment in highly rated debt securities. High yield bonds may be regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments. Moreover, such securities may, under certain circumstances, be less liquid than higher rated debt securities. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher quality debt securities. The ability of a Fund to achieve its investment objective may, to the extent of its investment in high yield bonds, be more dependent on such credit analysis than would be the case if the Fund were investing in higher quality bonds. High yield bonds may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher-grade bonds. The prices of high yield bonds have been found to be less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual corporate developments. If the issuer of high yield bonds defaults, a Fund may incur additional expenses to seek recovery. The secondary market on which high yield bonds are traded may be less liquid than the market for higher-grade bonds. Less liquidity in the secondary trading market could adversely affect the price at which a Fund could sell a high yield Principal Investors Fund 179 www.principal.com bond and could adversely affect and cause large fluctuations in the daily price of the Fund's shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the value and liquidity of high yield bonds, especially in a thinly traded market. The use of credit ratings for evaluating high yield bonds also involves certain risks. For example, credit ratings evaluate the safety of principal and interest payments, not the market value risk of high yield bonds. Also, credit rating agencies may fail to change credit ratings in a timely manner to reflect subsequent events. If a credit rating agency changes the rating of a portfolio security held by a Fund, the Fund may retain the security if the Manager or Sub-Advisor thinks it is in the best interest of shareholders. INITIAL PUBLIC OFFERINGS ("IPOS") Certain of the Funds may invest in IPOs. An IPO is a company's first offering of stock to the public. IPO risk is that the market value of IPO shares will fluctuate considerably due to factors such as the absence of a prior public market, unseasoned trading, the small number of shares available for trading and limited information about the issuer. The purchase of IPO shares may involve high transaction costs. IPO shares are subject to market risk and liquidity risk. In addition, the market for IPO shares can be speculative and/or inactive for extended periods of time. The limited number of shares available for trading in some IPOs may make it more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. Investors in IPO shares can be affected by substantial dilution in the value of their shares by sales of additional shares and by concentration of control in existing management and principal shareholders. When a Fund's asset base is small, a significant portion of the Fund's performance could be attributable to investments in IPOs because such investments would have a magnified impact on the Fund. As the Fund's assets grow, the effect of the Fund's investments in IPOs on the Fund's performance probably will decline, which could reduce the Fund's performance. Because of the price volatility of IPO shares, a Fund may choose to hold IPO shares for a very short period of time. This may increase the turnover of the Fund's portfolio and lead to increased expenses to the Fund, such as commissions and transaction costs. By selling IPO shares, the Fund may realize taxable gains it will subsequently distribute to shareholders. DERIVATIVES To the extent permitted by its investment objectives and policies, each of the Funds may invest in securities that are commonly referred to as derivative securities. Generally, a derivative is a financial arrangement, the value of which is derived from, or based on, a traditional security, asset, or market index. Certain derivative securities are described more accurately as index/structured securities. Index/structured securities are derivative securities whose value or performance is linked to other equity securities (such as depositary receipts), currencies, interest rates, indices or other financial indicators (reference indices). Some derivatives, such as mortgage-related and other asset-backed securities, are in many respects like any other investment, although they may be more volatile or less liquid than more traditional debt securities. There are many different types of derivatives and many different ways to use them. Futures and options are commonly used for traditional hedging purposes to attempt to protect a Fund from exposure to changing interest rates, securities prices, or currency exchange rates and for cash management purposes as a low-cost method of gaining exposure to a particular securities market without investing directly in those securities. The Funds may enter into put or call options, future contracts, options on futures contracts and over-the-counter swap contracts (e.g., interest rate swaps, total return swaps and credit default swaps) for both hedging and non-hedging purposes. Generally, no Fund may invest in a derivative security unless the reference index or the instrument to which it relates is an eligible investment for the Fund. The return on a derivative security may increase or decrease, depending upon changes in the reference index or instrument to which it relates. The risks associated with derivative investments include: .. the risk that the underlying security, interest rate, market index or other financial asset will not move in the direction the Manager or Sub-Advisor anticipated; .. the possibility that there may be no liquid secondary market which may make it difficult or impossible to close out a position when desired; 180 Principal Investors Fund 1-800-247-4123 .. the risk that adverse price movements in an instrument can result in a loss substantially greater than a Fund's initial investment; and .. the counterparty may fail to perform its obligations. EXCHANGE TRADED FUNDS (ETFS) These are a type of index fund bought and sold on a securities exchange. An ETF trades like common stock and represents a fixed portfolio of securities designed to rack a particular market index. The Funds could purchase an ETF to temporarily gain exposure to a portion of the U.S. or a foreign market while awaiting purchase of underlying securities. The risks of owning an ETF generally reflect the risks of owning the underlying securities they are designed to track, although lack of liquidity in an ETF could result in it being more volatile and ETFs have management fees that increase their costs. CONVERTIBLE SECURITIES Convertible securities are fixed-income securities that a Fund has the right to exchange for equity securities at a specified conversion price. The option allows the Fund to realize additional returns if the market price of the equity securities exceeds the conversion price. For example, the Fund may hold fixed-income securities that are convertible into shares of common stock at a conversion price of $10 per share. If the market value of the shares of common stock reached $12, the Fund could realize an additional $2 per share by converting its fixed-income securities. Convertible securities have lower yields than comparable fixed-income securities. In addition, at the time a convertible security is issued the conversion price exceeds the market value of the underlying equity securities. Thus, convertible securities may provide lower returns than non-convertible fixed-income securities or equity securities depending upon changes in the price of the underlying equity securities. However, convertible securities permit the Fund to realize some of the potential appreciation of the underlying equity securities with less risk of losing its initial investment. The Funds treat convertible securities as both fixed-income and equity securities for purposes of investment policies and limitations because of their unique characteristics. The Funds may invest in convertible securities without regard to their ratings. FOREIGN INVESTING As a principal investment strategy, the Diversified International, International Emerging Markets and International Growth Funds may invest Fund assets in securities of foreign companies. The other Funds (except Government & High Quality Bond Fund) may invest in securities of foreign companies but not as a principal investment strategy. For the purpose of this restriction, foreign companies are: .. companies with their principal place of business or principal office outside the U.S.; and .. companies for which the principal securities trading market is outside the U.S. Foreign companies may not be subject to the same uniform accounting, auditing and financial reporting practices as are required of U.S. companies. In addition, there may be less publicly available information about a foreign company than about a U.S. company. Securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commissions on foreign securities exchanges may be generally higher than those on U.S. exchanges, although each Fund seeks the most favorable net results on its portfolio transactions. Foreign markets also have different clearance and settlement procedures than those in U.S. markets. In certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct these transactions. Delays in settlement could result in temporary periods when a portion of Fund assets is not invested and earning no return. If a Fund is unable to make intended security purchases due to settlement problems, the Fund may miss attractive investment opportunities. In addition, a Fund may incur a loss as a result of a decline in the value of its portfolio if it is unable to sell a security. With respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect a Fund's investments in those countries. In addition, a Fund may also suffer losses due to nationalization, expropriation or differing accounting practices and treatments. Investments in foreign securities are subject to laws of the foreign country that may limit the amount and types of foreign investments. Changes of governments or of economic or monetary policies, in the U.S. or abroad, changes in Principal Investors Fund 181 www.principal.com dealings between nations, currency convertibility or exchange rates could result in investment losses for a Fund. Finally, even though certain currencies may be convertible into U.S. dollars, the conversion rates may be artificial relative to the actual market values and may be unfavorable to Fund investors. Foreign securities are often traded with less frequency and volume, and therefore may have greater price volatility, than is the case with many U.S. securities. Brokerage commissions, custodial services, and other costs relating to investment in foreign countries are generally more expensive than in the U.S. Though the Funds intend to acquire the securities of foreign issuers where there are public trading markets, economic or political turmoil in a country in which a Fund has a significant portion of its assets or deterioration of the relationship between the U.S. and a foreign country may negatively impact the liquidity of a Fund's portfolio. A Fund may have difficulty meeting a large number of redemption requests. Furthermore, there may be difficulties in obtaining or enforcing judgments against foreign issuers. A Fund may choose to invest in a foreign company by purchasing depositary receipts. Depositary receipts are certificates of ownership of shares in a foreign-based issuer held by a bank or other financial institution. They are alternatives to purchasing the underlying security but are subject to the foreign securities to which they relate. Investments in companies of developing countries may be subject to higher risks than investments in companies in more developed countries. These risks include: .. increased social, political and economic instability; .. a smaller market for these securities and low or nonexistent volume of trading that results in a lack of liquidity and in greater price volatility; .. lack of publicly available information, including reports of payments of dividends or interest on outstanding securities; .. foreign government policies that may restrict opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; .. relatively new capital market structure or market-oriented economy; .. the possibility that recent favorable economic developments may be slowed or reversed by unanticipated political or social events in these countries; .. restrictions that may make it difficult or impossible for the Fund to vote proxies, exercise shareholder rights, pursue legal remedies, and obtain judgments in foreign courts; and .. possible losses through the holding of securities in domestic and foreign custodial banks and depositories. In addition, many developing countries have experienced substantial, and in some periods, extremely high rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of those countries. Repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval in some developing countries. A Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for repatriation. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. SMALL AND MEDIUM CAPITALIZATION COMPANIES The Funds (except the Government & High Quality Bond Fund) may invest in securities of companies with small- or mid-sized market capitalizations. The Bond & Mortgage Securities, High Quality Intermediate-Term Bond, Inflation Protection, LargeCap Growth, LargeCap S&P 500 Index, LargeCap Value, Partners LargeCap Blend, Money Market, Partners LargeCap Blend I, Partners LargeCap Growth, Partners LargeCap Growth I, Partners LargeCap Growth II, Partners LargeCap Value, Preferred Securities, Real Estate Securities and Short-Term Bond Funds may hold securities of small and medium capitalization companies but not as a principal investment strategy. The international funds invest in the securities of foreign corporations without regard to the market capitalizations of those companies. Market capitalization is defined as total current market value of a company's outstanding common stock. Investments in companies with smaller market capitalizations may involve greater risks and price volatility (wide, rapid fluctuations) 182 Principal Investors Fund 1-800-247-4123 than investments in larger, more mature companies. Small companies may be less significant within their industries and may be at a competitive disadvantage relative to their larger competitors. While smaller companies may be subject to these additional risks, they may also realize more substantial growth than larger or more established companies. Smaller companies may be less mature than larger companies. At this earlier stage of development, the companies may have limited product lines, reduced market liquidity for their shares, limited financial resources or less depth in management than larger or more established companies. Unseasoned issuers are companies with a record of less than three years continuous operation, including the operation of predecessors and parents. Unseasoned issuers by their nature have only a limited operating history that can be used for evaluating the company's growth prospects. As a result, investment decisions for these securities may place a greater emphasis on current or planned product lines and the reputation and experience of the company's management and less emphasis on fundamental valuation factors than would be the case for more mature growth companies. TEMPORARY DEFENSIVE MEASURES From time to time, as part of its investment strategy, each Fund (other than the Money Market Fund which may invest in high-quality money market securities at any time) may invest without limit in cash and cash equivalents for temporary defensive purposes in response to adverse market, economic or political conditions. To the extent that the Fund is in a defensive position, it may lose the benefit of upswings and limit its ability to meet its investment objective. For this purpose, cash equivalents include: bank notes, bank certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper, and commercial paper master notes which are floating rate debt instruments without a fixed maturity. In addition, a Fund may purchase U.S. government securities, preferred stocks and debt securities, whether or not convertible into or carrying rights for common stock. There is no limit on the extent to which the Funds may take temporary defensive measures. In taking such measures, the Fund may fail to achieve its investment objective. LIFETIME FUNDS The performance and risks of each LifeTime Fund directly corresponds to the performance and risks of the underlying funds in which the Fund invests. By investing in many underlying funds, the LifeTime Funds have partial exposure to the risks of many different areas of the market. The more a LifeTime Fund allocates to stock funds, the greater the expected risk. For Funds that are farthest from their stated retirement dates, allocations to stocks are relatively high so that investors may benefit from their long-term growth potential, while allocations to fixed-income securities are relatively low. This approach is designed to help investors accumulate the assets needed during their retirement years. Principal intends to gradually shift each LifeTime Fund's (except the Lifetime Strategic Income Fund) allocation among the underlying funds so that within five to ten years after the stated retirement date, the Fund's underlying fund allocation matches the underlying fund allocation of the Principal LifeTime Strategic Income Fund. If you are considering investing in a LifeTime Fund, you should take into account your estimated retirement date and risk tolerance. In general, each LifeTime Fund is managed with the assumption that the investor will invest in a LifeTime Fund whose stated date is closest to the date the shareholder retires. Choosing a Fund targeting an earlier date represents a more conservative choice; targeting a Fund with a later date represents a more aggressive choice. It is important to note that the retirement year of the Fund you select should not necessarily represent the specific year you intend to start drawing retirement assets. It should be a guide only. Generally, the potential for higher returns over time is accompanied by the higher risk of a decline in the value of your principal. Investors should realize that the LifeTime Funds are not a complete solution to their retirement needs. Investors must weigh many factors when considering when to retire, what their retirement needs will be, and what sources of income they may have. Each LifeTime Fund indirectly bears its pro-rata share of the expenses of the Institutional Class shares of the underlying funds in which it invests, as well as directly incurring expenses. Therefore, investment in a LifeTime Fund may be more costly than investing directly in shares of the underlying funds. Principal Investors Fund 183 www.principal.com PORTFOLIO TURNOVER "Portfolio Turnover" is the term used in the industry for measuring the amount of trading that occurs in a Fund's portfolio during the year. For example, a 100% turnover rate means that on average every security in the portfolio has been replaced once during the year. Funds with high turnover rates (more than 100%) often have higher transaction costs (that are paid by the Fund) that may have an adverse impact on Fund performance and may generate short-term capital gains (on which taxes may be imposed even if no shares of the Fund are sold during the year). No turnover rate can be calculated for the Money Market Fund because of the short maturities of the securities in which it invests. Turnover rates for each of the other Funds may be found in the Fund's Financial Highlights table. Please consider all the factors when you compare the turnover rates of different funds. A fund with consistently higher total returns and higher turnover rates than another fund may actually be achieving better performance precisely because the managers are active traders. You should also be aware that the "total return" line in the Financial Highlights section already includes portfolio turnover costs. MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE THE MANAGER Principal Management Corporation serves as the Manager for the Fund. Through the Management Agreement with the Fund, the Manager has agreed to handle the investment advisory services and provide certain corporate administrative services for the Fund. The Fund and the Manager have entered into a Portfolio Accounting Services Agreement under which the Manager provides portfolio accounting services. The Manager is an indirect subsidiary of Principal Financial Group, Inc. and has managed mutual funds since 1969. As of December 31, 2005, the mutual funds it manages had assets of approximately $28.6 billion. The Manager's address is Principal Financial Group, Des Moines, Iowa 50392-2080. THE SUB-ADVISORS The Manager has signed contracts with various Sub-Advisors. Under the Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the Manager to provide investment advisory service for a specific Fund. For these services, the Sub-Advisor is paid a fee by the Manager. Information regarding Sub-Advisors and individual portfolio managers is set forth below. The Statement of Additional Information provides additional information about each portfolio manager's compensation, other accounts managed by the portfolio manager and the portfolio manager's ownership of securities in each of the Funds. SUB-ADVISOR: Alliance Capital Management, L.P. ("Alliance") managed $579 billion in assets as of December 31, 2005. Alliance is located at 1345 Avenue of the Americas, New York, NY 10105. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners SmallCap Growth I Bruce K. Aronow Michael W. Doherty N. Kumar Kirpalani Samantha S. Lau
184 Principal Investors Fund 1-800-247-4123 BRUCE K. ARONOW, CFA . Senior Vice President, Portfolio Manager/Research Analyst. Mr. Aronow is team leader of the Small Cap Growth equity portfolio management team. Prior to joining Alliance in 1999, Mr. Aronow was responsible for research and portfolio management of the small cap consumer sectors since early 1997 at INVESCO (NY) (formerly Chancellor Capital Management). He joined Chancellor in 1994. Previously, Mr. Aronow was a Senior Associate with Kidder, Peabody & Company. Mr. Aronow holds a BA from Colgate University. Mr. Aronow is a member of both the New York Society of Security Analysts and the Association of Investment Management & Research. He is a Chartered Financial Analyst. MICHAEL W. DOHERTY . Assistant Vice President, Quantitative Analyst. Mr. Doherty is responsible for maintaining and updating the quantitative models used by the small cap group. He also provides research assistance across all industries and portfolio administration. Prior to joining Alliance in 1999, Mr. Doherty worked as a small cap research assistant and portfolio administrator for INVESCO (NY) (formerly Chancellor Capital Management). Mr. Doherty began his career at Citicorp Investment Management in 1983 as a research assistant. He is currently attending Mount Saint Mary's College working toward a BA in Business Administration. N. KUMAR KIRPALANI, CFA . Vice President, Portfolio Manager/Research Analyst. Prior to joining Alliance in 1999, Mr. Kirpalani was responsible for research and portfolio management of small cap industrial, financial and energy sectors for INVESCO (NY) (formerly Chancellor Capital Management). Mr. Kirpalani joined Chancellor in 1993. Previously, Mr. Kirpalani served as Vice President of Investment Research at Scudder, Stevens & Clark. Mr. Kirpalani received a BTech from the Indian Institute of Technology and an MBA from the University of Chicago. Mr. Kirpalani is a member of both the New York Society of Security Analysts and the Association for Investment Management and Research. He is a Chartered Financial Analyst and has 22 years of investment experience. SAMANTHA S. LAU, CFA . Vice President, Portfolio Manager/Research Analyst. Prior to joining Alliance in 1999, Ms. Lau was responsible for covering small cap technology companies for INVESCO (NY) (formerly Chancellor Capital Management). She joined Chancellor LGT in 1997. Previously Ms. Lau worked for three years in the investment research department of Goldman Sachs. Ms. Lau has a BS, magna cum laude, in Finance and Accounting from the Wharton School of the University of Pennsylvania. She is a Chartered Financial Analyst. SUB-ADVISOR: AllianceBernstein Investment Research and Management ("Bernstein"), a wholly-owned subsidiary of Alliance Capital Management, L.P. ("Alliance"). As of December 31, 2005, Alliance managed $579 billion in assets. Bernstein is located at 767 Fifth Avenue, New York, NY 10153 and Alliance is located at 1345 Avenue of the Americas, New York, NY 10105. The management of and investment decisions for the Fund's portfolio are made by the US Value Investment Policy Group, comprised of senior US Value Investment Team members. The US Value Investment Policy Group relies heavily on the fundamental analysis and research of the Adviser's large internal research staff. No one person is principally responsible for making recommendations for the Fund's portfolio. the members of the US Value Investment Policy Group with the most significant responsibility for the day-to-day management of the Fund's portfolio are: Marilyn Fedak, John Mahedy, John Phillips and Chris Marx. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Value Marilyn G. Fedak John Mahedy Chris Marx John D. Phillips, Jr.
