|
|
|
|
|
|
|
|
|
|
|
|
|
This Prospectus describes a mutual fund organized by Principal Life Insurance Company. The Fund provides a choice of investment objectives through International Growth-Oriented Portfolios and an Income-Oriented Portfolio.
Neither the Securities and Exchange Commission nor any State Securities Commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
Fund Description........................................................3
International Growth-Oriented Portfolios
International Emerging Markets Portfolio............................4
International Securities Portfolio..................................6
International SmallCap Portfolio....................................8
Income-Oriented Portfolio
Mortgage-Backed Securities Portfolio...............................10
The Costs of Investing.................................................12
Certain Investment Strategies and Related Risks........................12
Management, Organization and Capital Structure.........................15
Management Discussion of Fund Performance..............................16
Pricing of Fund Shares.................................................20
Dividend and Distributions.............................................20
To Buy Shares..........................................................21
Offering Price of Shares ..............................................22
To Sell Shares.........................................................22
General Information about a Fund Account...............................24
Financial Highlights...................................................26
In the description for each Portfolio, you will find important information about the Portfolio’s:
This section summarizes how the Portfolio intends to achieve its investment objective. It identifies the Portfolio’s primary investment strategy including the type or types of securities in which the Portfolio invests.
The annual operating expenses for each Portfolio are deducted from its assets (stated as a percentage of the Portfolio’s assets) and are shown as of the end of the most recent fiscal year. The examples are intended to help you compare the cost of investing in a particular Portfolio with the cost of investing in other mutual funds. The examples assume you invest $10,000 in a Portfolio for the time period indicated. The examples also assume that your investment had a 5% return each year and that the Portfolio’s operating expenses are the same as the most recent fiscal year expenses. Although your actual costs may be higher or lower, based on these assumptions your costs would be as shown.
The investment professionals who manage the assets of each Portfolio are listed with each Portfolio. Backed by their staffs of experienced securities analysts, they provide the Portfolios with professional investment management.
Principal Management Corporation serves as the manager for the Fund. It has signed a contract with Invista Capital Management LLC (“Invista”). Under the contract, Invista provides investment advisory services for the Portfolios (see Management, Organization and Capital Structure).
Included in each Portfolio's description is a set of tables and a bar chart. Together, these provide an indication of the risks involved when you invest.
The bar chart is included to provide you with an indication of the risks involved when you invest. The chart shows changes in the Portfolio's performance from year to year. One of the tables compares the Portfolio's average annual returns with:
| • | a broad-based securities market index (An index measures the market price of a specific group of securities in particular 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 Lipper, Inc., an independent statistical service. |
A Portfolio’s past performance is not necessarily an indication of how the Portfolio will perform in the future.
| NOTE: | Investments in these Portfolios are not deposits of a bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. |
| No salesperson, dealer or other person is authorized to give information or to make representations about a Portfolio or the Fund other than those contained in this Prospectus. Information or representations from unauthorized parties may not be relied upon as having been made by a Portfolio, the Fund, the Manager or the Sub-Advisor. |
The International Emerging Markets Portfolio seeks to achieve long-term growth of capital by investing primarily in equity securities of issuers in emerging market countries.
For this Portfolio, 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. Invista, 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 65% of the Portfolio's assets are invested in emerging market country equity securities. The Portfolio 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 its 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. |
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. In addition, there are risks involved with any investment in foreign securities. These include the risk that a foreign security could lose value as a result of political, financial and economic events in foreign countries. In addition, foreign securities may be subject to securities regulators with less stringent accounting and disclosure standards than are required of U.S. companies.
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 changed 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 that may affect portfolio liquidity.
Under unusual market or economic conditions, the Portfolio may invest in securities issued by domestic corporations, governments or governmental agencies, instrumentalities or political subdivisions. The securities may be denominated in U.S. dollars or other currencies.
The Portfolio is generally a suitable investment for investors seeking long-term growth who want to invest a portion of their assets in securities of companies in emerging market countries. Because the values of the Portfolio’s assets may rise or fall dramatically, if you sell your shares when their value is less than the price you paid, you will lose money. This Portfolio is not an appropriate investment if you are seeking either preservation of capital or high current income. You must be 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.
1998 -17.21
1999 63.37
| The portfolio’s highest/lowest quarterly results during this time period were: |
Highest 38.53% (12/31/1999)
Lowest -19.25% (9/30/1998 )
This table shows how the Portfolio’s average annual returns compare with those of a broad-based securities market index and an index of funds with similar investment objectives.
Past One Past Five Past One Past Five Past Ten
Portfolio Year Years Year Years Years
International Emerging Morgan Stanley Capital International EMF
Markets 63.37% 16.26%* (Emerging Markets Free) Index 66.41% 2.00% 11.04%
Lipper Emerging Markets Fund Average 70.77 5.11 7.47
| * | Period from November 26, 1997, date shares first offered to the public, through December 31, 1999. |
Management Fees......................... 1.15%
Other Expenses*......................... 0.00
Total Portfolio Operating Expenses 1.15%
| * | In addition to brokerage and extraordinary expenses, a Portfolio will pay only taxes and interest expenses, which it is anticipated to be minimal or nonexistent under normal circumstances. |
| The Examples assume that you invest $10,000 in the Portfolio 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% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: |
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
$117 $365 $633 $1,398
| Since March 2000 | Co-Manager: Corydon Gilchrist, CFA. Mr. Gilchrist joined Invista Capital Management in 1994. He holds an MBA and a BBA from the University of Iowa. He is a Chartered Financial Analyst. |
| Since November 1997 (Portfolio's inception) | Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler joined Invista Capital Management in 1995. He holds an MBA from Drake University and a BBA from Iowa State University. He is a Chartered Financial Analyst. |
The International Securities Portfolio seeks long-term growth of capital by investing in a portfolio of securities of companies domiciled in any of the nations of the world.
The International Securities Portfolio invests in common stocks of companies established outside of the U.S. The Portfolio 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 Portfolio intends to have at least 65% of its assets invested in companies in at least three different countries. One of those countries may be the U.S. though currently the Portfolio 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.
In choosing investments for the Portfolio, the Sub-Advisor, Invista pays particular attention to the long-term earnings prospects of the various companies under consideration. Invista then weighs those prospects relative to the price of the security.
The values of the stocks owned by the Portfolio change on a daily basis. Stock prices reflect the activities of individual companies as well as general market and economic conditions. In the short term, stock prices and currencies can fluctuate dramatically in response to these factors. In addition, there are risks involved with any investment in foreign securities that are not generally found in securities of U.S. companies. These include the risk that a foreign security could lose value as a result of political, financial and economic events in foreign countries. In addition, foreign securities may be subject to securities regulators with less stringent accounting and disclosure standards than are required of U.S. companies.
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 changed 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 that may affect portfolio liquidity.
Under unusual market or economic conditions, the Portfolio may invest in securities issued by domestic corporations, governments or governmental agencies, instrumentalities or political subdivisions. The securities may be denominated in U.S. dollars or other currencies.
The Portfolio is generally a suitable investment for investors who seek long-term growth and who want to invest in non-U.S. companies. This Portfolio is not an appropriate investment if you are seeking either preservation of capital or high current income. Suitable investors must be 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. As with all mutual funds, the value of the Fund's assets may rise or fall. If you sell your shares when their value is less than the price you paid, you will lose money.
The Portfolio's past performance is not necessarily an indication of future performance. The bar chart and tables provide some indication of the risks of investing in the Portfolio by showing changes in share performance from year to year.
1994 -6.45
1995 12.02
1996 24.12
1997 12.55
1998 9.55
1999 27.89
| The portfolio’s highest/lowest quarterly results during this time period were: |
Highest 18.06% (12/31/1999)
Lowest -17.48% (9/30/1998)
This table shows how the Portfolio’s average annual returns compare with those of a broad-based securities market index and an index of funds with similar investment objectives.
Past One Past FivePast Ten Past OnePast FivePast Ten
Portfolio Year Years Years Year Years Years
International Securities 27.89% 17.00% 15.88%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Fund Average 40.80 15.37 10.54
| * | Period from May 7, 1993, date shares first offered to the public, through December 31, 1999. |
Management Fees......................... 0.90%
Other Expenses*......................... 0.00
Total Portfolio Operating Expenses 0.90%
| * | In addition to brokerage and extraordinary expenses, a Portfolio will pay only taxes and interest expenses, which it is anticipated to be minimal or nonexistent under normal circumstances. |
| The Examples assume that you invest $10,000 in the Portfolio 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% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: |
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$92 $287 $498 $1,108
| Since June 1993 | Co-Manager: Scott D. Opsal, CFA. Mr. Opsal is Chief Investment Officer of Invista Capital Management and has been with the organization since 1993. He holds an MBA from the University of Minnesota and BS from Drake University. He is a Chartered Financial Analyst. |
| Since March 2000 | Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler joined Invista Capital Management in 1995. He holds an MBA from Drake University and a BBA from Iowa State University. He is a Chartered Financial Analyst. |
The International SmallCap Portfolio seeks to achieve long-term growth of capital by investing primarily in equity securities of non-United States companies with comparatively smaller market capitalizations. Market capitalization is defined as total current market value of a company’s outstanding common stock. Under normal market conditions, the Portfolio invests at least 65% of its assets in securities of companies having market capitalizations of $1 billion or less.
In selecting securities for the Portfolio, Invista, the Sub-Advisor, diversifies the investments geographically. There is no limitation of the percentage of assets that may be invested in one country or denominated in any one currency. However, under normal market circumstances, the Portfolio intends to have at least 65% of its assets invested in securities of companies of at least three countries.
Foreign stocks carry risks that are not generally found in stocks of U.S. companies. These include the risk that a foreign security could lose value as a result of political, financial and economic events in foreign countries. In addition, foreign securities may be subject to securities regulators with less stringent accounting and disclosure standards than are required of U.S. companies.
Investments in companies with small market capitalizations carry their own risks. Historically, small company securities have been more volatile in price than larger company securities, especially over the short-term. While small, unseasoned companies may offer greater opportunities for capital growth than larger, more established companies, they also involve greater risks and should be considered speculative.
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 changed 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 that may affect portfolio liquidity.
This Portfolio is not an appropriate investment if you are seeking either preservation of capital or high current income. You must be 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.
The Portfolio is generally a suitable investment for investors seeking long-term growth who want to invest a portion of their assets in smaller, non-U.S. companies. Because the values of the Portfolio's assets may rise or fall, when shares of the Portfolio are sold they may be worth more or less than the amount paid for them.
The Portfolio's past performance is not necessarily an indication of future performance. The bar chart and tables provide some indication of the risks of investing in the Portfolio by showing changes in share performance from year to year.
1998 11.92
1999 85.93
| The portfolio’s highest/lowest quarterly results during this time period were: |
Highest 36.97% (12/31/1999
Lowest -20.68% (9/30/1998)
This table shows how the Portfolio’s average annual returns compare with those of a broad-based securities market index and an index of funds with similar investment objectives.
Past One Past Five Past OnePast FivePast Ten
Portfolio Year Years Year Years Years
International SmallCap 85.93% 42.93%* Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Small-Cap Fund Average 75.41 19.91 13.04
| * | Period from November 26, 1997, date first offered to the public, through December 31, 1999. |
Management Fees......................... 1.00%
Other Expenses*......................... 0.00
Total Portfolio Operating Expenses 1.00%
| * | In addition to brokerage and extraordinary expenses, a Portfolio will pay only taxes and interest expenses, which it is anticipated to be minimal or nonexistent under normal circumstances. |
| The Examples assume that you invest $10,000 in the Portfolio 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% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: |
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
$102 $318 $552 $1,225
| Since March 2000 | Co-Manager: Dan J. Sherman, CFA. Mr. Sherman joined Invista Capital Management in 1998. Prior to joining the firm, he led a regional research team for Salomon Smith Barney. He holds an MBA from the University of Wisconsin. He is a Chartered Financial Analyst. |
| Since November 1997 (Portfolio's inception) | Co-Manager: Darren K. Sleister, CFA. Mr. Sleister joined Invista Capital Management as a Portfolio Strategist in 1993. He holds an MBA from the University of Iowa, and an undergraduate degree from Central College. He is a Chartered Financial Analyst. |
The Mortgage-Backed Securities Portfolio seeks a high level of current income, liquidity and safety of principal by purchasing obligations issued or guaranteed by the United States Government or its agencies, with emphasis on Government National Mortgage Associations Certificates. The guarantees by the United States Government extends only to principal and interest. There are certain risks unique to GNMA Certificates.
The Mortgage-Backed Securities Portfolio invests in U.S. Government securities, which include obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. The Portfolio may invest in securities supported by:
| • | full faith and credit of the U.S. Government (e.g. GNMA certificates); or |
| • | credit of the instrumentality (e.g. bonds issued by the Federal Home Loan Mortgage Corp.). In addition, the Portfolio may invest in money market investments. |
In addition, the Portfolio may invest in money market investments.
Although some of the securities the Portfolio purchases are backed by the U.S. government and its agencies, shares of the Portfolio are not guaranteed. Generally, when interest rates fall, the value of the Portfolio's shares rises, and when rates rise, the value declines. Because of the fluctuation in values of the Portfolio's shares, when sold, shares of the Portfolio may be worth more or less than the amount paid for them.
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 Portfolio's securities do not effect interest income on securities already held by the Portfolio, but are reflected in the Fund's price per share. Since the magnitude of these fluctuation generally are greater at times when the Portfolio's average maturity is longer, under certain market conditions the Portfolio may invest in short term investments yielding lower current income rather than investing in higher yielding longer term securities.
GNMA Certificates are mortgage backed securities representing an interest in a pool of mortgage loans. Various lenders make the loans which are then insured (by the Federal Housing Administration) or loans which are guaranteed (by Veterans Administration or Farmers Home Administration). The lender or other security issuer creates a pool of mortgages which it submits to GNMA for approval.
The Portfolio invests in modified pass-through GNMA Certificates. Owners of Certificates receive all interest and principal payments owed on the mortgages in the pool, regardless of whether or not the mortgagor has made the payment. Timely payment of interest and principal is guaranteed by the full faith and credit of the U.S. Government.
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 period 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 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 Portfolio to experience a loss of some or all of the premium.
The Mortgaged-Backed Securities Portfolio is generally a suitable investment for investors who want monthly dividends to provide income or to be reinvested in additional Portfolio shares to produce growth. Such investors prefer to have the repayment of principal and interest on most of the securities in which the Portfolio invests to be backed by the U.S. Government, its agencies or instrumentalities.
The Portfolio's past performance is not necessarily an indication of future performance. The bar chart and tables provide some indication of the risks of investing in the Portfolio by showing changes in share performance from year to year.
1994 -3.60
1995 19.26
1996 4.20
1997 10.18
1998 7.74
1999 0.30
| The portfolio’s highest/lowest quarterly results during this time period were: |
Highest 6.41% (6/30/1995)
Lowest -3.50% (3/30/1994)
This table shows how the Portfolio’s average annual returns compare with those of a broad-based securities market index and an index of funds with similar investment objectives.
