XX XXXXXX SUB-ADVISORY
AGREEMENT 10/1/08
PRINCIPAL FUNDS, INC.
AMENDED AND RESTATED SUB-ADVISORY AGREEMENT
X.X. XXXXXX SUB-ADVISED FUNDS
AGREEMENT executed as of the 1st day of October, 2008, by and between PRINCIPAL
MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the Manager"),
and X.X. Xxxxxx Investment Management, Inc., a Delaware 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 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 on the latest of (i) the date of its
execution, (ii) the date of its approval by a majority of the Board of Directors
of the Fund, including approval by the 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 or (iii) if required
by the 1940 Act, the date of its approval by a majority of the outstanding
voting securities of the Series. It shall continue in effect 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 the 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 Fund 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 000 Xxxx Xxxxxx Xxx Xxxx, X.X. 00000. . Attention:
Legal - Mutual Funds.
(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) 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
X.X. XXXXXX INVESTMENT MANAGEMENT INC.
By /s/Xxxxx X. Xxxxxxx
Xxxxx X. Xxxxxxx, Vice President
APPENDIX A
The Sub-Advisor shall serve as investment sub-advisor for the Fund. The Manager
will pay the Sub-Advisor, as full compensation for all services provided under
this Agreement, a fee computed at an annual rate as follows (the "Sub-Advisor
Percentage Fee"):
SmallCap Value Fund I
Sub-Advisor's Fee as a Percentage of Average Daily Net Assets
First $300 million 0.45%
Over $300 million 0.35%
Global Equity Fund I
Sub-Advisor's Fee as a Percentage of Average Daily Net Assets
First $50 million 0.55%
Next $100 million 0.45%
Next $150 million 0.40%
Next $200 million 0.35%
Next $500 million 0.30%
Over $1 billion 0.25%
High Yield Fund I
Sub-Advisor's Fee as a Percentage of Average Daily Net Assets
All Assets 0.30%
The Sub-Advisor Percentage Fee shall be accrued for each calendar day and the
sum of the daily fee accruals shall be paid monthly to the Sub-Advisor. The
daily fee accruals will be computed by multiplying the fraction of one over the
number of calendar days in the year by the applicable annual rate described
above and multiplying this product by the net assets of the Fund as determined
in accordance with the Fund's prospectus and statement of additional information
as of the close of business on the previous business day on which the Fund was
open for business.
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.
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