Principal Investors Fund 185 www.principal.com MARILYN G. FEDAK, CFA . Ms. Fedak was named executive vice president and chief investment officer for U.S. Value Equities of Alliance in 2000. She became chief investment office for U.S. Value Equities and chairman of the Bernstein U.S. Equity Investment Policy Group at Sanford C. Bernstein & Co., Inc. in 1993. She had previously served as a senior portfolio manager since joining the firm in 1984. From 1972 to 1983, she was a portfolio manager and research analyst at Morgan Guaranty Trust Company. She earned a BA from Smith College in 1968 and an MBA from Harvard University in 1972. She has earned the right to use the Chartered Financial Analyst designation. JOHN MAHEDY, CPA . Mr. Mahedy was named Co-CIO-US Value equities in 2003. He continues to serve as director of research-US Value Equities, a position he has held since 2001. Previously, Mr. Mahedy was a senior research analyst in Bernstein's institutional research and brokerage unit, covering the domestic and international energy industry from 1995 to 2001 and the oil-services industry from 1988 to 1991. He also covered oil services at Morgan Stanley for three years in the early 1990s. Mr. Mahedy was ranked among the top-five oil analysts in the Reuters and Greenwich Associates polls in 1999 and 2000, and he was named to the Institutional Investor All-America Research Team in 1993, 1994 and 1995. Mr. Mahedy began his career as a senior auditor with Peat Marwick Main. He earned a BS and an MBA from New York University. CHRISTOPHER W. MARX . Mr. Marx joined the firm in 1997 as a research analyst. He covered a variety of industries both domestically and internationally, including chemicals, food, supermarkets, beverages and tobacco. Prior to that, he spent six years as a consultant for Deloitte & Touche and the Boston Consulting Group. Mr. Marx earned an AB in economics from Harvard, and an MBA from the Stanford Graduate School of Business. Location: New York. JOHN D. PHILLIPS, JR., CFA . Mr. Phillips, Senior Portfolio Manager - U.S. Value Equities, is a member of the Investment Policy Group, and member of the Research Review Committee. He joined the firm in 1994. From 1992 to 1993, he was chairman of the Investment Committee and chief equity officer at Investment Advisers, Inc. in Minneapolis. From 1972 to 1992, he was at State Street Research and Management Co. in Boston, where he progressed from investment research analyst to vice chairman of the Equity Investment Committee. He earned a BA from Hamilton College and an MBA from Harvard University. He has earned the right to use the Chartered Financial Analyst designation. SUB-ADVISOR: American Century Investment Management, Inc. ("American Century") was founded in 1958. Its office is located in the American Century Tower at 4500 Main Street, Kansas City, MO 64111. As of December 31, 2005, American Century managed $100.9 billion in assets. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Growth II Prescott LeGard Gregory Woodhams
E.A. PRESCOTT LEGARD, CFA . Mr. LeGard is a Vice President and Portfolio Manager for American Century. Mr. LeGard joined the company in 1999. Before joining the company, he was an Equity Analyst for USAA Investment Management where he analyzed technology companies. He has worked in the investment industry since 1993. Mr. LeGard holds a BA degree in Economics from DePauw University. He has earned the right to use the Chartered Financial Analyst designation. 186 Principal Investors Fund 1-800-247-4123 GREGORY J. WOODHAMS, CFA . Mr. Woodhams is a Vice President and Senior Portfolio Manager for American Century. Mr. Woodhams has worked in the financial industry since 1992 and joined American Century in 1997. Previously, he was Vice President and Director of Equity Research at Texas Commerce Bank. Mr. Woodhams holds a Bachelor's degree in Economics from Rice University and a Master's degree in Economics from the University of Wisconsin at Madison. He has earned the right to use the Chartered Financial Analyst designation. SUB-ADVISOR: Ark Asset Management Co., Inc. ("Ark Asset") is an independent, 100% employee owned investment management firm. Ark Asset's offices are located at 125 Broad Street, New York, NY 10004. As of December 31, 2005, Ark Asset managed $16.7 billion in assets. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners SmallCap Value Coleman M. Brandt William G. Charcalis
COLEMAN M. BRANDT . Vice Chairman, Ark Asset. Mr. Brandt joined Ark Asset in 1989. Prior to joining Ark Asset, he served as President of Lehman Management Co., Inc. He earned an MBA from the Harvard Graduate School of Business Administration and a BS from the Philadelphia Textile Institute. WILLIAM G. CHARCALIS . Managing Director, Ark Asset. Mr. Charcalis joined Ark Asset in 1994 as Senior Manager and has served in his current position since 1997. Prior to joining Ark Asset, he was Senior Manager at The IBM Retirement Funds. He earned a BS from the University of Southern California. SUB-ADVISOR: Barrow, Hanley, Mewhinney & Strauss ("BHMS") is an investment advisory firm that was founded in 1979. It is registered as an investment adviser under the Investment Advisers Act of 1940. BHMS manages investments for institutional investors. It is a wholly-owned subsidiary of Old Mutual Asset Management (US), which is a wholly-owned subsidiary of Old Mutual plc. BHMS's address is 2200 Ross Avenue, 31st Floor, Dallas, Texas 75201. At December 31, 2005, BHMS had approximately $55.4 billion in assets under management. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- MidCap Value James P. Barrow Mark Giambrone
JAMES P. BARROW . During Mr. Barrow's 43-year investment career, he has worked as a securities analyst and portfolio manager for several major institutions including Citizens & Southern Bank of South Carolina, Atlantic Richfield and Reliance Insurance. In 1973 re joined Republic National Bank of Dallas as a portfolio manager, where he worked with Tim Hanley and John Strauss. He later was placed in charge of the Employee benefit Portfolio Group and was a Principal Investors Fund 187 www.principal.com member of the Trust Investment Committee until the founding of BHMS in 1979. Mr. Barrow is the lead portfolio manager for the Vanguard Windsor II and Selected Value Funds. He earned a BS from the University of South Carolina. MARK GIAMBRONE, CPA . Mr. Giambrone joined BHMS in December 1998 and became a principal in 2000. Prior to joining BHMS, Mr. Giambrone served as a portfolio consultant at HOLT Value Associates. During his 13-year career, he has also served as a senior auditor/tax specialist for KPMG Peat Marwick and Ernst & Young Kenneth Leventhal. Mr. Giambrone is a member of the American Institute of Certified Public Accountants. He graduated summa cum laude from Indiana University with a BS in Accounting, and earned an MBA from the University of Chicago. SUB-ADVISOR: BNY Investment Advisors ("BNY"), a separately identifiable division of The Bank of New York, is located at 1633 Broadway, New York, New York 10019. Founded by Alexander Hamilton in 1784, The Bank of New York is one of the largest commercial banks in the United States, with over $102 billion in assets. The Bank of New York began offering investment services in the 1830s and as of December 31, 2005, managed more than $102 billion in investments for institutions and individuals. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Growth II Edward J. Von Sauers Kurt Zyla
EDWARD J. VON SAUERS . Mr. Von Sauers joined BNY Asset Management in 1987. As Division Head of Short Term Money Management, he has overall responsibility for $29 billion in short term fixed income assets. Mr. Von Sauers is a member of the Bank's Investment Policy Committee. Prior to joining the Bank, he was a portfolio manager for the New York State Power Authority. Mr. Von Sauers earned both a BBA and an MBA in Finance from Pace University. KURT ZYLA . Mr. Zyla is the Managing Director and Division Head of Index Fund Management at BNY. Prior to managing the Division in 1998, he was an index portfolio manager and worked in the Special Investment Products area, focusing on portfolio transitions/liquidations and equity derivative product strategies. Before joining BNY in 1989, Mr. Zyla worked in the Specialty Chemical's Division of Engelhard Corporation in the areas of technical sales and product management. He earned a BS in Chemical Engineering from New Jersey Institute of Technology and an MBA from New York University's Stern School of Business. SUB-ADVISOR: Columbus Circle Investors ("CCI") is an affiliate of Principal Global Investors LLC and a member of the Principal Financial Group. CCI was founded in 1975. Its address is Metro Center, One Station Place, Stamford, CT 06902. As of December 31, 2005, CCI had approximately $5.9 billion in assets under management. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- LargeCap Growth Anthony Rizza MidCap Growth Clifford G. Fox
188 Principal Investors Fund 1-800-247-4123 CLIFFORD G. FOX, CFA . Mr. Fox, portfolio manager, joined CCI in 1992. He had previously served as Vice President of Equity Investments at General Reinsurance Corporation. He received an MBA from the Stern School of Business, New York University and a BS from the Wharton School, University of Pennsylvania. Mr. Fox has earned the right to use the Chartered Financial Analyst designation and is a member of the New York Society of Security Analysts. ANTHONY RIZZA, CFA . Mr. Rizza, portfolio manager, joined CCI in 1991. He had previously worked with Connecticut National Bank as a Research Officer. He received a BS in Business from the University of Connecticut. Mr. Rizza has earned the right to use the Chartered Financial Analyst designation and is a member of the Hartford Society of Security Analysts. SUB-ADVISOR: Emerald Advisers, Inc. ("Emerald") is a wholly-owned subsidiary of Emerald Asset Management. Emerald provides professional investment advisory services to institutional investors, high net worth individuals and the general public. As of December 31, 2005, Emerald managed approximately $2.36 billion in assets. Emerald's offices are located at 1703 Oregon Pike Road, Suite 101, Lancaster, Pennsylvania 17601. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners SmallCap Growth II Joseph W. Garner Kenneth G. Mertz II Stacey L. Sears
The portfolio management and strategy team have long tenures at Emerald, with Ms. Sears joining Emerald in 1991, Mr. Mertz in 1992 and Mr. Garner in 1994. KENNETH G. MERTZ II, CFA. . Mr. Mertz joined Emerald in 1992 and serves as President of Emerald Advisers, Inc. Formerly he served as Past Trustee, Vice President of the Emerald Mutual Funds (1992-2005) and Chief Investment Officer of the Pennsylvania State Employees' Retirement System (1985-1992). He earned a BA in Economics from Millersville University. Mr. Mertz supervises the entire portfolio management and trading process. As Chief Investment Officer, he has full discretion over all portfolios. Mr. Mertz, Ms. Sears and Mr. Garner work as a team developing strategy. JOSEPH W. GARNER . Mr. Garner joined Emerald in 1994 and serves as Director of Emerald Research and Portfolio Manager. Prior to joining Emerald, Mr. Garner was the Program Manager of the Pennsylvania Economic Development Financing Authority (PEDFA); an Economic Development Analyst with the PA Department of Commerce's Office of Technology Development; and an Industry Research Analyst with the Pittsburgh High Technology Council. Mr. Garner earned an MBA from the Katz Graduate School of Business, University of Pittsburgh, and graduated magna cum laude with a BA in Economics from Millersville University. STACEY L. SEARS . Ms. Sears joined Emerald in 1991 and serves as Senior Vice President and Portfolio Manager of Emerald Advisers, Inc. She is co-manager of the Forward Emerald Growth Fund and a member of the Portfolio Principal Investors Fund 189 www.principal.com Management team. Additionally, Ms. Sears maintains research coverage of retail, apparel, consumer goods and consumer technology companies. Ms. Sears earned a BS in Business Administration from Millersville University and an MBA from Villanova University. SUB-ADVISOR: Goldman Sachs Asset Management, L.P. ("GSAM") is part of the Investment Management Division ("IMD") of Goldman, Sachs & Co. GSAM's principal office is located at 32 Old Slip, New York, NY 10005. Goldman Sachs Asset Management reported $496.1 billion in total assets under management and/or distribution as of December 31, 2005 (including seed capital and excluding assets under supervision). The day-to-day portfolio management for some of the Funds listed below is shared by two or more portfolio managers. In each such case the portfolio managers operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio with no limitation on the authority of one portfolio manager in relation to another. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Blend I Melissa R. Brown Robert C. Jones Partners MidCap Value I Dolores Bamford David L. Berdon Andrew Braun Scott Carroll Sally Pope Davis Sean Gallagher Lisa Parisi Edward Perkin Eileen Rominger
DOLORES BAMFORD . Ms. Bamford is a Vice President and Portfolio Manager at GSAM. She joined GSAM as a portfolio manager for the Value team in April 2002. Prior to that, Ms. Bamford was a portfolio manager at Putnam Investments for various products since 1991. DAVID L. BERDON . Mr. Berdon is a Vice President and Portfolio Manager at GSAM. Mr. Berdon joined GSAM as a research analyst in March 2001 and became a portfolio manager in October 2002. From September 1999 to March 2001, he was a Vice President for Business Development and Strategic Alliances at Soliloquy Inc. From September 1997 to September 1999, he was a principal consultant at Diamond Technology Partners. ANDREW BRAUN . Mr. Braun is a Managing Director and Portfolio Manager at GSAM. Mr. Braun joined GSAM as a mutual fund product development analyst in July 1993. From January 1997 to April 2001, he was a research analyst on the Value team. He became a portfolio manager in May 2001. MELISSA R. BROWN, CFA . Ms. Brown is a senior portfolio manager responsible for the US Portfolios for the Global Quantitative Equity ("GQE") group. A member of the GQE Investment Policy Committee, she is involved with all aspects of the portfolio management process. Ms. Brown joined GSAM as a portfolio manager in 1998. From 1984 to 1998, she was the director of Quantitative Equity Research and served on the Investment Policy Committee at 190 Principal Investors Fund 1-800-247-4123 Prudential Securities. She earned an MBA from New York University. She has earned the right to use the Chartered Financial Analyst designation. SCOTT CARROLL . Mr. Carroll is a Vice President and Portfolio Manager at GSAM. Mr. Carroll joined GSAM as a portfolio manager for the Value team in May 2002. From 1996 to 2002, he worked at Van Kampen Funds where he had portfolio management and analyst responsibilities for Growth and Income and Equity Income funds. SALLY POPE DAVIS . Ms. Pope Davis is a Vice President and Portfolio Manager at GSAM. She joined GSAM as a portfolio manager in August 2001. From December 1999 to July 2001, she was a relationship manager in Private Wealth Management at Goldman Sachs. From August 1989 to November 1999, she was a bank analyst in the Goldman Sachs Investment Research Department. SEAN GALLAGHER . Mr. Gallagher is a Managing Director and Portfolio Manager at GSAM. Mr. Gallagher joined GSAM as a research analyst in May 2000. He became a portfolio manager in December 2001. From October 1993 to May 2000, he was a research analyst at Merrill Lynch Asset Management. ROBERT C. JONES, CFA . Mr. Jones is the Chief Investment Officer and a senior portfolio manager for the GQE group. He brings 20 years of investment experience to his work in managing the GQE group. Mr. Jones joined GSAM as a portfolio manager in 1989. He earned an MBA from the University of Michigan. He has earned the right to use the Chartered Financial Analyst designation. JAMES OTNESS . Mr. Otness is a Managing Director and Portfolio Manager at GSAM. Mr. Otness joined GSAM as a portfolio manager in May 2000. From 1998 to 2000, he headed Dolphin Asset Management. From 1970 to 1998, he worked at J.P. Morgan, most recently as a managing director and portfolio manager responsible for small-cap institutional equity investments. LISA PARISI . Ms. Parisi is a Managing Director and Portfolio Manager at GSAM. Ms. Parisi joined GSAM as a portfolio manager in August 2001. From December 2000 to August 2001, she was a portfolio manager at John A. Levin & Co. From March 1995 to December 2000, she was a portfolio manager and managing director at Valenzuela Capital. EDWARD PERKIN. . Mr. Perkin is a Vice President and Portfolio Manager at GSAM. Mr. Perkin joined GSAM as a research analyst in June 2002. He became a portfolio manager in June 2004. From August 2000 to May 2002, Mr. Perkin earned his MBA at Columbia Business School, during which time he served as a research intern for Fidelity Investments and Gabelli Asset Management. From September 1997 to May 2000, Mr. Perkin was a senior research analyst for a subsidiary of Fiserv, where he oversaw all matters related to compliance and historical market data. EILEEN ROMINGER . Ms. Rominger is a Managing Director, Chief Investment Officer and Portfolio Manager at GSAM. Ms. Rominger joined GSAM as a portfolio manager and Chief Investment Officer of the Value team in August 1999. From 1981 to 1999, she worked at Oppenheimer Capital, most recently as a senior portfolio manager. SUB-ADVISOR: Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") is a privately held global investment management firm servicing clients in the corporate, public, endowment and foundation marketplace located at 40 Rowes Wharf, Boston, MA 02110. As of December 31, 2005, GMO managed $111 billion in client assets. Day-to-day management of the Fund is the responsibility of GMO's U.S. Quantitative Division. The Division's members work collaboratively to manage the Fund's portfolio, and no one person is primarily responsible for day-to-day management. The individual responsible for managing the implementation and monitoring of the overall portfolio management of the Fund is Sam Wilderman. Mr. Wilderman allocates responsibility for portions of the Fund's portfolio Principal Investors Fund 191 www.principal.com to various members of the Division, oversees the implementation of trades, reviews the overall composition of the Fund's portfolio, including compliance with stated investment objectives and strategies and monitors cash flows. Mr. Wilderman is a member (partner) of GMO and is Director of GMO's U.S. Quantitative Division. Mr. Wilderman served as co-director of U.S. equity management in 2005. Prior to this position, he was responsible for research and portfolio management for the GMO Emerging Markets Fund, the GMO Emerging Countries Fund and the GMO Emerging Markets Quality Fund. He joined GMO in 1996 following the completion of his B.A. in Economics from Yale University. The SAI contains other information about how GMO determines the compensation of the Division's senior member, other accounts managed by the team's senior member, and ownership of mutual fund shares by the Division's senior member. SUB-ADVISOR: Los Angeles Capital Management and Equity Research, Inc. ("LA Capital") is an independent, employee-owned firm. It is located at 11150 Santa Monica Boulevard, Los Angeles, California 90025. As of December 31, 2005, LA Capital had assets under management of approximately $3.7 billion. Day-to-day portfolio management is performed by an investment management team. Current members of the team include: Thomas D. Stevens, CFA, Chairman; Hal W. Reynolds, CFA, Chief Investment Officer; David R. Borger, CFA, Director of Research; Stuart K. Matsuda, Director of Trading; and Christine M. Kugler, Director of Implementation. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners MidCap Value Fund I David R. Borger Christine M. Kugler Stuart K. Matsuda Hal W. Reynolds Thomas D. Stevens Partners SmallCap Value David R. Borger Christine M. Kugler Stuart K. Matsuda Hal W. Reynolds Thomas D. Stevens
DAVID R. BORGER, CFA . Director of Research and Principal, L.A. Capital. Mr. Borger co-founded L.A. Capital in 2002 and is responsible for the development and management of the Dynamic Alpha Model (the firm's proprietary stock selection model). Prior to co-founding L.A. Capital, he was Managing Director and Principal at Wilshire Associates. He earned a BS from the Wittenberg University and an MA and MBA from the University of Michigan. He has earned the right to use the Chartered Financial Analyst designation. CHRISTINE M. KUGLER . Director of Implementation and Principal, L.A. Capital. Ms. Kugler was with L.A. Capital at its founding and became a Principal in January of 2004. Prior to joining L.A. Capital she worked at Wilshire Associates. She earned a BA from the University of California, Santa Barbara. STUART K. MATSUDA . Director of Trading and Principal, L.A. Capital. Mr. Matsuda co-founded L.A. Capital in 2002. Prior to co-founding L.A. Capital, he was Vice President and principal at Wilshire Associates where he also served as Wilshire Asset Management's Director of Trading. He earned a BBA from the University of Hawaii and an MBA from California State University Northridge. 192 Principal Investors Fund 1-800-247-4123 HAL W. REYNOLDS, CFA . Chief Investment Officer and Principal, L.A. Capital. Mr. Reynolds co-founded L.A. Capital in 2002. Prior to co-founding L.A. Capital, he was Managing Director and Principal at Wilshire Associates. He joined the consulting division of Wilshire Associates in 1989 where he served as a senior consultant and also designed the Wilshire Compass (the firm's asset allocation and manager optimization technology system). In 1989, he joined Wilshire Asset Management as Chief Investment Officer. Mr. Reynolds earned a BA from the University of Virginia and an MBA from the University of Pittsburgh. He has earned the right to use the Chartered Financial Analyst designation. THOMAS D. STEVENS, CFA . Chairman and Principal, L.A. Capital. Mr. Stevens co-founded L.A. Capital in 2002. Prior to co-founding L.A. Capital, he was Senior Managing Director and Principal at Wilshire Associates. He joined Wilshire in 1980 and for six years directed its Equity Division, overseeing the delivery of the Equity and Index Fund Management Services, In 1986, he assumed responsibility for Wilshire Asset Management and for the next 16 years headed that division. Mr. Stevens earned a BBA and MBA from the University of Wisconsin. He has earned the right to use the Chartered Financial Analyst designation. SUB-ADVISOR: Neuberger Berman Management, Inc. ("Neuberger Berman") is an affiliate of Neuberger Berman, LLC. Neuberger Berman, LLC is located at 605 Third Avenue, 2nd Floor, New York, NY 10158-0180. Together with Neuberger Berman, the firms manage more than $105.9 billion in total assets (as of December 31, 2005) and continue an asset management history that began in 1939. Neuberger Berman Management, Inc. is an indirect, wholly owned subsidiary of Lehman Brothers Holdings, Inc. Lehman Brothers is located at 745 Seventh Avenue, New York, NY 10019. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners MidCap Value S. Basu Mullick
S. BASU MULLICK . Mr. Mullick, Managing Director, Portfolio Manager, joined Neuberger Berman in 1998. He is manager of mid- to large-cap value Partners Fund and mid-cap value strategy totaling $5.4 billion in assets. Prior to joining the company, Mr. Mullick was a portfolio manager at Ark Asset Management. He earned a BA in Economics from the Presidency College, India. He also earned a MA in Economics and a Ph.D., ABD Finance from Rutgers University. SUB-ADVISOR: Principal Global Investors, LLC ("Principal") is an indirectly wholly-owned subsidiary of Principal Life Insurance Company and an affiliate of the Manager. Principal manages equity, fixed-income and real estate investments primarily for institutional investors, including Principal Life. As of December 31, 2005, Principal, together with its affiliated asset management companies, had approximately $159 billion in asset under management. Principal Global Investor's headquarters address is 801 Grand Avenue, Des Moines, Iowa 50392 and has other primary asset management offices in New York, London, Sydney and Singapore. The day-to-day portfolio management for some of the Funds listed below is shared by two or more portfolio managers. In each such case the portfolio managers operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio with no limitation on the authority of one portfolio manager in relation to another. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund. Principal Investors Fund 193 www.principal.com
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Bond & Mortgage Securities William C. Armstrong Timothy R. Warrick Diversified International Paul H. Blankenhagen Juliet Cohn Chris Ibach Government & High Quality Bond Brad Fredericks Lisa A. Stange High Quality Intermediate-Term Bond William C. Armstrong Timothy R. Warrick Inflation Protection Martin J. Schafer Gwen Swanger International Emerging Markets Michael A. Marusiak Michael L. Reynal International Growth Steven Larson John Pihlblad LargeCap S&P 500 Index Dirk Laschanzky Mariateresa Monaco LargeCap Value John Pihlblad MidCap Blend K. William Nolin MidCap S&P 400 Index Dirk Laschanzky Mariateresa Monaco MidCap Value Jeff Schwarte Dirk Laschanzky Money Market Tracy Reeg Alice Robertson Principal LifeTime 2010 Dirk Laschanzky Principal LifeTime 2020 Dirk Laschanzky Principal LifeTime 2030 Dirk Laschanzky Principal LifeTime 2040 Dirk Laschanzky Principal LifeTime 2050 Dirk Laschanzky Principal LifeTime Strategic Income Dirk Laschanzky Short-Term Bond Zeid Ayer Craig Dawson Martin J. Schafer SmallCap Blend Todd Sanders SmallCap Growth Mariateresa Monaco SmallCap S&P 600 Index Dirk Laschanzky Mariateresa Monaco SmallCap Value Thomas Morabito Ultra Short Bond Zeid Ayer Craig Dawson
