business_looking_banner

Principal Financial Group: A Deeper Look at the Performance

business_looking_banner

In recent years, a host of large insurance carriers have been paring back their forays into asset management. Major players like John Hancock, Allianz, MetLife, AIG and Jackson National have spun off their broker-dealer networks to focus on core business competencies. 

Meanwhile, Principal Financial has been bucking such a trend. "The insurer and fund company is ramping up its 401(k) and wealth management even as other insurance firms exit," Financial Planning magazine reported after Principal announced it was buying Wells Fargo Bank's institutional retirement and trust business. The $1.2 billion deal, which closed in July 2019, followed an earlier acquisition of startup investment manager RobustWealth.

The acquisition of Wells Fargo's institutional unit "doubled the size of our U.S. retirement business and positions us as a top-three retirement player," Principal's CEO told investors at a conference call earlier this year, according to industry trade publication IndustryNewsNet.com. 

The publicly traded provider of retirement savings, as well as investment and insurance products, is based in Des Moines, Iowa. Its roots as an insurer trace back to 1879. By April 2020, it had amassed more than $631 billion in assets under management and employed about 18,000 workers around the world. Principal Financial Group operates in four business segments: Retirement and Income Solutions; Principal Global Investors; Principal International and United States Insurance Solutions. 

Given its rather expansive designs to move deeper into asset management, we thought it'd be worthwhile to put under our research microscope Principal's family of active mutual funds. This analysis is part of our ongoing Deeper Look series, which investigates claims by managers of peer performance superiority by holding them to a higher standard -- i.e., how they've done over longer periods against their respective indexes.

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 40 active mutual funds with five or more years of performance-related data currently offered by Principal, it doesn't necessarily mean these are the only strategies this company has ever managed. In fact, there are 62 mutual funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.  

Fees & Expenses

Let's first examine the costs associated with Principal's surviving 40 strategies. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, sales loads -- front-end (A), back-end (B) and level (C) -- as well as 12b-1 marketing fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach, and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities, such as short- and long-term capital gains distributions, than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 40 surviving active funds offered by Principal that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is what is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Deferred Load Max Front Load Global Category
Principal Opportunistic Municipal A PMOAX 66.10 0.96 0.25   3.75 US Municipal Fixed Income
Principal Tax-Exempt Bond A PTEAX 64.00 0.86 0.25   3.75 US Municipal Fixed Income
Principal California Municipal A SRCMX 42.30 0.81 0.25   3.75 US Municipal Fixed Income
Principal Core Fixed Income A CMPIX 19.80 0.89 0.25   2.25 US Fixed Income
Principal Government & High Qual Bd A CMPGX 23.20 0.83 0.15   2.25 US Fixed Income
Principal Short-Term Income A SRHQX 52.40 0.69 0.15   2.25 US Fixed Income
Principal Inflation Protection J PIPJX 68.40 1.15 0.15 1.00   US Fixed Income
Principal Core Plus Bond R5 PBMPX 138.60 0.72       US Fixed Income
Principal Spectrum Pref&Cptl Scs IncInst PPSIX 19.80 0.81       US Fixed Income
Principal Capital Securities S PCSFX 14.70 0.00       US Fixed Income
Principal High Yield A CPHYX 49.80 0.94 0.25   3.75 US Fixed Income
Principal High Income Inst PYHIX 56.50 0.61       US Fixed Income
Principal International I Inst PINIX 71.00 0.90       Global Equity Large Cap
Principal Diversified Intl R5 PINPX 51.00 0.99       Global Equity Large Cap
Principal Overseas Instl PINZX 47.80 0.93       Global Equity Large Cap
Principal Intl Emerging Markets R5 PEPSX 148.30 1.39       Global Emerging Markets Equity
Principal International Small Company A PICAX 46.80 1.60 0.25   5.50 Global Equity Mid/Small Cap
Principal SAM Strategic Growth A SACAX 19.90 1.23 0.25   5.50 Aggressive Allocation
Principal SAM Flexible Income A SAUPX 11.10 1.12 0.25   3.75 Cautious Allocation
Principal Global Div Inc Instl PGDIX 87.30 0.69       Cautious Allocation
Principal Diversified Real Asset Instl PDRDX 71.50 0.84       Flexible Allocation
Principal SAM Conservative Growth A SAGPX 10.90 1.23 0.25   5.50 Aggressive Allocation
Principal SAM Conservative Bal A SAIPX 15.00 1.23 0.25   5.50 Cautious Allocation
Principal Global Multi-Strategy Instl PSMIX 387.80 3.01       Multialternative
Principal SAM Balanced A SABPX 13.40 1.23 0.25   5.50 Moderate Allocation
Principal Blue Chip Institutional PBCKX 15.90 0.66       US Equity Large Cap Growth
Principal LargeCap Growth I Instl PLGIX 71.00 0.68       US Equity Large Cap Growth
Principal Capital Appreciation A CMNWX 35.40 0.86 0.25   5.50 US Equity Large Cap Blend
Principal Equity Income A PQIAX 21.50 0.91 0.25   5.50 US Equity Large Cap Value
Principal Large Cap Value III Inst PLVIX 51.50 0.72       US Equity Large Cap Value
Principal SmallCap Growth I Instl PGRTX 57.40 0.96       US Equity Small Cap
Principal SmallCap R5 PSBPX 40.00 1.01       US Equity Small Cap
Principal SmallCap Value II Instl PPVIX 76.10 1.01       US Equity Small Cap
Principal MidCap Growth R5 PHPPX 104.60 0.93       US Equity Mid Cap
Principal MidCap R5 PMBPX 13.60 0.85       US Equity Mid Cap
Principal MidCap Growth III R5 PPQPX 43.20 1.12       US Equity Mid Cap
Principal MidCap Value I Inst PVMIX 60.00 0.70       US Equity Mid Cap
Principal Small-MidCap Dividend Inc Inst PMDIX 21.90 0.86       US Equity Small Cap
Principal Global Real Estate Sec Instl POSIX 42.40 0.94       Real Estate Sector Equity
Principal Real Estate Securities R5 PREPX 20.10 1.07       Real Estate Sector Equity

Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Principal Financial Group prospectuses are available at:  https://www.principalfunds.com/funds

On average, an investor who utilized a surviving active equity mutual fund strategy from Principal experienced a 0.95% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 0.77% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Principal were 51.98% and 51.30%, respectively. This implies an average holding period of 23.09 to 23.39 months.

In contrast, most index funds have very long holding periods -- decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Principal's implementation of active management. We compare all of its 102 strategies, which includes both current funds and funds no longer in existence, against its Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

  • 81.37% (83 of 102 funds) have underperformed their respective benchmarks or did not survive the period since inception.

  • 18.63% (19 of 102 funds) have outperformed their respective benchmarks since inception, having delivered a POSITIVE alpha.

Here's the real kicker, however:

  • None (0 of 102 funds) wound up outperforming their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance would persist (as opposed to being based on random outcomes).

As a result, this study shows that a majority of funds offered by Principal have not outperformed their Morningstar-assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Principal has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions (betas) of expected return in the U.S. (i.e., market, size, relative price, etc.).

For example, if we were to look at all of the U.S.-based strategies from Principal that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2020. Screening criteria include funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.

As shown above, although two mutual funds had a positive excess return over the stated benchmarks, none of the equity funds reviewed produced a statistically significant level of alpha, based on a t-stat of 2.0 or greater. (For a review of how to calculate a fund's t-stat, see the section of this study that follows the individual Principal alpha charts.)

Why is this important? It means that if we wanted to simply replicate the factor risk exposures to these Principal funds with indexes of the factors, we could blend the indexes and capture similar returns. 

To get similar risks and returns in a mutual fund would require the additional fees of those passively managed funds. That would alter such an analysis, but not by much because of the relatively low fees of the passively managed funds compared to the actively managed funds.

Conclusion

Like many of the other largest financial institutions, a deep analysis into the performance of Principal has yielded a not so surprising result: Active management is likely to fail many investors. We believe this is due to market efficiency, costs and increased competition in the financial services sector.

As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold and rebalance a globally diversified portfolio of index funds.

Below are the individual alpha charts for the existing Principal actively managed mutual funds that have five years or more of a track record.

 

Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

 


Back To Top

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.


This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. Performance may contain both live and back-tested data. Data is provided for illustrative purposes only, it does not represent actual performance of any client portfolio or account and it should not be interpreted as an indication of such performance. IFA Index Portfolios are recommended based on time horizon and risk tolerance.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.