PRINCIPAL FUNDS, INC.
SUB-ADVISORY AGREEMENT
XXXXX INVESTMENT ADVISORY INCORPORATED SUB-ADVISED FUNDS
AGREEMENT executed as of September 14, 2010, by and between PRINCIPAL
MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the
Manager"), and XXXXX INVESTMENT ADVISORY INCORPORATED, a Maryland
corporation (hereinafter called "the Sub-Advisor).
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to each Fund
of the Principal Funds, Inc., (the "Fund"), an open-end management
investment company registered under the Investment Company Act of 1940,
as amended (the "1940 Act"); and
WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it
with portfolio selection and related research and statistical services
in connection with the investment advisory services for each series
identified in Appendix A ( hereinafter called the "Series"), which the
Manager has agreed to provide to the Fund, and the Sub-Advisor desires
to furnish such services; and
WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly
provide the Sub-Advisor with copies properly certified or authenticated
of any amendment or supplement thereto:
(a) Management Agreement (the "Management Agreement") with the
Fund;
(b) The Fund's registration statement and financial statements as
filed with the Securities and Exchange Commission;
(c) The Fund's Articles of Incorporation and By-laws;
(d) Policies, procedures or instructions adopted or approved by
the Board of Directors of the Fund relating to obligations and
services provided by the Sub-Advisor.
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, the parties agree as follows:
1. Appointment of Sub-Advisor
In accordance with and subject to the Management Agreement, the
Manager hereby appoints the Sub-Advisor to perform the services
described in Section 2 below for investment and reinvestment of
the securities and other assets of the Series, subject to the
control and direction of the Manager and the Fund's Board of
Directors, for the period and on the terms hereinafter set forth.
The Sub-Advisor accepts such appointment and agrees to furnish
the services hereinafter set forth for the compensation herein
provided. The Sub-Advisor shall for all purposes herein be deemed
to be an independent contractor and shall, except as expressly
provided or authorized, have no authority to act for or represent
the Fund or the Manager in any way or otherwise be deemed an
agent of the Fund or the Manager.
2. Obligations of and Services to be Provided by the Sub-Advisor
The Sub-Advisor will:
(a) Provide investment advisory services, including but not
limited to research, advice and supervision for the Series.
(b) Furnish to the Board of Directors of the Fund for approval
(or any appropriate committee of such Board), and revise from
time to time as economic conditions require, a recommended
investment program for the Fund consistent with the Series'
investment objective and policies.
(c) Implement the approved investment program by placing orders
for the purchase and sale of securities without prior
consultation with the Manager and without regard to the
length of time the securities have been held, the resulting
rate of portfolio turnover or any tax considerations, subject
always to the provisions of the Fund's Articles of
Incorporation and Bylaws, the requirements of the 1940 Act,
as each of the same shall be from time to time in effect.
(d) Advise and assist the officers of the Fund, as requested by
the officers, in taking such steps as are reasonably
necessary or appropriate to carry out the decisions of its
Board of Directors, and any appropriate committees of such
Board, regarding the general conduct of the investment
business of the Series.
(e) Maintain, in connection with the Sub-Advisor's investment
advisory services provided to the Series, its compliance with
the 1940 Act and the regulations adopted by the Securities
and Exchange Commission thereunder and the Series' investment
strategies and restrictions as stated in the Fund's
prospectus and statement of additional information, subject
to receipt of such additional information as may be required
from the Manager and provided in accordance with Section
11(d) of this Agreement. The Sub-Advisor has no
responsibility for the maintenance of Fund records except
insofar as is directly related to the services it provides to
the Series.
(f) Report to the Board of Directors of the Fund at such times
and in such detail as the Board of Directors may reasonably
deem appropriate in order to enable it to determine that the
investment policies, procedures and approved investment
program of the Series are being observed.
(g) Upon request, provide assistance in the determination of
the fair value of certain securities when reliable market
quotations are not readily available for purposes of
calculating net asset value in accordance with procedures and
methods established by the Fund's Board of Directors.
(h) Furnish, at its own expense, (i) all necessary investment
and management facilities, including salaries of investment,
clerical and other personnel required for it to execute its
duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment
necessary for the efficient conduct of its duties under this
Agreement.
(i) Open accounts with broker-dealers and futures commission
merchants ("broker-dealers"), select broker-dealers to effect
all transactions for the Series, place all necessary orders
with broker-dealers or issuers (including affiliated broker-
dealers), and negotiate commissions, if applicable. To the
extent consistent with applicable law, purchase or sell
orders for the Series may be aggregated with contemporaneous
purchase or sell orders of other clients of the Sub-Advisor.