194 Principal Investors Fund 1-800-247-4123 WILLIAM C. ARMSTRONG, CFA . Mr. Armstrong leads the multi-sector/core portfolio management group for Principal. Mr. Armstrong has been with the Principal Financial Group since 1992. He earned his Master's degree from the University of Iowa and his Bachelor's degree from Kearney State College. He has earned the right to use the Chartered Financial Analyst designation. ZEID AYER, PH.D., CFA . Mr. Ayer joined Principal in 2001 and is a senior research analyst and co-manager of the Ultra Short Fixed Income portfolios. He is the global sector head for asset-backed securities (ABS) and non-agency mortgage-backed securities (MBS). Mr. Ayer is also the primary analyst responsible for mortgage-related ABS and non-agency MBS investments. Previously, he was assistant vice president at PNC Financial Services Group. He earned a PhD in Physics from the University of Notre Dame, an MS in Computational Finance from Carnegie Mellon University and a Bachelor's degree in Physics from St. Xavier's College, Bombay University. He has earned the right to use the Chartered Financial Analyst designation. PAUL H. BLANKENHAGEN, CFA . Mr. Blankenhagen is a portfolio manager at Principal. He is responsible for developing portfolio strategy and leading the ongoing management of core international equity portfolios including developed markets portfolios and broad market portfolios. Mr. Blankenhagen is also active in research with an emphasis on the banking and media industries. He joined the firm in 1992 and has been a member of the international equity team since 1995. He was named a portfolio manager in 2000. Mr. Blankenhagen received a Master's degree from Drake University and a Bachelor's degree in Finance from Iowa State University. He holds the Chartered Financial Analyst designation, and is a member of the Association for Investment Management and Research (AIMR) and the Iowa Society of Financial Analysts. JULIET COHN . Ms. Cohn is a portfolio manager at Principal. Prior to joining the firm in 2003, she served as a director and senior portfolio manager at Allianz Dresdner Asset Management, managing both retail and institutional European accounts. Prior to that, she was a fund manager at London firms Capel Cure Myers and Robert Fleming. She earned a bachelor's degree in Mathematics from Trinity College Cambridge England. CRAIG DAWSON, CFA . Mr. Dawson joined Principal in 1998 and became a portfolio manager in 2002. He manages ultra short, high quality short, stable value and global strategic income portfolios. He previously managed corporate bond portfolios and multi-sector portfolios. He earned an MBA and a Bachelor's degree in Finance from the University of Iowa. Mr. Dawson has earned the right to use the Chartered Financial Analyst designation. BRAD FREDERICKS. . Mr. Fredericks is a portfolio manager at Principal Global Investors. He is responsible for co-managing the government securities accounts. His responsibilities include general portfolio overview and security analysis. He joined the firm in 1998 as a financial accountant and was named a portfolio manager in 2002. Previously, Mr. Fredericks was an assistant trader at Norwest Mortgage. He received a Bachelor's degree in Finance from Iowa State University. Mr. Frederick is a Fellow of the Life Management Institute (FLMI). CHRISTOPHER IBACH, CFA . Mr. Ibach joined Principal in 2000 and is an associate portfolio manager and equity research analyst. He specializes in the analysis of international technology companies and is also responsible for coordinating portfolio rebalancing and the application of Principal's Global Research Platform. Previously, he was with Motorola, Inc. Mr. Ibach earned an MBA in Finance and a Bachelor's degree in Electrical Engineering from the University of Iowa. He has earned the right to use the Chartered Financial Analyst designation. STEVEN LARSON, CFA. . Mr. Larson is an associate portfolio manager and equity analyst for Principal. Prior to joining the firm in 2001, he led the investment management review and portfolio analysis process for the $80 billion Wells Fargo fund family. Prior to that, he was Manager of the Investment Analytics Group at First American Asset Management. He received an MBA in Finance from the University of Minnesota and a Bachelor's degree from Drake University. He is a member of the Association for Investment Management and Research (AIMR) and has earned the right to use the Chartered Financial Analyst designation. DIRK LASCHANZKY, CFA . As a portfolio manager at Principal, Mr. Laschanzky is responsible for asset allocation and provides advice to clients concerning their portfolios across all asset classes. Prior to joining Principal in 1997, he was a portfolio manager and analyst for over seven years at AMR Investment Services where he managed short-term money market funds and was responsible for American Airlines' pension plan investment management. He also served Principal Investors Fund 195 www.principal.com as a financial analyst for American Airlines. He received an MBA and BA, both in Finance, from the University of Iowa. He has earned the right to use the Chartered Financial Analyst designation. MICHAEL A. MARUSIAK . Mr. Marusiak joined Principal in 2000, specializing in the international emerging markets sector. Prior to joining Principal, he was an analyst on Trust Company of the West's global fund management team. He also worked with SBC Warburg of London as a research analyst responsible for Eastern Europe, the Middle East and Africa. He earned an MIA in International Finance from the Columbia University School of International and Public Affairs and a BA in Business Administration and Finance from Simon Fraser University of Burnaby, British Columbia. MARIATERESA MONACO . Ms. Monaco is an associate portfolio manager at Principal. Joining Principal in 2005, she works with the asset allocation and indexed funds. Most recently, she was a quantitative equity analyst at Fidelity Management in Boston. During her 10-year career with Fidelity, she supported a family of institutional equity funds with $2 billion in assets. Ms. Monaco earned an MBA from the Sloan School of Management at the Massachusetts Institute of Technology and a Master's degree in Electrical Engineering from Northeastern University. She also earned a Master's degree in Electrical Engineering from Politecnico di Torino, Italy, and a diploma in Piano from the Conservatorio di Torino, Italy. THOMAS MORABITO, CFA . Mr. Morabito joined Principal in 2000 as the lead small-cap value portfolio manager. He has more than 12 years of analytical and portfolio management expertise. From 1994 until joining Principal, Mr. Morabito was a manager for INVESCO Management & Research. He received his MBA in Finance from Northeastern University and his BA in Economics from State University of New York. He has earned the right to use the Chartered Financial Analyst designation. K. WILLIAM NOLIN, CFA . Mr. Nolin has managed the domestic mid-cap equity portfolios since 1999. His expertise is grounded in the telecommunications, media & entertainment, lodging and consumer non-durables sectors. Mr. Nolin joined the Principal Financial Group in 1993 as an investment credit analyst. He earned his MBA from the Yale School of Management and his Bachelor's degree in Finance from the University of Iowa. He has earned the right to use the Chartered Financial Analyst designation. JOHN PIHLBLAD, CFA . Mr. Pihlblad is director of quantitative portfolio management for Principal. He has over 24 years experience in creating and managing quantitative investment systems. Prior to joining Principal in 2000, Mr. Pihlblad was a partner and co-founder of GlobeFlex Capital in San Diego where he was responsible for the development and implementation of the investment process for both domestic and international products. He received his BA from Westminster College. He has earned the right to use the Chartered Financial Analyst designation. TRACY REEG. . Ms. Reeg is a portfolio manager at Principal specializing in the management and research areas for the short-term money market portfolios. She joined the firm in 1993. Ms. Reeg received a Bachelor's degree in Finance from the University of Northern Iowa. She is a member of the Life Office Management Association (LOMA) and is a Fellow of the Life Management Institute (FLMI). MICHAEL L. REYNAL . Mr. Reynal joined Principal in 2001, specializing in emerging markets portfolios. Prior to joining Principal, he was responsible for equity investments in Latin America, the Mediterranean and the Balkans while at Wafra Investment Advisory Group, Inc. in New York. He also spent four years with Paribas Capital Markets in New York as the head of the equity trading desk, and three years with Barclays do Zoete Weed in London, focusing on Latin American equity trading. Mr. Reynal received an MBA from the Amos Tuck School at Dartmouth College in New Hampshire, a BA/MA in History from Christ's College at Cambridge University in England and a BA in History from Middlebury College in Vermont. ALICE ROBERTSON . Ms. Robertson is a trader for Principal on the corporate fixed-income trading desk. She joined the Principal Financial Group in 1990 as a credit analyst and moved to her current position in 1993. Previously, Ms. Robertson was an assistant vice president/commercial paper analyst with Duff & Phelps Credit Company. Ms. Robertson earned her Master's degree in Finance and Marketing from DePaul University and her Bachelor's degree in Economics from Northwestern University. 196 Principal Investors Fund 1-800-247-4123 TODD SANDERS, CFA . Mr. Sanders is an equity analyst for Principal focused on quantitative research. He joined the firm in 1998. Previously, he was an investment analyst for NISA Investment Advisors and in credit analysis/risk management with the U.S. Central Credit Union. He received an MBA in Finance from Washington University and a Bachelor's degree in Finance/Economics from the University of Missouri-Columbia. He is a member of the International Association of Financial Engineers (IAFE), the Global Association of Risk Professionals (GARP) and the Association of Investment Management and Research (AIMR). He has earned the right to use the Chartered Financial Analyst designation. MARTIN J. SCHAFER . Mr. Schafer is a portfolio manager for Principal specializing in managing mortgage-backed securities and high quality short, intermediate and long duration portfolios. Mr. Schafer joined the firm in 1977. In the early 1980s, he developed the firm's secondary mortgage marketing operation and in 1984, he assumed portfolio management responsibility for its residential mortgage portfolio. He began managing mutual fund assets in 1985 and institutional portfolios in 1992. Mr. Schafer holds a Bachelor's degree in Accounting and Finance from the University of Iowa. JEFFREY A. SCHWARTE, CFA, CPA . Mr. Schwarte is an associate portfolio manager and equity analyst at Principal. He is a member of the systematic strategies team and is responsible for conducting research on stock selection strategies, portfolio construction techniques, and strategy implementation. He joined the firm in 1993 as a staff auditor and has held various positions before moving to an equity research position in 2000. He received a Bachelor's degree in Accounting from the University of Northern Iowa. He also holds the Chartered Financial Analyst designation and is a Certified Public Accountant, a Certified Internal Auditor, and a Fellow of the Life Management Institute (FLMI). He is a member of the Iowa Society of Certified Public Accountants and the Association for Investment Management and Research (AIMR). He also has the NASD Series 7 license. LISA A. STANGE, CFA . Ms. Stange is a portfolio manager and strategist for Principal. She is integrally involved in the formulation of broad investment strategy, quantitative research and product development. She joined the firm in 1989. Ms. Stange received an MBA and a Bachelor's degree from the University of Iowa. She holds the Chartered Financial Analyst designation and is a member of the Iowa Society of Financial Analysts and the CFA Institute. GWEN SWANGER, CFA . Ms. Swanger is a portfolio manager for Principal's global fixed income and inflation protection portfolios. She has managed global fixed income since 1997. She has been involved in international and U.S. investing for over fifteen years. In addition to managing the international bond portfolios, she has directed the international fixed income research effort overseeing sovereign credit analysis of developed, developing countries and emerging markets. Ms. Swanger joined the firm in 1989 as a private placement analyst. She received an MBA in Finance, a Bachelor's degree from Drake University and is a Fellow of the Life Management Institute (FLMI). She also holds the Chartered Financial Analyst designation and is a member of the CFA Institute. TIMOTHY R. WARRICK, CFA . Mr. Warrick is a co-portfolio manager at Principal with responsibility for the U.S. multi-sector product with focus on the management of U.S. credit instruments. His prior responsibilities with the firm include portfolio management for multiple asset class portfolios, product development and fixed income credit analyst duties. He joined Principal in 1990. In 1996, Mr. Warrick joined ReliaStar Investment Research, Inc. and was responsible for multiple asset classes, including corporate bonds and leveraged bank loans. He rejoined Principal in 1998 as a portfolio manager. He received an MBA in Finance from Drake University and a Bachelor's degree in Accounting and Economics from Simpson College. He holds the Chartered Financial Analyst designation and is a member of the Association for Investment Management and Research (AIMR). SUB-ADVISOR: Principal Real Estate Investors, LLC ("Principal - REI"), an indirect wholly-owned subsidiary of Principal Life and an affiliate of the Manager, was founded in 2000. It manages investments for institutional investors, including Principal Life. As of December 31, 2005, Principal - REI, together with its affiliated asset management companies, had approximately $32.0 billion in asset under management. Principal - REI's address is 801 Grand Avenue, Des Moines, Iowa 50392. Principal Investors Fund 197 www.principal.com The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Real Estate Securities Kelly D. Rush
KELLY D. RUSH, CFA . Mr. Rush directs the Real Estate Investment Trust (REIT) activity for Principal - REI. Mr. Rush joined the Principal Financial Group in 1987 and has been dedicated to public real estate investments since 1995. His experience includes the structuring of public real estate transactions that included commercial mortgage loans and the issuance of unsecured bonds. He received his Master's degree and Bachelor's degree in Finance from the University of Iowa. He has earned the right to use the Chartered Financial Analyst designation. SUB-ADVISOR: Spectrum Asset Management, Inc. ("Spectrum") is an affiliate of Principal Global Investors LLC and a member of the Principal Financial Group. Spectrum was founded in 1987. Its address is 4 High Ridge Park, Stamford, CT 06905. As of December 31, 2005, Spectrum, together with its affiliated asset management companies, had approximately $13.2 billion in asset under management. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Preferred Securities L. Phillip Jacoby Bernard M. Sussman
L. PHILLIP JACOBY. . Mr. Jacoby is Sr. Vice President and Portfolio Manager. Mr. Jacoby joined Spectrum in 1995 as Portfolio Manager. Previously, he was a Senior Investment Officer at USL Capital Corporation (a subsidiary of Ford Motor Corporation) and was a co-manager of a $600 million preferred stock portfolio. Mr. Jacoby received his BS in Finance from Boston University. BERNARD M. SUSSMAN. . Mr. Sussman is Chief Investment Officer and Chair of Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr. Sussman was with Goldman Sachs & Co. for nearly 18 years. A General Partner and head of the Preferred Stock Department, he was in charge of sales, trading and underwriting for all preferred products and was instrumental in the development of the hybrid market. He was a Limited Partner at Goldman Sachs from 1994-1996. He received a BS in Industrial Relations and an MBA in Finance, both from Cornell University. SUB-ADVISOR: T. Rowe Price Associates, Inc. ("T. Rowe Price"), a wholly-owned subsidiary of T. Rowe Price Group, Inc., a financial services holding company, has over 68 years of investment management experience. Together with its affiliates, T. Rowe Price had approximately $269.5 billion in assets under management as of December 31, 2005. T. Rowe Price is located at 100 East Pratt Street, Baltimore, MD 21202. The Statement of Additional Information provides further information about the portfolio manager's compensation, other accounts managed by the portfolio manager, and the portfolio manager's ownership of shares of the Fund. 198 Principal Investors Fund 1-800-247-4123
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Blend William J. Stromberg Richard T. Whitney Partners LargeCap Growth I Robert W. Sharps
ROBERT W. SHARPS, CFA, CPA . Mr. Sharps is a Vice President of T. Rowe Price Group, Inc., and T. Rowe Price. He is also a Portfolio Manager with the Large-Cap Growth Strategy Team in the Equity Division. Prior to joining the firm in 1997, Mr. Sharps was a Senior Consultant at KPMG Peat Marwick. He earned a BS, summa cum laude, in Accounting from Towson University and an MBA in Finance from the Wharton School, University of Pennsylvania. He has also earned the Chartered Financial Analyst and Certified Public Accountant accreditations. WILLIAM J. STROMBERG, CFA . Mr. Stromberg is a Vice President of T. Rowe Price Group, Inc., and T. Rowe Price, Director of Global Equity Research, and a member of the firm's Equity and International Steering Committees. Prior to joining the firm in 1987, he was employed as a Systems Engineer for the Westinghouse Defense and Electronics Center. He earned a BA from Johns Hopkins University and an MBA from Tuck School of Business at Dartmouth College. He has earned the right to use the Chartered Financial Analyst designation. Mr. Stromberg serves as a portfolio coordinator for the Fund. Instead of making stock selection decisions, he is responsible for ensuring adherence to portfolio constraints and risk controls, along with managing inter-analyst activity. As the lead portfolio coordinator, Mr. Stromberg has ultimate accountability for the Fund. RICHARD T. WHITNEY, CFA . Mr. Whitney is a Vice President of T. Rowe Price Group, Inc. and T. Rowe Price, Director of the firm's Quantitative Equity Group and member of the Equity Steering Committee. Prior to joining the firm in 1985, Mr. Whitney was employed by the Chicago Board of Trade and IBM. He earned a BS and an MEE in Electrical Engineering from Rice University and an MBA from the University of Chicago. He has earned the right to use the Chartered Financial Analyst designation. Mr. Whitney serves as a portfolio coordinator for the Fund. Instead of making stock selection decisions, he, along with Mr. Stromberg, is responsible for ensuring adherence to portfolio constraints and risk controls, as well as managing inter-analyst activity. SUB-ADVISOR: Turner Investment Partners, Inc. ("Turner") was founded in 1990. Its address is 1205 Westlakes Drive, Suite 100, Berwyn, PA 19312. As of December 31, 2005, Turner had discretionary management authority with respect to approximately $18 billion in assets. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund. Principal Investors Fund 199 www.principal.com
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners MidCap Growth Christopher K. McHugh William C. McVail Robert E. Turner
CHRISTOPHER K. MCHUGH . Mr. McHugh, Senior Portfolio Manager, joined Turner in 1990. He holds a BS in Accounting from Philadelphia University and an MBA in Finance from St. Joseph's University. He has been in investment management since 1986. WILLIAM C. MCVAIL . Mr. McVail, Senior Portfolio Manager, joined Turner in 1998. Previously, he was Portfolio Manager at PNC Equity Advisers. He has been in investment management since 1987. He earned a BA in Economics and a BA in Psychology from Vassar College. ROBERT E. TURNER, CFA . Mr. Turner, Chairman and Chief Investment Officer, founded Turner in 1990. Prior to 1990, he was Senior Investment Manager with Meridian Investment Company. He has been in investment management since 1981. He earned a BS in Accounting and an MBA in Finance from Bradley University. He has earned the right to use the Chartered Financial Analyst designation. SUB-ADVISOR: UBS Global Asset Management (Americas) Inc., a Delaware corporation located at One North Wacker, Chicago, IL 60606 ("UBS Global AM"), is a registered investment advisor. UBS Global AM, a subsidiary of UBS AG, is a member of the UBS Global Asset Management business group (the "Group") of UBS AG. As of December 31, 2005, UBS Global AM managed approximately $66.12 billion in assets and the Group managed approximately $581.49 billion in assets. Investment decisions for the Partners LargeCap Value I Fund are made by investment management teams at UBS Global AM, including Thomas M. Cole, Thomas J. Digenan, John C. Leonard and Scott C. Hazen. No memeber of the investment management team is primarily responsible for making recommendations for portfolio purchases. The day-to-day portfolio management for the Partners SmallCap Growth II Fund is shared by two portfolio managers. The portfolio managers operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio with no limitation on the authority of one portfolio manager in relation to another. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund.
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Value I Thomas M. Cole Thomas J. Digenan Scott C. Hazen John C. Leonard Partners SmallCap Growth II Paul A. Graham, Jr. David N. Wabnik
THOMAS M. COLE, CFA . Mr. Cole joined UBS Global AM in 1985. Mr. Cole is responsible for the direction and oversight of the research group of the North American Core Equities Team. He is actively involved in security analysis and the portfolio construction process. Mr. Cole's prior experience with the firm includes Senior Analyst (responsible for the retail, food, household and personal products, media, auto and auto parts sectors), managing the US Equity Trading 200 Principal Investors Fund 1-800-247-4123 Desk and serving as a Portfolio Manager in the US Fixed Income Group. He is a member of the Association of Investment Management and Research and the Investment Analysts Society of Chicago. He received both his BBA and MBA from the University of Wisconsin. He has earned the right to use the Chartered Financial Analyst designation. THOMAS J. DIGENAN, CFA, CPA . Mr. Digenan joined UBS Global AM in 1993. Mr. Digenan participates in the analysis and development of US Equity portfolio. He is responsible for communicating the firm's equity strategy to clients and investment consultants. Mr. Digenan's prior experience with the firm includes President of mutual funds and relationship funds organization. Prior to joining the firm, Mr. Digenan was a senior manager in the tax department of KPMG Peat Marwick working exclusively in the investment services industry. Mr. Digenan is a member of the Association for Investment Management and Research, the Investment Analysts Society of Chicago and the American Institute of Certified Public Accounts. PAUL A. GRAHAM, JR., CFA . Mr. Graham joined UBS Global AM in 1994 and has had portfolio management responsibilities since 1994. Mr. Graham is Managing Director, Head of Growth Investors and Co-Head of U.S. Small Cap Growth Equity. For eight years prior to joining the firm, he served as a small cap portfolio manager and research analyst at Value Line Asset Management. Mr. Graham received his BA from Dartmouth College. He has earned the right to use the Chartered Financial Analyst designation and is a member of the New York Society of Security Analysts. SCOTT C. HAZEN, CFA . Mr. Hazen joined UBS Global AM in 1992 and participates in the analysis and development of U.S. Equity portfolios. Prior to joining the portfolio management team in 2004, Mr. Hazen served as a member of the firm's global investment team responsible for providing client service and relationship management to the firm's clients. He earned a BBA from the University of Notre Dame and an MBA from the University of Chicago. He has earned the right to use the Chartered Financial Analyst designation and is a member of the Investment Analysts Society of Chicago. JOHN C. LEONARD, CFA . Mr. Leonard joined UBS Global AM in 1991. Mr. Leonard Head of North American Equities and is responsible for the development of sector and stock selection strategies within this market. In addition, as Deputy Head of Equities, Mr. Leonard assumes management responsibilities for Japanese, Asian and Australian Equities. Prior to joining UBS Global AM, he worked as an investment analyst at a real estate management company and as a financial advisor with two investment management firms. Mr. Leonard received his AB from Dartmouth College and his MBA from the University of Chicago. He has earned the right to use the Chartered Financial Analyst designation. DAVID N. WABNIK . Mr. Wabnik joined UBS Global AM in 1995 and has been a portfolio manager since 1995. Mr. Wabnik is Executive Director, Co-Head of U.S. SmallCap Growth Equity. For four years prior to joining the firm, he served as a small cap portfolio manager/senior research analyst at Value Line Asset Management. Mr. Wabnik received his BS from Binghamton University and his MBA from Columbia Business School. He has completed the Certified Financial Analyst Level I exams. SUB-ADVISOR: Wellington Management Company, LLP ("Wellington Management"), a Massachusetts limited liability partnership, is a professional investment counseling firm with its principal business offices located at 75 State Street, Boston, MA 02109. Wellington Management and its predecessor organizations have provided investment services since 1928. As of December 31, 2005, Wellington Management managed $520.7 billion of client assets. The portfolio managers listed below operate as a team, sharing authority and responsibility for research and the day-to-day management of the portfolio. The Statement of Additional Information provides further information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of shares of the Fund. Principal Investors Fund 201 www.principal.com
DAY-TO-DAY FUND FUND MANAGEMENT ---- --------------- Partners LargeCap Blend I Maya K. Bittar Jeffrey L. Kripke Matthew E. Megargel Michael D. Rodier
MAYA K. BITTAR, CFA . Ms. Bittar, a Vice President, joined Wellington Management in 1998 as an equity portfolio manager. Prior to joining the firm, Ms. Bittar was a Senior Portfolio Manager at Firstar Investment Research and Management. Ms. Bittar earned an MBA and MS, along with a BBA, from the University of Wisconsin-Madison. She has earned the right to use the Chartered Financial Analyst designation. JEFFREY L. KRIPKE . Mr. Kripke, a Vice President, joined Wellington Management in 2001 as a portfolio manager. Prior to joining the firm, Mr. Kripke was an associate portfolio manager for Merrill Lynch Asset Management, Chase Asset Management and Morgan Stanley Asset Management. Mr. Kripke earned an MBA in Finance from Columbia University Graduate School of Business and a BA in Economics from Tufts University. MATTHEW E. MEGARGEL, CFA . Mr. Megargel, a Senior Vice President and Partner of Wellington Management, joined the firm in 1983 as a research analyst and took on additional responsibilities as a portfolio manager in 1988. In 1991, he became solely a portfolio manager with Wellington Management. Mr. Megargel received his BA in Economics from the University of North Carolina - Chapel Hill in 1979, and his MBA from the University of Virginia's Darden Graduate School of Business Administration in 1983. MICHAEL D. RODIER . Mr. Rodier, a Vice President, joined Wellington Management in 1982 while pursuing a BS degree in journalism at Suffolk University. Upon graduation in 1984, Mr. Rodier joined the firm as a fixed income analyst focusing on convertible securities. Mr. Rodier joined the US Core Equity team as an analyst and portfolio manager in 1994. As noted, Mr. Rodier earned a BS in Journalism from Suffolk University. THE SUB-SUB-ADVISORS Principal Global Investors, LLC ("Principal") has entered into sub-sub-advisory agreements for various Funds. Under these agreements, each sub-sub-advisor has agreed to assume the obligations of Principal for a certain portion of the Fund's assets. The sub-sub-advisor is paid a fee by Principal. Principal is the sub-advisor for the Bond & Mortgage Securities Fund. Day-to-day management decisions concerning a portion of the Bond & Mortgage Securities Fund's portfolio are made by Spectrum Asset Management, Inc. ("Spectrum"), and Post Advisory Group, LLC ("Post") each of which serves as sub-sub-advisor. Similar day-to-day management decisions concerning a portion of the High Quality Intermediate-Term Bond Fund's portfolio are made by Spectrum and such decisions for a portion of the Ultra Short Bond Fund's portfolio are made by Post. See the discussion regarding Spectrum provided in connection with the Preferred Securities Fund for a description of the firm and the individuals who serve as portfolio managers. SUB-ADVISOR: Post Advisory Group, LLC ("Post") is an affiliate of Principal Global Investors LLC and a member of the Principal Financial Group. Post was founded in April 1992. Its address is 11755 Wilshire Boulevard, Los Angeles, CA 90025. As of December 31, 2005, Post had $8.1 billion in asset under management. 202 Principal Investors Fund 1-800-247-4123 LAWRENCE A. POST . Mr. Post joined Principal in 2003 with over 30 years of investment experience. Prior to founding the Post Advisory Group in 1992, he founded the high yield bond department at Smith Barney, and subsequently served as director of high yield research at Salomon Brothers and co-director of research and senior trader at Drexel Burnham Lambert. Mr. Post received an MBA in Business Administration from the University of Pennsylvania's Wharton School of Business and a Bachelor's degree from Lehigh University. ALLAN SCHWEITZER . Mr. Schweitzer is a Managing Director at Post. Prior to joining Post in 2000, he was a senior high yield analyst at Trust Company of the West ("TCW"). Prior to TCW, he was a high yield research analyst at Putnam Investments. Mr. Schweitzer received a Bachelor's degree in Business Administration from Washington University at St. Louis and his Master's in Business Administration from the University of Chicago with a concentration in analytical finance and international economics. DUTIES OF THE MANAGER AND SUB-ADVISOR The Manager or Sub-Advisor provides the Directors of the Fund with a recommended investment program. The program must be consistent with the Fund's investment objective and policies. Within the scope of the approved investment program, the Sub-Advisor advises the Fund on its investment policy and determines which securities are bought or sold, and in what amounts. FEES PAID TO THE MANAGER The Manager is paid a fee by the Fund for its services, which includes any fee paid to the Sub-Advisor. The fee paid by each Fund (as a percentage of the average daily net assets) for the fiscal year ended October 31, 2005 was:
Bond & Mortgage Securities 0.54% Partners LargeCap Value 0.78% Diversified International 0.90% Partners MidCap Growth 1.00% Government & High Quality Bond 0.40% Partners MidCap Value 1.00% High Quality Partners SmallCap Growth Intermediate-Term Bond 0.40% I 1.10% Partners SmallCap Growth Inflation Protection 0.40% II 1.00% International Emerging Markets 1.35% Partners SmallCap Value 1.00% International Growth 1.00% Preferred Securities 0.75% LargeCap Growth 0.55% Principal LifeTime 2010 0.1225% LargeCap S&P 500 Index 0.15% Principal LifeTime 2020 0.1225% LargeCap Value 0.45% Principal LifeTime 2030 0.1225% MidCap Blend 0.65% Principal LifeTime 2040 0.1225% MidCap Growth 0.65% Principal LifeTime 2050 0.1225% Principal LifeTime MidCap S&P 400 Index 0.15% Strategic Income 0.1225% MidCap Value 0.65% Real Estate Securities 0.85% Money Market 0.40% Short-Term Bond 0.40% Partners LargeCap Blend 0.75% SmallCap Blend 0.75% Partners LargeCap Blend I 0.45% SmallCap Growth 0.75% Partners LargeCap Growth 1.00% SmallCap S&P 600 Index 0.15% Partners LargeCap Growth I 0.74% SmallCap Value 0.75% Partners LargeCap Growth II 1.00% Ultra Short Bond 0.40%