Past One Past FivePast Ten Past OnePast FivePast Ten
Portfolio Year Years Years Year Years Years
Mortgage-Backed Lehman Brothers Mortgage Index 1.86% 7.98% 7.78%
Securities 0.30% 8.15% 6.17%* Lipper U.S. Mortgage Fund Average 0.65 7.00 6.95
| * | Period from May 7, 1993, date shares first offered to the public, through December 31, 1999. |
Management Fees......................... 0.45%
Other Expenses*......................... 0.00
Total Portfolio Operating Expenses 0.45%
| * | In addition to brokerage and extraordinary expenses, a Portfolio will pay only taxes and interest expenses, which it is anticipated to be minimal or nonexistent under normal circumstances. |
| The Examples assume that you invest $10,000 in the Portfolio 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% return each year and that the Portfolio’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your cost would be: |
1 Year 3 Years 5 Years 10 Years
---------------------------------------------------------
$46 $144 $252 $567
| Since May 1993 (Portfolio's inception) | Martin J. Schafer. Mr. Schafer joined the Principal in 1977 and has broad experience in residential mortgage related securities. He served as Director of Investment Securities at the Principal prior to joining Invista Capital Management in 1992. He holds a BBA in Accounting and Finance from the University of Iowa. |
There is no sales charge on purchases or sales of shares of the Portfolios.
The Fund pays ongoing fees to its Manager, Underwriter and others who provide services to the Fund. They reduce the value of each share you own.
The Statement of Additional Information (SAI) contains additional information about investment strategies and their related risks.
Equity securities include common stocks, preferred stocks, convertible securities and warrants. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation. Although equity securities have a history of long term growth in value, their prices fluctuate based on changes in a company’s financial condition and on overall market and economic conditions. Smaller companies are especially sensitive to these factors.
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.
Fixed-income securities are sensitive to changes in interest rates. In general, bond 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.
Bond prices are also affected by the credit quality of the issuer. Investment grade debt securities are medium and high quality securities. Some bonds may have speculative characteristics and be particularly sensitive to economic conditions and the financial condition of the issuers.
Each of the Fund’s Portfolios 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 Portfolio 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 Portfolio collateralized by the underlying securities. This arrangement results in a fixed rate of return that is not subject to market fluctuation while the Portfolio holds the security. In the event of a default or bankruptcy by a selling financial institution, the affected Portfolio bears a risk of loss. To minimize such risks, the Portfolio enters into repurchase agreements only with large, well-capitalized and well-established financial institutions. In addition, the value of the collateral underlying the repurchase agreement is always at least equal to the repurchase price, including accrued interest.
Each of the Fund's Portfolios may lend its portfolio securities to unaffiliated broker-dealers and other unaffiliated qualified financial institutions.
The International Emerging Markets, International Securities and International SmallCap Portfolios may each enter into forward currency contracts, currency futures contracts and options, and options on currencies for hedging and other non-speculative purposes. 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 Portfolio will not hedge currency exposure to an extent greater than the aggregate market value of the securities held or to be purchased by the Portfolio (denominated or generally quoted or currently convertible into the currency).
Hedging is a technique used in an attempt to reduce risk. If a Portfolio’s Manager or Sub-Advisor hedges market conditions incorrectly or employs a strategy that does not correlate well with the Portfolio’s investment, these techniques could result in a loss, regardless of whether the intent was to reduce risk or to increase return. These techniques may increase the volatility of a Portfolio 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. Additionally, there is the risk of government action through exchange controls that would restrict the ability of the Portfolio to deliver or receive currency.
Each of the Portfolios may invest up to 5% of its assets in warrants. Up to 2% of a Portfolio’s assets may be invested in warrants which are not listed on either the New York or American Stock Exchanges. For the International, International Emerging Markets and International SmallCap Funds, the 2% limitation also applies to warrants not listed on the Toronto Stock and Chicago Board Options Exchanges.
Each of the Portfolios may buy and sell certain types of options. Each type is more fully discussed in the SAI.
The International Emerging Markets, International Securities and International SmallCap Portfolios each may invest in foreign securities. Investment in foreign securities presents certain risks including: fluctuations in currency exchange rates, revaluation of currencies, the imposition of foreign taxes, future political and economic developments including war, expropriations, nationalization, the possible imposition of currency exchange controls and other foreign governmental laws or restrictions. In addition, there may be reduced availability of public information concerning issuers compared to domestic issuers. Foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements that apply to domestic issuers. Transactions in foreign securities may be subject to higher costs. Each Portfolio’s investment in foreign securities may also result in higher custodial costs and the costs associated with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more volatile than those of comparable domestic issuers. Foreign securities markets, particularly those in emerging market countries, are known to experience long delays between the trade and settlement dates of securities purchased and sold. Such delays may result in a lack of liquidity and greater volatility in the price of securities on those markets. As a result of these factors, the Board of Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the Portfolios. These procedures outline the steps to be followed by the Manager and Sub-Advisor to establish a reliable market or fair value if a reliable market value is not available through normal market quotations. The Executive Committee of the Board of Directors oversees this process.
The Portfolios may invest in securities of companies with small- or mid-sized market capitalizations. 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) than investments in larger, more mature companies. Smaller companies may be less mature than older 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. Small companies also 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.
The Portfolios may invest in the securities of unseasoned issuers. 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 which can be used for evaluating the companies 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 companies management and less emphasis on fundamental valuation factors than would be the case for more mature growth companies. In addition, many unseasoned issuers also may be small companies and involve the risks and price volatility associated with smaller companies.
For temporary or defensive purposes in times of unusual or adverse market conditions, the Portfolios may invest without limit in cash and cash equivalents. For this purpose, cash equivalents include: bank certificates of deposit, bank acceptances, repurchase agreements, commercial paper, and commercial paper master notes which are floating rate debt instruments without a fixed maturity. In addition, a Portfolio may purchase U.S. Government securities, preferred stocks and debt securities, whether or not convertible into or carrying rights for common stock.
“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 (which are paid by the fund) and may generate short-term capital gains (on which you pay taxes even if you don’t sell any of your shares during the year). You can find the turnover rate for each Portfolio in the Portfolio’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 already includes portfolio turnover costs.
Principal Management Corporation (the “Manager”) serves as the manager for the Fund. In its handling of the business affairs of each Portfolio, the Manager provides clerical, recordkeeping and bookkeeping services, and keeps the financial and accounting records required for the Fund. The Manager has signed sub-advisory agreements with Invista for portfolio management functions for the Portfolios. The Manager compensates Invista for its sub-advisory services as provided in the Sub-Advisory Agreement between Invista and the Manager.
The Manager is an indirect subsidiary of Principal Financial Services, Inc. and has managed mutual funds since 1969. As of December 31, 1999, the Funds it managed had assets of approximately $6.4 billion. The Manager's address is Principal Financial Group, Des Moines, Iowa 50392-0200.
Invista is an indirect wholly-owned subsidiary of Principal Life Insurance Company and is an affiliate of the Manager. Invista has managed investments for institutional investors, including Principal Life, since 1985. As of December 31, 1999, it managed assets of approximately $35.3 billion. Invista’s address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista provides the Board of Directors of the Fund a recommended investment program for each of the Portfolios. Each program must be consistent with the Portfolio’s investment objective and policies. Within the scope of the approved investment program, the Manager or Invista advises each Portfolio on its investment policies and determines which securities are bought and sold, and in what amounts.
The Manager is paid a fee by each Portfolio for its services, which includes any fee paid to Invista. The fee paid by each Portfolio (as a percentage of the average daily net assets) is determined using the following rate:
Fees Computed On Fees as a Percent of
Portfolio Net Asset Value of Portfolio Average Daily Net Assets
------------------------------------------------------------------------------------------
International Emerging Markets Portfolio First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
International Securities Portfolio Entire Portfolio 0.90%
International SmallCap Portfolio First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
Mortgage-Backed Securities Portfolio Entire Portfolio 0.45%
For the fiscal year ended December 31, 1999 the Management fee
for each Portfolio was:
International Emerging Markets Portfolio 1.15% International SmallCap Portfolio 1.00%
International Securities Portfolio 0.90% Mortgage-Backed Securities Portfolio 0.45%
Emerging markets had a strong run in 1999. EMEA (Eastern Europe, Middle East, Africa) posted the largest gain as technology stocks soared and the region finished up 79.6% for the year. Asia registered a gain of 79.6%, and Latin America “lagged” the rest of the emerging world at 58.9%. The International Emerging Markets Portfolio’s total return of 65.14% barely under-performed the MSCI EMF Index at 66.41%, with similar regional returns. For the year the Portfolio’s market selection was slightly negative, but a majority of the lost ground was made up by selecting better stocks. The following paragraphs highlight the most significant events from each emerging markets region.
Despite their big run early in 1999, Asian countries continued to show evidence of solid economic recovery throughout the year. The Portfolio’s managers were cautious on entering the Asian region immediately after the markets tumbled in late 1998 and by choosing to wait for evidence of structural change before reinvesting ground was lost early in the year. Since the initial rebound had been sparked by companies that were more speculative in nature, Portfolio managers were able to capitalize on the turning economy by purchasing stocks of companies with solid balance sheets and intriguing business prospects. This strategy helped power the Portfolio’s relative out-performance in the second half of the year. Although by year-end many Asian current account surpluses had peaked, management still feels there is excess capacity in some of the sectors including manufacturing and property. Thus it is not expected Asia will experience the level of investment activity that was typical before the financial downturn, even though certain countries are still heavily leveraged. The Portfolio’s managers continue to favor companies in the technology sector as well as look for global outsourcing opportunities that will benefit from increased IT spending. Additionally, the Portfolio may now invest locally in India, a country that is seeing explosive growth in the technology sector.
Latin America was the relative laggard in the emerging markets over the past year, due to devaluation concerns in Brazil and a recession in Argentina. Brazil continues to weigh heavily on the region as concerns regarding the fiscal deficit and social security remain. Other factors that continue to weigh on the Latin American economy include the Mexican elections and excess government spending. On a positive note, Latin American companies continue to reduce their cost structure in response to the region’s weak economies. With the prospects of economic recovery and cheap valuations, the region looks attractive from a bottom up perspective. Latin American telecom and Internet-related businesses are favored as the best ways to benefit from the region’s growth.
EMEA (Eastern Europe, Middle East, Africa) faired well as Israeli technology stocks kept pace with the NASDAQ, receiving an additional boost from favorable governmental elections. The Greek stock market experienced a bubble as investors were anticipating Greece would join the EU and the local retail investors continued to provide a strong influx of capital. Toward the end of 1999 this bubble gradually deflated, but the country’s economic outlook is still favorable. The devastating earthquake in Turkey only marginally shook investors and was more than offset by political change. It is anticipated Turkey will enter a cycle of lower interest rates and less inflation that will bode well for equity investors. Managers are also looking to Egypt as the economy is positioned well for growth, remaining cheap on a valuation level. It is felt the best investment opportunities in the EMEA region will come from wireless telecom, technology, and media.
Comparison of Change in Value of $1.0 Million Investment in the International Emerging Markets Portfolio, Lipper Emerging Markets Fund Average and MSCI EMF Index.
-------------------------------------
Average Annual Total Returns
As of December 31, 1999
1 Year 5 Year 10 Year
63.37% 16.26* --
* - Since Inception Date 11/26/97
-------------------------------------
MSCI Lipper Emerging
EMF ID Markets
Year Ended December 31, IEP INDEX Fund Avg.
1,000,000 1,000,000 1,000,000
1997 1,014,000 1,021,800 1,015,300
1998 839,491 740,601 742,895
1999 1,371,476 1,232,434 1,268,642
| Note: | Past performance is not predictive of future performance. |
The return for the International Securities Portfolio in 1999 was 27.89%. This performance outpaced the 26.96% return posted by the EAFE (Europe, Australia and Far East) Index. The largest positive contributions came from the Portfolio’s exposure to emerging markets and the allocation of the European investments. The Portfolio would have outperformed the benchmark by a larger amount if not for the strength of the Japanese market and its currency. Positive equity returns globally were driven by improving economies, low inflation and the strong performance of the so-called ‘New Era’ stocks in the telecommunications, technology and media industries.
Emerging markets performed very strongly in 1999 as economic growth troughed and began to move up early in the year and accelerated as 1999 progressed. This specifically benefited the holdings in South Korea and South Africa where the Portfolio held more cyclical companies. An additional benefit came when one of the Portfolio’s largest holdings, an oil company in Argentina, was taken over early in the year.
Strong stock specific performance in Europe, especially in the UK and the Netherlands, aided relative outperformance. Several of the companies held in the Portfolio were taken over by competitors in 1999. These takeovers resulted in the rapid realization of value for shareholders. The Portfolio’s returns benefited from this activity. 1999 was also characterized by sluggish European markets in the first three quarters of the year because of worries about rising interest rates. These worries impacted media, technology and telecommunications stocks most severely. The Portfolio took advantage of the weakness in stock prices in these industries to increase the weighting in these higher growth areas of the economy. This strategy paid off handsomely in the fourth quarter, as these growth sectors led the market rally. The Portfolio’s overweight positions in media and technology and underweight positions in insurance and utilities were the main drivers of the positive relative performance.
The Portfolio increased its weighting in the Japanese market as the economy began to show signs of improvement and companies in Japan began to announce restructuring plans to raise profitability. The average weighting in Japan in 1999 was still only 8%, significantly below the benchmark. This hurt relative returns because of the strong market performance, but also because the yen was the strongest major currency in the world last year.
The Portfolio continues to be underweight Japan (50% of the benchmark) and overweight Europe. Europe is expected to grow its economy faster than the rest of the world this year and European equities still offer good value. Inflation is expected to remain subdued, but the efforts of central banks in the US and Europe to prevent inflation will mean rising short-term interest rates that may cause market volatility. There is still good value in some media, technology and telecommunications stocks. Select financials and cyclicals also offer good value.
Comparison of Change in Value of $1.0 Million Investment in the International Securities Portfolio, Lipper International Fund Average and MSCI EAFE Index.
--------------------------------------------
Average Annual Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Year
27.89% 17.00% 15.88%**
** Since inception date 5/7/93
--------------------------------------------
ISP* Morgan Stanley Lipper
Total EAFE International
Year Ended December 31 Return Index Index
1,000,000 1,000,000 1,000,000
1993 1,298,152 1,058,800 1,225,000
1994 1,214,388 1,141,175 1,216,303
1995 1,360,336 1,269,100 1,330,757
1996 1,688,511 1,345,881 1,487,520
1997 1,900,456 1,369,838 1,568,441
1998 2,082,034 1,643,805 1,772,652
1999 2,662,622 2,086,975 2,495,894
| Note: | Past performance is not predictive of future performance. |
The international small cap arena saw impressive returns that were unprecedented previous to 1999. The Lipper International SmallCap Fund Average total return was 75.41% for the year. The International SmallCap Portfolio’s return exceeded the Lipper average by 10.5% on a 1-year basis. Earlier in 1999 Japan was a significant outperformer in the small cap world and the Portfolio’s holdings outpaced the index returning, on average, some 60%. The Portfolio went from a zero weighting in Japan to one that more closely matched the benchmark at mid-year, to lightening up during fourth quarter as the Portfolio’s managers felt much of the Japanese market had simply run out of steam. The fourth quarter saw investors taking gains in the Japanese small cap stocks as the economy once again came into question as to what could be delivered and how much restructuring was actually occurring. 1999 was a good year for European start-up companies. Many were technology-oriented that soon turned into mid-caps due to massive price appreciation in a short time span. A fundamental change was seen in the liquidity flows as capital began to pour into the European markets in the fourth quarter. The top performing sectors included media, telecommunications and technology as those companies that had exposure in these areas saw strong price appreciation in the fourth quarter as investors scrambled to gain exposure to these industries.