In such event allocation of securities so sold or purchased,
as well as the expenses incurred in the transaction, will be
made by the Sub-Advisor in the manner the Sub-Advisor
considers to be the most equitable and consistent with its
fiduciary obligations to the Fund and to other clients. The
Manager recognizes that, in some cases, this procedure may
limit the size of the position that may be acquired or sold
for the Series. The Sub-Advisor will report on such
allocations at the request of the Manager, the Fund or the
Fund's Board of Directors providing such information as the
number of aggregated trades to which the Series was a party,
the broker-dealers to whom such trades were directed and the
basis for the allocation for the aggregated trades. The Sub-
Advisor shall use its best efforts to obtain execution of
transactions for the Series at prices which are advantageous
to the Series and at commission rates that are reasonable in
relation to the benefits received. However, the Sub-Advisor
may select brokers or dealers on the basis that they provide
brokerage, research or other services or products to the Sub-
Advisor. To the extent consistent with applicable law, the
Sub-Advisor may pay a broker or dealer an amount of
commission for effecting a securities transaction in excess
of the amount of commission or dealer spread another broker
or dealer would have charged for effecting that transaction
if the Sub-Advisor determines in good faith that such amount
of commission is reasonable in relation to the value of the
brokerage and research products and/or services provided by
such broker or dealer. This determination, with respect to
brokerage and research products and/or services, may be
viewed in terms of either that particular transaction or the
overall responsibilities which the Sub-Advisor and its
affiliates have with respect to the Series as well as to
accounts over which they exercise investment discretion. Not
all such services or products need be used by the Sub-Advisor
in managing the Series. In addition, joint repurchase or
other accounts may not be utilized by the Series except to
the extent permitted under any exemptive order obtained by
the Sub-Advisor provided that all conditions of such order
are complied with.
(j) Maintain all accounts, books and records with respect to the
Series as are required of an investment advisor of a
registered investment company pursuant to the 1940 Act and
Investment Advisor's Act of 1940 (the "Investment Advisor's
Act"), and the rules thereunder, and furnish the Fund and the
Manager with such periodic and special reports as the Fund or
Manager may reasonably request. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Sub-
Advisor hereby agrees that all records that it maintains for
the Series are the property of the Fund, agrees to preserve
for the periods described by Rule 31a-2 under the 1940 Act
any records that it maintains for the Fund and that are
required to be maintained by Rule 31a-1 under the 1940 Act,
and further agrees to surrender promptly to the Fund any
records that it maintains for the Series upon request by the
Fund or the Manager.
(k) Observe and comply with Rule 17j-1 under the 1940 Act and the
Sub-Advisor's Code of Ethics adopted pursuant to that Rule as
the same may be amended from time to time. The Manager
acknowledges receipt of a copy of Sub-Advisor's current Code
of Ethics. Sub-Advisor shall promptly forward to the Manager
a copy of any material amendment to the Sub-Advisor's Code of
Ethics.
(l) From time to time as the Manager or the Fund may request,
furnish the requesting party reports on portfolio
transactions and reports on investments held by the Series,
all in such detail as the Manager or the Fund may reasonably
request. The Sub-Advisor will make available its officers
and employees to meet with the Fund's Board of Directors at
the Fund's principal place of business on due notice to
review the investments of the Series.
(m) Provide such information as is customarily provided by a sub-
advisor and may be required for the Fund or the Manager to
comply with their respective obligations under applicable
laws, including, without limitation, the Internal Revenue
Code of 1986, as amended (the "Code"), the 1940 Act, the
Investment Advisers Act, the Securities Act of 1933, as
amended (the "Securities Act"), and any state securities
laws, and any rule or regulation thereunder. Sub-Advisor
will advise Manager of any changes in Sub-Advisor's general
partners within a reasonable time after any such change.
Manager acknowledges receipt of Sub-Advisor's Form ADV more
than 48 hours prior to the execution of this Agreement.
(n) Perform quarterly and annual tax compliance tests to monitor
the Series' compliance with Subchapter M of the Code and
Section 817(h) of the Code, subject to receipt of such
additional information as may be required from the Manager
and provided in accordance with Section 11(d) of this
Agreement. The Sub-Advisor shall notify the Manager
immediately upon having a reasonable basis for believing that
the Series has ceased to be in compliance or that it might
not be in compliance in the future. If it is determined that
the Series is not in compliance with the requirements noted
above, the Sub-Advisor, in consultation with the Manager,
will take prompt action to bring the Series back into
compliance (to the extent possible) within the time permitted
under the Code.