The Fund and the Manager, under an order received from the SEC, may enter into and materially amend agreements with Sub-Advisors without obtaining shareholder approval. For any Fund that is relying on that order, the Manager may: .. hire one or more Sub-Advisors; .. change Sub-Advisors; and .. reallocate management fees between itself and Sub-Advisors. The Manager will continue to have the ultimate responsibility for the investment performance of these Funds due to its responsibility to oversee Sub-Advisors and recommend their hiring, termination and replacement. No Fund will rely on Principal Investors Fund 203 www.principal.com the order until it receives approval from its shareholders or, in the case of a new Fund, the Fund's sole initial shareholder before the Fund is available to the public, and the Fund states in its prospectus that it intends to rely on the order. The shareholders of each of the Funds have approved the Fund's reliance on the order; however, only the Partners LargeCap Blend Fund, Partners LargeCap Blend Fund I, Partners LargeCap Growth Fund, Partners LargeCap Growth Fund I, Partners LargeCap Growth Fund II, Partners LargeCap Value Fund, Partners MidCap Growth Fund, Partners MidCap Value Fund, Partners SmallCap Growth Fund I, Partners SmallCap Growth Fund II and Partners SmallCap Value Fund intend to rely on the order. PRICING OF FUND SHARES Each Fund's shares are bought and sold at the current share price. The share price of each class of each Fund is calculated each day the New York Stock Exchange ("NYSE") is open (shares are not priced on the days on which the NYSE is closed for trading). The share price is determined at the close of business of the NYSE (normally 3:00 p.m. Central time). When an order to buy or sell shares is received, the share price used to fill the order is the next price calculated after the order is received. For all Funds, except the Money Market Fund, the share price is calculated by: .. taking the current market value of the total assets of the Fund .. subtracting liabilities of the Fund .. dividing the remainder proportionately into the classes of the Fund .. subtracting the liability of each class .. dividing the remainder by the total number of shares owned in that class. The securities of the Money Market Fund are valued at amortized cost. The calculation procedure is described in the SAI. The Money Market Fund reserves the right to determine a share price more than once each day. NOTES: .. If current market values are not readily available for a security owned by a Fund, its fair value is determined using a policy adopted by the Directors. .. A Fund's securities may be traded on foreign securities markets that generally complete trading at various times during the day prior to the close of the NYSE. Generally, the values of foreign securities used in computing a Fund's NAV are determined at the time the foreign market closes. Foreign securities and currencies are converted to U.S. dollars using the exchange rate in effect at the close of the London Exchange (generally 11:00 a.m. Eastern Time). Occasionally, events affecting the value of foreign securities occur when the foreign market is closed and the NYSE is open. The Fund has adopted policies and procedures to "fair value" some or all securities held by a Fund if significant events occur after the close of the market on which the foreign securities are traded but before the Fund's NAV is calculated. Significant events can be specific to a single security or can include events that affect a particular foreign market or markets. A significant event can also include a general market movement in the U.S. securities markets. If the Manager believes that the market value of any or all of the foreign securities is materially affected by such an event, the securities will be valued, and the Fund's NAV will be calculated, using the policy adopted by the Fund. These fair valuation procedures are intended to discourage shareholders from investing in the Fund for the purpose of engaging in market timing or arbitrage transactions. The trading of foreign securities generally or in a particular country or countries may not take place on all days the NYSE is open, or may trade on days the NYSE is closed. Thus, the value of the foreign securities held by the Fund may change on days when shareholders are unable to purchase or redeem shares. .. Certain securities issued by companies in emerging market countries may have more than one quoted valuation at any point in time. These may be referred to as local price and premium price. The premium price is often a negotiated price that may not consistently represent a price at which a specific transaction can be effected. The Fund has a policy to value such securities at a price at which the Sub-Advisor expects the securities may be sold. 204 Principal Investors Fund 1-800-247-4123 HOW TO BUY FUND SHARES Fill out the Principal Investors Fund (or the IRA, SEP or SIMPLE) application completely. You must include: .. the name you want to appear on the account; .. the Principal Investors Fund(s) in which you want to invest; .. the amount of the investment; .. your Social Security number; and .. other required information. The Fund requires a minimum initial investment of $1,000. Subsequent investment minimums are $100. However, if your subsequent investments are made using an Automatic Investment Plan, the investment minimum is $50. NOTES: .. The Funds may reject or cancel any purchase orders for any reason. For example, the Funds do not permit market timing because short-term or other excessive trading into and out of the Funds may harm performance by disrupting portfolio management strategies and by increasing expenses. Accordingly, the Funds may reject any purchase orders from market timers or investors that, in the Manager's opinion, may be disruptive to the Funds. For these purposes, the Manager may consider an investor's trading history in the Funds or other Funds sponsored by Principal Life and accounts under common ownership or control. .. The minimum investment applies on a Fund level, not on the total investment being made. .. You may buy Class J shares from any registered representative whose broker/dealer has a selling agreement for Principal Investors Fund Class J shares. If you do not have a registered representative, please call 1-800-247-4123 for information on how to purchase Class J shares. .. Class J shares of the MidCap Value, Preferred Securities and SmallCap Value Funds are also available through Principal Passage, a fee-based brokerage account. To eliminate the need for safekeeping, the Fund will not issue certificates for shares. The Fund may periodically close to new purchases of shares or refuse any order to buy shares if the Manager determines that doing so would be in the best interests of the Fund and its shareholders. In order for us to process your purchase order on the day it is received, we must receive the order (with complete information): .. on a day that the New York Stock Exchange (NYSE) is open; and .. prior to the close of trading on the NYSE (normally 3 p.m. Central Time). Orders received after the close of the NYSE or on days that the NYSE is not open will be processed on the next day that the NYSE is open for normal trading. NOTE: We consider your purchase of Fund shares by check to be your authorization to make an ACH debit entry to your account. INVEST BY MAIL .. Send a check and completed application to: Principal Investors Fund P. O. Box 10423 Des Moines Iowa 50306-9780 .. Make your check payable to Principal Investors Fund. .. Your purchase will be priced at the next share price calculated after Principal Investors Fund receives your paperwork, completed in a manner acceptable to us. .. When you purchase shares by check, you authorize us to process your purchase electronically. If your check is processed electronically, your checking account may be debited on the same day we receive the check and it will not be returned with your checking account statement. Principal Investors Fund 205 www.principal.com ORDER BY TELEPHONE .. Registered representatives on behalf of shareholders of Principal Investors Fund Class A, B, or J shares may call us between 7:00 A.M. and 7:00 P.M. Central Time on any day that the NYSE is open. .. We must receive your payment for the order within three business days (or the order will be canceled and you may be liable for any loss). NOTES: .. Phone orders are not available for qualified accounts or the Money Market Fund. .. Other restrictions may apply, please call us for details. WIRE MONEY FROM YOUR BANK .. Call Principal Investors Fund for an account number and wiring instructions. .. For both initial and subsequent purchases, federal funds should be wired to: Wells Fargo, N.A. San Francisco, CA ABA No.: 121000248 For credit to: Principal Investors Fund, Inc. Account No.: 3000499968 For credit: Principal ________ Fund, Class J Shareholder Account No. __________________ Shareholder Registration __________________ .. Give the number and instructions to your bank (which may charge a wire fee). .. No wires are accepted on days when the NYSE is closed or when the Federal Reserve is closed (because the bank that would receive your wire is closed). ESTABLISH A DIRECT DEPOSIT PLAN Direct Deposit allows you to deposit automatically all or part of your paycheck (or government allotment) to your Principal Investors Fund account(s). .. Availability of this service must be approved by your payroll department. .. Call Principal Investors Fund for an account number, Automated Clearing House (ACH) instructions and the form needed to establish Direct Deposit. .. Give the Direct Deposit Authorization Form to your employer or the governmental agency (either of which may charge a fee for this service). .. Shares will be purchased on the day the ACH notification is received by Wells Fargo, N.A. .. On days when the NYSE is closed, but the bank receiving the ACH notification is open, your purchase will be priced at the next calculated share price. .. ESTABLISH AN AUTOMATIC INVESTMENT PLAN .. You may make regular monthly investments with automatic deductions from your bank or other financial institution account. You select the day (not the 29th, 30th or 31st) of the month the deduction is to be made. .. The minimum initial investment is waived if you set up an Automatic Investment Plan when you open your account. .. Minimum monthly purchase is $50 per Fund. .. Send completed application, check authorization form and voided check (or voided deposit slip) to: Principal Investors Fund P. O. Box 10423 Des Moines Iowa 50306-0423 SET UP A DIVIDEND RELAY .. Invest your dividends and capital gains from one Principal Investors Fund in shares of another Principal Investors Fund. .. You may acquire shares of a Fund only if its shares are legally offered in your state of residence. .. Distributions from a Fund may be directed to only one receiving Fund. .. The Fund share class receiving the investment must be the same class as the originating Fund. .. There is no sales charge or administrative charge for the Dividend Relay. 206 Principal Investors Fund 1-800-247-4123 .. You can set up Dividend Relay: . on the application for a new account; or . by calling Principal Investors Fund if telephone services apply to the originating account; or . in writing (a signature guarantee may be required). .. You may discontinue your Dividend Relay election with a written notice to Principal Investors Fund. The election may also be discontinued by calling Principal Investors Fund if telephone services apply to the originating account. There may be a delay of up to 10 days before the Dividend Relay plan is discontinued. .. The amount invested in the receiving Fund must meet that Fund's minimums. If it does not, the receiving Fund reserves the right to close the account if it is not brought up to the minimum investment amount within 30 days of sending you a deficiency notice. HOW TO REDEEM (SELL) SHARES After you place a sell order in proper form, shares are sold using the next share price calculated. The amount you receive will be reduced by any applicable CDSC or redemption fee. There is no additional charge for a sale of shares however, you will be charged a $6 wire fee if you have the sale proceeds wired to your bank. Generally, the sale proceeds are sent out on the next business day* after the sell order has been placed. It may take additional business days for your financial institution to post this payment to your account at that financial institution. At your request, the check will be sent overnight (a $15 overnight fee will be deducted from your account unless other arrangements are made). A Fund can only sell shares after your check making the Fund investment has cleared your bank. To avoid the inconvenience of a delay in obtaining sale proceeds, shares may be purchased with a cashier's check, money order or certified check. A sell order from one owner is binding on all joint owners. * a day when the NYSE is open for normal business Distributions from IRA, SEP, SIMPLE, and SAR-SEP accounts may be taken as: .. lump sum of the entire interest in the account; .. partial interest in the account; or .. periodic payments of either a fixed amount or an amount based on certain life expectancy calculations. Tax penalties may apply to distributions before the participant reaches age 591/2. Selling shares may create a gain or a loss for federal (and state) income tax purposes. You should maintain accurate records for use in preparing your income tax returns. Generally, sales proceeds checks are: .. payable to all owners on the account (as shown in the account registration); and .. mailed to address on the account (if not changed within last month) or previously authorized bank account. For other payment arrangements, please call Principal Investors Fund. You should also call Principal Investors Fund for special instructions that may apply to sales from accounts: .. when an owner has died; .. for certain employee benefit plans; or .. owned by corporations, partnerships, agents or fiduciaries. Payment for shares sold is generally sent the business day after the sell order is received. Under unusual circumstances, the Fund may suspend redemptions, or postpone payment for more than seven days, as permitted by federal securities law. REDEMPTION FEE (OTHER THAN MONEY MARKET FUND). Each Fund, except the Money Market Fund, will impose a redemption fee when $30,000 or more of Class J shares are redeemed within 30 days after they are purchased. The fee is equal to 1.00% of the total redemption amount. The fee is paid to the Fund and is intended to offset the trading costs, market impact and other costs associated with short-term money movement in and out of the Fund. SELL SHARES BY MAIL .. Send a letter or distribution form (call us for the form) which is signed by the owner/owners of the account to: Principal Investors Fund 207 www.principal.com Principal Investors Fund P. O. Box 10423 Des Moines Iowa 50306-0423 .. Specify the Fund and account number. .. Specify the number of shares or the dollar amount to be sold. .. A medallion signature guarantee* will be required if the: . sell order is for more than $100,000; . check is being sent to an address other than the account address; . account address has been changed within one month of the sell order; or . check is payable to a party other than the account shareholder(s) or Principal Life. * If required, the signature(s) must be guaranteed by a commercial bank, trust company, credit union, savings and loan, national securities exchange member or brokerage firm. A signature guaranteed by a notary public or savings bank is not acceptable. SELL SHARES IN AMOUNTS OF $100,000 OR LESS BY TELEPHONE .. The address on the account must not have been changed within the last month and telephone privileges must apply to the account from which the shares are being sold. .. If our phone lines are busy, you may need to send in a written sell order. .. To sell shares the same day, the order must be received before the close of normal trading on the NYSE (generally 3:00 p.m. Central Time). .. Telephone redemption privileges are NOT available for Principal Investors Fund 403(b) plans, inherited IRAs and certain employee benefit plans. .. If previously authorized, checks can be sent to a shareholder's U.S. bank account. PERIODIC WITHDRAWAL PLANS You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or annual basis to: .. sell enough shares to provide a fixed amount of money ($25 minimum amount); .. pay insurance or annuity premiums or deposits to Principal Life (call us for details); and .. provide an easy method of making monthly installment payments (if the service is available from your creditor who must supply the necessary forms). You can set up a periodic withdrawal plan by: .. completing the applicable section of the application; or .. sending us your written instructions; or .. calling us if you have telephone privileges on the account (telephone privileges may not be available for all types of accounts). Your periodic withdrawal plan continues until: .. you instruct us to stop; or .. your Fund account balance is zero. When you set up the withdrawal plan, you select which day you want the sale made (if none selected, the sale will be made on the 15th of the month). If the selected date is not a trading day, the sale will take place on the next trading day (if that day falls in the month after your selected date, the transaction will take place on the trading day before your selected date). If telephone privileges apply to the account, you may change the date or amount by telephoning us. Sales made under your periodic withdrawal plan will reduce and may eventually exhaust your account. The Funds do not normally accept purchase payments while a periodic withdrawal plan is in effect (unless the purchase represents a substantial addition to your account). The Fund from which the periodic withdrawal is made makes no recommendation as to either the number of shares or the fixed amount that you withdraw. 10% WITHDRAWAL PRIVILEGE . Sales may be subject to a CDSC. Up to 10% of the value of your Class J share account may be withdrawn annually free of a CDSC. If the withdrawal plan is set up when the account is opened, 10% of the 208 Principal Investors Fund 1-800-247-4123 value of additional purchases made within 60 days may also be withdrawn free of a CDSC. The amount of the 10% withdrawal privilege is reset as of the last business day of December of each year based on the account's value as of that day. The free withdrawal privilege not used in a calendar year is not added to the free withdrawal privileges for any following year. HOW TO EXCHANGE SHARES AMONG PRINCIPAL INVESTORS FUNDS Your shares in the Funds may be exchanged without a sales charge for the same class of any other Principal Investors Fund*. .. The CDSC, if any, is not charged on exchanges. However, the original purchase date of the shares from which an exchange is made is used to determine if newly acquired shares are subject to the CDSC when they are sold. .. An exchange fee is imposed on exchanges of $30,000 or more if the exchanged shares were purchased within 30 days of the date of the exchange. * Only the MidCap Value, Preferred Securities and SmallCap Value Funds are available through Principal Passage. You may exchange shares by: .. sending a written request to: Principal Investors Fund P. O. Box 10423 Des Moines, Iowa 50306-0423 .. completing an Exchange Authorization Form (call us to obtain the form). .. via the Internet at www.principal.com. .. calling us, if you have telephone privileges on the account. Automatic exchange election - --------------------------- This election authorizes an exchange from one Principal Investors Fund to another on a monthly, quarterly, semiannual or annual basis. You can set up an automatic exchange by: .. completing the Automatic Exchange Election section of the application; .. calling us if telephone privileges apply to the account from which the exchange is to be made; or .. sending us your written instructions. Your automatic exchange continues until: .. you instruct us to stop by calling us if telephone privileges apply to the account or by sending us your written instructions; or .. your Fund account balance is zero. You may specify the day of the exchange (if none selected, the exchange will be made on the 15th of the month). If the selected day is not a trading day, the sale will take place on the next trading day (if that day falls in the month after your selected date, the transaction will take place on the trading day before your selected date). If telephone privileges apply to the account, you may change the date or amount by telephoning us. General - ------- .. An exchange by any joint owner is binding on all joint owners. .. If you do not have an existing account in the Fund to which the exchange is being made, a new account is established. The new account has the same owner(s), dividend and capital gain options and dealer of record as the account from which the shares are being exchanged. .. All exchanges are subject to the minimum investment and eligibility requirements of the Fund being acquired. .. You may acquire shares of a Fund only if its shares are legally offered in your state of residence. .. For an exchange to be effective the day we receive your instruction, we must receive the instruction before the close of normal trading on the NYSE (generally 3 p.m. Central Time). When money is exchanged or transferred from one account registration or tax identification number to another, the account holder is relinquishing his or her rights to the money. Therefore exchanges and transfers can only be accepted by telephone if the exchange (transfer) is between: Principal Investors Fund 209 www.principal.com .. accounts with identical ownership; .. an account with a single owner to one with joint ownership if the owner of the single owner account is also an owner of the account with joint ownership; .. a single owner to a UTMA account if the owner of the single owner account is also the custodian on the UTMA account; or .. a single or jointly owned account to an IRA account to fund the yearly IRA contribution of the owner (or one of the owners in the case of a jointly owned account). The exchange is treated as a sale of shares for federal (and state) income tax purposes and may result in a capital gain or loss. Income tax rules regarding the calculation of cost basis may make it undesirable in certain circumstances to exchange shares within 90 days of their purchase. Fund shares used to fund an employee benefit plan may be exchanged only for shares of other Principal Investors Funds available to employee benefit plans. Such an exchange must be made by following the procedures provided in the employee benefit plan and the written service agreement. The Fund reserves the right to revise or terminate the exchange privilege at any time. Notice will be provided to shareholders of any such change, to the extent required by law. FREQUENT PURCHASES AND REDEMPTIONS The Funds are not designed for, and do not knowingly accommodate, frequent purchases and redemptions of fund shares by investors. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase these Funds. Frequent purchases and redemptions pose a risk to the Funds because they may: .. Disrupt the management of the Funds by; . forcing the Funds to hold short-term (liquid) assets rather than investing for long term growth, which results in lost investment opportunities for the Funds; and . causing unplanned portfolio turnover; .. Hurt the portfolio performance of the Funds; and .. Increase expenses of the Funds due to; . increased broker-dealer commissions; and . increased recordkeeping and related costs. Certain Funds may be at greater risk of harm due to frequent purchases and redemptions. For example, those Funds that invest in foreign securities may appeal to investors attempting to take advantage of time-zone arbitrage. The Funds have adopted procedures to "fair value" foreign securities under certain circumstances, which are intended, in part, to discourage excessive trading of shares of the Funds. The Board of Directors of the Fund has also adopted policies and procedures with respect to frequent purchases and redemptions of shares of the Funds. The Funds monitor trading activity to identify and take action against abuses. While our policies and procedures are designed to identify and protect against abusive trading practices, there can be no certainty that we will identify and prevent abusive trading in all instances. When we do identify abusive trading, we will apply our policies and procedures in a fair and uniform manner. If we are not able to identify such abusive trading practices, the abuses described above may negatively impact the Funds. Currently the Funds, except the Money Market Fund, impose a redemption fee on redemptions of $30,000 or more of Class J shares redeemed within 30 days after they are purchased. The fee is equal to 1.00% of the total redemption amount. The fee is paid to the Funds and is intended to offset the trading costs, market impact and other costs associated with short-term money movement in and out of the Funds. In addition, if the Manager, or a Fund, deem frequent trading and redemptions to be occurring, action will be taken that may include, but is not limited to: 210 Principal Investors Fund 1-800-247-4123 .. Increasing the redemption fee to 2%, or such higher amount as may be permitted by law; .. Increasing the redemption fee period from 30 days to as much as 90 days; .. Applying the redemption fee to redemptions of less than $30,000; .. Limiting the number of permissible exchanges available to shareholders identified as "excessive traders"; and .. Taking such other action as directed by the Fund. .. Limit exchange requests to be in writing and submitted through the United States Postal Service (in which case, requests for exchanges by fax or telephone will not be accepted). The Funds have reserved the right to accept or reject, without prior written notice, any exchange requests. In some instances, an exchange may be completed prior to a determination of abusive trading. In those instances, we will reverse the exchange and return the account holdings to the positions held prior to the exchange. We will give the shareholder that requested the exchange notice in writing in this instance. DIVIDENDS AND DISTRIBUTIONS The Funds pay their net investment income to shareholders of record on the business day prior to the payment date: The payment schedule is as follows: .. The Bond & Mortgage Securities, Government & High Quality Bond, Inflation Protection and Short-Term Bond Funds pay their net investment income on a monthly basis. The payment date is the last business day of each month. .. The Preferred Securities and Real Estate Securities Funds pay their net investment income on a quarterly basis. The payment date is the last business day of March, June, September and December. .. The other Funds (except Money Market and Ultra Short Bond) pay their net investment income on an annual basis. The payment date is the last business day of the year. Net realized capital gains, if any, are distributed annually. Generally the distribution is made on the fourth business day of December. Payments are made to shareholders of record on the business day prior to the payable date. Capital gains may be taxable at different rates, depending on the length of time that the Fund holds its assets. Dividend and capital gain distributions will be reinvested, without a sales charge, in shares of the Fund from which the distribution is paid. However, you may authorize the distribution to be; .. invested in shares of another Principal Investors Fund (Dividend Relay) without a sales charge (distributions of a Fund may be directed only to one receiving Fund); or .. paid in cash. Generally, for federal income tax purposes, Fund distributions are taxable as ordinary income, except that any distributions of long-term capital gains will be taxed as such regardless of how long Fund shares have been held. Special tax rules apply to Fund distributions to Individual Retirement Accounts and other retirement plans. A tax advisor should be consulted to determine the suitability of the Fund as an investment by such a plan and the tax treatment of distributions by the Fund. A tax advisor can also provide information on the potential impact of possible foreign, state and local taxes. A Fund's investments in foreign securities may be subject to foreign withholding taxes. In that case, the Fund's yield on those securities would be decreased. The Money Market Fund declares dividends of all its daily net investment income each day its shares are priced. The dividends are paid daily and are automatically reinvested back into additional shares of the Fund. You may ask to have your dividends paid to you monthly in cash. These cash payments are made on the 20th of each month (or previous business day). The Money Market Fund does not seek to realize any capital gains or losses. If capital gains or losses were to occur, they could result in an increase or decrease in dividends. The Ultra Short Bond Fund declares dividends of all its daily net investment income each day its shares are priced. Dividends are based on estimates of income, expenses, and shareholder activity for the Fund. Actual income, Principal Investors Fund 211 www.principal.com expenses and shareholder activity may differ from estimate, consequently, differences, if any, will be included in the calculation of subsequent dividends. On the last business day of each month (or the previous business day) the Fund will pay out its accumulated declared dividends. You may ask to have your dividends paid to you in cash. If you do not request cash payments, monthly your dividend will be reinvested back into additional shares of the Fund. NOTES: .. Payment of income dividends and capital gains shortly after you buy shares has the effect of reducing the share price by the amount of the payment. .. Distributions from a Fund, whether received in cash or reinvested in additional shares may be subject to federal (and state) income tax. .. For these reasons, buying shares of a Fund shortly before it makes a distribution may be disadvantageous to you. GENERAL INFORMATION ABOUT A FUND ACCOUNT STATEMENTS You will receive quarterly statements for the Funds you own. The statements provide the number and value of shares you own, transactions during the period, dividends declared or paid and other information. The year-end statement includes information for all transactions that took place during the year. Please review your