Portfolio managers continue to look for market leaders in their respective fields with good growth characteristics, a solid business strategy and strong barriers to entry. 1999 was a year of stellar performance for technology companies as the internet and e-commerce began to demonstrate that they will revolutionize the business world. Managers identified some promising companies that are global leaders and should benefit from the explosion of growth in e-commerce. The Portfolio has rotated out of many of the stronger performers and continues to look for new opportunities whose growth opportunities are undervalued relative to their stock price.
The International SmallCap Portfolio continues to benefit from themes such as outsourcing of electronic components, increasing advertising expenditures, market research companies and indirect e-commerce solutions. At the current time, growth companies offer the most attractive investments from a risk/return trade-off compared to the more traditional value stocks. Portfolio mangers continue to look for companies that are at attractive valuations and also offer long-term earnings growth potential.
Comparison of Change in Value of $1.0 Million Investment in the International SmallCap Portfolio, Lipper International SmallCap Fund Average and MSCI EAFE Index.
-------------------------------------
Average Annual Total Returns*
As of December 31, 1999
1 Year 5 Year 10 Year
85.93% 42.93** --
** - Since Inception Date 11/26/97
-------------------------------------
Lipper
MSCI International
EAFE ND SmallCap
Year Ended December 31, ICP* INDEX Fund Avg.
1,000,000 1,000,000 1,000,000
1997 1,015,900 1,008,700 985,500
1998 1,136,995 1,210,440 1,113,812
1999 2,114,015 1,536,775 1,953,738
| Note: | Past performance is not predictive of future performance. |
Important Notes:
Lipper Emerging Markets Fund Average: This average consists of funds which invest at least 65% of their total assets in emerging market equity securities, where “emerging market” is defined by a country’s GNP per capita or other economic measures. The one-year average currently contains 180 funds.
Morgan Stanley Capital International EMF (Emerging Markets Free) Index: This market capitalization weighted index is composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America and the Pacific Basin. The Index excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. These countries include: Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary, India, Indonesia Free, Israel, Jordan, Korea, Malaysia (Free), Mexico (Free), Pakistan, Peru, Philippines (Free), Poland, Russia, South Africa, Sri Lanka, Taiwan (at 50%), Thailand (Free), Turkey and Venezuela.
Lipper International Small Cap Funds Average: This average consists of funds which invest at least 65% of their assets in equity securities of non-United States companies with market capitalizations less than U.S. $1 billion at the time of purchase. The one-year average currently contains 70 funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East) Index: This market capitalization weighted index is composed of countries representative of the market structure of 20 developed market countries in Europe, Australasia and the Far East. The countries include: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and United Kingdom.
Lipper International Fund Average: This average consists of funds which invest in securities primarily traded in markets outside of the United States. The one-year average currently contains 618 funds.
Over the last 15 months the Federal Reserve has lowered interest rates to stabilize the global financial turmoil, only to reverse course and start raising rates as markets stabilized and global growth resumed. Fund managers view these Federal Reserve actions as the equivalent of a doctor prescribing aspirin to treat the economic patient. These are mild treatments, needed to keep inflation low and growth reasonable.
On an absolute basis, the returns for the Mortgage-Backed Securities Portfolio for the year were poor. Fixed income securities had no momentum, especially with the Fed raising interest rates. This was especially true during December as investors poured money into fast moving growth stocks and out of fixed-income securities.
The Portfolio underperformed both the Lipper U.S. Mortgage Fund Average and the Lehman Brothers Mortgage Index, primarily due to its slightly longer duration.
Fund managers continue to believe the Portfolio will do well into the future. Quality, liquidity, lack of credit volatility and the participation of certain federal agencies are cited as the key drivers. Agency participation is a significant factor. The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) are two major issuers of mortgage-backed securities “MBS.” As stock companies, they are driven by stockholders and the price of their stock. In order to grow earnings in the face of declining new issue MBS (typically they earn their income by issuing new MBS), they are arbitraging more of the outstanding MBS. These agencies arbitrage by issuing debt and buying MBS to earn the “spread” for their stockholders. FNMA and FHLMC are expected to buy 60% of net MBS issuance in 2000, strengthening the MBS market.
The Portfolio continues to hold more discount MBS securities than the Lehman MBS index (this leads to a bias of longer duration) as managers believe the homeowner’s propensity to refinance and the mortgage banker’s technology driven inducement to refinance loans puts great risk on securities priced above par. This is especially true in a market when overall volume is declining as higher interest rates impact both new and existing home markets.
The Portfolio is expected to stay close to its duration benchmarks. Currently it is a little long but is expected to be duration neutral soon, and fund managers patiently wait for the opportunity to strategically lengthen maturities.
Comparison of Change in Value of $1.0 Million Investment in the Mortgage-Backed Securities Portfolio, Lipper U.S. Mortgage Fund Average and Lehman Brothers Mortgage Index.
--------------------------------------------
Average Annual Total Returns*
As of December 31, 1999
1 Year 5 Year 10 Year
0.30% 8.15% 6.17%**
** Since Inception Date 5/7/93
--------------------------------------------
Lehman Brothers Lipper U.S.
MBS* Mortgage Mortgage Fund
Year Ended December 31, Value Index Average
1,000,000 1,000,000 1,000,000
1993 1,045,260 1,032,308 1,033,900
1994 1,007,869 1,015,688 990,786
1995 1,201,901 1,186,323 1,151,591
1996 1,252,353 1,249,791 1,196,158
1997 1,380,077 1,368,397 1,298,788
1998 1,486,863 1,463,637 1,377,754
1999 1,491,417 1,490,861 1,386,710
| Note: | Past performance is not predictive of future performance. |
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds investing at least 65% of their assets in mortgages/securities issued or guaranteed as to principal and interest by the U.S. Government and certain federal agencies. The one-year average currently contains 62 mutual funds.
| Note: | Mutual fund data from Lipper Services, Inc. |
Each Portfolio’s shares are bought and sold at the current share price. The share price of each Portfolio is calculated each day the New York Stock Exchange is open. The share price is determined at the close of business of the Exchange (normally at 3:00 p.m. Central Time). When Princor receives your order to buy or sell shares, the share price used to fill the order is the next price calculated after the order is placed.
For all Portfolios the share price is calculated by:
| • | taking the current market value of the total assets of the Portfolio |
| • | subtracting liabilities of the Portfolio |
| • | dividing the remainder by the total number of shares owned |
| • | If current market values are not readily available for a security, its fair value is determined using a policy adopted by the Fund's Board of Directors. |
| • | The Portfolio’s securities may be traded on foreign securities markets which generally complete trading at various times during the day prior to the close of the New York Stock Exchange. The values of foreign securities used in computing share price are determined at the time the foreign market closes. Occasionally, events affecting the value of foreign securities occur when the foreign market is closed and the New York Stock Exchange is open. If the Manager believes the market value is materially affected, the share price will be calculated using the policy adopted by the Fund. |
| • | Foreign securities markets may trade on days when the New York Stock Exchange is closed (such as customary U.S. holidays) and the Portfolio’s share price is not calculated. As a result, the value of a Portfolio’s assets may be significantly affected by such trading on days when you cannot purchase or sell shares of the Portfolio. |
The International Growth-Oriented and Income-Oriented Portfolios pay most of their net dividend income to you every year. The payment schedule is:
Portfolios Record Date Payable Date
-----------------------------------------------------------------------------
International Emerging Markets, three business days before December 24
International Securities and each payable date (or previous
International SmallCap business day)
Mortgage-Backed Securities three business days before last business
each payable date day of each month
Net realized capital gain for each of the Portfolios, if any, are distributed annually, on the 24th of December (or the preceding business day if the 24th is not a business day) to shareholders of record three business days before the payable date. Payments are made to shareholders of record on the third business day prior to the payable date. Capital gains may be taxable at different rates, depending on the length of time that the Portfolio holds it’s assets.
You can authorize income dividend and capital gain distributions to be:
| • | invested in additional shares of the Portfolio you own; or |
| • | paid in cash. |
| NOTE: | 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 Portfolio, whether received in cash or reinvested in additional shares, may be subject to federal (and state) income tax. |
| You should consult your tax advisor as to the federal, state and local tax consequences of Portfolio ownership. |
Each Portfolio requires:
| • | A minimum initial investment of $1,000,000 which may be invested over a three month period. If the minimum investment has not been met within 3 months, we will send you a notice. If following the notice, we do not receive sufficient funds within 30 days to meet the required minimum, then we will redeem the account and send you the proceeds. |
| • | You may combine your investment with those of your spouse, dependent children and/or a trust for the benefit of such persons to meet the requirement; |
| • | Subsequent purchases are not subject to limitations. |
Fill out the Principal Mutual Fund application* completely. You must include:
| • | the name(s) you want to appear on the account; |
| • | the Portfolio(s) you want to invest in; |
| • | the amount of the investment; |
| • | your Social Security number or Taxpayer I.D. number; |
| • | investor information (used to help your Registered Representative confirm that your investment selection is consistent with your goals and circumstances) ; and |
| • | other required information (may include corporate resolutions, trust agreements, etc.). |
* An application is included with this prospectus.
Invest by mail:
| • | Send a check and completed application to: |
| • | Make your check payable to Principal Special Markets Fund, Inc. |
| • | Your purchase will be priced at the next share price calculated after Fund receives your completed paperwork. |
Order by telephone:
| • | Call us at 1-800-521-1502 between 7:00 a.m. and 7:00 p.m. Central Time on any day that the New York Stock Exchange is open. |
| • | To buy shares the same day, you need to call before 3:00 p.m. Central Time. |
| • | 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). |
| • | For new accounts, you also need to send a completed application. |
Wire money from your bank:
| • | Have your Registered Representative call Principal Mutual Funds (1-800-521-1502) for an account number and wiring instructions. |
| • |
For both initial and subsequent purchases, federal funds should be wired to: Norwest Bank Iowa, N.A. Des Moines, Iowa 50309 ABA No.: 073000228 For credit to: Principal Special Markets Fund Account No.: 3000499968 For credit: Principal Special Markets Fund, Portfolios Shareholder Account No. __________________ Shareholder Registration __________________ |
| • | Give the number and instructions to your bank (which may charge a wire fee). |
| • | To buy shares the same day, the wire must be received before 3:00 p.m. Central Time. |
| • | No wires are accepted on days when the New York Stock Exchange is closed or when the Federal Reserve is closed (because the bank that would receive your wire is closed). |
The Fund offers shares of each Portfolio continuously through Princor Financial Services Corporation which is the principal underwriter for the Fund and sells shares as agent for the Fund. Shares are sold to the public at net asset value, subject to the minimum investment requirements. In certain circumstances, Princor Financial Services Corporation will compensate its registered representatives or a selected dealer with whom it has entered into a selling agreement for their efforts in distributing shares of the fund. Compensation is an ongoing fee in an amount up to 0.10% on an annualized basis of the average net asset value of shares held in your account the establishment of which is attributable to the efforts of the registered representative or selected dealer.
After you place a sell order in proper form, shares are sold using the next share price calculated. There is no charge for a sale. Generally, the sale proceeds are sent out on the next business day after the sell order has been placed. At your request, the check will be sent overnight (a $15 overnight fee will be deducted from your account unless other arrangements are made). The 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.
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 Mutual Funds (1-800-521-1502).
You should also call Principal Mutual Funds (1-800-521-1502) for special instructions that may apply to sales from accounts:
| • | when an owner has died; or |
| • | owned by corporations, partnerships, agents or fiduciaries. |
| • | Send a letter (signed by the owner of the account) to Principal Mutual Funds P. O. Box 10423 Des Moines Iowa 50306-9780 |
| • | Specify the Fund and account number. |
| • | Specify the Portfolio(s). |
| • | Specify the number of shares or the dollar amount to be sold. |
| • | A signature guarantee* will be required if the: |
| • | 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 Insurance Company. * 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. |
| • | Address on 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 New York Stock Exchange (generally 3:00 p.m. Central Time). |
| • | If previously authorized, checks can be sent to a shareholder's U.S. bank account. |
| * | The Fund and transfer agent reserve the right to refuse telephone orders to sell shares. The shareholder is liable for a loss resulting from a fraudulent telephone order that the Fund reasonably believes is genuine. The Fund will use reasonable procedures to assure instructions are genuine. If the procedures are not followed, the Fund may be liable for loss due to unauthorized or fraudulent transactions. The procedures include: recording all telephone instructions, requesting personal identification information (name, phone number, social security number, birth date, etc.) and sending written confirmation to the address on the account. |
You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or annual basis to:
| • | sell a fixed number of shares ($100 initial minimum amount), or |
| • | sell enough shares to provide a fixed amount of money ($100 initial minimum amount). |
You can set up a periodic withdrawal plan by:
| • | completing the applicable section of the application; or |
| • | sending us your written instructions (and share certificate, if any, issued for the account). |
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 at 1-800-521-1502.
You will receive quarterly statements. The statements provide the number and value of shares you own, transactions during the quarter, 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 your receive it. Keep your statements as you may need them for tax reporting purposes.
Generally, each time you buy, sell or exchange shares between Portfolios, 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; and |
| • | sales under a periodic withdrawal plan. |
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 Portfolio; |
| • | if a sales proceeds check is payable to other than the account shareholder(s), Principal Life Insurance Company or one of its affiliates; |
| • | to change ownership of an account; |
| • | to add telephone transaction services and/or wire privileges to an existing account; |
| • | to change bank account information designated under an existing telephone withdrawal plan; |
| • | 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; and |
| • | to exchange or transfer among accounts with different ownership. |
The Fund reserves the right to amend or terminate the special plans described in this prospectus. Such plans include periodic withdrawal for certain purchasers. You would be notified of any such action to the extent required by law.
The Fund reserves the right to refuse telephone instructions. You are liable for a loss resulting from a fraudulent telephone instruction that we reasonably believe is genuine. We will 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, requesting personal identification information (name, phone number, social security number, birth date, etc.) and sending written confirmation to the shareholder’s address of record.
You will receive an annual financial statement for the Fund, examined by the Fund’s independent auditors, Ernst & Young LLP. That report is a part of this prospectus. You will also receive a semiannual financial statement which is unaudited. The following financial highlights are derived from financial statements which were audited by Ernst & Young LLP.