(o) Have the responsibility and authority to vote proxies
solicited by, or with respect to, the issuers of securities
held in the Series. The Manager shall cause to be forwarded
to Sub-Advisor all proxy solicitation materials that it
receives and shall assist Sub-Advisor in its efforts to
conduct the proxy voting process.
3. Prohibited Conduct
In providing the services described in this agreement, the Sub-
Advisor will not consult with any other investment advisory firm
that provides investment advisory services to any investment
company sponsored by Principal Life Insurance Company regarding
transactions for the Fund in securities or other assets.
4. Compensation
As full compensation for all services rendered and obligations
assumed by the Sub-Advisor hereunder with respect to the Fund,
the Manager shall pay the compensation specified in Appendix A to
this Agreement.
5. Liability of Sub-Advisor
Neither the Sub-Advisor nor any of its directors, officers,
employees, agents or affiliates shall be liable to the Manager,
the Fund or its shareholders for any loss suffered by the Manager
or the Fund resulting from any error of judgment made in the good
faith exercise of the Sub-Advisor's duties under this Agreement
or as a result of the failure by the Manager or any of its
affiliates to comply with the terms of this Agreement except for
losses resulting from willful misfeasance, bad faith or gross
negligence of, or from reckless disregard of, the duties of the
Sub-Advisor or any of its directors, officers, employees, agents
(excluding any broker-dealer selected by the Sub-Advisor), or
affiliates.
6. Indemnification
The Manager agrees to indemnify and hold harmless the Sub-Advisor
from and against any and all claims, losses, liabilities or
damages (including reasonable attorneys' fees and other related
expenses), ("Losses") howsoever arising, from or in connection
with this Agreement or the performance by the Sub-Advisor of its
duties hereunder, so long as the Sub-Advisor shall, after receipt
of notice of any claim or commencement of any action, promptly
notify the Manager in writing of the claim or commencement of
such action. The Manager shall not be liable for any settlement
of any claim or action effected without its written consent.
Nothing contained herein shall require the Manager to indemnify
the Sub-Advisor for Losses resulting from the Sub-Advisor's
willful misfeasance, bad faith or gross negligence in the
performance of its duties or from its reckless disregard of its
obligations and duties under this Agreement.
7. Supplemental Arrangements
The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor or with unaffiliated third
parties to better enable the Sub-Advisor to fulfill its
obligations under this Agreement for the provision of certain
personnel and facilities to the Sub- Advisor, subject to written
notification to and approval of the Manager and, where required
by applicable law, the Board of Directors of the Fund.
8. Regulation
The Sub-Advisor shall submit to all regulatory and administrative
bodies having jurisdiction over the services provided pursuant to
this Agreement any information, reports or other material which
any such body may request or require pursuant to applicable laws
and regulations.
9. Duration and Termination of This Agreement
This Agreement shall become effective as of the date of its
execution and, unless otherwise terminated, shall continue in
effect for a period of two years and thereafter from year to year
provided that the 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
Series and in either event by a vote of a majority of the Board
of Directors of the Fund who are not interested persons of the
Manager, Principal Life Insurance Company, the Sub-Advisor or the
Fund cast in person at a meeting called for the purpose of voting
on such approval.
If the shareholders of a Series fail to approve the Agreement or
any continuance of the Agreement in accordance with the
requirements of the 1940 Act, the Sub-Advisor will continue to
act as Sub-Advisor with respect to the Series pending the
required approval of the Agreement or its continuance or of any
contract with the Sub-Advisor or a different manager or Sub-
Advisor or other definitive action; provided, that the
compensation received by the Sub-Advisor in respect to the Series
during such period is in compliance with Rule 15a-4 under the
1940 Act.
This Agreement may be terminated at any time without the payment
of any penalty by the Board of Directors of the Fund or by the
Sub-Advisor, the Manager or by vote of a majority of the
outstanding voting securities of the Series on sixty days written
notice. This Agreement shall automatically terminate in the event
of its assignment. In interpreting the provisions of this Section
9, the definitions contained in Section 2(a) of the 1940 Act
(particularly the definitions of "interested person,"
"assignment" and "voting security") shall be applied.