statement as soon as you receive it. Keep your statements as you may need them for tax reporting purposes. Generally, each time you buy, sell or exchange shares in the Principal Investors Fund, you will receive a confirmation in the mail shortly thereafter. It summarizes all the key information - what you bought or sold, the amount of the transaction, and other vital data. Certain purchases and sales are only included on your quarterly statement. These include accounts: .. when the only activity during the quarter: . is purchase of shares from reinvested dividends and/or capital gains; . is a result of Dividend Relay; . are purchases under an Automatic Investment Plan; . are sales under a periodic withdrawal plan; or . are purchases or sales under an automatic exchange election. .. used to fund certain individual retirement or individual pension plans; or .. established under a payroll deduction plan. If you need information about your account(s) at other times, you may: .. access your account on the internet at www.principal.com; .. call our PrinCall/(R)/ line 24 hours a day at 1-800-421-2298; or .. call us at 1-800-247-4123. (Our office generally is open Monday through Friday between 7 a.m. and 7 p.m. Central Time). ORDERS PLACED BY INTERMEDIARIES Principal Investors Fund may have an agreement with your intermediary, such as a broker-dealer, third party administrator or trust company, that permits the intermediary to accept orders on behalf of the Fund until 4 p.m. Eastern Time. The agreement may include authorization for your intermediary to designate other intermediaries ("sub-designees") to accept orders on behalf of the Fund on the same terms that apply to the intermediary. In such cases, if your intermediary or a sub-designee receives your order in correct form by 4 p.m. Eastern Time, transmits it to the Fund and pays for it in accordance with the agreement, the Fund will price the order at the next NAV it computes after your intermediary or sub-designee received your order. NOTE: The time at which the Fund prices orders and the time until which the Fund or your intermediary or sub-designee will accept orders may change in the case of an emergency or if the New York Stock Exchange closes at a time other than 4 p.m. Eastern Time. 212 Principal Investors Fund 1-800-247-4123 SIGNATURE GUARANTEES Certain transactions require that your signature be guaranteed. If required, the signature(s) must be guaranteed by a commercial bank, trust company, credit union, savings and loan, national securities exchange member or brokerage firm. A signature guaranteed by a notary public or savings bank is not acceptable. Signature guarantees are required: .. if you sell more than $100,000 from any one Fund; .. if a sales proceeds check is payable to other than the account shareholder(s), Principal Life or Principal Bank; .. to make a Dividend Relay election from an account with joint owners to an account with only one owner or different joint owners; .. to change ownership of an account; .. to add wire privileges to an existing account; .. to change bank account information designated under an existing telephone withdrawal plan; .. to exchange or transfer among accounts with different ownership; and .. to have a sales proceeds check mailed to an address other than the address on the account or to the address on the account if it has been changed within the preceding month. SPECIAL PLANS The Funds reserve the right to amend or terminate the special plans described in this prospectus. Such plans include automatic investment, dividend relay, periodic withdrawal, waiver of Fund minimums for certain accounts and waiver or reduction of the contingent deferred sales charge for certain purchasers. You will be notified of any such action to the extent required by law. MINIMUM ACCOUNT BALANCE Generally, the Funds do not have a minimum required balance. Because of the disproportional high cost of maintaining small accounts, the Funds reserve the right to set a minimum and sell all shares in an account with a value of less than $300. The sales proceeds would then be mailed to you. These involuntary sales will not be triggered just by market conditions. If the Funds exercise this right, you will be notified that the redemption is going to be made. You will have 30 days to make an additional investment and bring your account up to the required minimum. The Funds reserve the right to increase the required minimum. TELEPHONE AND INTERNET INSTRUCTIONS The Funds reserve the right to refuse telephone and/or internet instructions. You are liable for a loss resulting from a fraudulent telephone or internet instruction that we reasonably believe is genuine. We use reasonable procedures to assure instructions are genuine. If the procedures are not followed, we may be liable for loss due to unauthorized or fraudulent transactions. The procedures include: recording all telephone instructions, requiring the use of a Personal Identification Number for internet instructions, requesting personal identification information (name, address, phone number, social security number, birth date, security phrase, etc.) and sending written confirmation to the shareholder's address of record. Instructions received from one owner is binding on all owners. In the case of an account owned by a corporation or trust, instructions received from an authorized person are binding on the corporation/trust unless we have a written notification requiring that written instructions be executed by more than one authorized person. HOUSEHOLDING To avoid sending duplicate copies of materials to households, the Fund will mail only one copy of each prospectus, annual and semi-annual report to shareholders having the same last name and address on the Fund's records. The consolidation of these mailings, called householding, benefits the Fund through reduced mailing expense. If you want to receive multiple copies of these materials, you may call the Fund at 1-800-247-4123. You may notify the Fund in writing. Individual copies of prospectuses and reports will be sent to you within thirty (30) days after the Fund receives your request to stop householding. MULTIPLE TRANSLATIONS This prospectus may be translated into other languages. In the event of any inconsistencies or ambiguity as to the meaning of any word or phrase in a translation, the English text will prevail. Principal Investors Fund 213 www.principal.com PROCEDURES FOR OPENING AN ACCOUNT To help the government fight the funding of terrorism and money laundering activities, Federal law requires financial institutions to obtain, verify, and record information that identifies each person who opens an account. When you open an account, we will ask for your name, address, date of birth, and other information that will allow us to verify your identity. We may also ask to see your driver's license or other identifying documents. If concerns arise with verification of your identification, no transactions, other than redemptions, will be permitted while we attempt to reconcile the concerns. If we are unable to verify your identify within 30 days of our receipt of your original purchase, the account(s) will be closed and redeemed in accordance with normal redemption procedures. FINANCIAL STATEMENTS Shareholders will receive annual financial statements for the Funds, audited by the Funds' independent registered public accounting firm, Ernst & Young LLP. Shareholders will also receive a semiannual financial statement that is unaudited. That report is a part of this prospectus. PORTFOLIO HOLDINGS INFORMATION The Fund will publish portfolio holdings information for the Funds described in this Prospectus as of the end of each calendar quarter for each of the portfolios. The information will include all of each Fund's holdings, and may include information regarding the top ten holdings as well. The information will be published on the principal.com website on the first business day of the second month following the end of each calendar quarter (e.g. June 30 holdings information will be published on the first business day of August). The information will remain on the website until the information for the subsequent calendar quarter is published on the website. Also, from time to time, information relating to the impact of specific events, such as national disasters, corporate debt defaults, or similar events, on a Fund's portfolio will be published on the website. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Fund's financial performance for the periods shown. Certain information reflects results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). The financial statements for the Funds were audited by Ernst & Young LLP, whose report, along with the financial statements, is included in the most recent annual report for the Fund. To receive a copy of the latest annual or semiannual report for the Fund, you may telephone 1-800-247-4123. FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- BOND & MORTGAGE SECURITIES FUND - ------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $10.94 $10.73 $10.66 $10.73 $10.37 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.38 0.32 0.28 0.40 0.31 Net Realized and Unrealized Gain (Loss) on Investments......... (0.28) 0.20 0.11 -- 0.37 ---- ----- ---- ---- ---- Total From Investment Operations 0.10 0.52 0.39 0.40 0.68 Less Dividends and Distributions: Dividends from Net Investment Income... (0.36) (0.31) (0.32) (0.41) (0.32) Distributions from Realized Gains...... (0.01) -- -- (0.06) -- ------ ----- ----- Total Dividends and Distributions (0.37) (0.31) (0.32) (0.47) (0.32) ----- ----- ----- ----- ----- Net Asset Value, End of Period............ $10.67 $10.94 $10.73 $10.66 $10.73 ====== ====== ====== ====== ====== Total Return /(c)/ ... 0.85% 4.94% 3.64% 3.86% 6.46%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $211,273 $159,802 $110,398 $51,760 $7,941 Ratio of Expenses to Average Net Assets.. 1.35% 1.36% 1.43% 1.50% 1.48%/(f)/ Ratio of Expenses to Average Net Assets (Excluding Reverse Repurchase Agreement Interest Expense) /(b)/ .............. 1.13% 1.32% -- -- -- Ratio of Gross Expenses to Average Net Assets /(d)/ ... 1.52% 1.37% 1.48% -- -- Ratio of Net Investment Income to Average Net Assets.. 3.46% 2.94% 2.65% 3.78% 4.41%/(f)/ Portfolio Turnover Rate................ 202.1%/(h)/ 150.5% 91.0% 46.7% 124.7%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Excludes interest expense paid on borrowings through reverse repurchase agreements. See "Operating Policies" in notes to financial statements. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares recognized $.01 of net investment income per share and incurred an unrealized gain of $.02 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $213,484,000 of securities from the acquisition of Principal Bond Fund, Inc. 1 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(J)/ ---- ---- ---- ---- ---- DIVERSIFIED INTERNATIONAL FUND - ------------------------------ CLASS J SHARES /(A)/ - -------------- Net Asset Value, Beginning of Period.. $9.27 $7.98 $6.49 $7.42 $9.54 Income from Investment Operations: Net Investment Income (Operating Loss) /(b)/ .............. 0.06 0.03 0.02 0.01 (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 2.24 1.26 1.47 (0.94) (2.11) ---- ---- ---- ----- ----- Total From Investment Operations 2.30 1.29 1.49 (0.93) (2.12) Less Dividends and Distributions: Dividends from Net Investment Income... (0.04) -- -- -- -- Distributions from Realized Gains...... (0.21) -- -- -- -- ----- ----- Total Dividends and Distributions (0.25) -- -- -- -- ----- ----- Net Asset Value, End of Period............ $11.32 $9.27 $7.98 $6.49 $7.42 ====== ===== ===== ===== ===== Total Return /(c)/ ... 25.24% 16.17% 22.98% (12.53)% (22.22)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $105,345 $63,380 $33,430 $10,104 $2,165 Ratio of Expenses to Average Net Assets.. 1.69% 1.78% 2.05% 1.85% 1.81%/(f)/ Ratio of Gross Expenses to Average Net Assets /(d)/ ... -- 1.79%/(g)/ 2.15%/(g)/ 1.85%/(g)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.61% 0.37% 0.24% 0.03% (0.36)%/(f)/ Portfolio Turnover Rate................ 202.7%/(k)/ 160.2%/(h)/ 162.2%/(i)/ 71.4% 86.8%/(f)/
/(a) /Effective March 1, 2005, International Fund I changed its name to Diversified International Fund. /(b) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Expense ratio without commission rebates. /(h) /Portfolio turnover rate excludes approximately $7,549,000 from portfolio realignment from the acquisition of International SmallCap Fund. /(i) /Portfolio turnover rate excludes approximately $8,876,000 of securities from the acquisition of European Fund, Pacific Basin Fund, and International SmallCap Fund and $5,654,000 from portfolio realignment. /(j) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.03 per share from February 27, 2001 through February 28, 2001. /(k) /Portfolio turnover rate excludes approximately $279,644,000 of securities from the acquisition of Principal International Fund, Inc. and Principal International SmallCap Fund, Inc. and $19,133,000 from portfolio realignment. 2 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ ---- ---- ---- ---- ---- GOVERNMENT & HIGH QUALITY BOND FUND - ----------------------------------- CLASS J SHARES /(A)/ - -------------- Net Asset Value, Beginning of Period.. $10.40 $10.37 $10.60 $10.55 $10.26 Income from Investment Operations: Net Investment Income (Operating Loss) /(b)/ .............. 0.32 0.28 0.25 0.40 0.32 Net Realized and Unrealized Gain (Loss) on Investments......... (0.28) 0.09 (0.15) 0.10 0.30 ----- ---- ----- ---- ---- Total From Investment Operations 0.04 0.37 0.10 0.50 0.62 Less Dividends and Distributions: Dividends from Net Investment Income... (0.31) (0.34) (0.33) (0.45) (0.33) ----- ----- ----- ----- ----- Total Dividends and Distributions (0.31) (0.34) (0.33) (0.45) (0.33) ----- ----- ----- ----- ----- Net Asset Value, End of Period............ $10.13 $10.40 $10.37 $10.60 $10.55 ====== ====== ====== ====== ====== Total Return /(d)/ ... 0.37% 3.59% 0.93% 4.87% 6.07%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $108,545 $101,937 $89,856 $44,955 $4,397 Ratio of Expenses to Average Net Assets.. 1.18% 1.18% 1.36% 1.35% 1.32%/(g)/ Ratio of Expenses to Average Net Assets (Excluding Reverse Repurchase Agreement Interest Expense) /(c)/ .............. 1.17% -- -- -- -- Ratio of Gross Expenses to Average Net Assets /(e)/ ... 1.18% 1.18% 1.36% -- -- Ratio of Net Investment Income to Average Net Assets.. 3.07% 2.74% 2.40% 4.02% 4.88%/(g)/ Portfolio Turnover Rate................ 542.3%/(i)/ 95.2% 219.5% 49.9% 36.1%/(g)/
/(a) /Effective September 30, 2005, Government Securities Fund changed its name to Government & High Quality Bond Fund. /(b) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(c) /Excludes interest expense paid on borrowings through reverse repurchase agreements. See "Operating Policies" in notes to financial statements. /(d) /Total return is calculated without the contingent deferred sales charge. /(e) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and decreased on March 1, 2004. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. /(h) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares recognized $.01 of net investment income per share from February 27, 2001 through February 28, 2001. /(i) /Portfolio turnover rate excludes approximately $343,164,000 of securities from the acquisition of Principal Government Securities Fund Income, Inc. 3 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ HIGH QUALITY INTERMEDIATE-TERM BOND FUND - ---------------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $10.68 $10.59 $10.58 $10.69 $10.33 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.33 0.28 0.35 0.43 0.33 Net Realized and Unrealized Gain (Loss) on Investments......... (0.25) 0.18 0.02 (0.01) 0.37 Total From Investment Operations 0.08 0.46 0.37 0.42 0.70 Less Dividends and Distributions: Dividends from Net Investment Income... (0.11) (0.29) (0.36) (0.44) (0.34) Distributions from (0.06) (0.08) -- (0.09) -- -----ized Gains...... Total Dividends and (0.17) (0.37) (0.36) (0.53) (0.34) Distributions Net Asset Value, End $10.59 $10.68 $10.59 $10.58 $10.69 of Period............ Total Return /(c)/ ... 0.80% 4.42% 3.55% 4.20% 6.67%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $36,958 $21,841 $17,476 $9,630 $1,334 Ratio of Expenses to Average Net Assets.. 1.35% 1.30% 1.39% 1.35% 1.33%/(f)/ Ratio of Expenses to Average Net Assets (Excluding Reverse Repurchase Agreement Expense) /(b)/...... 1.08% 1.26% -- -- -- Ratio of Gross Expenses to Average Net Assets /(d)/ ... 1.52% 1.30% 1.50% -- -- Ratio of Net Investment Income to Average Net Assets.. 3.08% 2.69% 3.31% 4.18% 4.85%/(f)/ Portfolio Turnover Rate................ 177.4%/(h)/ 152.5% 71.3% 60.8% 80.3%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Excludes interest expense paid on borrowings through reverse repurchase agreements. See "Operating Policies" in notes to financial statements. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and decreased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares recognized $.01 of net investment income per share and incurred an unrealized gain of $.02 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $15,223,000 of securities from the acquisition of High Quality Long-Term Bond Fund. 4 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005/(D)/ ---- INFLATION PROTECTION FUND - ------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.46 Net Realized and Unrealized Gain (Loss) on Investments......... (0.32) ----- Total From Investment Operations 0.14 Less Dividends and Distributions: Dividends from Net Investment Income... (0.33) ----- Total Dividends and Distributions (0.33) ----- Net Asset Value, End of Period............ $9.81 ===== Total Return /(c)/ ... 1.38%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $3,728 Ratio of Expenses to Average Net Assets.. 1.35%/(f)/ Ratio of Expenses to Average Net Assets (Excluding Reverse Repurchase Agreement Interest Expense) /(b)/ .............. 0.33%/(f)/ Ratio of Gross Expenses to Average Net Assets/(g)/..... 4.24%/(f)/ Ratio of Net Investment Income to Average Net Assets.. 5.46%/(f)/ Portfolio Turnover Rate................ 45.5%/(f)/
/(a) /Calculated based on average shares outstanding during the period. /(b) /Excludes interest expense paid on borrowings through reverse repurchase agreements. See "Operating Policies" in notes to financial statements. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Period from December 29, 2004, date operations commenced, through October 31, 2005. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Expense ratio without the Manager's voluntary expense limit. 5 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- INTERNATIONAL EMERGING MARKETS FUND - ----------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $14.90 $12.82 $8.68 $8.26 $10.29 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.17 0.01 -- (0.02) 0.01 Net Realized and Unrealized Gain (Loss) on Investments......... 5.04 2.07 4.14 0.45 (2.04) ---- ---- ---- ---- ----- Total From Investment Operations 5.21 2.08 4.14 0.43 (2.03) Less Dividends and Distributions: Dividends from Net Investment Income... -- -- -- (0.01) -- Distributions from Realized Gains...... (1.16) -- -- -- -- ----- ----- Total Dividends and Distributions (1.16) -- -- (0.01) -- ----- ----- ----- Net Asset Value, End of Period............ $18.95 $14.90 $12.82 $8.68 $8.26 ====== ====== ====== ===== ===== Total Return /(b)/ ... 36.79% 16.26% 47.70% 5.17% (19.41)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $68,971 $25,631 $8,956 $2,240 $347 Ratio of Expenses to Average Net Assets.. 2.22% 2.39% 2.65% 2.30% 2.26%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 2.40%/(f)/ 3.31%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. 1.00% 0.10% 0.05% (0.28)% 0.42%/(e)/ Portfolio Turnover Rate................ 181.2%/(h)/ 146.9% 144.7% 151.0% 156.3%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.06 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $24,418,000 of securities from the acquisition of Principal International Emerging Markets Fund, Inc. 6 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ INTERNATIONAL GROWTH FUND - ------------------------- CLASS J SHARES /(A)/ - -------------------- Net Asset Value, Beginning of Period.. $9.95 $8.28 $6.62 $7.56 $9.29 Income from Investment Operations: Net Investment Income (Operating Loss) /(b)/ .............. 0.05 0.04 0.01 0.04 (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 2.16 1.64 1.65 (0.97) (1.72) Total From Investment Operations 2.21 1.68 1.66 (0.93) (1.73) Less Dividends and Distributions: Dividends from Net Investment Income... (0.09) (0.01) -- (0.01) -- Distributions from (0.87) -- -- -- -- ------zed Gains...... Total Dividends and (0.96) (0.01) -- (0.01) -- ------ Distributions Net Asset Value, End $11.20 $9.95 $8.28 $6.62 $7.56 of Period............ Total Return /(c)/ ... 23.63% 20.30% 25.08% (12.33)% (18.80)%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $44,266 $20,013 $8,079 $3,871 $931 Ratio of Expenses to Average Net Assets.. 1.88% 2.00% 2.10% 1.95% 1.92%/(g)/ Ratio of Gross Expenses to Average Net Assets /(d)/ ... 1.88% 2.00% 2.65%/(e)/ 1.95%/(e)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.47% 0.43% 0.18% (0.11)% (0.38)%/(g)/ Portfolio Turnover Rate................ 139.5% 156.2% 135.3% 96.9% 143.1%/(g)/
/(a) /Effective March 1, 2005, International Fund II changed its name to International Growth Fund. /(b) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(e) /Expense ratio without commission rebates. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. /(h) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J incurred an unrealized loss of $.03 per share from February 27, 2001 through February 28, 2001. 7 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ ---- ---- ---- ---- ---- LARGECAP GROWTH FUND - -------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $5.89 $5.72 $5.01 $6.14 $7.63 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.01) (0.04) (0.04) (0.01) (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 0.96 0.21 0.75 (1.12) (1.48) ---- ---- ---- ----- ----- Total From Investment Operations 0.95 0.17 0.71 (1.13) (1.49) Less Dividends and Distributions: Dividends from Net Investment Income... (0.03) -- -- -- -- ------ ----- Total Dividends and Distributions (0.03) -- -- -- -- ------ ----- Net Asset Value, End of Period............ $6.81 $5.89 $5.72 $5.01 $6.14 ===== ===== ===== ===== ===== Total Return /(b)/ ... 16.17% 2.97% 14.17% (18.40)% (20.05)%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $20,860 $15,898 $12,629 $5,092 $1,406 Ratio of Expenses to Average Net Assets.. 1.48% 1.53% 1.64% 1.50% 1.47%/(g)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.53%/(d)/ 1.92%/(d)/ -- -- Ratio of Net Investment Income to Average Net Assets.. (0.21)% (0.63)% (0.72)% (0.64)% (0.63)%/(g)/ Portfolio Turnover Rate................ 169.0%/(i)/ 59.8% 59.2%/(e)/ 29.6% 37.5%/(g)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Expense ratio without commission rebates. /(e) /Portfolio turnover rate excludes approximately $2,976,000 of securities from the acquisition of Technology Fund and $875,000 from portfolio realignment.. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. /(h) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.12 per share from February 27, 2001 through February 28, 2001. /(i) /Portfolio turnover rate excludes approximately $289,113,000 of securities from the acquisition of Principal Growth Fund, Inc. 8 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ ---- ---- ---- ---- ---- LARGECAP S&P 500 INDEX FUND - --------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $8.62 $7.99 $6.72 $8.04 $9.37 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.10 0.07 0.05 0.03 0.01 Net Realized and Unrealized Gain (Loss) on Investments......... 0.56 0.58 1.24 (1.34) (1.34) ---- ---- ---- ----- ----- Total From Investment Operations 0.66 0.65 1.29 (1.31) (1.33) Less Dividends and Distributions: Dividends from Net Investment Income... (0.13) (0.02) (0.02) (0.01) -- Distributions from Realized Gains...... (0.59) -- -- -- -- ----- ----- Total Dividends and Distributions (0.72) (0.02) (0.02) (0.01) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $8.56 $8.62 $7.99 $6.72 $8.04 ===== ===== ===== ===== ===== Total Return /(b)/ ... 7.72% 8.19% 19.19% (16.31)% (14.38)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $309,862 $247,010 $154,666 $61,111 $12,926 Ratio of Expenses to Average Net Assets.. 0.86% 0.90% 1.11% 1.10% 1.07%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 0.90% 1.13% -- -- Ratio of Net Investment Income to Average Net Assets.. 1.20% 0.78% 0.66% 0.51% 0.36%/(e)/ Portfolio Turnover Rate................ 11.5%/(g)/ 67.3% 1.1% 67.9% 117.4%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.14 per share from February 27, 2001 through February 28, 2001. /(g) /Portfolio turnover rate excludes approximately $71,356,000 of securities from the acquisition of Principal LargeCap Stock Index Fund, Inc. 9 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- LARGECAP VALUE FUND - ------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $10.61 $9.74 $8.22 $9.09 $10.12 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.10 0.06 0.03 0.03 0.02 Net Realized and Unrealized Gain (Loss) on Investments......... 0.98 0.82 1.50 (0.89) (1.05) ---- ---- ---- ----- ----- Total From Investment Operations 1.08 0.88 1.53 (0.86) (1.03) Less Dividends and Distributions: Dividends from Net Investment Income... (0.12) (0.01) (0.01) (0.01) -- Distributions from Realized Gains...... (0.38) -- -- -- -- ----- ----- Total Dividends and Distributions (0.50) (0.01) (0.01) (0.01) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $11.19 $10.61 $9.74 $8.22 $9.09 ====== ====== ===== ===== ===== Total Return /(b)/ .. 10.45% 9.07% 18.60% (9.44)% (10.09)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $28,185 $18,334 $10,876 $3,683 $1,083 Ratio of Expenses to Average Net Assets.. 1.31% 1.35% 1.62% 1.40% 1.35%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.36%/(f)/ 1.91%/(f)/ 1.40%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.93% 0.62% 0.38% 0.59% 0.60%/(e)/ Portfolio Turnover Rate................ 181.1%/(h)/ 228.4% 179.1% 128.9% 116.0%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.16 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $329,124,000 of securities from the acquisition of Principal Capital Value Fund, Inc. 10 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(I)/ ---- ---- ---- ---- ---- MIDCAP BLEND FUND - ----------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $12.75 $11.20 $8.95 $9.23 $9.95 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.05 -- -- -- (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 1.61 1.61 2.25 (0.28) (0.71) ---- ---- ---- ----- ----- Total From Investment Operations 1.66 1.61 2.25 (0.28) (0.72) Less Dividends and Distributions: Dividends from Net Investment Income... (0.02) (0.01) -- -- -- Distributions from Realized Gains...... (0.87) (0.05) -- -- -- ----- ----- ----- Total Dividends and Distributions (0.89) (0.06) -- -- -- ----- ----- ----- Net Asset Value, End of Period............ $13.52 $12.75 $11.20 $8.95 $9.23 ====== ====== ====== ===== ===== Total Return /(b)/ ... 13.53% 14.32% 25.20% (3.03)% (7.42)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $117,300 $75,490 $41,132 $13,260 $2,568 Ratio of Expenses to Average Net Assets.. 1.43% 1.49% 1.68% 1.60% 1.57%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.49%/(f)/ 1.78%/(f)/ 1.60%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.35% 0.27% (0.27)% -- (0.19)%/(e)/ Portfolio Turnover Rate................ 133.8%/(j)/ 60.8%/(g)/ 35.3%/(h)/ 62.0% 55.6%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Portfolio turnover rate excludes approximately $3,858,000 from portfolio realignment from the acquisition of Partners MidCap Blend Fund. /(h) /Portfolio turnover rate excludes approximately $6,912,000 of securities from the acquisition of Partners MidCap Blend Fund and $2,567,000 from portfolio realignment. /(i) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.08 per share from February 27, 2001 through February 28, 2001. /(j) /Portfolio turnover rate excludes approximately $574,898,000 of securities from the acquisition of Principal MidCap Fund, Inc. 11 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(B)/ MIDCAP GROWTH FUND - ------------------ CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $5.17 $5.06 $3.94 $5.69 $7.82 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.07) (0.06) (0.06) (0.06) (0.02) Net Realized and Unrealized Gain (Loss) on Investments......... 0.85 0.17 1.18 (1.69) (2.11) Total From Investment 0.78 0.11 1.12 (1.75) (2.13) Operations Net Asset Value, End $5.95 $5.17 $5.06 $3.94 $5.69 of Period............ Total Return /(c)/ ... 15.09% 2.17% 28.43% (30.76)% (27.52)%/(g)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $18,341 $14,824 $10,116 $4,128 $1,395 Ratio of Expenses to Average Net Assets.. 1.58% 1.65% 1.83% 1.64% 1.61%/(f)/ Ratio of Gross Expenses to Average Net Assets /(d)/ ... -- 1.65%/(e)/ 2.23%/(e)/ 1.65%/(e)/ -- Ratio of Net Investment Income to Average Net Assets.. (1.21)% (1.13)% (1.38)% (1.27)% (1.27)%/(f)/ Portfolio Turnover Rate................ 233.8% 324.2% 290.7% 276.9% 299.0%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.20 per share from February 27, 2001 through February 28, 2001. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(e) /Expense ratio without commission rebates. /(f) /Computed on an annualized basis. /(g) /Total return amounts have not been annualized. 