Selected data for a share of Capital Stock outstanding throughout each year ended December 31 (except as noted):
1999 1998 1997(a)
-------------------------------------------------- ------------------------
Net Asset Value, Beginning of Period................... $8.21 $10.14 $9.94
Income from Investment Operations:
Net Investment Income............................... .09 .17 .01
Net Realized and Unrealized Gain (Loss) on Investments 5.10 (1.91) .21
Total from Investment Operations 5.19 (1.74) .22
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.09) (.17) (.02)
Excess Distributions from Net Investment Income..... (.08) -- --
Distributions from Capital Gains....................... -- (.02) --
Total Dividends and Distributions (.17) (.19) (.02)
Net Asset Value, End of Period......................... $13.23 $8.21 $10.14
Total Return........................................... 63.37% (17.21)% 1.40%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $129,575 $79,481 $32,488
Ratio of Expenses to Average Net Assets............. 1.15% 1.15% 1.15%(c)
Ratio of Net Investment Income to Average Net Assets .94% 2.11% .91%(c)
Portfolio Turnover Rate............................. 107.5% 36.5% 12.3%(c)
1999 1998 1997 1996 1995
--------------------------------- ------------------------ ---- ----
Net Asset Value, Beginning of Period $14.90 $14.45 $13.67 $11.70 $11.29
Income from Investment Operations:
Net Investment Income............................... .40 .24 .24 .31 .19
Net Realized and Unrealized Gain on Investments..... 3.60 1.12 1.46 2.46 1.11
Total from Investment Operations 4.00 1.36 1.70 2.77 1.30
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.41) (.23) (.24) (.16) (.10)
Excess Distributions from Net Investment Income..... -- -- -- (.07) (.07)
Distributions from Capital Gains.................... (1.66) (.68) (.68) (.57) (.72)
Excess Distributions from Capital Gains............. (.19) -- -- -- --
Total Dividends and Distributions (2.26) (.91) (.92) (.80) (.89)
Net Asset Value, End of Period......................... $16.64 $14.90 $14.45 $13.67 $11.70
Total Return........................................... 27.89% 9.55% 12.55% 24.12% 12.02%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $61,341 $47,912 $37,684 $28,161 $17,251
Ratio of Expenses to Average Net Assets............. .90% .90% .90% .90% .90%
Ratio of Net Investment Income to Average Net Assets 2.74% 1.60% 1.73% 1.90% 1.79%
Portfolio Turnover Rate............................. 71.4% 36.7% 30.8% 25.5% 46.0%
1999 1998 1997(a)
-------------------------------------------------------------
Net Asset Value, Beginning of Period................... $11.06 $9.97 $9.86
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.01) .07 .01
Net Realized and Unrealized Gain on Investments..... 9.25 1.11 .12
Total from Investment Operations 9.24 1.18 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.07) (.02)
Distributions from Capital Gains.................... (1.46) (.02) --
Total Dividends and Distributions (1.46) (.09) (.02)
Net Asset Value, End of Period......................... $18.84 $11.06 $9.97
Total Return........................................... 85.93% 11.92% 1.59%(b)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $154,892 $83,330 $31,968
Ratio of Expenses to Average Net Assets............. 1.00% 1.00% 1.00%(c)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.06)% .78% .91%(c)
Portfolio Turnover Rate............................. 236.3% 88.5% 30.3%(c)
1999 1998 1997 1996 1995
--------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period $10.39 $10.27 $9.93 $10.17 $9.11
Income from Investment Operations:
Net Investment Income............................... .63 .65 .64 .64 .65
Net Realized and Unrealized Gain (Loss) on Investments (.60) .12 .34 (.24) 1.06
Total from Investment Operations .03 .77 .98 .40 1.71
Less Dividends from Net Investment Income.............. (.63) (.65) (.64) (.64) (.65)
Net Asset Value, End of Period......................... $9.79 $10.39 $10.27 $9.93 $10.17
Total Return........................................... .30% 7.74% 10.18% 4.20% 19.26%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $5,045 $14,861 $13,796 $14,968 $14,253
Ratio of Expenses to Average Net Assets............. .45% .45% .45% .45% .45%
Ratio of Net Investment Income to Average Net Assets 6.24% 6.28% 6.37% 6.51% 6.66%
Portfolio Turnover Rate............................. 17.0% 13.8% 15.5% 28.7% 41.8%
| (a) | Period from November 26, 1997, date shares first offered to the public, through December 31, 1997. Net investment income, aggregating $.02 per share for the International Emerging Markets Portfolio and $.01 per share for the International SmallCap Portfolio for the period from the initial purchase of shares on November 17, 1997 through November 25, 1997, was recognized, none of which was distributed to the sole shareholder, Principal Life Insurance Company. Additionally, the portfolios incurred unrealized losses on investments of $.08 per share and $.15 per share respectively, during the interim period. This represents activities of each portfolio prior to the initial offering. |
| (b) | Total return amounts have not been annualized. |
| (c) | Computed on an annualized basis. |
Additional information about the Fund is available in the Statement of Additional Information dated April 3, 2000 and which is part of this prospectus. Information about the Fund’s investments is also available in the Fund’s annual and semi-annual reports to shareholders. The Statement of Additional Information and 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. Telephone 1-800-451-5447.
Information about the Fund can be reviewed and copied at the Securities and Exchange 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 1-800-SEC-0330. Reports and other information about the Fund are available 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 writing the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
The U.S. Government does not insure or guarantee an investment in the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed by, any financial institution, nor are shares of the Fund federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.
Principal Special Markets Fund, Inc. SEC File 811-07572
This Statement of Additional Information provides information about each Portfolio in addition to the information that is contained in the Prospectus, dated April 3, 2000.
This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Prospectus, a copy of which can be obtained free of charge by writing or telephoning:
FV 76 B-9
Investment Policies and Restrictions .................................... 2 Investments ............................................................. 4 Directors and Officers of the Fund....................................... 14 Manager and Sub-Advisor ................................................. 16 Cost of Manager's Services .............................................. 17 Brokerage on Purchases and Sales of Securities .......................... 20 Offering Price .......................................................... 23 Determination of Net Asset Value ........................................ 23 Performance Calculation ................................................. 24 Tax Treatment, Dividends and Distributions .............................. 26 Financial Statements..................................................... 27
The following information supplements the information provided in the Prospectus under the caption "Certain Investment Strategies and Related Risks."
In implementing the investment policies of the Portfolios, the Fund is subject to fundamental and nonfundamental restrictions. Nonfundamental restrictions may be changed by the Board of Directors without shareholder approval. Fundamental restrictions may only be changed by a vote of the lesser of (i) 67% or more of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. The required shareholder approval shall be effective with respect to a Portfolio if a majority of the outstanding voting securities of that Portfolio votes to approve the matter, notwithstanding that the matter has not been approved by a majority of the outstanding voting securities of the Fund or of any other Portfolio affected by the matter.
The investment objective and investment policies and restrictions of each Portfolio discussed in the Prospectus and the Statement of Additional Information, except for those investment restrictions identified below under the caption “Fundamental Restrictions,” are not fundamental and may be changed by the Fund’s Board of Directors without shareholder approval. Shareholders must be given 30 days prior written notice before the investment objectives of the Portfolios may be amended at the discretion of the Board of Directors.
All percentage limitations apply at the time of acquisition of a security, and any subsequent change in any applicable percentage resulting from changes in the values or nature of a Portfolio’s assets will not require elimination of the security from the Portfolio.
Fundamental Restrictions. Each of the following restrictions is fundamental and may not be changed without shareholder approval. Each Portfolio will not (unless specifically excepted):
| (1) | With respect to 75% of its total assets, purchase the securities of any issuer if the purchase would cause more than 5% of the total assets of the Portfolio to be invested in the securities of any one issuer (other than securities issued or guaranteed by the United States Government or its agencies or instrumentalities) or cause more than 10% of the outstanding voting securities of any one issuer to be held by the Portfolio. |
| (2) | Borrow money, except (a) for temporary or emergency purposes in an amount not to exceed 5% of the value of the Portfolio's total assets at the time of the borrowing and (b) for any purpose from banks in an amount not to exceed one-third of the Portfolio's total assets (including the amount borrowed) less all liabilities and indebtedness other than borrowings deemed to be senior securities. |
| (3) | Issue any senior securities as defined in the Investment Company Act of 1940. For purposes of this restriction, purchasing and selling securities, currency and futures contracts and options and borrowing money in accordance with restrictions described herein do not involve the issuance of a senior security. |
| (4) | Act as an underwriter of securities, except to the extent the Portfolio may be deemed to be an underwriter in connection with the sale of securities held in its portfolio. |
| (5) | Concentrate its investments in any particular industry or industries, except that the Portfolio may invest not more than 25% of the value of its total assets in a single industry. For purposes of this restriction, foreign government and supranational issuers are not considered members of any industry. |
| (6) | Invest in real estate, although it may invest in securities that are secured by real estate and securities of issuers that invest or deal in real estate. |
| (7) | Invest in commodities or commodity contracts, but it may purchase and sell currency and financial futures contracts and options on such contracts. |
| (8) | Make loans, except that the Portfolio may (i) purchase and hold debt obligations in accordance with its investment objective and policies, (ii) enter into repurchase agreements, and (iii) lend its portfolio securities but not in excess of 33% of the value of its total assets. The deposit of underlying securities and other assets in escrow and other collateral arrangements in connection with options, currency and futures transactions are not deemed to be the making of loans. |
Nonfundamental Restrictions. Each of the following restrictions is nonfundamental and may be changed by the Board of Directors without shareholder approval. Each Portfolio will not (unless specifically excepted):
| (1) | Invest more than 15% of its total assets in securities not readily marketable and in repurchase agreements maturing in more than seven days. The value of any options purchased in the over-the-counter market are included as part of this 15% limitation. |
| (2) | Sell securities short (except where the Portfolio holds or has the right to obtain at no added cost a long position in the securities sold that equals or exceeds the securities sold short) or purchase any securities on margin, except it may obtain such short-term credits as are necessary for the clearance of transactions. The deposit or payment of margin in connection with options, currency and futures transactions is not considered the purchase of securities on margin. |
| (3) | Invest in companies for the purpose of exercising control or management. |
| (4) | Purchase puts, calls, straddles, spreads or any combination thereof if by reason thereof the value of its aggregate investment in such classes of securities will exceed 5% of its total assets. Options will be used solely for hedging purposes; not for speculation. |
| (5) | Invest more than 5% of its assets in initial margin and premiums on futures contracts and options on such contracts. |
| (6) | Purchase securities of other investment companies if the purchase would cause more than 10% of its total assets to be invested in securities of other investment companies or more than 5% of its total assets to be invested in the securities of any investment company or would cause the Portfolio to own more than 3% of the outstanding voting securities of any investment company. These restrictions do not apply to purchases in connection with a merger, consolidation, or plan of reorganization. [For purposes of these restrictions, privately issued collateralized mortgage obligations will not be treated as investment company securities if issued by "Exemptive Issuers." Exemptive Issuers are defined as unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed securities, (ii) do not issue redeemable securities as defined in section 2(a)(32) of the Investment Company Act of 1940, (iii) operate under general exemptive orders exempting them from "all provisions of the Investment Company Act of 1940," and (iv) are not registered or regulated under the Investment Company Act of 1940 as investment companies.] |
| (7) | Pledge, mortgage or hypothecate its assets, except to secure permitted borrowings. The deposit of underlying securities and other assets in escrow and other collateral arrangements in connection with options, currency and futures transactions are not deemed to be pledges or other encumbrances. |
| (8) | Purchase warrants in excess of 5% of its total assets, of which 2% may be invested in warrants that are not listed on the New York, American or Toronto Stock Exchanges or the Chicago Board Options Exchange. This restriction does not apply to warrants included in units or attached to other securities. |
| (9) | Invest in interests in oil, gas or other mineral exploration or development programs, although the Portfolio may invest in securities of issuers that invest in or sponsor such programs. |
| (10) | Purchase securities of any issuer having less than three years' continuous operation (including operations of any predecessors) if such purchase would cause the value of the Portfolio's investments in all such issuers to exceed 5% of the value of its total assets (this restriction does not apply to the Mortgage-Backed Securities Portfolio). |
| (11) | Purchase or retain in its portfolio securities of any issuer if those officers or directors of the Fund or its Manager owning beneficially more than one-half of 1% (0.5%) of the securities of the issuer together own beneficially more than 5% of such securities. |
| (12) | Invest in arbitrage transactions. |
| (13) | Invest in mineral leases. |
| (14) | Invest in real estate limited partnership interests. |
| (15) | Invest more than 25% of the value of its total assets (i) in the securities issued by a single foreign government; or (ii) in securities issued by supranational issuers. |
The Manager will waive its management fee on Portfolio assets invested in securities of other open-end investment companies and will generally invest only in those open-end investment companies that have investment policies requiring investment in securities comparable to those in which the Portfolio invests.
The following information further supplements the discussion of the investment objectives and policies in the Prospectus under the caption “Certain Investment Strategies and Related Risks.”
In making selections of equity securities, the Sub-Advisor, Invista Capital Management LLC (“Invista”) will use an approach described broadly as fundamental analysis. Fundamental analysis consists of three steps. First is the continuing study of basic economic factors in an effort to conclude what the future general economic climate is likely to be over the next one to two years. Second, given some conviction as to the likely economic climate, Invista attempts to identify the prospects for the major industrial, commercial and financial segments of the economy, by looking at such factors as demand for products, capacity to produce, operating costs, pricing structure, marketing techniques, adequacy of raw materials and components, domestic and foreign competition, and research productivity, to ascertain prospects for each industry for the near and intermediate term. Finally, Invista determines what the earnings prospects are for individual companies within each industry by considering the same types of factors described above. Invista evaluates these earnings prospects in relation to the current price of the securities of each company.
Although each Portfolio may pursue the investment practices described under the captions Restricted Securities, Foreign Securities, Spread Transactions, Options on Securities and Securities Indices, and Futures Contracts and Options on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of Portfolio Securities and When-Issued and Delayed Delivery Securities, none of the Portfolios currently intends to commit during the present fiscal year more than 5% of its net assets to any of the practices, with the exception that the Mortgage-Backed Securities Portfolio may commit more than 5% of its net assets in When-Issued and Delayed Delivery Securities. The International Emerging Markets Portfolio, International Securities Portfolio and International SmallCap Portfolio will each invest more than 5% of its net assets in foreign securities. Each Portfolio may commit more than 5% of its assets to Currency Contracts.
Each Portfolio is subject to an investment restriction that limits its investments in illiquid securities to 15% of its net asset value. In computing the Portfolio’s net asset value per share, illiquid securities are valued at their fair value as determined in good faith by or under the direction of the Board of Directors.
Each Portfolio may acquire securities that are subject to legal or contractual restrictions upon resale. Securities subject to such restrictions (“restricted securities”) are frequently treated as illiquid for purposes of the 15% restriction. Such securities may be sold only in a public offering with respect to which a registration statement is in effect under the Securities Act of 1933 (“1933 Act”) or in a transaction which is exempt from the registration requirements of that act. One such exemption is provided by Rule 144A under the 1933 Act, pursuant to which certain restricted securities may be sold at a readily ascertainable price. The Board of Directors has adopted procedures to determine the liquidity of restricted securities qualifying for Rule 144A treatment, and any such securities so determined to be liquid will be excluded when applying the Portfolio’s limitation on illiquid securities. To the extent Rule 144A securities held by a Portfolio should become illiquid because of a lack of interest on the part of qualified institutional investors, the overall liquidity of the Portfolio could be adversely affected.