10. Amendment of this Agreement
No material amendment of this Agreement shall be effective until
approved, if required by the 1940 Act or the rules, regulations,
interpretations or orders issued thereunder, by vote of the
holders of a majority of the outstanding voting securities of the
Series and by vote of a majority of the Board of Directors of the
Fund who are not interested persons of the Manager, the
Sub-Advisor, Principal Life Insurance Company or the Fund cast in
person at a meeting called for the purpose of voting on such
approval, and such amendment is signed by both parties.
11. General Provisions
(a) Each party agrees to perform such further acts and execute
such further documents as are necessary to effectuate the
purposes hereof. This Agreement shall be construed and
enforced in accordance with and governed by the laws of the
State of Iowa. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or
effect.
(b) Any notice under this Agreement shall be in writing, addressed
and delivered or mailed postage pre-paid to the other party
at such address as such other party may designate for the
receipt of such notices. Until further notice to the other
party, it is agreed that the address of the Manager for this
purpose shall be Principal Financial Group, Xxx Xxxxxx, Xxxx
00000-0000, and the address of the Sub-Advisor shall be Xxxxx
Advisory, 000 X. Xxxx Xxxxxx, Xxxxxxxxx, Xxxxxxxx 00000.
(c) The Sub-Advisor will promptly notify the Manager in writing
of the occurrence of any of the following events:
(1) the Sub-Advisor fails to be registered as an
investment adviser under the Investment Advisers Act or
under the laws of any jurisdiction in which the Sub-Advisor
is required to be registered as an investment advisor in
order to perform its obligations under this Agreement.
(2) the Sub-Advisor is served or otherwise receives
notice of any action, suit, proceeding, inquiry or
investigation, at law or in equity, before or by any court,
public board or body, involving the affairs of the Fund.
(d) The Manager shall provide (or cause the Series custodian to
provide) timely information to the Sub-Advisor regarding such
matters as the composition of the assets of the Series, cash
requirements and cash available for investment in the Series,
and all other reasonable information as may be necessary for
the Sub-Advisor to perform its duties and responsibilities
hereunder.
(e) The Sub-Advisor agrees that neither it nor any of its
affiliates will in any way refer directly or indirectly to
its relationship with the Fund, the Series, or the Manager
or any of their respective affiliates in offering, marketing
or other promotional materials without the express written
consent of the Manager.
(f) The Sub-Advisor represents that it will not enter into any
agreement, oral or written, or other understanding under which
the Fund directs or is expected to direct portfolio securities
transactions, or any remuneration, to a broker or dealer in
consideration for the promotion or sale of Fund shares or
shares issued by any other registered investment company. Sub-
advisor further represents that it is contrary to the Sub-
advisor's policies to permit those who select brokers or
dealers for execution of fund portfolio securities transactions
to take into account the broker or dealer's promotion or sale
of Fund shares or shares issued by any other registered
investment company.
(g) This Agreement contains the entire understanding and
agreement of the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
PRINCIPAL MANAGEMENT CORPORATION
By /s/ Xxxxxxx X. Beer
Xxxxxxx X. Beer, Executive Vice
President and
Chief Operating Officer
XXXXX INVESTMENT ADVISORY INCORPORATED
By /s/ Xxxxxxx X. Xxxxxx
Xxxxxxx X. Xxxxxx, President
APPENDIX A
Xxxxx Investment Advisory Incorporated ("Xxxxx") shall serve as an
investment sub-advisor for the Series identified below. The Manager
will pay Xxxxx, as full compensation for all services provided under
this Agreement, a fee, computed and paid monthly, at an annual rate as
shown below of the Series' net assets as the first day of each month
allocated to Xxxxx'x management, provided however cash and cash
equivalents shall be included in the Series' net assets calculation up
to a maximum of 1.00% of the Series net assets.
In calculating the fee for a series included in the table, assets of
any unregistered separate account of Principal Life Insurance Company
and any investment company sponsored by Principal Life Insurance
Company to which Xxxxx provides investment advisory services and which
have the same investment mandate as the series for which the fee is
calculated, will be combined with the assets of the series to arrive at
net assets.
If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the
end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the
proportion which such period bears to the full month in which such
effectiveness or termination occurs.
SmallCap Growth Fund I
Sub-Advisor's Fee as a Percentage of Average Daily
Net Assets
First $200 million
0.50%
Next $200 million ....................................... 0.45%
Assets over $400 million
0.40%
LargeCap Growth Fund I
Sub-Advisor's Fee as a Percentage of Average Daily
Net Assets
First $100 million
0.30%
Next $100 million ....................................... 0.25%
Assets over $200 million
0.20%
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