| June 2, 2011 | |
| Via EDGAR | |
| Kieran Brown | |
| Senior Counsel | |
| Division of Investment Management | |
| Securities and Exchange Commission | |
| 100 F Street, NE | |
| Washington D.C. 20549 | |
| Re: | Principal Funds, Inc. |
| Post-Effective Amendment No. 99 to the Registration Statement on Form N-1A | |
| File Nos. 033-59474, 811-07572 | |
| Dear Mr. Brown, | |
| This letter responds, on behalf of Principal Funds, Inc. (the “Registrant”), to the comments of the Staff of | |
| the Securities and Exchange Commission (“Commission”), which you communicated to me by telephone | |
| on May 12, 2011, with respect to post-effective amendment number 99 to the Registrant’s registration | |
| statement on Form N-1A (“the Amendment”). The Amendment was filed with the Commission on March | |
| 23, 2011, pursuant to Rule 485(a) under the Securities Act of 1933 (the “1933 Act”). Changes in response | |
| to Staff comments as described below will be made by the Registrant in a post-effective amendment that | |
| will be filed with the Commission pursuant to Rule 485(b) under the 1933 Act (Amendment number 100). | |
| Comments on the Prospectus | |
| Comment 1.The name of the fund is “Small-MidCap Dividend Income Fund” and the objective states, | |
| “The Fund seeks to provide a relatively high level of current income and long-term growth of income and | |
| capital, while investing primarily in small- to mid-capitalization companies.” If “Income” is part of the name, | |
| the Staff believes the portion of the objective which states “long-term growth of…capital” should be a | |
| secondary objective rather than a primary one. | |
| Response: The Registrant will revise the language to state substantially as follows: “The Fund | |
| primarily seeks to provide a relatively high level of current income and long-term growth of | |
| income, and secondarily long-term growth of capital, while investing primarily in small- to mid- | |
| capitalization companies.” | |
| Comment 2.In the Annual Fund Operating Expenses table, remove the heading from the table that | |
| states “Estimated for the year ending August 31, 2011” and instead add a footnote to the “Other Expenses” | |
| line that notes the information is estimated for the year ending August 31, 2011. | |
| Response: The Registrant will make the requested revision. | |
| Comment 3.Add “plus borrowings for investment purposes” after “net assets” in the statement, “Under | |
| normal circumstances, the Fund invests at least 80% of its net assets in dividend-paying equity securities | |
| of companies with small to medium market capitalizations (those with market capitalizations ranging from | |
| between $200 million and $7 billion) at the time of purchase.” | |
| Response: The Registrant respectfully declines to make this revision because doing so would | |
| restate a legal requirement to which funds are generally subject without enhancing the quality of | |
| the information disclosed. Additionally, for the annual update post-effective amendment, the | |
| Registrant’s prospectuses contain multiple funds and 80% language usually appears more than | |
| once in each prospectus. See Investment Company Act Rule 35d-1(d)(2) (defining assets as “net | |
| assets, plus the amount of any borrowings for investment purposes”), Form N-1A General | |
| Instruction C.1.(c) (stating, “The prospectus should avoid…simply restating legal or regulatory | |
| requirements to which Funds generally are subject ”), and Note 4 to Securities Act of 1933 Rule |
| 421(b)(4) (stating, “you should avoid…Disclosure repeated in different sections of the document |
| that increases the size of the document but does not enhance the quality of the information.”). |
| Comment 4.Please reconcile the Fund’s investments in master limited partnerships and the Fund’s |
| intention to invest at least 80% of its net assets in dividend-paying equity securities of companies with |
| small to medium market capitalizations (those with market capitalizations ranging from between $200 |
| million and $7 billion) at the time of purchase. |
| Response: The Fund’s investments in master limited partnerships will not prevent the Fund from |
| investing 80% of its net assets in dividend-paying equity securities. |
| Comment 5.The Preferred Securities Risk in the Principal Risks section states, “Preferred securities are |
| junior subordinated securities in a company’s capital structure and therefore can be subject to greater |
| credit and liquidation risk.” Within the Preferred Securities Risk definition, note that credit risk is described |
| within the Fixed-Income Securities Risk. |
| Response: The Registrant respectfully declines to make this revision because the risk definitions |
| are in close proximity and adding a cross reference there would make the document |
| unnecessarily complex. See Form N-1A General Instruction C.2.(a). |