When registration of a restricted security is required, a Portfolio may be obligated to pay all or a part of the registration expenses and a considerable period may elapse between the time of the decision to sell and the time the Portfolio may be permitted to sell the security under an effective registration statement. If during such a period adverse market conditions were to develop, the Portfolio might obtain a less favorable price than prevailed when it decided to sell.
Investment in foreign securities presents certain risks, including those resulting from fluctuations in currency exchange rates, revaluation of currencies, the imposition of foreign taxes, the withholding of taxes on dividends at the source, future political and economic developments including war, expropriations, nationalization, the possible imposition of currency exchange controls and other foreign governmental laws or restrictions, reduced availability of public information concerning issuers, and the fact that foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards or to other regulatory practices and requirements comparable to those applicable to domestic issuers. Moreover, securities of many foreign issuers may be less liquid and their prices more volatile than those of comparable domestic issuers. In addition, transactions in foreign securities may be subject to higher costs, and the time for settlement of transactions in foreign securities may be longer than the settlement period for domestic issuers. A Portfolio’s investment in foreign securities may also result in higher custodial costs and the costs associated with currency conversions.
Securities of many foreign issuers may be less liquid and their prices more volatile than those of comparable domestic issuers. In particular, securities markets in emerging market countries are known to experience long delays between the trade and settlement dates of securities purchased and sold, potentially resulting in a lack of liquidity and greater volatility in the price of securities on those markets. In addition, investments in smaller companies may present greater opportunities for capital appreciation, but may also involve greater risks than large, mature issuers. Such companies may have limited product lines and financial resources. Their securities may trade in more limited volume than larger companies and may therefore experience significantly more price volatility and less liquidity than securities of larger companies. As a result of these factors, the Boards of Directors of the Funds have adopted Daily Pricing and Valuation Procedures for the Funds which set forth the steps to be followed by the Manager and Sub-Advisor to establish a reliable market or fair value if a reliable market value is not available through normal market quotations. Oversight of this process is provided by the Executive Committee of the Boards of Directors.
Except as specifically indicated otherwise, each Portfolio may engage in the practices described under this heading to attempt to hedge market value, interest rate and currency risks and, in certain cases, to enhance its income.
| A Portfolio may purchase from securities dealers covered spread options. Such covered spread options are not presently exchange listed or traded. The purchase of a spread option gives the Portfolio the right to put, or sell, a security that it owns at a fixed dollar spread or fixed yield spread in relationship to another security that the Portfolio does not own, but which is used as a benchmark. The risk to the Portfolio in purchasing covered spread options is the cost of the premium paid for the spread option and any transaction costs. In addition, there is no assurance that closing transactions will be available. The purchase of spread options can be used to protect the Portfolio against adverse changes in prevailing credit quality spreads, i.e., the yield spread between high quality and lower quality securities. The security covering the spread option will be maintained in a segregated account by the Portfolio’s custodian. A security covered by a spread option is not considered to be “pledged” as that term is used in the Portfolio’s policy limiting the pledging or mortgaging of assets. |
| Each Portfolio may write (sell) and purchase call and put options on securities in which it may invest and on securities indices based on securities in which the Portfolio may invest. The Portfolio may write call and put options to generate additional revenue, and may write and purchase call and put options in seeking to hedge against a decline in the value of securities owned or an increase in the price of securities which the Portfolio plans to purchase. |
| Writing Covered Call and Put Options. When a Portfolio writes a call option, it gives the purchaser of the option, in return for the premium it receives, the right to buy from the Portfolio the underlying security at a specified price at any time before the option expires. When a Portfolio writes a put option, it gives the purchaser of the option, in return for the premium it receives, the right to sell to the Portfolio the underlying security at a specified price at any time before the option expires. |
| The premium received by a Portfolio, when it writes a put or call option, reflects, among other factors, the current market price of the underlying security, the relationship of the exercise price to the market price, the time period until the expiration of the option and interest rates. The premium will generate additional income for the Portfolio if the option expires unexercised or is closed out at a profit. By writing a call, a Portfolio limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option, but it retains the risk of loss if the price of the security should decline. By writing a put, a Portfolio assumes the risk that it may have to purchase the underlying security at a price that may be higher than its market value at time of exercise. |
| The Portfolios write only covered options and will comply with applicable regulatory and exchange cover requirements. A Portfolio will own the underlying security covered by any outstanding call option that it has written or will be able to acquire such security through the exercise of conversion privileges on convertible securities or otherwise at no additional cost. With respect to an outstanding put option that it has written, each Portfolio will deposit and maintain with its custodian cash, U.S. Government securities or other liquid securities with a value at least equal to the exercise price of the option. |
| Once a Portfolio has written an option, it may terminate its obligation, before the option is exercised, by effecting a closing transaction, which is accomplished by the Portfolio’s purchasing an option of the same series as the option previously written. The Portfolio will have a gain or loss depending on whether the premium received when the option was written exceeds the closing purchase price plus related transaction costs. |
| Purchasing Call and Put Options. When a Portfolio purchases a call option, it receives, in return for the premium it pays, the right to buy from the writer of the option the underlying security at a specified price at any time before the option expires. The Portfolio may purchase call options in anticipation of an increase in the market value of securities that it intends ultimately to buy. During the life of the call option, the Portfolio would be able to buy the underlying security at the exercise price regardless of any increase in the market price of the underlying security. In order for a call option to result in a gain, the market price of the underlying security must rise to a level that exceeds the sum of the exercise price, the premium paid and transaction costs. If the option expires unexercised, the Portfolio will lose the premium paid and any transaction costs incurred. |
| When a Portfolio purchases a put option, it receives, in return for the premium it pays, the right to sell to the writer of the option the underlying security at a specified price at any time before the option expires. The Portfolio may purchase put options in anticipation of a decline in the market value of the underlying security. During the life of the put option, the Portfolio would be able to sell the underlying security at the exercise price regardless of any decline in the market price of the underlying security. In order for a put option to result in a gain, the market price of the underlying security must decline, during the option period, below the exercise price sufficiently to cover the premium and transaction costs. |
| Once a Portfolio has purchased an option, it may close out its position by selling an option of the same series as the option previously purchased. The Portfolio will have a gain or loss depending on whether the closing sale price exceeds the initial purchase price plus related transaction costs. |
| Options on Securities Indices. Each Portfolio may purchase and sell put and call options on any securities index based on securities in which the Portfolio may invest. Securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does not involve the actual purchase or sale of securities. A Portfolio would engage in transactions in put and call options on securities indices for the same purposes, as it would engage in transactions in options on securities. When a Portfolio writes call options on securities indices, it will hold in its portfolio underlying securities which, in the judgment of Invista, correlate closely with the securities index and which have a value at least equal to the aggregate amount of the securities index options. |
| Risks Associated with Options Transactions. An options position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although a Portfolio will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time. For some options, no secondary market on an exchange or elsewhere may exist. If a Portfolio is unable to effect closing sale transactions in options it has purchased, the Portfolio would have to exercise its options in order to realize any profit and may incur transaction costs upon the purchase or sale of underlying securities pursuant thereto. If a Portfolio is unable to effect a closing purchase transaction for a covered option that it has written, it will not be able to sell the underlying securities, or dispose of the assets held in a segregated account, until the option expires or is exercised. A Portfolio’s ability to terminate option positions established in the over-the-counter market may be more limited than for exchange-traded options and may also involve the risk that broker-dealers participating in such transactions might fail to meet their obligations. |
| A Portfolio’s hedging strategy that employs options on a securities index may be unsuccessful due to imperfect correlation between the securities in the index and the securities owned by the Portfolio. In addition, if Invista is incorrect in predicting the direction of stock prices, interest rates and other economic factors, hedging through the use of options could result in a lower return than if the Portfolio had not hedged its investments. |
| Each Portfolio may purchase and sell financial futures contracts and options on those contracts. Financial futures contracts are commodities contracts based on financial instruments such as U.S. Treasury bonds or bills or on securities indices such as the S&P 500 Index. Futures contracts, options on futures contracts and the commodity exchanges on which they are traded are regulated by the Commodity Futures Trading Commission (“CFTC”). Through the purchase and sale of futures contracts and related options, a Portfolio may seek to hedge against a decline in securities owned by the Portfolio or an increase in the price of securities, which the Portfolio plans to purchase. |
| Futures Contracts. When a Portfolio sells a futures contract based on a financial instrument, the Portfolio becomes obligated to deliver that kind of instrument at a specified future time for a specified price. When a Portfolio purchases the futures contract, it becomes obligated to take delivery of the instrument at a specified time and to pay the specified price. In most instances, these contracts are closed out by entering into an offsetting transaction before the settlement date, thereby canceling the obligation to make or take delivery of specific securities. The Portfolio realizes a gain or loss depending on whether the price of an offsetting purchase plus transaction costs are less or more than the price of the initial sale or on whether the price of an offsetting sale is more or less than the price of the initial purchase plus transaction costs. Although a Portfolio will usually liquidate futures contracts on financial instruments in this manner, it may instead make or take delivery of the underlying securities whenever it appears economically advantageous to do so. |
| A futures contract based on a securities index provides for the purchase or sale of a group of securities at a specified future time for a specified price. These contracts do not require actual delivery of securities, but result in a cash settlement based upon the difference in value of the index between the time the contract was entered into and the time it is liquidated, which may be at its expiration or earlier if it is closed out by entering into an offsetting transaction. |
| When a futures contract is purchased or sold a brokerage commission is paid, but unlike the purchase or sale of a security or option, no price or premium is paid or received. Instead, an amount of cash or U.S. Government securities, which varies, but is generally about 5% of the contract amount, is deposited by the Portfolio with its custodian for the benefit of the futures commission merchant through which the Portfolio engages in the transaction. This amount is known as “initial margin.” It does not involve the borrowing of funds by the Portfolio to finance the transaction, but instead represents a “good faith” deposit assuring the performance of both the purchaser and the seller under the futures contract. It is returned to the Portfolio upon termination of the futures contract, if all the Portfolio’s contractual obligations have been satisfied. |
| Subsequent payments to and from the broker, known as “variation margin,” are required to be made on a daily basis as the price of the futures contract fluctuates, making the long or short positions in the futures contract more or less valuable, a process known as “marking to market.” If the position is closed out by taking an opposite position prior to the settlement date of the futures contract, a final determination of variation margin is made, additional cash is required to be paid to or released by the broker, and the Portfolio realizes a loss or gain. |
| In using futures contracts, a Portfolio will seek to establish more certainly than would otherwise be possible the effective price of or rate of return on portfolio securities or securities that the Portfolio proposes to acquire. A Portfolio, for example, may sell futures contracts in anticipation of a rise in interest rates which would cause a decline in the value of its debt investments. When this kind of hedging is successful, the futures contracts should increase in value when the Portfolio’s debt securities decline in value and thereby keep the Portfolio’s net asset value from declining as much as it otherwise would. A Portfolio may also sell futures contracts on securities indices in anticipation of or during a stock market decline in an endeavor to offset a decrease in the market value of its equity investments. When a Portfolio is not fully invested and anticipates an increase in the cost of securities it intends to purchase, it may purchase financial futures contracts. When increases in the prices of equities are expected, a Portfolio may purchase futures contracts on securities indices in order to gain rapid market exposure that may partially or entirely offset increases in the cost of the equity securities it intends to purchase. |
| Options on Futures. A Portfolio may also purchase and write call and put options on futures contracts. A call option on a futures contract gives the purchaser the right, in return for the premium paid, to purchase a futures contract (assume a long position) at a specified exercise price at any time before the option expires. A put option gives the purchaser the right, in return for the premium paid, to sell a futures contract (assume a short position), for a specified exercise price, at any time before the option expires. |
| Upon the exercise of a call, the writer of the option is obligated to sell the futures contract (to deliver a long position to the option holder) at the option exercise price, which will presumably be lower than the current market price of the contract in the futures market. Upon exercise of a put, the writer of the option is obligated to purchase the futures contract (deliver a short position to the option holder) at the option exercise price, which will presumably be higher than the current market price of the contract in the futures market. However, as with the trading of futures, most options are closed out prior to their expiration by the purchase or sale of an offsetting option at a market price that will reflect an increase or a decrease from the premium originally paid. |
| Options on futures can be used to hedge substantially the same risks as might be addressed by the direct purchase or sale of the underlying futures contracts. For example, if a Portfolio anticipated a rise in interest rates and a decline in the market value of the debt securities in its portfolio, it might purchase put options or write call options on futures contracts instead of selling futures contracts. |
| If a Portfolio purchases an option on a futures contract, it may obtain benefits similar to those that would result if it held the futures position itself. But in contrast to a futures transaction, the purchase of an option involves the payment of a premium in addition to transaction costs. In the event of an adverse market movement, however, the Portfolio will not be subject to a risk of loss on the option transaction beyond the price of the premium it paid plus its transaction costs. |
| When a Portfolio writes an option on a futures contract, the premium paid by the purchaser is deposited with the Portfolio’s custodian, and the Portfolio must maintain with its custodian all or a portion of the initial margin requirement on the underlying futures contract. The Portfolio assumes a risk of adverse movement in the price of the underlying futures contract comparable to that involved in holding a futures position. Subsequent payments to and from the broker, similar to variation margin payments, are made as the premium and the initial margin requirement are marked to market daily. The premium may partially offset an unfavorable change in the value of portfolio securities, if the option is not exercised, or it may reduce the amount of any loss incurred by the Portfolio if the option is exercised. |
| Risks Associated with Futures Transactions. There are a number of risks associated with transactions in futures contracts and related options. A Portfolio’s successful use of futures contracts is subject to Invista’s ability to predict correctly the factors affecting the market values of the Portfolio’s portfolio securities. For example, if a Portfolio was hedged against the possibility of an increase in interest rates which would adversely affect debt securities held by the Portfolio and the prices of those debt securities instead increased, the Portfolio would lose part or all of the benefit of the increased value of its securities which it hedged because it would have offsetting losses in its futures positions. Other risks include imperfect correlation between price movements in the financial instrument or securities index underlying the futures contract, on the one hand, and the price movements of either the futures contract itself or the securities held by the Portfolio, on the other hand. If the prices do not move in the same direction or to the same extent, the transaction may result in trading losses. |
| Prior to exercise or expiration, a position in futures may be terminated only by entering into a closing purchase or sale transaction. This requires a secondary market on the relevant contract market. The Portfolio will enter into a futures contract or related option only if there appears to be a liquid secondary market. There can be no assurance, however, that such a liquid secondary market will exist for any particular futures contract or related option at any specific time. Thus, it may not be possible to close out a futures position once it has been established. Under such circumstances, the Portfolio would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such situations, if the Portfolio has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. In addition, the Portfolio may be required to perform under the terms of the futures contracts it holds. The inability to close out futures positions also could have an adverse impact on a Portfolio’s ability effectively to hedge its portfolio. |