12 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ MIDCAP S&P 400 INDEX FUND - ------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.77 $10.84 $8.42 $9.07 $9.98 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.04 0.01 (0.01) -- -- Net Realized and Unrealized Gain (Loss) on Investments......... 1.85 1.04 2.43 (0.58) (0.91) Total From Investment Operations 1.89 1.05 2.42 (0.58) (0.91) Less Dividends and Distributions: Dividends from Net Investment Income... (0.04) -- -- -- -- Distributions from (0.33) (0.12) -- (0.07) -- -----ized Gains...... Total Dividends and (0.37) (0.12) -- (0.07) -- ----- Distributions Net Asset Value, End $13.29 $11.77 $10.84 $8.42 $9.07 of Period............ Total Return /(b)/ ... 16.31% 9.72% 28.74% (6.52)% (8.84)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $27,806 $19,932 $13,620 $6,373 $2,125 Ratio of Expenses to Average Net Assets.. 0.99% 1.04% 1.28% 1.10% 1.07%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.04% 1.48% -- -- Ratio of Net Investment Income to Average Net Assets.. 0.35% 0.11% (0.10)% -- -- Portfolio Turnover Rate................ 52.1% 55.9% 41.4% 48.5% 63.4%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.10 per share from February 27, 2001 through February 28, 2001. 13 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ MIDCAP VALUE FUND - ----------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $12.85 $11.68 $9.68 $9.91 $10.49 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.05 0.02 0.01 0.01 -- Net Realized and Unrealized Gain (Loss) on Investments......... 2.20 1.16 2.01 0.04 (0.58) Total From Investment Operations 2.25 1.18 2.02 0.05 (0.58) Less Dividends and Distributions: Dividends from Net Investment Income... (0.02) (0.01) (0.02) (0.01) -- Distributions from (0.82) -- -- (0.27) -- -----ized Gains...... Total Dividends and (0.84) (0.01) (0.02) (0.28) -- ---- Distributions Net Asset Value, End $14.26 $12.85 $11.68 $9.68 $9.91 of Period............ Total Return /(b)/ ... 18.24% 10.15% 20.88% 0.24% (5.17)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $111,378 $77,354 $47,750 $20,879 $3,090 Ratio of Expenses to Average Net Assets.. 1.41% 1.47% 1.70% 1.58% 1.57%/(f)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.48%/(d)/ 1.77%/(d)/ 1.60%/(d)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.34% 0.12% 0.06% 0.13% 0.04%/(f)/ Portfolio Turnover Rate................ 167.8% 225.4% 186.5% 172.2% 122.3%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(d) /Expense ratio without commission rebates. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.05 per share from February 27, 2001 through February 28, 2001. 14 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ ---- ---- ---- ---- ---- MONEY MARKET FUND - ----------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $1.000 $1.000 $1.000 $1.000 $1.000 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.018 0.001 0.001 0.007 0.021 ----- ----- ----- ----- ----- Total From Investment Operations 0.018 0.001 0.001 0.007 0.021 Less Dividends and Distributions: Dividends from Net Investment Income... (0.018) (0.001) (0.001) (0.007) (0.021) ------ ------ ------ ------ ------ Total Dividends and Distributions (0.018) (0.001) (0.001) (0.007) (0.021) ------ ------ ------ ------ ------ Net Asset Value, End of Period............ $1.000 $1.000 $1.000 $1.000 $1.000 ====== ====== ====== ====== ====== Total Return /(b)/ ... 1.79% 0.08% 0.06% 0.68% 2.12%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $143,460 $132,551 $95,332 $36,795 $7,269 Ratio of Expenses to Average Net Assets.. 1.15% 1.17% 1.21% 1.35% 1.31%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.15% 1.43% 1.54% -- -- Ratio of Net Investment Income to Average Net Assets.. 1.78% 0.09% 0.04% 0.59% 2.48%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from March 1, 2001, date operations commenced, through October 31, 2001. 15 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ ---- ---- ---- ---- ---- PARTNERS LARGECAP BLEND FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $9.95 $9.22 $8.05 $8.99 $10.15 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.04 -- 0.01 0.05 -- Net Realized and Unrealized Gain (Loss) on Investments......... 0.77 0.73 1.16 (0.99) (1.16) ---- ---- ---- ----- ----- Total From Investment Operations 0.81 0.73 1.17 (0.94) (1.16) Less Dividends and Distributions: Dividends from Net Investment Income... (0.09) -- -- -- -- Distributions from Realized Gains...... (0.57) -- -- -- -- ----- ----- Total Dividends and Distributions (0.66) -- -- -- -- ----- ----- Net Asset Value, End of Period............ $10.10 $9.95 $9.22 $8.05 $8.99 ====== ===== ===== ===== ===== Total Return /(b)/ ... 8.29% 7.95% 14.53% (10.46)% (11.25)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $69,766 $43,662 $20,880 $5,315 $559 Ratio of Expenses to Average Net Assets.. 1.49% 1.53% 1.70% 1.68% 1.67%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.56%/(h)/ 1.92%/(h)/ 1.70%/(h)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.41% 0.04% 0.17% 0.24% 0.10%/(e)/ Portfolio Turnover Rate................ 51.8%/(g)/ 93.9% 41.7% 71.9% 59.4%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(h) /Expense ratio without commission rebates. /(f) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J incurred an unrealized loss of $.13 per share from February 27, 2001 through February 28, 2001. /(g) /Portfolio turnover rate excludes approximately $72,822,000 of securities from the acquisition of Principal Partners LargeCap Blend Fund, Inc. and $136,000 from portfolio realignment. 16 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS LARGECAP BLEND FUND I - ------------------------------ CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.67 $7.08 $6.00 $7.51 $8.88 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.06 0.02 0.01 0.01 -- Net Realized and Unrealized Gain (Loss) on Investments......... 0.64 0.58 1.08 (1.51) (1.37) ---- ---- ---- ----- ----- Total From Investment Operations 0.70 0.60 1.09 (1.50) (1.37) Less Dividends and Distributions: Dividends from Net Investment Income... (0.06) (0.01) (0.01) (0.01) -- Distributions from Realized Gains...... (0.04) -- -- -- -- ----- ----- Total Dividends and Distributions (0.10) (0.01) (0.01) (0.01) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $8.27 $7.67 $7.08 $6.00 $7.51 ===== ===== ===== ===== ===== Total Return /(b)/ ... 9.06% 8.45% 18.16% (20.02)% (15.52)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $33,926 $25,189 $15,775 $8,756 $2,572 Ratio of Expenses to Average Net Assets.. 1.20% 1.26% 1.44% 1.40% 1.36%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.26%/(f)/ 1.50%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. 0.78% 0.28% 0.19% 0.12% 0.02%/(e)/ Portfolio Turnover Rate................ 148.8%/(h)/ 76.5% 82.9% 89.4% 71.7%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.11 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $149,848,000 of securities from the acquisition of Principal Partners Blue Chip Fund, Inc. and $268,000 from portfolio realignment. 17 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003/(E)/ PARTNERS LARGECAP GROWTH FUND - ----------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.65 $11.93 $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.04) (0.09) (0.09) Net Realized and Unrealized Gain (Loss) on Investments......... 0.63 (0.19) 2.02 Total From Investment Operations 0.59 (0.28) 1.93 Less Dividends and Distributions: Distributions from (0.68) -- -- ----lized Gains...... Total Dividends and (0.68) -- -- ---- Distributions Net Asset Value, End $11.56 $11.65 $11.93 of Period............ Total Return /(b)/ ... 5.04% (2.35)% 19.30%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $8,187 $5,451 $2,609 Ratio of Expenses to Average Net Assets.. 1.75% 1.80% 1.94%/(g)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 2.13% 2.36%/(d)/ 6.94%/(g)(d)/ Ratio of Net Investment Income to Average Net Assets.. (0.32)% (0.77)% (0.95)%/(g)/ Portfolio Turnover Rate................ 87.9% 129.3% 64.8%/(g)/
/(a) /Calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit decreased on March 1, 2004. /(d) /Expense ratio without commission rebates. /(e) /Period from December 30, 2002, date operations commenced, through October 31, 2003. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. 18 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS LARGECAP GROWTH FUND I - ------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $6.91 $6.70 $5.89 $7.31 $8.58 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.04) (0.06) (0.05) (0.02) (0.02) Net Realized and Unrealized Gain (Loss) on Investments......... 0.79 0.27 0.86 (1.40) (1.25) ---- ---- ---- ----- ----- Total From Investment Operations 0.75 0.21 0.81 (1.42) (1.27) Less Dividends and Distributions: Dividends from Net Investment Income... (0.03) -- -- -- -- ----- ----- Total Dividends and Distributions (0.03) -- -- -- -- ----- ----- Net Asset Value, End of Period............ $7.63 $6.91 $6.70 $5.89 $7.31 ===== ===== ===== ===== ===== Total Return /(b)/ ... 10.94% 3.13% 13.75% (19.43)% (15.00)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $27,706 $17,673 $9,744 $4,306 $1,050 Ratio of Expenses to Average Net Assets.. 1.65% 1.72% 1.89% 1.70% 1.68%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.65% 1.78%/(f)/ 2.27%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. (0.49)% (0.82)% (0.76)% (0.73)% (0.84)%/(e)/ Portfolio Turnover Rate................ 66.5%/(h)/ 157.8% 130.9% 182.9% 104.8%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and decreased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.09 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $62,466,000 of securities from the acquisition of Principal Partners Equity Growth Fund, Inc. 19 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ ---- ---- ---- ---- ---- PARTNERS LARGECAP GROWTH FUND II - -------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.38 $7.00 $5.99 $7.27 $8.37 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.03) (0.06) (0.06) (0.21) (0.02) Net Realized and Unrealized Gain (Loss) on Investments......... 0.51 0.44 1.07 (1.07) (1.08) ---- ---- ---- ----- ----- Total From Investment Operations 0.48 0.38 1.01 (1.28) (1.10) Less Dividends and Distributions: Dividends from Net Investment Income... (0.02) -- -- -- -- Distributions from Realized Gains...... (0.13) -- -- -- -- ---- ----- Total Dividends and Distributions (0.15) -- -- -- -- ---- ----- Net Asset Value, End of Period............ $7.71 $7.38 $7.00 $5.99 $7.27 ===== ===== ===== ===== ===== Total Return /(b)/ ... 6.52% 5.43% 16.86% (17.61)% (13.76)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $10,661 $7,723 $4,234 $2,425 $688 Ratio of Expenses to Average Net Assets.. 1.75% 1.79% 1.95% 1.95% 1.93%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 2.00% 2.10% 2.97% -- -- Ratio of Net Investment Income to Average Net Assets.. (0.45)% (0.88)% (0.93)% (1.01)% (1.15)%/(e)/ Portfolio Turnover Rate................ 95.2% 124.7% 193.9% 176.7% 153.6%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were decreased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J incurred an unrealized loss of $.12 per share from February 27, 2001 through February 28, 2001. 20 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS LARGECAP VALUE FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $12.58 $11.34 $9.33 $10.42 $10.82 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.10 0.08 0.08 0.02 0.01 Net Realized and Unrealized Gain (Loss) on Investments......... 0.93 1.23 1.94 (1.07) (0.41) ---- ---- ---- ----- ----- Total From Investment Operations 1.03 1.31 2.02 (1.05) (0.40) Less Dividends and Distributions: Dividends from Net Investment Income... (0.17) (0.07) (0.01) -- -- Distributions from Realized Gains...... (0.10) -- -- (0.04) -- ---- ----- ----- Total Dividends and Distributions (0.27) (0.07) (0.01) (0.04) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $13.34 $12.58 $11.34 $9.33 $10.42 ====== ====== ====== ===== ====== Total Return /(b)/ ... 8.25% 11.56% 21.64% (10.13)% (3.43)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $69,104 $41,043 $16,843 $5,816 $708 Ratio of Expenses to Average Net Assets.. 1.54% 1.63% 1.75% 1.75% 1.72%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.64%/(f)/ 2.01%/(f)/ 1.75%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. 0.78% 0.64% 0.79% 0.68% 0.52%/(e)/ Portfolio Turnover Rate................ 28.1%/(h)/ 26.4% 16.2% 7.8% 19.5%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares recognized $.01 of net investment income per share and incurred an unrealized loss of $.09 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $72,312,000 of securities from the acquisition of Principal Partners LargeCap Value Fund, Inc. and $331,000 from portfolio realignment. 21 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS MIDCAP GROWTH FUND - --------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.20 $7.03 $5.03 $6.28 $8.27 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.12) (0.12) (0.10) (0.09) 0.04 Net Realized and Unrealized Gain (Loss) on Investments......... 1.35 0.29 2.10 (1.16) (2.03) ---- ---- ---- ----- ----- Total From Investment Operations 1.23 0.17 2.00 (1.25) (1.99) ---- ---- ---- ----- ----- Net Asset Value, End of Period $8.43 $7.20 $7.03 $5.03 $6.28 ===== ===== ===== ===== ===== Total Return /(b)/ ... 17.08% 2.42% 39.76% (19.90)% (24.43)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $22,011 $15,436 $9,625 $2,648 $663 Ratio of Expenses to Average Net Assets.. 1.89% 1.92% 1.95% 1.95% 1.90%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.89% 2.02%/(f)/ 2.72%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. (1.51)% (1.63)% (1.73)% (1.72)% (1.66)%/(e)/ Portfolio Turnover Rate................ 185.7%/(h)/ 163.7% 163.3% 225.6% 347.3%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.24 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $34,689,000 of securities from the acquisition of Principal Partners MidCap Growth Fund, Inc. and $23,000 from portfolio realignment. 22 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS MIDCAP VALUE FUND - -------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $13.46 $11.75 $9.21 $9.35 $10.20 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.09) (0.10) (0.09) (0.04) (0.02) Net Realized and Unrealized Gain (Loss) on Investments......... 2.07 1.97 2.63 (0.10) (0.83) ---- ---- ---- ----- ----- Total From Investment Operations 1.98 1.87 2.54 (0.14) (0.85) Less Dividends and Distributions: Distributions from Realized Gains...... (0.98) (0.16) -- -- -- ----- ----- ----- Total Dividends and Distributions (0.98) (0.16) -- -- -- ----- ----- ----- Net Asset Value, End of Period............ $14.46 $13.46 $11.75 $9.21 $9.35 ====== ====== ====== ===== ===== Total Return /(b)/ ... 15.19% 16.06% 27.58% (1.50)% (8.15)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $75,737 $32,930 $12,295 $4,573 $891 Ratio of Expenses to Average Net Assets.. 1.85% 1.93% 1.94% 1.95% 1.92%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.85% 1.96%/(f)/ 2.49%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. (0.61)% (0.77)% (0.89)% (0.94)% (0.48)%/(e)/ Portfolio Turnover Rate................ 87.9% 49.9% 49.7% 80.0% 224.9%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the front-end sales charge or contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.07 per share from February 27, 2001 through February 28, 2001. 23 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ PARTNERS SMALLCAP GROWTH FUND I - ------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.33 $6.75 $4.92 $7.12 $8.28 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.14) (0.13) (0.10) (0.06) (0.05) Net Realized and Unrealized Gain (Loss) on Investments......... 0.83 0.71 1.93 (2.14) (1.11) Total From Investment 0.69 0.58 1.83 (2.20) (1.16) Operations Net Asset Value, End $8.02 $7.33 $6.75 $4.92 $7.12 of Period............ Total Return /(b)/ ... 9.41% 8.59% 37.20% (30.90)% (13.70)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $8,323 $8,026 $5,932 $1,386 $316 Ratio of Expenses to Average Net Assets.. 2.05% 2.05% 2.05% 2.05% 2.02%/(f)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 2.21% 2.24%/(d)/ 3.39%/(d)/ -- -- Ratio of Net Investment Income to Average Net Assets.. (1.80)% (1.86)% (1.85)% (1.85)% (1.72)%/(f)/ Portfolio Turnover Rate................ 91.5% 94.6% 333.6% 110.9% 161.1%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(d) /Expense ratio without commission rebates. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.10 per share from February 27, 2001 through February 28, 2001. 24 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PARTNERS SMALLCAP GROWTH FUND II - -------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.54 $7.44 $5.47 $6.04 $7.75 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.14) (0.13) (0.10) (0.04) (0.04) Net Realized and Unrealized Gain (Loss) on Investments......... 1.01 0.27 2.07 (0.53) (1.67) ---- ---- ---- ----- ----- Total From Investment Operations 0.87 0.14 1.97 (0.57) (1.71) Less Dividends and Distributions: Distributions from Realized Gains...... (0.22) (0.04) -- -- -- ------ ----- ----- Total Dividends and Distributions (0.22) (0.04) -- -- -- ------ ----- ----- Net Asset Value, End of Period............ $8.19 $7.54 $7.44 $5.47 $6.04 ===== ===== ===== ===== ===== Total Return /(b)/ ... 11.63% 1.94% 36.01% (9.44)% (22.56)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $9,483 $6,025 $3,303 $1,099 $301 Ratio of Expenses to Average Net Assets.. 2.05% 2.05% 2.03% 1.93% 1.92%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 2.14% 2.30%/(f)/ 3.66%/(f)/ 1.95%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. (1.78)% (1.75)% (1.64)% (1.64)% (1.60)%/(e)/ Portfolio Turnover Rate................ 53.4%/(h)/ 69.4% 115.9% 120.1% 159.8%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.22 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $21,459,000 of securities from the acquisition of Principal Partners SmallCap Growth Fund, Inc. and $84,000 from portfolio realignment. 25 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(E)/ ---- ---- ---- ---- ---- PARTNERS SMALLCAP VALUE FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $14.53 $12.89 $9.46 $9.94 $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.14) (0.13) (0.11) (0.05) (0.04) Net Realized and Unrealized Gain (Loss) on Investments......... 2.10 1.77 3.63 (0.28) (0.02) ---- ---- ---- ----- ----- Total From Investment Operations 1.96 1.64 3.52 (0.33) (0.06) Less Dividends and Distributions: Distributions from Realized Gains...... -- -- (0.09) (0.15) -- ------ ----- ----- Total Dividends and Distributions -- -- (0.09) (0.15) -- ------ ----- ----- Net Asset Value, End of Period............ $16.49 $14.53 $12.89 $9.46 $9.94 ====== ====== ====== ===== ===== Total Return /(b)/ ... 13.49% 12.73% 37.53% (3.55)% (0.60)%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $10,055 $6,843 $5,962 $4,867 $1,472 Ratio of Expenses to Average Net Assets.. 1.95% 1.95% 1.95% 1.95% 1.81%/(g)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 2.05% 2.11%/(d)/ 2.57% -- -- Ratio of Net Investment Income to Average Net Assets.. (0.85)% (0.90)% (1.00)% (1.15)% (0.84)%/(g)/ Portfolio Turnover Rate................ 51.3% 26.3% 44.1% 27.9% 58.0%/(g)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(d) /Expense ratio without commission rebates. /(e) /Period from March 1, 2001, date operations commenced, through October 31, 2001. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. 26 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004/(F)/ ---- ---- PREFERRED SECURITIES FUND - ------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.25 $11.04 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.52 0.48 Net Realized and Unrealized Gain (Loss) on Investments......... (0.38) (0.27) ----- ----- Total From Investment Operations 0.14 0.21 Less Dividends and Distributions: Dividends from Net Investment Income... (0.91) -- ---- ----- Total Dividends and Distributions (0.91) -- ---- ----- Net Asset Value, End of Period............ $10.48 $11.25 ====== ====== Total Return /(b)/ ... 1.27% 1.90%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $24,037 $16,472 Ratio of Expenses to Average Net Assets.. 1.60% 1.59%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.63% 2.13%/(e)/ Ratio of Net Investment Income to Average Net Assets.. 4.84% 5.13%/(e)/ Portfolio Turnover Rate................ 17.8% 14.0%/(e)/
/(a) /Calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from December 29, 2003, date operations commenced, through October 31, 2004. 27 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME 2010 FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.59 $10.60 $9.36 $9.83 $10.04 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.29 0.13 0.04 0.10 0.05 Net Realized and Unrealized Gain (Loss) on Investments......... 0.53 0.95 1.26 (0.51) (0.26) ---- ---- ---- ----- ----- Total From Investment Operations 0.82 1.08 1.30 (0.41) (0.21) Less Dividends and Distributions: Dividends from Net Investment Income... (0.24) (0.09) (0.06) (0.06) -- Distributions from Realized Gains...... (0.10) -- -- -- -- ------ ----- Total Dividends and Distributions (0.34) (0.09) (0.06) (0.06) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $12.07 $11.59 $10.60 $9.36 $9.83 ====== ====== ====== ===== ===== Total Return /(c)/ ... 7.20% 10.21% 13.92% (4.16)% (2.09)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $106,539 $59,805 $27,052 $5,071 $488 Ratio of Expenses to Average Net Assets /(b)/ .............. 0.73% 0.78% 1.05% 1.05% 1.05%/(f)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. -- 0.78% 1.05% -- -- Ratio of Net Investment Income to Average Net Assets.. 2.46% 1.16% 0.39% 1.79% 1.22%/(f)/ Portfolio Turnover Rate................ 10.2% 34.3% 47.8% 17.6% 2.2%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 28 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME 2020 FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.48 $10.53 $9.11 $9.69 $10.02 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.24 0.11 0.03 0.09 0.03 Net Realized and Unrealized Gain (Loss) on Investments......... 0.84 0.95 1.43 (0.63) (0.36) ---- ---- ---- ----- ----- Total From Investment Operations 1.08 1.06 1.46 (0.54) (0.33) Less Dividends and Distributions: Dividends from Net Investment Income... (0.23) (0.11) (0.04) (0.04) -- Distributions from Realized Gains...... (0.09) -- -- -- -- ------ ----- Total Dividends and Distributions (0.32) (0.11) (0.04) (0.04) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $12.24 $11.48 $10.53 $9.11 $9.69 ====== ====== ====== ===== ===== Total Return /(c)/ ... 9.52% 10.10% 16.09% (5.56)% (3.29)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $187,253 $97,035 $45,114 $8,645 $1,153 Ratio of Expenses to Average Net Assets /(b)/ .............. 0.73% 0.78% 1.01% 1.05% 1.05%/(f)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. -- 0.78% 1.01% -- -- Ratio of Net Investment Income to Average Net Assets.. 2.02% 1.01% 0.31% 1.46% 1.93%/(f)/ Portfolio Turnover Rate................ 5.5% 27.0% 41.1% 12.3% 4.0%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 29 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME 2030 FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.18 $10.21 $8.74 $9.50 $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.19 0.08 (0.01) 0.07 0.02 Net Realized and Unrealized Gain (Loss) on Investments......... 0.98 0.96 1.49 (0.78) (0.52) ---- ---- ---- ----- ----- Total From Investment Operations 1.17 1.04 1.48 (0.71) (0.50) Less Dividends and Distributions: Dividends from Net Investment Income... (0.21) (0.07) (0.01) (0.05) -- Distributions from Realized Gains...... (0.08) -- -- -- -- ------ ----- Total Dividends and Distributions (0.29) (0.07) (0.01) (0.05) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $12.06 $11.18 $10.21 $8.74 $9.50 ====== ====== ====== ===== ===== Total Return /(c)/ ... 10.57% 10.18% 16.91% (7.52)% (5.00)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $157,396 $95,677 $55,252 $7,610 $839 Ratio of Expenses to Average Net Assets /(b)/ .............. 0.79% 0.87% 1.09% 1.05% 1.05%/(f)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. -- 0.87% 1.09% -- -- Ratio of Net Investment Income to Average Net Assets.. 1.59% 0.75% (0.06)% 0.96% 1.39%/(f)/ Portfolio Turnover Rate................ 4.8% 30.7% 52.4%/(g)/ 19.9% 60.2%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Portfolio turnover rate excludes approximately $22,287,000 of securities from the acquisition of Balanced Fund and $22,287,000 from portfolio realignment. /(h) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 30 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME 2040 FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.14 $10.15 $8.66 $9.55 $9.98 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.13 0.03 (0.07) 0.04 0.02 Net Realized and Unrealized Gain (Loss) on Investments......... 1.11 0.97 1.56 (0.88) (0.45) ---- ---- ---- ----- ----- Total From Investment Operations 1.24 1.00 1.49 (0.84) (0.43) Less Dividends and Distributions: Dividends from Net Investment Income... (0.18) (0.01) -- (0.04) -- Distributions from Realized Gains...... (0.08) -- -- (0.01) -- ------ ----- ----- Total Dividends and Distributions (0.26) (0.01) -- (0.05) -- ----- ----- ----- ----- Net Asset Value, End of Period............ $12.12 $11.14 $10.15 $8.66 $9.55 ====== ====== ====== ===== ===== Total Return /(c)/ ... 11.25% 9.86% 17.26% (8.89)% (4.31)%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $50,858 $26,053 $12,332 $3,304 $344 Ratio of Expenses to Average Net Assets /(b)/ .............. 0.87% 0.97% 1.60% 1.05% 1.05%/(g)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. -- 0.97% 1.66% -- -- Ratio of Net Investment Income to Average Net Assets.. 1.07% 0.29% (0.71)% 0.45% 0.70%/(g)/ Portfolio Turnover Rate................ 7.1% 40.0% 46.0% 19.6% 316.2%/(g)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. /(h) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 31 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME 2050 FUND - ---------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $10.55 $9.67 $8.15 $9.20 $9.97 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.03 (0.08) (0.08) 0.04 -- Net Realized and Unrealized Gain (Loss) on Investments......... 1.20 0.96 1.60 (1.04) (0.77) ---- ---- ---- ----- ----- Total From Investment Operations 1.23 0.88 1.52 (1.00) (0.77) Less Dividends and Distributions: Dividends from Net Investment Income... (0.16) -- -- (0.05) -- Distributions from Realized Gains...... (0.07) -- -- -- -- ----- ----- Total Dividends and Distributions (0.23) -- -- (0.05) -- ----- ----- ----- Net Asset Value, End of Period............ $11.55 $10.55 $9.67 $8.15 $9.20 ====== ====== ===== ===== ===== Total Return /(c)/ ... 11.72% 9.10% 18.67% (10.98)% (7.72)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $9,276 $3,887 $1,636 $776 $273 Ratio of Expenses to Average Net Assets /(b)/ .............. 1.21% 1.68% 1.70% 1.05% 1.05%/(f)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. 1.21% 1.73% 4.30% -- -- Ratio of Net Investment Income to Average Net Assets.. 0.27% (0.74)% (0.97)% 0.35% 0.20%/(f)/ Portfolio Turnover Rate................ 7.5% 44.9% 45.7% 25.4% 59.0%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 32 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- PRINCIPAL LIFETIME STRATEGIC INCOME FUND - ---------------------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $11.70 $10.72 $9.68 $9.99 $10.07 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.34 0.13 0.02 0.10 0.11 Net Realized and Unrealized Gain (Loss) on Investments......... 0.26 0.94 1.06 (0.33) (0.19) ---- ---- ---- ----- ----- Total From Investment Operations 0.60 1.07 1.08 (0.23) (0.08) Less Dividends and Distributions: Dividends from Net Investment Income... (0.24) (0.09) (0.03) (0.08) -- Distributions from Realized Gains...... (0.13) -- (0.01) -- -- ------ ----- ----- Total Dividends and Distributions (0.37) (0.09) (0.04) (0.08) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $11.93 $11.70 $10.72 $9.68 $9.99 ====== ====== ====== ===== ===== Total Return /(c)/ ... 5.13% 10.04% 11.15% (2.29)% (0.79)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $57,536 $24,991 $8,325 $754 $104 Ratio of Expenses to Average Net Assets /(b)/ .............. 0.77% 0.86% 1.30% 1.04% 1.04%/(f)/ Ratio of Gross Expenses to Average Net Assets /(b)/ /(d)/ .............. -- 0.86% 1.94% -- -- Ratio of Net Investment Income to Average Net Assets.. 2.80% 1.12% 0.20% 1.84% 2.87%/(f)/ Portfolio Turnover Rate................ 43.8% 34.1% 43.9% 46.2% 103.3%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Does not include expenses of the investment companies in which the Fund invests. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from June 15, 2001, date shares first offered, through October 31, 2001. 33 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- REAL ESTATE SECURITIES FUND - --------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $18.28 $14.42 $11.07 $10.45 $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. 0.28 0.28 0.37 0.30 0.13 Net Realized and Unrealized Gain (Loss) on Investments......... 3.14 3.97 3.22 0.62 0.32 ---- ---- ---- ---- ---- Total From Investment Operations 3.42 4.25 3.59 0.92 0.45 Less Dividends and Distributions: Dividends from Net Investment Income... (0.46) (0.25) (0.24) (0.30) -- Distributions from Realized Gains...... (1.05) (0.14) -- -- -- ----- ----- ----- Total Dividends and Distributions (1.51) (0.39) (0.24) (0.30) -- ---- ----- ----- ----- ----- Net Asset Value, End of Period............ $20.19 $18.28 $14.42 $11.07 $10.45 ====== ====== ====== ====== ====== Total Return /(b)/ ... 19.47% 30.09% 32.98% 8.88% 3.67%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $147,059 $95,696 $51,874 $20,110 $2,108 Ratio of Expenses to Average Net Assets.. 1.63% 1.68% 1.90% 1.80% 1.76%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.68%/(f)/ 1.95%/(f)/ -- -- Ratio of Net Investment Income to Average Net Assets.. 1.42% 1.72% 2.95% 2.83% 4.01%/(e)/ Portfolio Turnover Rate................ 26.7%/(h)/ 67.9% 35.4% 46.3% 77.5%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without fees the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized gain of $.06 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $101,379,000 of securities from the acquisition of Principal Real Estate Securities Fund, Inc. 34 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(H)/ ---- ---- ---- ---- ---- SHORT-TERM BOND FUND - -------------------- CLASS J SHARES/(a)/ - -------------- Net Asset Value, Beginning of Period.. $10.24 $10.38 $10.39 $10.54 $10.25 Income from Investment Operations: Net Investment Income (Operating Loss) /(b)/ .............. 0.27 0.22 0.25 0.37 0.32 Net Realized and Unrealized Gain (Loss) on Investments......... (0.23) (0.09) 0.02 (0.04) 0.30 ----- ----- ---- ----- ---- Total From Investment Operations 0.04 0.13 0.27 0.33 0.62 Less Dividends and Distributions: Dividends from Net Investment Income... (0.30) (0.23) (0.28) (0.37) (0.33) Distributions from Realized Gains...... -- (0.04) -- (0.11) -- ------ ----- ----- Total Dividends and Distributions (0.30) (0.27) (0.28) (0.48) (0.33) ----- ----- ----- ----- ----- Net Asset Value, End of Period............ $9.98 $10.24 $10.38 $10.39 $10.54 ===== ====== ====== ====== ====== Total Return /(d)/ ... 0.39% 1.27% 2.64% 3.33% 6.02%/(f)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $45,825 $45,294 $35,847 $12,108 $996 Ratio of Expenses to Average Net Assets.. 1.27% 1.18% 1.33% 1.35% 1.31%/(g)/ Ratio of Expenses to Average Net Assets (Excluding Reverse Repurchase Agreement Interest Expense) /(c)/ .............. 1.15% -- -- -- -- Ratio of Gross Expenses to Average Net Assets /(e)/ ... 1.27% 1.18% 1.33% -- -- Ratio of Net Investment Income to Average Net Assets.. 2.65% 2.15% 2.46% 3.56% 4.75%/(g)/ Portfolio Turnover Rate................ 110.8%/(i)/ 61.5% 72.3% 105.8% 68.4%/(g)/
