$100 billion and growing
How Principal Funds pulled to the front of a crowded field of U.S. mutual funds - and what’s ahead
Friday, September 06, 2013 7:00 AM
Larry Zimpleman knew that acquiring Washington Mutual Inc.’s mutual fund business seven years ago would mean significant growth for Principal Funds.
Principal’s top-selling mutual funds
(year-to-date sales through June 30)
1. Principal Global Diversified Income (No. 43 top-selling fund in U.S.)
2. Principal MidCap Fund (No. 65 overall)
3. Principal Preferred Securities Fund (No. 403 overall)
Source: Principal Funds
InvestmentNews named Principal Funds No. 9 among the top 10 “hottest fund firms” for 2012, based on net inflows.
Barron’s annual ranking of top mutual fund families for 2013 ranked Principal Funds No. 11 out of 65 fund families based on one-year performance.
Principal Funds is the fifth-largest manager of lifecycle (target-date and target-risk) funds in the industry, according to Financial Research Corp.’s Mutual Fund Lifecycle Report.
It has – in spades.
Zimpleman, now chairman, president and CEO of Principal Financial Group Inc., predicted in 2006 that the $740 million deal would propel Principal Funds into the 25 largest mutual fund families within the next several years.
It has happened. On May 7, Principal Funds’ assets under management crossed the $100 billion mark for the first time, punctuating a record sales year in which the company’s funds have won accolades both for growth and for quality. According to Strategic Insight, a mutual fund research firm, Principal Funds Inc. is currently the 19th largest mutual fund company by assets under management, up from No. 32 in January 2007.
“We are on a roll,” said Nora Everett, president and CEO of Principal Funds. The Des Moines-based mutual fund family, which now includes nearly 40 fund choices in eight asset classes, achieved record sales of $5.8 billion in the second quarter of 2013 and has garnered four Lipper Fund Awards this year, among them Best Mixed-Asset Large Fund Group.
Principal Funds is pulling to the front of a crowded field of more than 8,000 U.S. mutual funds, which last year reported $196 billion in net inflows as Baby Boomers begin to enter their retirement years.
Principal Funds’ expanded retail distribution base, combined with development of its own “outcome-based” funds, has enabled the company to rapidly increase its market share, Everett said.
One of Principal Funds’ competitive advantages has been its product design process, “which we really turned on its head a little bit,” she said.
“We said, what are those risks and needs as you go into retirement? Our product design team identified a number of retirement needs and risks. Then we said, how do we design a single product that solves for those needs?”
That process led Principal Funds in 2009 to launch its first outcome-based fund: the Global Diversified Income Fund. For the past two years, Global Diversified Income has been Principal Funds’ single largest-selling fund, pulling in more than $2 billion in sales just in the first half of this year.
The mutual fund company has since launched two more outcome-based funds: its Diversified Real Asset Fund and, most recently, its Global Multi-Strategy Fund.
“Each of those funds is solving for a specific need, and interestingly enough, we didn’t even have to wait for (the funds to establish) a track record.” Everett said. Normally, funds have to establish a performance record over several years before becoming popular. However, because they are addressing specific needs with known subadvisers, in less than five years, those three products account for more than $10 billion of Principal Funds’ assets under management, she said.
Tremendous opportunities ahead
Principal Funds operates in both the retail and retirement sides of the mutual fund business. On the retail side, its funds are sold to individual investors, typically through investment advisers. On the retirement side, its customers are 401(k) plans, pension plans and other retirement vehicles that invest in its funds.
Although Principal has been selling mutual funds since 1939, it had done so only through its own career insurance agents and through its 401(k) business. “So once we acquired the Washington Mutual business and made a significant investment in retail distribution, we’ve seen tremendous growth on the retail side of our business,” Everett said. Principal Funds currently generates about 60 percent of its fund sales in the retail business and the remaining 40 percent through its retirement business.
In addition to the growth in the individual market, “there are still tremendous opportunities in the retirement space,” she said. Besides selling mutual funds for retirement plans for which Principal serves as the record keeper, the company also sells to pension plans and investment consultants in cases where it’s not the record keeper as part of the “defined contribution investment-only” business, which it entered about five years ago.
“There is great opportunity in both those spaces, and we’re relatively new to that second space,” Everett said.
Two types of fully bundled products - target date and target risk funds - have been critical to Principal Funds’ rapid growth. Those two categories of funds make up nearly one-third of Principal Funds’ assets under management, and Principal Funds is now the fifth-largest mutual fund provider in the country for those types of products.
Those two “do-it-for-me” products represent huge growth opportunity in both the retail and retirement spaces, Everett noted.
“One of the highlights of this year was when Lipper awarded us the Top Fund Family of the Year for our asset allocation products, based on three-year investment performance – that’s huge,” she said. “That’s a coveted award, and we won against every major fund family in the country. And it’s based on investment performance, which is all about what are we delivering to our investors.”
More advisers to sell Principal funds
As a member of the Investment Company Institute’s board of governors since October 2012, Everett has gained additional insight into trends affecting the mutual fund industry. The institute represents more than 14,000 investment company funds that serve more than 90 million shareholders.
“Across the industry, we’re definitely seeing a trend in the (growth of) multi-asset class, multimanager solutions,” she said. “We’re definitely seeing trends with regard to income and yield; there is a huge appetite for yield.”
Additionally, globalization is definitely an emerging trend. Many mutual fund companies are offering international funds, and Principal is also building retail mutual fund businesses outside the United States through Principal Global Investors. “We’re seeing more U.S. investors wanting to complement their U.S. equity holdings with either global or emerging investments,” she said. “It’s mostly on the equity side, but we’re starting to see it on the debt side as well.”
On the distribution side, Everett said that Principal Funds will always be primarily adviser-sold funds.
“So I would expect that we would increase the number of advisers and firms we’re working with, and that you would see Principal Funds being sold by more independent firms and advisers than today,” she said.
“From one perspective, we’re still a bit of a startup,” Everett said. “We’ve only been in this independent distribution world for five years. Many of our peers have been there 80, 90 years. So we have a huge amount of runway there. And we’ve got the right product, and we’ve made the investment in our distribution franchise. So I think the combination gives us a lot of upside with regard to the number of new advisers we’ll be working with over the next couple of years.”
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