| Most United States futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. This daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses. |
| Limitations on the Use of Futures and Options on Futures. The Fund intends that each Portfolio will come within an exclusion from the definition of “commodity pool operator” provided by CFTC regulations by complying with certain limitations on the use of futures and related options prescribed by those regulations. |
| No Portfolio will purchase or sell futures contracts or options thereon if immediately thereafter the aggregate initial margin and premiums exceed 5% of the fair market value of the Portfolio’s assets, after taking into account unrealized profits and unrealized losses on any such contracts it has entered into (except that in the case of an option that is in-the-money at the time of purchase, the in-the-money amount generally may be excluded in computing the 5%). |
| The Portfolios will enter into futures contracts and related options transactions only for bona fide s permitted by the CFTC and for other appropriate risk management purposes, if any, which the CFTC may deem appropriate for mutual funds excluded from the regulations governing commodity pool operators. A Portfolio is not permitted to engage in speculative futures trading. Invista will determine that the price fluctuations in the futures contracts and options on futures used for hedging or risk management purposes for a Portfolio are substantially related to price fluctuations in securities held by the Portfolio or which it expects to purchase. In pursuing traditional hedging activities, each Portfolio will sell futures contracts or acquire puts to protect against a decline in the price of securities that the Portfolio owns, and each Portfolio will purchase futures contracts or calls on futures contracts to protect the Portfolio against an increase in the price of securities the Portfolio intends to purchase before it is in a position to do so. |
| When a Portfolio purchases a futures contract, or purchases a call option on a futures contract, it will comply with applicable cover requirements, such as maintaining an amount of cash, cash equivalents or short-term high grade fixed income securities in a segregated account with the Portfolio’s custodian, so that the amount so segregated plus the amount of initial margin held for the account of its broker equals the market value of the futures contract. |
| A Portfolio will not maintain open short positions in futures contracts, call options written on futures contracts, and call options written on securities indices if, in the aggregate, the value of the open positions (marked to market) exceeds the current market value of that portion of its securities portfolio being hedged by those futures and options plus or minus the unrealized gain or loss on those open positions, adjusted for the historical volatility relationship between that portion of the portfolio and the contracts (i.e., the Beta volatility factor). To the extent a Portfolio has written call options on specific securities in that portion of its portfolio, the value of those securities will be deducted from the current market value of that portion of the securities portfolio. If this limitation should be exceeded at any time, the Portfolio will take prompt action to close out the appropriate number of open short positions to bring its open futures and options positions within this limitation. |
| Currency Contracts |
| The International Emerging Markets Portfolio, International Securities Portfolio and International SmallCap Portfolio each may engage in currency transactions with securities dealers, financial institutions or other parties that are deemed credit worthy by Invista to hedge the value of portfolio securities denominated in particular currencies against fluctuations in relative value. Currency transactions include forward currency contracts, exchange-listed currency futures contracts and options thereon and exchange-listed and over-the-counter options on currencies. A forward currency contract involves a privately negotiated obligation to purchase or sell (with delivery generally required) a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon the parties, at a price set at the time of the contract. |
| A Portfolio will engage in currency transactions only for hedging and other non-speculative purposes, including transaction hedging and position hedging. Transaction hedging is entering into a currency transaction with respect to specific assets or liabilities of a Portfolio, which will generally arise in connection with the purchase or sale of the Portfolio’s portfolio securities or the receipt of income from them. Position hedging is entering into a currency transaction with respect to portfolio securities positions denominated or generally quoted in that currency. A Portfolio will not enter into a transaction to hedge currency exposure to an extent greater, after netting all transactions intended wholly or partially to offset other transactions, than the aggregate market value (at the time of entering into the transaction) of the securities held by the Portfolio that are denominated or generally quoted in or currently convertible into the currency, other than with respect to proxy hedging as described below. |
| A Portfolio may cross-hedge currencies by entering into transactions to purchase or sell one or more currencies that are expected to increase or decline in value relative to other currencies to which the Portfolio has or in which the Portfolio expects to have exposure. To reduce the effect of currency fluctuations on the value of existing or anticipated holdings of its securities, a Portfolio may also engage in proxy hedging. Proxy hedging is often used when the currency to which a Portfolio’s holding is exposed is difficult to hedge generally or difficult to hedge against the dollar. Proxy hedging entails entering into a forward contract to sell a currency, the changes in the value of which are generally considered to be linked to a currency or currencies in which some or all of a Portfolio’s securities are or are expected to be denominated, and to buy dollars. The amount of the contract would not exceed the market value of the Portfolio’s securities denominated in linked currencies. |
| Except when a Portfolio enters into a forward contract in connection with the purchase or sale of a security denominated in a foreign currency or for other non-speculative purposes, which requires no segregation, a currency contract that obligates the Portfolio to buy or sell a foreign currency will generally require the Portfolio to place any asset, including equity securities and non-investment grade debt, in a segregated account, so long as the asset is liquid and marked to the market daily. The amount so segregated shall be equal to the amount of the Portfolio’s obligation. |
| Currency hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to a Portfolio if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. Further, the risk exists that the perceived linkage between various currencies may not be present or may not be present during the particular time that a Portfolio is engaging in proxy hedging. Currency transactions are also subject to risks different from those of other portfolio transactions. Because currency control is of great importance to the issuing governments and influences economic planning and policy, purchases and sale of currency and related instruments can be adversely affected by government exchange controls, limitations or restrictions on repatriation of currency, and manipulations or exchange restrictions imposed by governments. These forms of governmental actions can result in losses to a Portfolio if it is unable to deliver or receive currency or monies in settlement of obligations and could also cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs. Currency exchange rates may also fluctuate based on factors extrinsic to a country’s economy. Buyers and sellers of currency futures contracts are subject to the same risks that apply to the use of futures contracts generally. Further, settlement of a currency futures contract for the purchase of most currencies must occur at a bank based in the issuing nation. Trading options on currency futures contracts is relative new, and the ability to establish and close out positions on these options is subject to the maintenance of a liquid market that may not always be available. |
Each Portfolio may invest in repurchase agreements. No Portfolio will enter into repurchase agreements that do not mature within seven days if any such investment, together with other illiquid securities held by the Portfolio, would amount to more than 15% of its assets. Repurchase agreements will typically involve the acquisition by the Portfolio of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. A repurchase agreement provides that the Portfolio will sell back to the seller and that the seller will repurchase the underlying securities at a specified price and at a fixed time in the future. Repurchase agreements may be viewed as loans by a Portfolio collateralized by the underlying securities (“collateral”). This arrangement results in a fixed rate of return that is not subject to market fluctuation during the Portfolio’s holding period. Although repurchase agreements involve certain risks not associated with direct investments in debt securities, each Portfolio follows procedures established by the Board of Directors that are designed to minimize such risks. These procedures include entering into repurchase agreements only with large, well-capitalized and well-established financial institutions, which have been approved by the Board of Directors and which Invista believes present minimum credit risks. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including accrued interest. In the event of a default or bankruptcy by a selling financial institution, the affected Portfolio bears a risk of loss. In seeking to liquidate the collateral, a Portfolio may be delayed in or prevented from exercising its rights and may incur certain costs. Further to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Portfolio could suffer a loss.
All Portfolios may lend their portfolio securities. None of the Portfolios will lend its portfolio securities if as a result the aggregate of such loans made by the Portfolio would exceed the limits established by the Investment Company Act. Portfolio securities may be lent to unaffiliated broker-dealers and other unaffiliated qualified financial institutions provided that such loans are callable at any time on not more than five business days’ notice and that cash or government securities equal to at least 100% of the market value of the securities loaned, determined daily, is deposited by the borrower with the Portfolio and is maintained each business day. While such securities are on loan, the borrower pays the Portfolio any income accruing thereon. The Portfolio may invest any cash collateral, thereby earning additional income, and may receive an agreed-upon fee from the borrower. Borrowed securities must be returned when the loan terminates. Any gain or loss in the market value of the borrowed securities which occurs during the term of the loan belongs to the Portfolio and its shareholders. A Portfolio pays reasonable administrative, custodial and other fees in connection with such loans and may pay a negotiated portion of the interest earned on the cash or government securities pledged as collateral to the borrower or placing broker. A Portfolio does not normally retain voting rights attendant to securities it has lent, but it may call a loan of securities in anticipation of an important vote.
Each of the Portfolios may from time to time purchase securities on a when-issued basis and may purchase or sell securities on a delayed delivery basis. The price of such a transaction is fixed at the time of the commitment, but delivery and payment take place on a later settlement date, which may be a month or more after the date of the commitment. No interest accrues to the purchaser during this period, and the securities are subject to market fluctuation, which involves the risk for the purchaser that yields available in the market at the time of delivery may be higher than those obtained in the transaction. Each Portfolio will only purchase securities on a when-issued or delayed delivery basis for the purpose of acquiring the securities and not for the purpose of investment leverage or to speculate on interest rate changes, but a Portfolio may sell the securities before the settlement date, if such action is deemed advisable. At the time a Portfolio makes the commitment to purchase securities on a when-issued or delayed delivery basis, the Fund will record the transaction and thereafter reflect the value, each day, of the securities in determining the net asset value of the Portfolio. Each Portfolio will also establish a segregated account with its custodian bank in which it will maintain cash or cash equivalents, United States Government securities and other high grade debt obligations equal in value to the Portfolio’s commitments for such when-issued or delayed delivery securities. The availability of liquid assets for this purpose and the effect of asset segregation on a Portfolio’s ability to meet its current obligations, to honor requests for redemption and to have its investment portfolio managed properly will limit the extent to which the Portfolio may engage in forward commitment agreements. Except as may be imposed by these factors, there is no limit on the percent of a Portfolio’s total assets that may be committed to transactions in such agreements.
Portfolio turnover will normally differ for each Portfolio, may vary from year to year, as well as within a year, and may be affected by portfolio sales necessary to meet cash requirements for redemption of Portfolio shares. The portfolio turnover rate for a Portfolio is calculated by dividing the lesser of purchases or sales of its portfolio securities during the fiscal year by the monthly average of the value of its portfolio securities (excluding from the computation all securities, including options, with maturities at the time of acquisition of one year or less). A high rate of portfolio turnover generally involves correspondingly greater brokerage commission expenses, which must be borne directly by the Portfolio.
The Mortgage-Backed Securities Portfolio intends to be active in the forward commitment market when the return from holding forward positions appears to be greater than the return from holding the actual securities. The Portfolio will enter into forward commitment contracts to purchase securities for the purpose of acquiring those securities and not for the purpose of investment leverage or to speculate on interest rate changes, but as delivery dates approach, a determination will be made whether to take delivery of a specific forward position, or sell that position and purchase another forward position. Because of this strategy, it is anticipated that its annual portfolio turnover rate should generally exceed 100% and may be as much as 600% or more, although this rate should not be construed as a limiting factor. The effect of a high turnover rate would be to incur more transaction expenses than would be incurred at a lower turnover rate, and there is no assurance that the additional transactions that cause the higher turnover rate would result in gains for the Portfolio or in sufficient gains to offset the increased transaction expenses. The annualized portfolio turnover rates for each portfolio for its most recent and immediately preceding fiscal year were as follows (annualized when reporting period is less than one year): International Emerging Markets 107.5% and 36.5%; International Securities 71.4% and 36.7%; International SmallCap Portfolio 236.3% and 88.5%; Mortgage-Backed Securities 17.0% and 13.8%.
The following listing discloses the principal occupations and other principal business affiliations of the Fund’s Officers and Directors during the past five years. All Directors and Officers listed here also hold similar positions with each of the other mutual funds sponsored by Principal Life Insurance Company. All mailing addresses are The Principal Financial Group, Des Moines, Iowa 50392, unless otherwise indicated.
| @ | James D. Davis, 66, Director. 4940 Center Court, Bettendorf, Iowa. Attorney. Vice President, Deere and Company, retired. |
| *& | Ralph C. Eucher, 47, Director and President. Vice President, Principal Life Insurance Company since 1999. Director and President, Princor Financial Services Corporation and Principal Management Corporation since 1999. Prior thereto, Second Vice President, Principal Life Insurance Company. |
| @ | Pamela A. Ferguson, 56, Director, 4112 River Oaks Drive, Des Moines, Iowa. Professor of Mathematics, Grinnell College since 1998. Prior thereto, President, Grinnell College. |
| *& | J. Barry Griswell, 51, Director and Chairman of the Board. President and CEO, Principal Life Insurance Company since 2000; President, 1998-2000; Executive Vice President, 1996-1998. Senior Vice President, 1991-1996. Director and Chairman of the Board, Principal Management Corporation and Princor Financial Services Corporation. |
| @& | Barbara A. Lukavsky, 59, Director. 13731 Bay Hill Court, Clive, Iowa. President and CEO, Barbican Enterprises, Inc. since 1997. President and CEO, Lu San ELITE USA, L.C., 1985-1998. |
| * | Craig L. Bassett, 48, Treasurer. Second Vice President and Treasurer, Principal Life Insurance Company since 1998. Director - Treasury, 1996-1998. Prior thereto, Associate Treasurer. |
| * | Michael J. Beer, 39, Executive Vice President. Executive Vice President, Princor Financial Services Corporation and Principal Management Corporation since 1999. Senior Vice President and Chief Operating Officer, 1997-1999. Vice President and Chief Operating Officer, 1995-1997. Prior thereto, Financial Officer. |
| * | Arthur S. Filean, 61, Senior Vice President and Secretary. Senior Vice President, Princor Financial Services Corporation and Principal Management Corporation since 2000. Vice President, Princor Financial Services Corporation, 1990-2000. Vice President, Principal Management Corporation, 1996-2000. |
| * | Ernest H. Gillum, 44, Vice President and Assistant Secretary. Vice President - Product Development, Princor Financial Services Corporation and Principal Management Corporation since 2000. Vice President - Compliance and Product Development, Princor Financial Services Corporation and Principal Management Corporation, 1998-2000. Assistant Vice President, Registered Products, 1995-1998. Prior thereto, Product Development and Compliance Officer. |
| Jane E. Karli, 43, Assistant Treasurer. Assistant Treasurer, Principal Life Insurance Company since 1998. Senior Accounting and Custody Administrator, 1994-1998; Prior thereto, Senior Investment Cost Accountant. |
| * | Michael D. Roughton, 48, Counsel. Vice President and Senior Securities Counsel, Principal Life Insurance Company since 1999. Counsel, 1994-1999. Counsel, Invista Capital Management, LLC, Princor Financial Services Corporation and Principal Management Corporation. |
| * | Layne Rasmussen, 41, Controller. Controller, Principal Mangement Corp. and Princor Financial Services Corp. since 1995. Prior thereto, Manager - Mutual Fund Accounting. |
| * | Jean B. Schustek, 48, Assistant Vice President and Assistant Secretary. Assistant Vice President - Registered Products, Princor Financial Services Corporation since 2000. Prior thereto, Compliance Officer - Registered Products. |
| * | Traci Weldon, 34, Assistant Counsel. Counsel, Principal Life Insurance Company since 1999. Assistant Counsel 1998-1999. Assistant State Attorney General, Iowa Attorney General's Office, 1994-1998. Prior thereto, Investment Banker, Kirkpatrick Pettis. |
| @ | Member of Audit and Nominating Committee. |
| * | Affiliated with the Manager of the Fund or its parent and considered an “Interested Persons,” as defined in the Investment Company Act of 1940, as amended. |
| & | Member of the Executive Committee. The Executive Committee is elected by the Board of Directors and may exercise all the powers of the Board of Directors, with certain exceptions, when the Board is not in session and shall report its actions to the Board. |
COMPENSATION TABLE*
fiscal year ended December 31, 1999 Compensation
Director Compensation from the Fund from Fund Complex
-------- ----------------------------------- -----------------
James D. Davis $2,400 $55,050
Pamela A. Ferguson $2,400 $50,850
Barbara A. Lukavsky $2,400 $50,250
* The Fund does not provide retirement benefits for any of the directors.