/(a) /Effective September 30, 2005, High Quality Short-Term Bond Fund changed its name to Short-Term Bond Fund. /(b) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(c) /Excludes interest expense paid on borrowings through reverse repurchase agreements. See "Operating Policies" in notes to financial statements. /(d) /Total return is calculated without the contingent deferred sales charge. /(e) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and decreased on March 1, 2004. /(f) /Total return amounts have not been annualized. /(g) /Computed on an annualized basis. /(h) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares recognized $.01 of net investment income per share and incurred an unrealized gain of $.01 per share from February 27, 2001 through February 28, 2001. /(i) /Portfolio turnover rate excludes approximately $117,013,000 of securities from the acquisition of Principal Limited Term Bond Fund, Inc. 35 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- SMALLCAP BLEND FUND - ------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $14.00 $12.96 $9.51 $10.38 $10.46 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.06) (0.05) (0.05) (0.02) (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 2.31 1.12 3.50 (0.83) (0.07) ---- ---- ---- ----- ----- Total From Investment Operations 2.25 1.07 3.45 (0.85) (0.08) Less Dividends and Distributions: Distributions from Realized Gains...... (0.85) (0.03) -- (0.02) -- ----- ----- ----- ----- Total Dividends and Distributions (0.85) (0.03) -- (0.02) -- ----- ----- ----- ----- Net Asset Value, End of Period............ $15.40 $14.00 $12.96 $9.51 $10.38 ====== ====== ====== ===== ====== Total Return /(b)/ ... 16.49% 8.26% 36.28% (8.23)% (0.67)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $113,607 $77,396 $47,377 $17,167 $2,480 Ratio of Expenses to Average Net Assets.. 1.50% 1.58% 1.70% 1.70% 1.66%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.58%/(f)/ 1.84%/(f)/ 1.70%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. (0.42)% (0.35)% (0.48)% (0.44)% (0.35)%/(e)/ Portfolio Turnover Rate................ 137.4%/(h)/ 98.5% 113.2% 108.8% 123.5%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.07 per share from February 27, 2001 through February 28, 2001. /(h) /Portfolio turnover rate excludes approximately $118,621,000 of securities from the acquisition of Principal SmallCap Fund, Inc. and $60,235,000 from portfolio realignment. 36 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- SMALLCAP GROWTH FUND - -------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $7.52 $7.29 $4.84 $7.31 $9.06 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.08) (0.08) (0.08) (0.20) (0.03) Net Realized and Unrealized Gain (Loss) on Investments......... 0.83 0.31 2.53 (1.91) (1.72) ---- ---- ---- ----- ----- Total From Investment Operations 0.75 0.23 2.45 (2.11) (1.75) Less Dividends and Distributions: Distributions from Realized Gains...... (0.40) -- -- (0.36) -- ---- ----- ----- Total Dividends and Distributions (0.40) -- -- (0.36) -- ---- ----- ----- Net Asset Value, End of Period............ $7.87 $7.52 $7.29 $4.84 $7.31 ===== ===== ===== ===== ===== Total Return /(b)/ ... 9.98% 3.16% 50.62% (30.92)% (18.42)%/(e)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $29,405 $25,984 $16,886 $4,449 $1,322 Ratio of Expenses to Average Net Assets.. 1.59% 1.68% 1.88% 1.70% 1.64%/(f)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.69%/(d)/ 2.18%/(d)/ 1.70%/(d)/ -- Ratio of Net Investment Income to Average Net Assets.. (0.97)% (1.06)% (1.26)% (1.27)% (1.32)%/(f)/ Portfolio Turnover Rate................ 181.7% 194.9% 270.1% 255.3% 178.3%/(f)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Expense ratio without commission rebates. /(e) /Total return amounts have not been annualized. /(f) /Computed on an annualized basis. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.17 per share from February 27, 2001 through February 28, 2001. 37 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2002 2004 2003 2001/(F)/ 2005 ---- ---- ---- SMALLCAP S&P 600 INDEX FUND - --------------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $14.40 $12.49 $9.50 $10.14 $10.74 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. -- -- (0.05) (0.01) (0.01) Net Realized and Unrealized Gain (Loss) on Investments......... 2.00 1.91 3.04 (0.49) (0.59) ---- ---- ----- Total From Investment Operations 2.00 1.91 2.99 (0.50) (0.60) Less Dividends and Distributions: Dividends from Net Investment Income... (0.05) -- -- -- -- Distributions from (0.14) Realized Gains...... -- -- -- ----- (0.36) Total Dividends and (0.14) Distributions -- -- -- ----- (0.41) Net Asset Value, End $9.50 of Period............ $14.40 $12.49 $10.14 $15.99 ====== ====== ====== Total Return /(b)/ ... 13.99% 15.31% 31.47% (5.16)% (5.59)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $57,122 $33,134 $17,505 $7,197 $1,860 Ratio of Expenses to Average Net Assets.. 1.00% 1.06% 1.38% 1.10% 1.06%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... -- 1.06% 1.49% -- -- Ratio of Net Investment Income to Average Net Assets.. 0.01% 0.01% (0.47)% (0.28)% (0.26)%/(e)/ Portfolio Turnover Rate................ 43.2% 54.5% 44.6% 61.0% 62.0%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were increased on March 1, 2003 and ceased on March 1, 2004. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.15 per share from February 27, 2001 through February 28, 2001. 38 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(G)/ ---- ---- ---- ---- ---- SMALLCAP VALUE FUND - ------------------- CLASS J SHARES - -------------- Net Asset Value, Beginning of Period.. $15.88 $14.53 $10.42 $10.48 $10.64 Income from Investment Operations: Net Investment Income (Operating Loss) /(a)/ .............. (0.03) (0.09) (0.04) (0.01) -- Net Realized and Unrealized Gain (Loss) on Investments......... 2.57 1.91 4.15 0.42 (0.16) ---- ---- ---- ---- ----- Total From Investment Operations 2.54 1.82 4.11 0.41 (0.16) Less Dividends and Distributions: Distributions from Realized Gains...... (1.40) (0.47) -- (0.47) -- ----- ----- ----- ----- Total Dividends and Distributions (1.40) (0.47) -- (0.47) -- ----- ----- ----- ----- Net Asset Value, End of Period............ $17.02 $15.88 $14.53 $10.42 $10.48 ====== ====== ====== ====== ====== Total Return /(b)/ ... 16.63% 12.80% 39.44% 3.65% (1.04)%/(d)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $46,466 $26,756 $12,945 $4,953 $749 Ratio of Expenses to Average Net Assets.. 1.56% 1.65% 1.70% 1.69% 1.66%/(e)/ Ratio of Gross Expenses to Average Net Assets /(c)/ ... 1.56% 1.65%/(f)/ 2.14%/(f)/ 1.70%/(f)/ -- Ratio of Net Investment Income to Average Net Assets.. (0.19)% (0.62)% (0.35)% (0.07)% 0.12%/(e)/ Portfolio Turnover Rate................ 133.7% 163.5% 221.7% 134.3% 89.1%/(e)/
/(a) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(b) /Total return is calculated without the contingent deferred sales charge. /(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. /(d) /Total return amounts have not been annualized. /(e) /Computed on an annualized basis. /(f) /Expense ratio without commission rebates. /(g) /Period from March 1, 2001, date shares first offered, through October 31, 2001. Class J shares incurred an unrealized loss of $.04 per share from February 27, 2001 through February 28, 2001. 39 FINANCIAL HIGHLIGHTS PRINCIPAL INVESTORS FUND, INC. ------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED OCTOBER 31 (EXCEPT AS NOTED):
2005 2004 2003 2002 2001/(F)/ ULTRA SHORT BOND FUND - --------------------- CLASS J SHARES /(A)/ - -------------------- Net Asset Value, Beginning of Period.. $10.00 $10.00 $10.00 $10.00 $10.00 Income from Investment Operations: Net Investment Income (Operating Loss) /(b)/ .............. 0.20 0.19 0.23 0.32 0.13 Net Realized and Unrealized Gain (Loss) on Investments......... (0.03) (0.11) -- -- -- Net Increase from Payments by Affiliates.......... -- 0.11 -- -- -- ----- Total From Investment Operations 0.17 0.19 0.23 0.32 0.13 Less Dividends and Distributions: Dividends from Net (0.20) (0.19) (0.23) (0.32) (0.13) Investment Income... Total Dividends and (0.20) (0.19) (0.23) (0.32) (0.13) Distributions Net Asset Value, End $9.97 $10.00 $10.00 $10.00 $10.00 of Period............ Total Return /(c)/ ... 1.77% 1.90%/(e)/ 2.33% 3.24% 1.34%/(g)/ Ratio/Supplemental Data: Net Assets, End of Period (in thousands).......... $38,214 $43,380 $40,460 $14,460 $2,376 Ratio of Expenses to Average Net Assets.. 1.16% 1.29% 1.55% 1.60% 1.60%/(h)/ Ratio of Gross Expenses to Average Net Assets /(d)/ ... 1.16% 1.32% 1.55% -- -- Ratio of Net Investment Income to Average Net Assets.. 2.02% 1.90% 2.21% 3.12% 3.51%/(h)/ Portfolio Turnover Rate................ 54.9% 105.5% 20.7% 13.6% 31.1%/(h)/
/(a) /On May 27, 2005, the board of Directors of Principal Investors Fund, Inc. authorized a reverse stock split to raise the value of each share from $1.00 to $10.00 per share in connection with the Capital Preservation Fund's change from a money market fund to an ultra short bond fund strategy. The financial highlights have been restated to reflect the reverse stock split. /(b) /Effective November 1, 2002, calculated based on average shares outstanding during the period. /(c) /Total return is calculated without the contingent deferred sales charge. /(d) /Expense ratio without the Manager's voluntary expense limit. The voluntary expense limit began on November 1, 2002. Expense limits were decreased on March 1, 2004. /(e) /In 2004, 1.02% of the total return consists of an increase from a payment by Principal Life Insurance Company. Excluding this payment, the total return for Class J shares would have been .88%. /(f) /Period from June 15, 2001, date shares first offered, through October 31, 2001. /(g) /Total return amounts have not been annualized. /(h) /Computed on an annualized basis. 40 APPENDIX A RELATED PERFORMANCE OF THE SUB-ADVISORS The following tables set forth historical information about client accounts managed by a Sub-Advisor that have investment objectives and strategies similar to those of the corresponding Fund the Sub-Advisor manages. These client accounts may consist of individuals, institutions and other mutual funds. This composite data is provided to illustrate the past performance of each Sub-Advisor in managing similar accounts and does not represent the performance of any Fund. On the following pages "composite performance" is shown for each Sub-Advisor with regard to all of those similarly managed accounts. The composite performance is computed based upon essentially the Sub-Advisor's asset weighted "average" performance with regard to such accounts. The composite performance information shown is based on a composite of all accounts of each Sub-Advisor (and its predecessor, if any) having substantially similar investment objectives, policies and strategies to the corresponding Fund. The composite results reflect the deduction of all fees and expenses actually incurred by the client accounts. If the composite results had been adjusted to reflect fees and expenses of the Fund, performance numbers shown would differ. Although the Fund and client accounts comprising the composite indices (Related Accounts) have substantially similar investment objectives and policies in all material respects, you should not assume that the Fund will have the same performance as the Related Accounts. For example, a Fund's future performance may be better or worse than the performance of its Related Accounts due to, among other things, differences in sales charge, expenses, asset sizes and cash flows between the Fund and its Related Accounts. Portions of the information below are based on data supplied by the Sub-Advisors and from statistical services, reports or other sources believed by the Manager to be reliable. However, such information has not been verified or audited by the Manager. Some of the accounts included in the composites are not mutual funds registered under the 1940 Act. Those accounts are not subject to investment limitations, diversification requirements and other restrictions imposed by the 1940 Act and the Internal Revenue Code. If such requirements were applicable to these accounts, the performance shown may have been lower. The following pages contain information on the historical performance of each of the Fund's. The date that these shares were first offered for sale is shown. The performance data should not be considered as an indication of future performance of any Fund or any Sub-Advisor. In addition, the effect of taxes is not reflected in the information below as it will depend on the investor's tax status. Current performance may be lower or higher than the performance data shown. For more performance information, including most recent month-end performance, visit our website at www.principal.com and click on rates and values. Principal Investors Fund 215 www.principal.com PERFORMANCE RESULTS - STABLE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 ---------------------------------------- ------------------------------------------------------------ MONEY MARKET FUND CLASS J (03/01/01) 2.20 2.20 0.80 N/A N/A 1.08 2.20 0.20 0.01 0.53 Principal Global Investors Money Market Composite 2.30 3.74 Lehman Brothers U.S. Treasury Bellwethers 3 Month Index 3.08 3.08 1.83 2.34 3.89 2.20 3.08 1.30 1.15 1.78 4.45 6.20 4.91 5.33 5.53 5.38 SHORT-TERM BOND FUND CLASS J (03/01/01) PREVIOUSLY HIGH QUALITY SHORT-TERM BOND FUND 1.42 1.42 1.23 N/A N/A 2.95 1.42 0.45 1.81 6.77 Principal Global Investors Limited Term Fixed Income Composite 4.37 N/A Lehman Brothers Mutual Fund 1-5 Gov't/Credit Index 1.44 1.44 2.21 4.71 5.38 4.38 1.44 1.85 3.35 8.12 9.03 8.91 2.09 7.63 7.13 4.67 Morningstar Short-Term Bond Category Average 1.43 1.43 1.96 3.82 4.63 3.45 1.43 1.60 2.39 5.24 7.32 8.14 2.12 6.28 6.51 4.35 ULTRA SHORT BOND CLASS J (06/15/01) PREVIOUSLY CAPITAL PRESERVATION FUND 2.14 2.14 2.02 N/A N/A 2.45 2.14 1.74 2.18 3.12 6-Month LIBOR Index 3.33 3.33 2.03 2.62 4.27 2.25 3.33 1.47 1.32 2.06 5.00 6.76 5.44 5.89 5.94 5.81 Morningstar Ultrashort 2.49 2.49 1.75 2.70 4.28 2.35 2.49 1.24 1.56 2.73 5.77 6.72 4.45 5.08 6.18 6.14 Bond Category Average ---------------------------------------- ------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
216 Principal Investors Fund 1-800-247-4123 PERFORMANCE RESULTS - CONSERVATIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 1997 ---------------------------------------- ----------------------------------------------------------- BOND & MORTGAGE SECURITIES FUND CLASS J (03/01/01) 1.90 1.90 3.01 N/A N/A 4.35 1.90 3.89 3.27 8.22 Principal Global Investors Multi Sector Fixed Income Composite 6.35 6.47 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.54 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 9.65 Morningstar Intermediate-Term Bond Category Average 1.79 1.79 3.64 5.32 5.38 4.92 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 GOVERNMENT & HIGH QUALITY BOND FUND CLASS J (03/01/01) PREVIOUSLY GOVERNMENT SECURITIES FUND 1.40 1.40 1.67 N/A N/A 3.49 1.40 2.80 0.83 7.75 Principal Global Investors Mortgage Backed Securities Composite 4.85 5.66 Lehman Brothers 2.63 2.63 3.14 5.40 6.01 Government/Mortgage Index 5.13 2.63 4.08 2.73 10.06 7.71 12.29 -0.54 8.72 9.54 Morningstar Intermediate Government Category Average 1.90 1.90 2.45 4.62 5.12 4.46 1.90 3.39 2.15 9.07 6.84 10.76 -1.44 7.45 8.45 HIGH QUALITY INTERMEDIATE-TERM BOND FUND CLASS J (03/01/01) 1.97 1.97 2.76 N/A N/A 4.32 1.97 3.44 2.88 8.71 Principal Global Investors Multi Sector High Qual. Fixed Inc. Composite 5.85 N/A Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.54 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 9.65 Morningstar Intermediate-Term Bond Category Average 1.79 1.79 3.64 5.32 5.38 4.92 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 INFLATION PROTECTION FUND CLASS J (12/29/04) 2.32 2.32 N/A N/A N/A 2.61 2.32 Lehman Brothers US Treasury TIPS Index 2.84 2.84 6.53 8.74 N/A 2.84 2.84 8.46 8.39 16.56 7.89 13.18 2.63 3.95 Morningstar Long-Term Government Category Average 3.29 3.29 4.95 6.50 5.95 3.26 3.29 7.16 4.73 16.70 3.69 20.06 -8.08 10.62 12.34 PREFERRED SECURITIES FUND CLASS J (12/29/03) 0.69 0.69 N/A N/A N/A 2.16 0.69 3.57 Spectrum Preferred Securities Composite 8.51 8.10 Merrill Lynch Preferred Stock Hybrid Index 0.46 0.46 5.10 6.17 N/A 2.96 0.46 5.51 9.51 6.63 8.99 17.75 -4.68 7.37 Morningstar Intermediate-Term 1.79 1.79 3.64 5.32 5.38 2.90 1.79 3.81 4.92 7.88 7.36 9.45 -1.22 7.42 8.76 Bond Category Average ---------------------------------------- ----------------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1996 ------- BOND & MORTGAGE SECURITIES FUND CLASS J (03/01/01) Principal Global Investors Multi Sector Fixed Income Composite Lehman Brothers 3.63 Aggregate Bond Index Morningstar 3.30 Intermediate-Term Bond Category Average GOVERNMENT & HIGH QUALITY BOND FUND CLASS J (03/01/01) PREVIOUSLY GOVERNMENT SECURITIES FUND Principal Global Investors Mortgage Backed Securities Composite Lehman Brothers 3.68 Government/Mortgage Index Morningstar 2.80 Intermediate Government Category Average HIGH QUALITY INTERMEDIATE-TERM BOND FUND CLASS J (03/01/01) Principal Global Investors Multi Sector High Qual. Fixed Inc. Composite Lehman Brothers 3.63 Aggregate Bond Index Morningstar 3.30 Intermediate-Term Bond Category Average INFLATION PROTECTION FUND CLASS J (12/29/04) Lehman Brothers US Treasury TIPS Index Morningstar Long-Term -1.61 Government Category Average PREFERRED SECURITIES FUND CLASS J (12/29/03) Spectrum Preferred Securities Composite Merrill Lynch Preferred Stock Hybrid Index Morningstar 3.30 Intermediate-Term Bond Category Average ------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
Principal Investors Fund 217 www.principal.com PERFORMANCE RESULTS - MODERATE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 -------------------------------------------- ------- LARGECAP GROWTH FUND CLASS J (03/01/01) 10.69 10.69 13.96 N/A N/A -1.69 10.69 Columbus Circle Investors Large Capitalization Composite /(1)/ 11.77 11.77 16.96 -2.55 9.80 Russell 1000 Growth Index 5.26 5.26 13.23 -3.58 6.73 -1.30 5.26 Morningstar Large Growth Category Average 6.46 6.46 13.88 -3.36 6.95 -0.84 6.46 LARGECAP S&P 500 INDEX FUND CLASS J (03/01/01) 4.01 4.01 13.15 N/A N/A 0.67 4.01 Principal Global Investors S&P 500 Index Composite 0.18 8.68 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 1.84 4.91 Morningstar Large Blend Category Average 5.77 5.77 14.00 0.50 8.12 1.82 5.77 LARGECAP VALUE FUND CLASS J (03/01/01) 5.91 5.91 13.57 N/A N/A 3.96 5.91 Principal Global Investors Large Cap Value Composite 3.92 9.31 Russell 1000 Value Index 7.05 7.05 17.49 5.28 10.94 6.00 7.05 Morningstar Large Value Category Average 5.88 5.88 15.58 3.96 8.85 4.46 5.88 MIDCAP VALUE FUND CLASS J (03/01/01) 12.13 12.13 18.04 N/A N/A 9.72 12.13 Principal Global Investors Mid Cap Value Composite 10.33 10.08 Russell Midcap Value Index 12.65 12.65 24.38 12.21 13.65 12.84 12.65 Morningstar Mid-Cap Value Category Average 8.41 8.41 20.46 9.36 11.39 10.29 8.41 PARTNERS LARGECAP BLEND FUND CLASS J (03/01/01) 4.16 4.16 11.88 N/A N/A 2.00 4.16 T. Rowe Price U.S. Structured Research Strategy /(//2//)//(3)/ 16.05 2.13 N/A S&P 500 Index 4.91 4.91 14.38 0.54 9.07 1.48 4.91 Morningstar Large Blend Category Average 5.77 5.77 14.00 0.50 8.12 1.39 5.77 PARTNERS LARGECAP BLEND FUND I CLASS J (03/01/01) 5.42 5.42 13.70 N/A N/A -0.32 5.42 Goldman Sachs Large Cap Blend Composite /(//4//)/ 1.90 9.92 Wellington LargeCap Blend Composite /(//5//)/ -1.61 8.55 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 1.84 4.91 Morningstar Large Blend Category 5.77 5.77 14.00 0.50 8.12 1.82 5.77 Average -------------------------------------------- ------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2004 2003 2002 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------ LARGECAP GROWTH FUND 8.31 23.43 -28.97 CLASS J (03/01/01) Columbus Circle Investors Large Capitalization Composite /(1)/ Russell 1000 Growth 6.30 29.76 -27.88 -20.42 -22.42 33.16 38.71 30.49 23.12 Index Morningstar Large 7.64 28.55 -27.73 -23.63 -14.09 39.72 33.56 25.00 18.95 Growth Category Average LARGECAP S&P 500 INDEX 9.76 26.89 -22.97 FUND CLASS J (03/01/01) Principal Global Investors S&P 500 Index Composite S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average LARGECAP VALUE FUND 11.43 24.11 -13.72 CLASS J (03/01/01) Principal Global Investors Large Cap Value Composite Russell 1000 Value 16.49 30.03 -15.52 -5.59 7.02 7.35 15.63 35.18 21.64 Index Morningstar Large 12.91 28.40 -18.92 -5.37 5.47 6.63 13.10 27.01 20.79 Value Category Average MIDCAP VALUE FUND 15.67 26.80 -8.95 CLASS J (03/01/01) Principal Global Investors Mid Cap Value Composite Russell Midcap Value 23.71 38.06 -9.65 2.34 19.18 -0.11 5.09 34.37 20.26 Index Morningstar Mid-Cap 17.90 34.38 -12.91 6.40 16.82 7.78 3.92 26.04 20.50 Value Category Average PARTNERS LARGECAP 9.41 22.90 -17.17 BLEND FUND CLASS J (03/01/01) T. Rowe Price U.S. Structured Research Strategy /(//2//)//(3)/ S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average PARTNERS LARGECAP 10.03 26.74 -25.65 BLEND FUND I CLASS J (03/01/01) Goldman Sachs Large Cap Blend Composite /(//4//)/ Wellington LargeCap Blend Composite /(//5//)/ S&P 500 Index 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 33.36 22.96 Morningstar Large 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 27.43 20.37 Blend Category Average ------------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ CCI began sub-advising the Fund on 01/05/05. The performance of the accounts represented in this composite does not reflect CCI's use of "estimated tracking error" in controlling investment risk, a tool CCI will use with the Fund under certain circumstances. Tracking error is a statistical estimate of the difference over the next twelve months between the Fund's return and the return of the Fund's benchmark or index. When employed, this risk control tool could increase or decrease, depending on market conditions, the return the Fund might otherwise achieve. / //(2)/ T. Rowe Price began sub-advising the Fund on 03/09/04 // /(//3//)// /The performance information provided by T. Rowe Associates, Inc. ("T. Rowe") is not that of a composite, but is the total return performance of the T. Rowe Price Capital Opportunity Fund (the "T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Blend Fund T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. The T. Rowe Fund's investment performance prior to May 1, 1999 reflects the T. Rowe Fund's prior investment program. It does not represent the historical performance of the Principal Partners LargeCap Blend Fund and should not be interpreted as indicative of its future performance. / //(//4//)/ Goldman Sachs began sub-advising the Fund on 12/16/02 / //(//5//)/ Wellington began sub-advising the Fund on 12/16/02
218 Principal Investors Fund 1-800-247-4123 PERFORMANCE RESULTS - MODERATE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND -------------------------------------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) 2.59 2.59 8.53 N/A N/A 8.52 GMO Growth Composite/(//1//)/ 11.76 -3.33 8.22 Russell 1000 Growth Index 5.26 5.26 13.23 -3.58 6.73 13.23 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 14.39 Morningstar Large Growth Category Average 6.46 6.46 13.88 -3.36 6.95 14.01 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) 6.69 6.69 12.24 N/A N/A -1.44 T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ 18.34 N/A N/A Russell 1000 Growth Index 5.26 5.26 13.23 -3.58 6.73 -1.30 Morningstar Large Growth Category Average 6.46 6.46 13.88 -3.36 6.95 -0.84 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) 4.00 4.00 12.09 N/A N/A -0.58 American Century Large Cap Growth Equity Composite 7.26 Russell 1000 Growth Index 5.26 5.26 13.23 -3.58 6.73 -1.30 Morningstar Large Growth Category Average 6.46 6.46 13.88 -3.36 6.95 -0.84 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) 4.48 4.48 14.03 N/A N/A 5.99 Russell 1000 Value Index 7.05 7.05 17.49 5.28 10.94 6.00 Morningstar Large Value Category Average 5.88 5.88 15.58 3.96 8.85 4.46 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) 9.89 9.89 21.58 N/A N/A 10.80 Neuberger Berman MidCap Value Composite 13.43 Russell Midcap Value Index 12.65 12.65 24.38 12.21 13.65 12.84 Morningstar Mid-Cap Value Category Average 8.41 8.41 20.46 9.36 11.39 10.29 -------------------------------------------------------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2005 2004 2003 2002 2001 2000 --------------------------------------------------------- PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) 2.59 1.88 22.30 GMO Growth Composite/(//1//)/ Russell 1000 Growth Index 5.26 6.30 29.76 -27.88 -20.42 -22.42 S&P 500 Index 4.91 10.87 28.67 -22.11 -11.88 -9.11 Morningstar Large Growth Category Average 6.46 7.64 28.55 -27.73 -23.63 -14.09 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) 6.69 8.13 22.57 -28.41 T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ Russell 1000 Growth Index 5.26 6.30 29.76 -27.88 -20.42 -22.42 Morningstar Large Growth Category Average 6.46 7.64 28.55 -27.73 -23.63 -14.09 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) 4.00 8.41 24.91 -26.61 American Century Large Cap Growth Equity Composite Russell 1000 Growth Index 5.26 6.30 29.76 -27.88 -20.42 -22.42 Morningstar Large Growth Category Average 6.46 7.64 28.55 -27.73 -23.63 -14.09 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) 4.48 12.41 26.23 -14.37 Russell 1000 Value Index 7.05 16.49 30.03 -15.52 -5.59 7.02 Morningstar Large Value Category Average 5.88 12.91 28.40 -18.92 -5.37 5.47 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) 9.89 21.45 34.66 -10.75 Neuberger Berman MidCap Value Composite Russell Midcap Value Index 12.65 23.71 38.06 -9.65 2.34 19.18 Morningstar Mid-Cap Value Category Average 8.41 17.90 34.38 -12.91 6.40 16.82 --------------------------------------------------------- 1999 1998 1997 1996 ------------------------------------ PARTNERS LARGECAP GROWTH FUND CLASS J (12/30/02) GMO Growth Composite/(//1//)/ Russell 1000 Growth Index 33.16 38.71 30.49 23.12 S&P 500 Index 21.04 28.58 33.36 22.96 Morningstar Large Growth Category Average 39.72 33.56 25.00 18.95 PARTNERS LARGECAP GROWTH FUND I CLASS J (03/01/01) T. Rowe Price Institutional Large Cap Growth Strategy Composite /(//2//)//(//3//)/ Russell 1000 Growth Index 33.16 38.71 30.49 23.12 Morningstar Large Growth Category Average 39.72 33.58 25.00 18.95 PARTNERS LARGECAP GROWTH FUND II CLASS J (03/01/01) American Century Large Cap Growth Equity Composite Russell 1000 Growth Index 33.16 38.71 30.49 23.12 Morningstar Large Growth Category Average 39.72 33.58 25.00 18.95 PARTNERS LARGECAP VALUE FUND CLASS J (03/01/01) Russell 1000 Value Index 7.35 15.63 35.18 21.64 Morningstar Large Value Category Average 6.63 13.10 27.01 20.79 PARTNERS MIDCAP VALUE FUND CLASS J (03/01/01) Neuberger Berman MidCap Value Composite Russell Midcap Value Index -0.11 5.09 34.37 20.26 Morningstar Mid-Cap Value Category Average 7.78 3.92 26.04 20.50 ------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. / //(//1//)/ GMO began sub-advising the Fund on 03/09/04 / //(//2//)/ T. Rowe began sub-advising the Fund on 08/24/04 ///(//3//)// /The performance information provided by T. Rowe Price Associates, Inc. ("T. Rowe Price") is not that of a composite, but is the total return performance of the T. Rowe Price Institutional Large Cap Growth Fund ("T. Rowe Fund"), which is managed in a substantially similar fashion to the Partners LargeCap Growth Fund I T. Rowe Price believes the T. Rowe Fund's prior performance is the most appropriate measure of its investment record in the strategy. It does not represent the historical performance of the Principal Partners Equity Growth Fund and should not be interpreted as indicative of its future performance.