As of March 6, 2000, Principal Life Insurance Company, a life insurance company organized in 1879 under the laws of Iowa, its subsidiaries and affiliates owned of record and beneficially the following number of shares or percentage of the outstanding shares of each Portfolio:
% of Outstanding
Portfolio Shares
--------- ------
International Emerging Markets Portfolio 83.5%
International Securities Portfolio 43.1%
International SmallCap Portfolio 98.6%
Mortgage-Backed Securities Portfolio 100.0%
As of March 6, 2000, the Officers and Directors of the Fund as a group owned less than 1% of the outstanding shares of any Portfolio of the Fund.
As of March 6, 2000, the following shareholders of the Fund owned 5% or more of the outstanding shares of any Portfolio of the Fund:
Percentage
Name Address of Ownership
---- ------- ------------
International Emerging Markets Portfolio
ConAgra Master Pension Trust 1 Enterprise Drive 15.4%
Quincy, MA 02171-2126
International Securities Portfolio
Centurion Life Insurance Company 206 8th Street 16.6%
Des Moines, IA 50309-3805
Norwest Financial Pension Trust 206 8th Street 7.3%
Des Moines, IA 50309-3805
Miter & Co. P.O. Box 2977 7.3%
Milwaukee, WI 53201-2977
Pigeon & Co. P.O. Box 2479 12.6%
San Antonio, TX 78298-2479
The Manager of each Portfolio of the Fund is Principal Management Corporation, a wholly-owned subsidiary of Princor Financial Services Corporation which is an affiliate of Principal Life Insurance Company, a life insurance company organized in 1879 under the laws of the state of Iowa. The address of the Manager is The Principal Financial Group, Des Moines, Iowa 50392-0200. The Manager was organized on January 10, 1969 and since that time has managed various mutual funds sponsored by Principal Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management, Inc. (“Invista”) under which Invista has agreed to assume the obligations of the Manager to provide investment advisory services for each Portfolio and to reimburse the Manager for the other costs it incurs under the Management Agreement. Invista, an indirectly wholly-owned subsidiary of Principal Life Insurance Company and an affiliate of the Manager, was founded in 1985 and manages investments for institutional investors, including Principal Life. Assets under management at December 31, 1999 were approximately $35.3 billion. Invista’s address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
Each of the persons affiliated with the Fund who is also an affiliated person of the Manager or Invista is named below, together with the capacities in which such person is affiliated with the Fund, Invista and the Manager:
Office Held With Office Held With
Name Each Fund The Manager/Invista
---- ------------------- -------------------
Craig L. Bassett Treasurer Treasurer (Manager)
Michael J. Beer Executive Vice President Executive Vice President and
Chief Operating Officer
(Manager)
Ralph C. Eucher Director and Director and President
President (Manager)
Arthur S. Filean Senior Vice President and Senior Vice President
Secretary (Manager)
Ernest H. Gillum Vice President and Vice President - Product
Assistant Secretary Development (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Layne Rasmussen Controller Controller - Mutual Funds
(Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jean B. Schustek Assistant Vice President and Assistant Vice President -
Assistant Secretary Registered Products
(Manager)
The Manager has entered into a Management Agreement with the Fund that requires the Manager to act as investment adviser and manager of each Portfolio. As compensation for its services and other responsibilities, the Manager receives a fee computed and accrued daily and payable monthly. Under a Sub-Advisory Agreement between Invista and the Manager, Invista performs all investment advisory responsibilities of the Manger under the Management Agreement and receive the full amount of the compensation paid by the Fund to the Manager.
The Management Fees are computed at the following annual rates:
Fees as a
Percent of
Fees Computed On Average Daily
Portfolio Net Asset Value of Portfolio Net Assets
---------------------------------------------------------------------
International Emerging
Markets Portfolio First $250 million 1.15%
Next $250 million 1.05%
Over $500 million 0.95%
International Securities
Portfolio Entire Portfolio 0.90%
International SmallCap
Portfolio First $250 million 1.00%
Next $250 million 0.90%
Over $500 million 0.80%
Mortgage-Backed Securities
Portfolio Entire Portfolio 0.45%
The net assets of each portfolio on December 31, 1999 and the rate of the fee for each portfolio for investment management services as provided in the Management Agreement for the fiscal year then ended were as follows:
Management Fee for
Net Assets as of Fiscal Year Ended
Portfolio December 31, 1999 December 31, 1999
--------- ----------------- -----------------
International Emerging Markets $129,574,687 1.15%
International Securities 61,340,966 .90%
International SmallCap 154,892,162 1.00%
Mortgage Backed Securities 5,044,844 .45%
Fees paid for investment management services during the periods indicated were as follows:
Management Fees for Fiscal
Year Ended December 31,
Portfolio except as noted
--------- ----------------------
1999 1998 1997
---- ---- ----
International Emerging Markets $ 1,092,430 $856,612 $ 43,775*
International 463,180 413,285 311,027
Securities 1,045,204 731,367 37,932*
International SmallCap 43,225 64,195 67,721
Mortgage-Backed Securities
| * | Period beginning November 26, 1997 and ended December 31, 1997 |
In addition to investment advisory services, the responsibilities of the Manager under the Management Agreement include various corporate and administrative services, including furnishing the services of its officers and employees that are elected to serve as officers or directors of the Fund; furnishing office space and all necessary office facilities and equipment for the general corporate functions of the Fund; furnishing the services of supervisory and clerical personnel necessary to perform such functions; determining the net asset value per share for the shares of each Portfolio; acting as and performing the services of transfer and paying agent (including preparing and distributing prospectuses, shareholder reports, tax information, notices and proxy statements, making dividend payments, maintaining shareholder records in an open account system and processing redemptions, repurchases and remittances to shareholders); and qualifying Fund shares for sale in various jurisdictions.
In addition, the Manager is responsible for all expenses of each Portfolio except (i) the management fee paid to it by the Fund, (ii) taxes, including in case of redeemed shares any initial transfer taxes, (iii) portfolio brokerage fees and incidental brokerage expenses, (iv) interest and (v) extraordinary expenses. Since brokerage fees are treated as part of the price paid or received upon the purchase or sale of securities and since taxes, interest and extraordinary expenses are expected to be minimal, the management fee should tend to give shareholders an idea as to the expected level of operating expenses of the Portfolios in which they invest. This arrangement is different from the fee structures of most mutual funds where one fee is paid to the investment adviser for advisory services and many or all other expenses involved with the operation of the fund are paid directly by the fund.
Under the terms of the Sub-Advisory Agreement with the Manager, Invista has agreed to reimburse the Manager for all of its costs in performing corporate and administrative services and to pay all expenses of the Fund that the Manager has undertaken to pay under the Management Agreement.
The Management Agreement and Sub-Advisory Agreement (“Agreements”) were last approved by the Fund’s Board of Directors on September 13, 1999. Both agreements provide that each will continue in effect as to any Portfolio from year to year only so long such continuance is specifically approved at least annually either by the Board of Directors of the Fund or by a vote of a majority of the outstanding voting securities of the Fund and in either event by vote of a majority of the directors of the Fund who are not interested persons of the Manager, Principal Life Insurance Company (“Principal Life”), the Fund and, in the case of the Sub-Advisory Agreement, Invista, cast in person at a meeting called for the purpose of voting on such approval. Each Agreement may, on sixty days’ written notice, be terminated at any time without the payment of any penalty, by the Board of Directors of the Fund, by vote of a majority of the outstanding voting securities of the Fund, as to any Portfolio by the vote of a majority of the outstanding voting securities of that Portfolio, by the Manager, and in the case of the Sub-Advisory Agreement by Invista. Each Agreement shall automatically terminate in the event of its assignment.
The required shareholder approval of any continuance of either Agreement shall be effective with respect to any Portfolio if a majority of the outstanding voting securities of that Portfolio votes to approve the continuance, notwithstanding that the amendment may not have been approved by a majority of the outstanding voting securities of the Fund or of any other Portfolio affected by the amendment. If the shareholders of any Portfolio of the Fund fail to approve the continuance of either Agreement and that failure causes the Agreement to be invalid with respect to that Portfolio, the Manager and Invista will continue to act as investment adviser and sub-adviser with respect to that Portfolio pending the required approval of the Agreement’s continuance or of a new contract or other definitive action, provided that the compensation received by each of the Manager and Invista, in case of the invalidity of the Management Agreement, or by Invista, in case of the invalidity of the Sub-Advisory Agreement, in respect of that Portfolio during such period will be no more than its actual costs incurred in furnishing services to that Portfolio or the amount it would have received under the Agreement in respect of that Portfolio, whichever is less.
The Management Agreement may be amended but such amendment will not be effective until specifically approved by vote of the holders of a majority of the Fund’s outstanding voting securities and by vote of a majority of the directors of the Fund who are not interested persons of the Manager, Principal Life or the Fund cast in person at a meeting called for the purpose of voting on such approval. The required shareholder approval of any amendment to the Management Agreement shall be effective with respect to any Portfolio if a majority of the outstanding voting securities of that Portfolio votes to approve the amendment, notwithstanding that the amendment may not have been approved by a majority of the outstanding voting securities of the Fund or of any other Portfolio affected by the matter.
The Manager has entered into an Investment Service Agreement with Principal Life whereby Principal Life has agreed to provide on a part-time basis such employees as the parties may agree are reasonably needed by the Manager and Invista in the performance of investment advisory services (but not corporate or administrative services) under the Management Agreement. Principal Life also agreed to permit such employees, in performing services for the Manager and Invista, full access to statistical and economic data, investment research reports and other non-confidential materials in the files of its Investment Department. For the services of Principal Life employees, the Manager will reimburse Principal Life for the direct and indirect costs fairly attributable to their services performed for the Manager, and the Manager will be reimbursed for such costs by Invista. The Investment Service Agreement contains provisions on continuation and termination comparable to those described above for the Management Agreement. The Management Agreement was last approved by the Funds Board of Directors on September 13, 1999.
In distributing brokerage business arising out of the placement of orders for the purchase and sale of securities for any Portfolio, Invista’s objective is to obtain the best overall terms. In pursuing this objective, Invista considers all matters it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and executing capability of the broker or dealer and the reasonableness of the commission, if any (for the specific transaction and on a continuing basis). This may mean in some instances that Invista will pay a broker commissions that are in excess of the amount of commission another broker might have charged for executing the same transaction when Invista believes that such commissions are reasonable in light of (a) the size and difficulty of transactions (b) the quality of the execution provided and (c) the level of commissions paid relative to commissions paid by other institutional investors. (Such factors are viewed both in terms of that particular transaction and in terms of all transactions that broker executes for accounts over which Invista exercises investment discretion. Invista may purchase securities in the over-the-counter market, utilizing the services of principal market matters, unless better terms can be obtained by purchases through brokers or dealers, and may purchase securities listed on the New York Stock Exchange from non-Exchange members in transactions off the Exchange.)
Invista gives consideration in the allocation of business to services performed by a broker (e.g. the furnishing of statistical data and research generally consisting of information of the following types: analyses and reports concerning issuers, industries, economic factors and trends, portfolio strategy and performance of client accounts). If any such allocation is made, the primary criteria used will be to obtain the best overall terms for such transactions. Invista may pay additional commission amounts for research services but generally does not do so. Such statistical data and research information received from brokers or dealers may be useful in varying degrees and Invista may use it in servicing some or all of the accounts it manages. Some statistical data and research information may not be useful to Invista in managing the client account, brokerage for which resulted in Invista’s receipt of the statistical data and research information. However, in Invista’s opinion, the value thereof is not determinable and it is not expected that Invista’s expenses will be significantly raised since the receipt of such statistical data and research information is only supplementary to Invista’s own research efforts. The Manager, or Sub-advisor, allocated portfolio transactions for the International Emerging Markets, International Securities and International SmallCap Portfolios to certain brokers during the fiscal year ended December 31, 1999 due to research services provided by such brokers. These portfolio transactions resulted in commissions paid to the International Emerging Markets, International and International SmallCap Portfolios broker by the Fund in the amount of $4,210, $9,381 and $2,690, respectively.
Some products and services brokers provide to Invista (such as computer hardware) may perform an administrative function (e.g. client accounting) as well as a research function. In such cases, Invista makes a reasonable allocation of the cost of the product or service according to Invista’s use. Invista pays for the portion of the product or service that consists of research in commission dollars. Invista pays for the portion that provides it with administrative or non-research assistance with its own money. Invista’s allocation of such products and services between research and non-research functions poses a conflict of interest between Invista and its clients.
Annually the officers of Invista call a meeting to determine dollar limits on business done with brokers who provide useful research information. A list of products, research and services is kept in Invista’s office.
Purchases and sales of debt securities and money market instruments usually will be principal transactions and will normally be purchased directly from the issuer or from an underwriter or marketmaker for the securities. Such transactions are usually conducted on a net basis with a Portfolio paying no brokerage commissions. Purchases from underwriters will include a commission or concession paid by the issuer to the underwriter and the purchases from dealers serving as marketmakers will include the spread between the bid and asked prices.
The following table shows the brokerage commissions paid during the periods indicated. In each year, 100% of the commissions paid by each Fund went to broker-dealers that provided research, statistical or other factual information.
Total Brokerage Commissions
Paid During Fiscal Year
Portfolio Ended December 31
--------- -----------------
1999 1998 1997
---- ---- ----
International Emerging Markets $ 678,304 $373,096 $99,367
International Securities 198,432 101,586 78,786
International SmallCap 1,330,219 417,318 80,568
Mortgage-Backed Securities -0- -0- -0-
Brokerage commissions paid to affiliates during the year ended December 31 were as follows:
Percent
of Dollar
Total As Percent Amount of
Dollar of Total Commissionable
Portfolio Amount Commissions Transactions
--------- ------ ----------- ------------
International Emerging Markets
1999 $27,048 3.99% 4.17%
1998 17,124 4.59 6.15
International Securities
1999 10,237 5.16 4.70
1998 6,290 6.19 4.66
International SmallCap
1999 102,707 7.72 8.52
1998 11,465 2.75 3.02
Percent
of Dollar
Total As Percent Amount of
Dollar of Total Commissionable
Portfolio Amount Commissions Transactions
--------- ------ ----------- ------------
International Emerging Markets
1999 $30,030 4.33% 5.86%
1998 16,910 4.59 6.15
International Securities
1999 4,465 2.25 2.62
1998 2,320 2.28 1.65
International SmallCap
1999 1,604 0.12 0.14
Percent
of Dollar
Total As Percent Amount of
Dollar of Total Commissionable
Portfolio Amount Commissions Transactions
--------- ------ ----------- ------------
International Emerging Markets
1999 $12,683 1.87% 2.89%
1998 20,062 5.38 5.45
1997 10,074 10.14 16.63
International Securities
1999 18,818 9.48 12.04
1998 7,322 7.21 7.48
1997 1,394 1.77 1.99
International SmallCap
1999 74,405 5.59 7.17
1998 24,089 5.77 9.80
Goldman Sachs Asset Management, a separate operating division of Goldman Sachs & Co., acts as sub-advisor for an account of the Principal Variable Contracts Fund, Inc. In addition, J.P. Morgan Investment Management Inc., an affiliate of J.P. Morgan Securities, acts as a sub-advisor of an account of the Principal Variable Contracts Fund, Inc.
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, Inc., which acts as sub-advisor to two accounts of the Principal Variable Contracts Fund and one fund included in the Fund Complex. On December 1, 1998 Morgan Stanley Asset Management, Inc. changed its name to Morgan Stanley Dean Witter Investment Management, Inc. but continues to do business in certain instances using the name Morgan Stanley Asset Management.
The Manager acts as investment advisor for each of the funds sponsored by Principal Life Insurance Company. The Manager or Sub-Advisor, if any, places orders to trade portfolio securities for each of these funds. If, in carrying out the investment objectives of the funds, occasions arise when purchases or sales of the same equity securities are to be made for two or more of the funds at the same time (or, in the case of accounts managed by Invista as Sub-Advisor, for two or more funds and any other accounts managed by Invista), the Manager or Invista may submit the orders to purchase or, whenever possible, to sell, to a broker/dealer for execution on an aggregate or “bunched” basis (including orders for accounts in which Registrant, its affiliates and/or its personnel have beneficial interests). The Manager or Invista may create several aggregate or “bunched” orders relating to a single security at different times during the same day. On such occasions, the Manager or Invista shall compose, before entering an aggregated order, a written Allocation Statement as to how the order will be allocated among the various accounts. Securities purchased or proceeds of sales received on each trading day with respect to each such aggregate or “bunched” order shall be allocated to the various funds (or, in the case of Invista, the various funds and other client accounts) whose individual orders for purchase or sale make up the aggregate or “bunched” order by filling each fund’s (or, in the case of Invista, each fund’s or other client account’s) order in accordance with the Allocation Statement. If the order is partially filled, it shall be allocated pro rata based on the Allocation Statement. Securities purchased for funds (or, in the case of Invista, funds and other client accounts) participating in an aggregate or “bunched” order will be placed into those funds and, where applicable, other client accounts at a price equal to the average of the prices achieved in the course of filling that aggregate or “bunched” order.
If purchases or sales of the same debt securities are to be made for two or more of the funds at the same time, the securities will be purchased or sold proportionately in accordance with the amount of such security sought to be purchased or sold at that time for each fund.
Invista expects aggregation or “bunching” of orders, on average, to reduce slightly the cost of execution. Invista will not aggregate a client’s order if, in a particular instance, it believes that aggregation will increase the client’s cost of execution. In some cases, aggregation or “bunching” of orders may increase the price a client pays or receives for a security or reduce the amount of securities purchased or sold for a client account.
Invista may enter aggregated orders for shares issued in an initial public offering (IPO). In determining whether to enter an order for an IPO for any client account, Invista considers the account’s investment restrictions, risk profile, asset composition and cash level. Accordingly, it is unlikely that every client account will participate in every available IPO. Partially filled orders for IPOs will be allocated to participating accounts in accordance with the procedures set out above. Often, however, the amount of shares designated by an underwriter for Invista’s clients are insufficient to provide a meaningful allocation to each participating account. In such cases, Invista will employ an allocation system it feels treats all participating accounts fairly and equitably over time.
Each Portfolio offers its shares continuously through Princor Financial Services Corporation, which is principal underwriter for the Fund and sells shares as agent for the Fund. Shares are sold at net asset value, without a sales charge. In certain circumstances, Princor Financial Services Corporation will compensate its registered representatives or a selected dealer with whom it has entered into a selling agreement for their efforts in distributing shares held in a customer account the establishment of which is attributable to the efforts of the registered representatives or selected dealer.
The net asset value of the shares of each Portfolio is determined daily, Monday through Friday, as of the close of trading on the New York Stock Exchange, except on days on which changes in the value of a Portfolio’s portfolio securities will not materially affect the current net asset value of that Portfolio’s redeemable securities, on days during which a Portfolio receives no order for the purchase or sale of its redeemable securities and no tender of such a security for redemption, and on customary national business holidays. The Portfolios treat as customary national business holidays those days on which the New York Stock Exchange is closed for New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The net asset value per share for each Portfolio is determined by dividing the value of securities in the Portfolio’s investment portfolio plus all other assets, less all liabilities, by the number of Portfolio shares outstanding. Securities for which market quotations are readily available, including options and futures traded on an exchange, are valued at market value, which is for exchanged-listed securities, the closing sale price; for United Kingdom-listed securities, the market-maker provided price; and for non-listed equity securities, the bid price. Non-listed corporate debt securities and government securities are usually valued using an evaluated bid price provided by a pricing service. If closing prices are unavailable for exchange-listed securities, generally the bid price, or in the case of debt securities an evaluated bid price, is used to value such securities. When reliable market quotations are not considered to be readily available, which may be the case, for example, with respect to certain debt securities, preferred stocks, foreign securities and over-the-counter options, the investments are valued by using market quotations, prices provided by market makers, which may include dealers with which the Portfolio has executed transactions, or estimates of market values obtained from yield data and other factors relating to instruments or securities with similar characteristics in accordance with procedures established in good faith by the Board of Directors. Securities with remaining maturities of 60 days or less are valued at amortized cost. Other assets are valued at fair value as determined in good faith through procedures established by the Board of Directors.
Generally, trading in foreign securities is substantially completed each day at various times prior to the close of the New York Stock Exchange. The values of such securities used in computing net asset value per share are usually determined as of such times. Occasionally, events which affect the values of such securities and foreign currency exchange rates may occur between the times at which they are generally determined and the close of the New York Stock Exchange and would therefore not be reflected in the computation of the net asset values of the Portfolios. If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair value as determined in good faith by the Manager or Invista under procedures established and regularly reviewed by the Board of Directors. To the extent the Portfolio invests in foreign securities listed on foreign exchanges which trade on days on which the Portfolio does not determine its net asset value, for example Saturdays and other customary national U.S. holidays, the Portfolio’s net asset value could be significantly affected on days when shareholders have no access to the Portfolio.
Each Portfolio may from time to time advertise its performance in terms of total return or yield. The figures used for total return and yield are based on the historical performance of a Portfolio, show the performance of a hypothetical investment and are not intended to indicate future performance. Total return and yield will vary from time to time depending upon market conditions, the composition of a Portfolio’s portfolio and operating expenses. These factors and possible differences in the methods used in calculating performance figures should be considered when comparing a Portfolio’s performance to the performance of some other kind of investment.
A Portfolio may also include in its advertisements performance rankings and other performance-related information published by independent statistical services or publishers, such as Lipper Analytical Services, Weisenberger Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal, Baron’s and Changing Times, and comparisons of the performance of a Portfolio to that of various market indices, such as the S&P 500 Index, Dow Jones Industrials Index, Morgan Stanley Capital International EAFE (Europe, Australia and Far East) Index and World Index, Morgan Stanley Capital International EMF (Emerging Markets Free) Index, Lehman Brothers U.S. Mortgage Index and the Salomon Brothers Investment Grade Bond Index.
When advertising total return figures, each Portfolio will include its average annual total return for each of the one, five and ten year periods (or if shorter, the period during which its registration statement has been in effect) that end on the last day of the most recent calendar quarter. Average annual total return is computed by calculating the average annual compounded rate of return over the stated period that would equate an initial $1,000 investment to the ending redeemable value assuming the reinvestment of all dividends and capital gains distributions at net asset value. In its advertising, a Portfolio may also include average annual total return for some other period or cumulative total return for a specified period. Cumulative total return is computed by dividing the difference between the ending redeemable value (assuming the reinvestment of all dividends and capital gains distributions) and the initial investment by the initial investment.
The following table shows as of December 31, 1999 average annual return for each of the Portfolios for the periods indicated:
Portfolio 1-Year 5-Year 10-Year
----------------------------------------------------------------------------
International Emerging Markets 63.37% 16.26%(1)
International Securities 27.89% 17.00% 15.88%(2)
International SmallCap Portfolio 85.93% 42.93%(1)
Mortgage-Backed Securities 0.30% 8.15% 6.17%(2)
(1) Period beginning November 26, 1997 and ending December 31, 1999.
(2) Period beginning May 7, 1993 and ending December 31, 1999.
The Mortgage-Backed Securities Portfolio calculates its yield by determining its net investment income per share for a 30-day (or one month) period, annualizing that figure (assuming semi-annual compounding) and dividing the result by the net asset value per share for the last day of the same period. The yield for the Mortgage-Backed Securities Portfolio as of December 31, 1999 was 6.77%.
A Portfolio may include in its advertisements the compounding effect of reinvested dividends over an extended period of time as illustrated below.
Years 6% 8% 10% 0 $10,000 $10,000 $10,000 20 $32,071 $46,610 $67,275
Shareholders who choose to reinvest their distributions get the advantage of compounding. Here’s what happens to a $10,000 investment with monthly income reinvested at 6 percent, 8 percent and 10 percent over 20 years.
These figures assume no fluctuation in the value of principal. This chart is for illustration purposes only and is not intended as an indication of the results a shareholder may receive as a shareholder of a specific Portfolio. The return and capital value of an investment in a Portfolio will fluctuate so that the value, when redeemed, may be worth more or less than the original cost.
A Portfolio may also include in its advertisements an illustration of the impact of income taxes and inflation on earnings from bank certificates of deposit (“CD’s”). The interest rate on the hypothetical CD will be based upon average CD rates for a stated period as reported in the Federal Reserve Bulletin. The illustrated annual rate of inflation will be the core inflation rate as measured by the Consumer Price Index for the 12-month period ended as of the most recent month prior to the advertisement’s publication. The illustrated income tax rate may include any federal income tax rate applicable to individuals at the time the advertisement is published. Any such advertisement will indicate that, unlike bank CD’s, an investment in the Fund is not insured nor is there any guarantee that the Fund’s net asset value or any stated rate of return will remain constant.
An example of a typical calculation included in such advertisements is as follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a $10,000 investment in a six-month bank CD with an annual interest rate of 6.07% (average six-month CD rate for the month of December, 1999, as reported in the Federal Reserve Bulletin) and an inflation rate of 2.7% (rate of inflation for the 12-month period ended December 31, 1999 as measured by the Consumer Price Index) and an income tax bracket of 28% would be $(84).
($10,000 x 6.07%) / 2 = $304 Interest for six-month period
- 85 Federal income taxes (28%)
- 135 Inflation's impact on invested principal
($10,000 x 2.7%) / 2
------
($84) After-tax, inflation-adjusted earnings
It is the policy of each Portfolio to distribute substantially all net investment income and net realized gains. Through such distributions, and by satisfying certain other requirements, the Fund intends to qualify each portfolio for the tax treatment accorded to regulated investment companies under the applicable provisions of the Internal Revenue Code. This means that in each year in which a Portfolio so qualifies, it will be exempt from federal income tax upon the amount so distributed to investors. The Tax Reform Act of 1986 imposed an excise tax on mutual funds that fail to distribute net investment income and capital gains by the end of the calendar year in accordance with the provisions of the Act. Each Portfolio intends to comply with the Act’s requirements and to avoid this excise tax.
Distributions from the International Emerging Markets Portfolio, International Securities Portfolio, International SmallCap Portfolio and Mortgage-Backed Securities Portfolio will generally not be eligible for the 70% corporate dividends received deduction. All taxable dividends and capital gains are taxable in the year in which distributed, whether received in cash or reinvested in additional shares. Dividends declared with a record date in December and paid in January will be deemed to have been distributed to shareholders in December. Each Portfolio will inform its shareholders of the amount and nature of their taxable income dividends and capital gain distributions. Dividends from a Portfolio’s net income and distributions of capital gains, if any, may also be subject to state and local taxation.
As previously discussed, a Portfolio may invest in futures contracts or options thereon, index options or options traded on qualified exchanges. For federal income tax purposes, capital gains and losses on futures contracts or options thereon, index options or options traded on qualified exchanges are generally treated as 60% long-term and 40% short-term. In addition, a Portfolio must recognize any unrealized gains and losses on such positions held at the end of the fiscal year. A Portfolio may elect out of such tax treatment, however, for a futures or options position that is part of an “identified mixed straddle” such as a put option purchased with respect to a portfolio security. Gains and losses on futures and options included in an identified mixed straddle will be considered 100% short-term and unrealized gain or loss on such positions will not be realized at year end. The straddle provisions of the Code may require the deferral of realized losses to the extent that a Portfolio has unrealized gains in certain offsetting positions at the end of the fiscal year, and may also require recharacterization of all or a part of losses on certain offsetting positions from short-term to long-term, as well as adjustment of the holding periods of straddle positions.
Each Portfolio is required by law under certain circumstances to withhold 31% of dividends paid to investors who do not furnish their correct taxpayer identification number (in the case of individuals, their social security number).
Shareholders should consult their own tax advisors as to the federal, state and local tax consequences of ownership of shares of the Portfolios in their particular circumstances.
When at the close of a fiscal year more than 50% of the value of a Portfolio’s total assets are invested in securities of foreign corporations, the Fund may elect pursuant to Section 853 of the Code to permit its Shareholders to take a credit (or a deduction) for foreign income taxes paid by the Portfolio. In that case, Shareholders should include in their report of gross income in their federal income tax returns both cash dividends received from the Portfolio and also the amount which the Portfolio advises is their pro rata portion of foreign income taxes paid with respect to, or withheld from, dividends and interest paid to the Portfolio from its foreign investments. Shareholders would then be entitled to subtract from their federal income taxes the amount of such taxes withheld, or treat such foreign taxes as a deduction from gross income, if that should be more advantageous. As in the case of individuals receiving income directly from foreign sources, the above-described tax credit or tax deduction is subject to certain limitations. Shareholders or prospective shareholders should consult their tax advisors on how these provisions apply to them.
The financial statements of the Fund for the year ended December 31, 1999 appearing in the Annual Report to Shareholders and the report thereon of Ernst & Young LLP, independent auditors, appearing therein are incorporated by reference in this Statement of Additional Information. The Annual Report will be furnished without charge, to investors who request copies of the Statement of Additional Information.
|
|