Principal Investors Fund 219 www.principal.com PERFORMANCE RESULTS - AGGRESSIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 -------------------------------------------- ------- MIDCAP BLEND FUND CLASS J (03/01/01) 8.38 8.38 18.24 N/A N/A 8.94 8.38 Principal Global Investors Mid Cap Blend Composite 8.65 11.60 Russell Midcap Index 12.65 12.65 23.79 8.45 12.49 9.82 12.65 Morningstar Mid-Cap Blend Category Average 9.21 9.21 20.10 8.14 11.74 8.94 9.21 MIDCAP GROWTH FUND CLASS J (03/01/01) 12.32 12.32 17.23 N/A N/A -4.20 12.32 Columbus Circle Investors Mid Capitalization Composite/(//1//)/ 13.30 13.30 21.66 3.02 13.70 Russell Midcap Growth Index 12.10 12.10 22.70 1.38 9.27 4.29 12.10 Morningstar Mid-Cap Growth Category Average 9.70 9.70 19.13 0.01 8.48 2.71 9.70 MIDCAP S&P 400 INDEX FUND CLASS J (03/01/01) 11.31 11.31 19.68 N/A N/A 8.39 11.31 Principal Global Investors S&P 400 Index Composite 7.95 N/A S&P MidCap 400 Index 12.55 12.55 21.13 8.59 14.35 9.74 12.55 Morningstar Mid-Cap Blend Category Average 9.21 9.21 20.10 8.14 11.74 8.94 9.21 PARTNERS MIDCAP GROWTH FUND CLASS J (03/01/01) 11.17 11.17 22.08 N/A N/A 1.47 11.17 Turner Midcap Growth Composite -1.18 N/A Russell Midcap Growth Index 12.10 12.10 22.70 1.38 9.27 4.29 12.10 Morningstar Mid-Cap Growth Category Average 9.70 9.70 19.13 0.01 8.48 2.71 9.70 PARTNERS SMALLCAP GROWTH FUND I CLASS J (03/01/01) 4.56 4.56 20.11 N/A N/A 0.59 4.56 Alliance Capital Small Cap Growth Composite/(//2//)/ 22.16 2.38 10.66 Russell 2000 Growth Index 4.15 4.15 20.93 2.28 4.69 3.85 4.15 Morningstar Small Growth Category Average 5.74 5.74 19.76 2.17 8.16 4.60 5.74 PARTNERS SMALLCAP GROWTH FUND II CLASS J (03/01/01) 6.05 6.05 18.67 N/A N/A 2.82 6.05 UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ 4.74 11.46 Emerald Diversified Small Cap Growth Composite /(//4//)/ 2.30 8.61 Russell 2000 Growth Index 4.15 4.15 20.93 2.28 4.69 3.85 4.15 Morningstar Small Growth Category 5.74 5.74 19.76 2.17 8.16 4.60 5.74 Average -------------------------------------------- ------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2004 2003 2002 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------ MIDCAP BLEND FUND 16.74 30.67 -9.30 CLASS J (03/01/01) Principal Global Investors Mid Cap Blend Composite Russell Midcap Index 20.22 40.08 -16.19 -5.63 8.25 18.23 10.09 29.01 19.00 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average MIDCAP GROWTH FUND 9.44 31.06 -41.07 CLASS J (03/01/01) Columbus Circle Investors Mid Capitalization Composite/(//1//)/ Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average MIDCAP S&P 400 INDEX 15.18 33.71 -16.07 FUND CLASS J (03/01/01) Principal Global Investors S&P 400 Index Composite S&P MidCap 400 Index 16.47 35.59 -14.53 -0.60 17.51 14.72 19.11 32.25 19.20 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average PARTNERS MIDCAP GROWTH 11.23 47.14 -32.51 FUND CLASS J (03/01/01) Turner Midcap Growth Composite Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average PARTNERS SMALLCAP 13.41 46.12 -41.11 GROWTH FUND I CLASS J (03/01/01) Alliance Capital Small Cap Growth Composite/(//2//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average PARTNERS SMALLCAP 9.92 43.35 -25.31 GROWTH FUND II CLASS J (03/01/01) UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ Emerald Diversified Small Cap Growth Composite /(//4//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average ------------------------------------------------------------------ *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. /1// CCI began sub-advising the Fund on 01/05/05. The performance of the accounts represented in this composite does not reflect CCI's use of "estimated tracking error" in controlling investment risk, a tool CCI will use with the Fund under certain circumstances. Tracking error is a statistical estimate of the difference over the next twelve months between the Fund's return and the return of the Fund's benchmark or index. When employed, this risk control tool could increase or decrease, depending on market conditions, the return the Fund might otherwise achieve. / //(//2//)/ Alliance began sub-advising the Fund on 03/31/03 // /(//3//)/ UBS began sub-advising the Fund on 04/22/02 // /(//4//)/ Emerald Advisers Inc. began as co-sub-advisor on 09/01/04
AVERAGE ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 -------------------------------------------- ------- MIDCAP BLEND FUND CLASS J (03/01/01) 8.38 8.38 18.24 N/A N/A 8.94 8.38 Principal Global Investors Mid Cap Blend Composite 8.65 11.60 Russell Midcap Index 12.65 12.65 23.79 8.45 12.49 9.82 12.65 Morningstar Mid-Cap Blend Category Average 9.21 9.21 20.10 8.14 11.74 8.94 9.21 MIDCAP GROWTH FUND CLASS J (03/01/01) 12.32 12.32 17.23 N/A N/A -4.20 12.32 Columbus Circle Investors Mid Capitalization Composite/(//1//)/ 13.30 13.30 21.66 3.02 13.70 Russell Midcap Growth Index 12.10 12.10 22.70 1.38 9.27 4.29 12.10 Morningstar Mid-Cap Growth Category Average 9.70 9.70 19.13 0.01 8.48 2.71 9.70 MIDCAP S&P 400 INDEX FUND CLASS J (03/01/01) 11.31 11.31 19.68 N/A N/A 8.39 11.31 Principal Global Investors S&P 400 Index Composite 7.95 N/A S&P MidCap 400 Index 12.55 12.55 21.13 8.59 14.35 9.74 12.55 Morningstar Mid-Cap Blend Category Average 9.21 9.21 20.10 8.14 11.74 8.94 9.21 PARTNERS MIDCAP GROWTH FUND CLASS J (03/01/01) 11.17 11.17 22.08 N/A N/A 1.47 11.17 Turner Midcap Growth Composite -1.18 N/A Russell Midcap Growth Index 12.10 12.10 22.70 1.38 9.27 4.29 12.10 Morningstar Mid-Cap Growth Category Average 9.70 9.70 19.13 0.01 8.48 2.71 9.70 PARTNERS SMALLCAP GROWTH FUND I CLASS J (03/01/01) 4.56 4.56 20.11 N/A N/A 0.59 4.56 Alliance Capital Small Cap Growth Composite/(//2//)/ 22.16 2.38 10.66 Russell 2000 Growth Index 4.15 4.15 20.93 2.28 4.69 3.85 4.15 Morningstar Small Growth Category Average 5.74 5.74 19.76 2.17 8.16 4.60 5.74 PARTNERS SMALLCAP GROWTH FUND II CLASS J (03/01/01) 6.05 6.05 18.67 N/A N/A 2.82 6.05 UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ 4.74 11.46 Emerald Diversified Small Cap Growth Composite /(//4//)/ 2.30 8.61 Russell 2000 Growth Index 4.15 4.15 20.93 2.28 4.69 3.85 4.15 Morningstar Small Growth Category 5.74 5.74 19.76 2.17 8.16 4.60 5.74 Average -------------------------------------------- ------- ANNUAL TOTAL RETURNS* (YEAR ENDED DECEMBER 31) 2004 2003 2002 2001 2000 1999 1998 1997 1996 ------------------------------------------------------------------ MIDCAP BLEND FUND 16.74 30.67 -9.30 CLASS J (03/01/01) Principal Global Investors Mid Cap Blend Composite Russell Midcap Index 20.22 40.08 -16.19 -5.63 8.25 18.23 10.09 29.01 19.00 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average MIDCAP GROWTH FUND 9.44 31.06 -41.07 CLASS J (03/01/01) Columbus Circle Investors Mid Capitalization Composite/(//1//)/ Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average MIDCAP S&P 400 INDEX 15.18 33.71 -16.07 FUND CLASS J (03/01/01) Principal Global Investors S&P 400 Index Composite S&P MidCap 400 Index 16.47 35.59 -14.53 -0.60 17.51 14.72 19.11 32.25 19.20 Morningstar Mid-Cap 16.00 36.42 -17.08 -4.96 3.37 18.70 6.77 26.45 20.44 Blend Category Average PARTNERS MIDCAP GROWTH 11.23 47.14 -32.51 FUND CLASS J (03/01/01) Turner Midcap Growth Composite Russell Midcap Growth 15.48 42.72 -27.40 -20.16 -11.74 51.29 17.86 22.54 17.48 Index Morningstar Mid-Cap 12.93 36.09 -27.53 -21.28 -6.90 63.90 17.51 17.05 16.99 Growth Category Average PARTNERS SMALLCAP 13.41 46.12 -41.11 GROWTH FUND I CLASS J (03/01/01) Alliance Capital Small Cap Growth Composite/(//2//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average PARTNERS SMALLCAP 9.92 43.35 -25.31 GROWTH FUND II CLASS J (03/01/01) UBS U.S. Small Capitalization Growth Equity Composite/(//3//)/ Emerald Diversified Small Cap Growth Composite /(//4//)/ Russell 2000 Growth 14.31 48.53 -30.25 -9.23 -22.43 43.09 1.23 12.95 11.26 Index Morningstar Small 12.09 45.00 -28.42 -9.02 -5.71 61.45 4.49 18.19 19.99 Growth Category Average ------------------------------------------------------------------
220 Principal Investors Fund 1-800-247-4123 PERFORMANCE RESULTS - AGGRESSIVE FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 -------------------------------------------- --------------------------------------------------- PARTNERS SMALLCAP VALUE FUND CLASS J (03/01/01) 6.62 6.62 19.38 N/A N/A 12.07 6.62 16.81 36.62 -11.11 Ark Asset Small Cap Value Composite 14.46 16.17 Russell 2000 Value Index 4.71 4.71 23.18 13.55 13.08 13.44 4.71 22.25 46.02 -11.42 14.02 22.83 -1.49 Morningstar Small Value Category Average 6.13 6.13 22.30 13.50 12.79 13.40 6.13 20.58 42.71 -10.25 17.31 16.98 4.49 REAL ESTATE SECURITIES FUND CLASS J (03/01/01) 14.70 14.70 27.84 N/A N/A 20.65 14.70 32.94 37.01 6.87 Principal Capital - REI Real Estate Composite 20.64 N/A MSCI US REIT Index 12.52 12.52 26.48 18.80 14.39 19.82 12.52 31.49 36.74 3.64 12.83 26.81 -4.55 Morningstar Specialty - Real Estate Category Average 11.59 11.59 36.47 18.58 14.95 19.39 11.59 31.88 36.89 4.10 8.93 25.83 -3.35 SMALLCAP BLEND FUND CLASS J (03/01/01) 8.96 8.96 21.22 N/A N/A 10.69 8.96 15.54 41.48 -17.85 Principal Global Investors Small - Company Blend Composite 10.07 N/A Russell 2000 Index 4.55 4.55 22.13 8.22 9.26 8.90 4.55 18.33 47.25 -20.48 2.49 -3.02 21.26 Morningstar Small Blend Category Average 6.62 6.62 21.72 9.89 11.15 10.76 6.62 18.86 42.77 -16.17 8.41 12.84 18.18 SMALLCAP GROWTH FUND CLASS J (03/01/01) 3.60 3.60 20.08 N/A N/A 0.29 3.60 13.61 47.12 -39.83 Principal Global Investors Small Company Growth Composite 1.57 5.97 Russell 2000 Growth Index 4.15 4.15 20.93 2.28 4.69 3.85 4.15 14.31 48.53 -30.25 -9.23 -22.43 43.09 Morningstar Small Growth Category Average 5.74 5.74 19.76 2.17 8.16 4.60 5.74 12.09 45.00 -28.42 -9.02 -5.71 61.45 SMALLCAP S&P 600 INDEX FUND CLASS J (03/01/01) 6.55 6.55 20.84 N/A N/A 10.23 6.55 21.24 36.58 -15.75 Principal Global Investors Small Cap S&P 600 Index Composite S&P SmallCap 600 Index 7.67 7.67 22.37 10.76 12.15 11.64 7.67 22.64 38.77 -14.63 6.54 11.80 12.40 Morningstar Small Blend Category Average 6.62 6.62 21.72 9.89 11.15 10.76 6.62 18.86 42.77 -16.17 8.41 12.84 18.18 SMALLCAP VALUE FUND CLASS J (03/01/01) 8.35 8.35 22.35 N/A N/A 14.75 8.35 18.93 42.14 -3.49 Principal Global Investors Small Cap Value Composite 15.36 12.71 Russell 2000 Value Index 4.71 4.71 23.18 13.55 13.08 13.44 4.71 22.25 46.02 -11.42 14.02 22.83 -1.49 Morningstar Small Value Category 6.13 6.13 22.30 13.50 12.79 13.40 6.13 20.58 42.71 -10.25 17.31 16.98 4.49 Average -------------------------------------------- --------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1998 1997 1996 ---------------------- PARTNERS SMALLCAP VALUE FUND CLASS J (03/01/01) Ark Asset Small Cap Value Composite Russell 2000 Value -6.45 31.78 21.37 Index Morningstar Small -6.99 30.04 25.53 Value Category Average REAL ESTATE SECURITIES FUND CLASS J (03/01/01) Principal Capital - REI Real Estate Composite MSCI US REIT Index -16.90 18.58 35.89 Morningstar Specialty -15.79 23.05 31.68 - Real Estate Category Average SMALLCAP BLEND FUND CLASS J (03/01/01) Principal Global Investors Small Company Blend Composite Russell 2000 Index -2.55 22.36 16.50 Morningstar Small -3.64 26.12 19.66 Blend Category Average SMALLCAP GROWTH FUND CLASS J (03/01/01) Principal Global Investors Small Company Growth Composite Russell 2000 Growth 1.23 12.95 11.26 Index Morningstar Small 4.49 18.19 19.99 Growth Category Average SMALLCAP S&P 600 INDEX FUND CLASS J (03/01/01) Principal Global Investors Small Cap S&P 600 Index Composite S&P SmallCap 600 -1.31 25.58 21.32 Index Morningstar Small -3.64 26.12 19.66 Blend Category Average SMALLCAP VALUE FUND CLASS J (03/01/01) Principal Global Investors Small Cap Value Composite Russell 2000 Value -6.45 31.78 21.37 Index Morningstar Small -6.99 30.04 25.53 Value Category Average ---------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
Principal Investors Fund 221 www.principal.com PERFORMANCE RESULTS - DYNAMIC FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 -------------------------------------------- ---------------------------------------------------- DIVERSIFIED INTERNATIONAL FUND CLASS J (03/01/01) 22.98 22.98 24.81 N/A N/A 6.19 22.98 19.18 32.65 -17.17 Principal Global Investors International Large Cap Composite 5.37 9.00 Citigroup BMI Global ex-US Index 19.59 19.59 28.09 8.09 7.79 9.85 19.59 22.23 42.15 -13.81 -20.08 -12.04 28.75 Morningstar Foreign Large Blend Category Average 14.55 14.55 21.30 2.93 6.47 4.82 14.55 17.59 33.32 -16.91 -21.83 -16.02 40.08 INTERNATIONAL EMERGING MARKETS FUND CLASS J (03/01/01) 34.83 34.83 37.57 N/A N/A 18.56 34.83 24.60 54.96 -7.72 Principal Global Investors International Emerging Markets Equity Composite 19.58 12.61 MSCI Emerging Markets Free Index - NDTR 34.00 34.00 37.84 19.08 N/A 18.64 30.31 25.56 55.82 -6.18 -2.61 Morningstar Diversified Emerging Markets Category Average 31.64 31.64 36.05 18.59 7.88 18.17 31.64 23.75 55.30 -5.90 -3.73 -31.11 71.86 INTERNATIONAL GROWTH FUND CLASS J (03/01/01) 21.41 21.41 26.57 N/A N/A 7.85 21.41 21.58 37.37 -16.86 Principal Global Investors International Large Cap Composite 5.37 9.00 CITI World Ex-US BMI Growth Index 17.18 17.18 24.60 4.04 6.29 6.57 17.18 19.34 38.42 -16.97 -24.13 -17.97 36.58 Morningstar Foreign Large Growth Category 15.27 15.27 21.66 2.15 5.69 4.22 15.27 15.58 33.15 -19.15 -24.36 -20.88 52.48 Average -------------------------------------------- ---------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1998 1997 1996 ---------------------- DIVERSIFIED INTERNATIONAL FUND CLASS J (03/01/01) Principal Global Investors International Large Cap Composite Citigroup BMI Global 17.27 2.62 8.70 ex-US Index Morningstar Foreign 13.55 5.99 12.31 Large Blend Category Average INTERNATIONAL EMERGING MARKETS FUND CLASS J (03/01/01) Principal Global Investors International Emerging Markets Equity Composite MSCI Emerging Markets Free Index - NDTR Morningstar -27.03 -3.68 13.35 Diversified Emerging Markets Category Average INTERNATIONAL GROWTH FUND CLASS J (03/01/01) Principal Global Investors International Large Cap Composite CITI World Ex-US BMI 19.63 3.91 8.41 Growth Index Morningstar Foreign 14.80 6.99 13.88 Large Growth Category Average ---------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
222 Principal Investors Fund 1-800-247-4123 PERFORMANCE RESULTS - LIFETIME FUNDS
AVERAGE ANNUAL TOTAL RETURNS* ANNUAL TOTAL RETURNS* (THROUGH DECEMBER 31, 2005) (YEAR ENDED DECEMBER 31) LIFE YTD 1 YR 3 YR 5 YR 10 YR OF FUND 2005 2004 2003 2002 2001 2000 1999 1998 ----------------------------------------- --------------------------------------------------------- PRINCIPAL LIFETIME 2010 FUND CLASS J (06/15/01) 4.87 4.87 11.09 N/A N/A 5.91 4.87 11.21 17.54 -5.26 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Conservative Allocation Category Average 3.05 3.05 6.90 3.65 6.26 3.65 3.05 5.71 12.79 -3.15 -0.81 4.40 7.15 11.63 PRINCIPAL LIFETIME 2020 FUND CLASS J (06/15/01) 6.95 6.95 12.87 N/A N/A 6.38 6.95 11.57 20.52 -7.83 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Moderate Allocation Category Average 5.29 5.29 11.20 2.93 7.35 3.99 5.29 8.62 20.06 -11.48 -4.63 1.66 10.34 13.2 PRINCIPAL LIFETIME 2030 FUND CLASS J (06/15/01) 7.66 7.66 13.75 N/A N/A 5.97 7.66 11.92 22.14 -10.96 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Moderate Allocation Category Average 5.29 5.29 11.20 2.93 7.35 3.99 5.29 8.62 20.06 -11.48 -4.63 1.66 10.34 13.2 PRINCIPAL LIFETIME 2040 FUND CLASS J (06/15/01) 7.97 7.97 14.11 N/A N/A 6.01 7.97 12.11 22.74 -13.55 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Moderate Allocation Category Average 5.29 5.29 11.20 2.93 7.35 3.99 5.29 8.62 20.06 -11.48 -4.63 1.66 10.34 13.2 PRINCIPAL LIFETIME 2050 FUND CLASS J (06/15/01) 8.25 8.25 14.56 N/A N/A 4.90 8.25 11.54 24.51 -16.31 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Large Blend Category Average 5.77 5.77 14.00 0.50 8.12 2.15 5.77 9.96 26.72 -22.02 -13.68 -6.97 19.72 21.95 PRINCIPAL LIFETIME STRATEGIC INCOME FUND CLASS J (06/15/01) 3.41 3.41 9.14 N/A N/A 5.45 3.41 10.32 13.97 -2.63 S&P 500 Index 4.91 4.91 14.38 0.54 9.07 2.17 4.91 10.87 28.67 -22.11 -11.88 -9.11 21.04 28.58 Lehman Brothers Aggregate Bond Index 2.43 2.43 3.62 5.87 6.17 5.71 2.43 4.34 4.11 10.26 8.42 11.63 -0.82 8.69 Morningstar Conservative Allocation Category 3.05 3.05 6.90 3.65 6.26 3.65 3.05 5.71 12.79 -3.15 -0.81 4.40 7.15 11.63 Average ----------------------------------------- --------------------------------------------------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower. 1997 1996 -------------- PRINCIPAL LIFETIME 2010 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 14.86 10.65 Conservative Allocation Category Average PRINCIPAL LIFETIME 2020 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar Moderate 19.35 14.15 Allocation Category Average PRINCIPAL LIFETIME 2030 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar Moderate 19.35 14.15 Allocation Category Average PRINCIPAL LIFETIME 2040 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar Moderate 19.35 14.15 Allocation Category Average PRINCIPAL LIFETIME 2050 FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar Large 27.43 20.37 Blend Category Average PRINCIPAL LIFETIME STRATEGIC INCOME FUND CLASS J (06/15/01) S&P 500 Index 33.36 22.96 Lehman Brothers 9.65 3.63 Aggregate Bond Index Morningstar 14.86 10.65 Conservative Allocation Category Average -------------- *The Average Annual Total Returns and the Annual Total Returns do not reflect sales charges; if sales charges were reflected, results would be lower.
Principal Investors Fund 223 www.principal.com IMPORTANT NOTES TO THE APPENDIX 6 MONTH LIBOR (LONDON INTERBANK OFFERED RATE) INDEX is an average of the interest rate of U.S. dollar deposits, known as Eurodollars, of a stated maturity. CITIGROUP BROAD MARKET (BMI) GLOBAL EX-US INDEX is a float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with an available free float market cap of US$100 million and above. CITIGROUP WORLD EX-US BROAD MARKET (BMI) GROWTH INDEX is a float-weighted, rules-based benchmark of the institutionally investable universe of all companies (excluding companies domiciled in the U.S.) with growth characteristics and an available free float market cap of US$100 million and above. LEHMAN BROTHERS AGGREGATE BOND INDEX is an unmanaged index of domestic, taxable fixed-income securities. The index covers the U.S. investment-grade bond market, with components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. LEHMAN BROTHERS U.S. TREASURY TIPS (TREASURY INFLATION PROTECTION SECURITIES) INDEX is an unmanaged index of inflation-protected U.S. Treasury securities that will mature in one year or longer. LEHMAN BROTHERS GOVERNMENT/MORTGAGE INDEX is a combination of the unmanaged Lehman Government Index and the unmanaged Lehman Mortgage Backed Securities (MBS) Index. The Lehman Government Index includes all Government Bonds including, but not limited to, U.S. Treasury bonds and government-sponsored agency securities, with no maturity restrictions. The MBS Index includes all securitized mortgage pools by GNMA, FNMA and the FHLMC. LEHMAN BROTHERS MUTUAL FUND 1-5 GOVERNMENT/CREDIT INDEX is an unmanaged index composed of Treasury notes, agencies and corporate debt securities rated BBB or better, and with maturities between one year and five years. LEHMAN BROTHERS U.S. TREASURY BELLWETHERS 3 MONTH INDEX is composed of public obligations of the U.S. Treasury with a maturity of three months. MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMF (EMERGING MARKETS FREE) INDEX is an unmanaged index that measures the stock returns of companies in 26 developing countries. MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) US REIT INDEX is a total-return index comprised of the most actively traded real estate investment trusts, and is designed to be a measure of real estate equity performance. MORNINGSTAR CONSERVATIVE ALLOCATION CATEGORY AVERAGE is an average of the net asset value (NAV) returns of domestic mutual funds with 20-50% invested in equities and 50-80% invested in fixed income and cash. MORNINGSTAR DIVERSIFIED EMERGING MARKETS CATEGORY AVERAGE is an average of the net asset value (NAV) returns of diversified emerging-markets mutual funds which invest in companies in developing nations. MORNINGSTAR FOREIGN LARGE BLEND CATEGORY AVERAGE is an average of the net asset value (NAV) returns of mutual funds that seek capital appreciation by investing in a variety of large international stocks. Large-cap foreign stocks have market capitalizations greater than $5 billion. The blend style is assigned to funds where neither growth nor value characteristics predominate. 224 Principal Investors Fund 1-800-247-4123 MORNINGSTAR FOREIGN LARGE GROWTH CATEGORY AVERAGE is an average of the net asset value (NAV) returns of mutual funds that seek capital appreciation by investing in large international stocks that are growth-oriented. Large-cap foreign stocks have market capitalizations greater than $5 billion. Growth is defined based on high price-to-book and price-to-cash flow ratios, relative to the MSCI EAFE index. MORNINGSTAR INTERMEDIATE-TERM BOND CATEGORY AVERAGE is an average of net asset value (NAV) returns of bond mutual funds that have average durations that are greater than 3.5 years and less than 6 years. MORNINGSTAR INTERMEDIATE GOVERNMENT CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that devote at least 90% of their bond holdings to government issues. These mutual funds have, on average, durations between 3.5 and 6 years. MORNINGSTAR LARGE BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on large companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries. MORNINGSTAR LARGE GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in large companies that are projected to grow faster than average. Most of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR LARGE VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on large companies that are less expensive than the market as a whole. They often come from the utilities, energy, financial, and cyclical sectors, and many pay above-average dividends. They also generally have more-stable stock prices. MORNINGSTAR LONG-TERM GOVERNMENT CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that devote at least 90% of their bond holdings to government issues. These mutual funds have, on average, durations of greater than or equal to 10 years. MORNINGSTAR MID-CAP BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on mid-size companies that are fairly representative of the overall stock market in terms of valuation. They tend to invest across the spectrum of U.S. industries. MORNINGSTAR MID-CAP GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that typically focus on mid-size companies that are projected to grow faster than average. Many of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR MID-CAP VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mid-cap value mutual funds that buy stocks mainly of medium-size companies that are cheap relative to their earnings potential. MORNINGSTAR MODERATE ALLOCATION CATEGORY AVERAGE is an average of the net asset value (NAV) returns of mutual funds with 50-70% invested in equities and the remainder invested in fixed income and cash. MORNINGSTAR SHORT-TERM BOND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in a variety of bonds, from the most creditworthy, such as Treasury bonds, to mortgages and corporates, and on rare occasions, even more speculative high-yield and emerging markets debt and which have durations between 1 and 3.5 years. MORNINGSTAR SMALL BLEND CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that focus on small companies that are fairly representative of the overall stock market in terms of valuations. Principal Investors Fund 225 www.principal.com MORNINGSTAR SMALL GROWTH CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest in small companies that are projected to grow faster than average. Most of these mutual funds focus on companies in rapidly-expanding industries. MORNINGSTAR SMALL VALUE CATEGORY AVERAGE is an average of net asset value (NAV) returns of small-cap value mutual funds that invest in less-popular companies at the smaller end of the size range and may focus on finding temporarily depressed stocks of companies working through business problems. MORNINGSTAR SPECIALTY - REAL ESTATE CATEGORY AVERAGE is an average of net asset value (NAV) returns of mutual funds that invest primarily in real-estate investment trusts (REITs) of various types. The performance of these mutual funds is less connected to the overall market than most other types of stock funds. MORNINGSTAR ULTRA-SHORT BOND CATEGORY AVERAGE is an average of the net asset value (NAV) returns of bond mutual funds that invest primarily in investment-grade U.S. fixed-income issues and have durations of less than one year. RUSSELL 1000 GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 1000 Index with higher price-to-book ratios and higher forecasted growth values. Companies included are large. RUSSELL 1000 VALUE INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 1000 Index with lower price-to-book ratios and lower forecasted growth values. Companies included are large. RUSSELL 2000 GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell 2000 Index with higher price-to-book ratios and higher forecasted growth values. Companies included are medium-size to small. RUSSELL 2000 INDEX is an unmanaged index that measures the investment returns of the 2,000 smallest stocks in the Russell 3000 Index. Companies included are medium-size to small. RUSSELL 2000 VALUE INDEX is an unmanaged index that measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. RUSSELL MIDCAP INDEX is an unmanaged index that measures the investment returns of the 800 smallest stocks in the Russell 1000 Index. RUSSELL MIDCAP GROWTH INDEX is an unmanaged index that measures the investment returns of stocks in the Russell MidCap Index with higher price-to-book ratios and higher forecasted growth rates. RUSSELL MIDCAP VALUE INDEX is an unmanaged market-capitalization-weighted index that measures the performance of those Russell Midcap companies with lower price-to-book value ratios and lower forecasted growth values. S&P 500 STOCK INDEX (S&P 500) is an unmanaged index of 500 widely-held stocks often used as a proxy for the domestic stock market. Included are the stocks of industrial, financial, utility and transportation companies. S&P MIDCAP 400 INDEX is an unmanaged index that includes approximately 10% of the capitalization of U.S. equity securities. These are comprised of stocks in the middle capitalization range. Any mid-sized stocks already included in the S&P 500 are excluded from this index. S&P SMALLCAP 600 INDEX is an unmanaged index that consists of 600 domestic stocks chosen for market size, liquidity and industry group representation. It is a market weighted index (stock price x shares outstanding), with each stock affecting the index in proportion to its market value. 226 Principal Investors Fund 1-800-247-4123 ADDITIONAL INFORMATION Additional information about the Fund (including the Fund's policy regarding the disclosure of portfolio securities) is available in the Statement of Additional Information dated March 1, 2006 which is incorporated by reference into this prospectus. Additional information about the Funds' investments is available in the Fund's annual and semiannual reports to shareholders. In the Funds' annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during the last fiscal year. The Statement of Additional Information and the Fund's annual and semi-annual reports can be obtained free of charge by writing or telephoning Princor Financial Services Corporation, P.O. Box 10423, Des Moines, IA 50306. In addition, the Fund makes its Statement of Additional Information and annual and semi-annual reports available, free of charge, on http://www.principal.com. To request this and other information about the Fund and to make shareholder inquiries, telephone 1-800-247-4123. Information about the Fund (including the Statement of Additional Information) can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090. Reports and other information about the Fund are available on the EDGAR Database on the Commission's internet site at http://www.sec.gov. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102. The U.S. government does not insure or guarantee an investment in any of the Funds. There can be no assurance that the Money Market Fund will be able to maintain a stable share price of $1.00 per share. Shares of the Funds are not deposits or obligations of, or guaranteed or endorsed by, any financial institution, nor are shares of the Funds federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency. Principal Investors Fund, Inc. SEC File 811-07572 Principal Investors Fund 227 www.principal.com -----END PRIVACY-ENHANCED MESSAGE-----