| Comment 6.Clarify why this fund is subject to Underlying Fund Risk. |
| Response: The Registrant will revise the name of the risk to Risk of Being an Underlying Fund |
| to indicate that this Fund is used as an underlying fund. |
| Comment 7.Within the text descriptions in the “Additional Information about Investment Strategies and |
| Risks” section, the Staff would like to have the Fund’s name next to the relevant text descriptions and |
| state whether the strategy and risk are principal or non-principal for the named fund. |
| Response: The Registrant respectfully declines to make this revision. The Registrant believes |
| the chart (the use of which is encouraged by Securities Act of 1933 Rule 421) clearly describes |
| the relevance of each of the listed strategies and risks for the Fund. Generally, for the annual |
| update post-effective amendment, the Registrant’s prospectuses contain multiple funds. An |
| investor interested in a particular fund could consult the chart to see which strategies and risks |
| are relevant to that fund and then go to the textual information about the strategies and risks |
| relevant to that fund. Additionally, the chart and the text organize the strategies and risks in |
| alphabetical order so the topics are easy to find. |
| Comment 8.In the “The Sub-Advisors” subsection within the “Management of the Funds” section, please |
| review the language in the first paragraph. |
| Response: The language will be revised to state substantially as follows: “Principal has signed a |
| contract with a Sub-Advisor. Under the sub-advisory agreement, the Sub-Advisor agrees to |
| assume the obligations of Principal to provide investment advisory services to the Fund.” |
| Comment 9.The Staff notes that the Registrant includes required disclosure about the availability of |
| additional information about the portfolio managers’ compensation, other accounts managed by the |
| portfolio manager, and the portfolio manager’s ownership of securities in the Fund. Please explain the |
| Registrants choice of location of this information (immediately preceding the sub-advisory firm and |
| corresponding portfolio managers). |
| Response: Usually, at the time of the annual update post-effective amendment, the Registrant’s |
| prospectuses contain multiple funds and sub-advisors. The Registrant includes this disclosure |
| with some general information relevant to all sub-advisors and immediately preceding the list of |
| sub-advisory firms and corresponding portfolio managers rather than repeat the statement |
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| multiple times throughout this section. See Note 4 to Securities Act of 1933 Rule 421(b)(4) |
| (stating, “[Y]ou should avoid…Disclosure repeated in different sections of the document that |
| increases the size of the document but does not enhance the quality of the information.”). |
| Comment 10.In the “Manager of Managers” subsection, the following sentence appears: “The |
| shareholders of the Small-MidCap Dividend Income Fund have approved the Fund’s reliance on the |
| order; however, it does not intend to rely on the order.” Does this mean that the Fund does not intend to |
| rely on the order at this time? |
| Response: The Registrant will revise the language to state substantially as follows: “The |
| shareholders of the Small-MidCap Dividend Income Fund have approved the Fund’s reliance on |
| the order; however, it does not intend to rely on the order at this time.” |
| Comment 11.In the bulleted list of “Notes” within the “Pricing of Fund Shares” section, the following |
| sentence appears: “A Fund’s securities may be traded on foreign securities markets that generally |
| complete trading at various times during the day prior to the close of the NYSE.” The Staff believes the |
| word “portfolio” should be inserted between the words “Fund’s” and “securities.” |
| Response: The Registrant will make the requested revision. |
| Comment 12.In the “Purchase of Fund Shares” section, the following sentence appears: “Classes A and |
| C shares are available in this prospectus.” However, the prospectus otherwise only discloses information |
| about Class A shares. |
| Response: The Registrant will revise the sentence to state substantially as follows: “Class A |
| shares are available in this prospectus.” |
| Comment 13.With respect to the policies described in the “Frequent Purchases and Redemptions” |
| section, how do the policies apply to (a) this fund as an underlying fund and (b) the affiliated fund of fund |
| that is investing in the underlying fund? (c) How do the policies apply to omnibus accounts? (d) Explain |
| the relevance of the disclosure in this section that explains the harm of excessive trading flowing through |
| to the Principal LifeTime Funds or Strategic Asset Management Portfolios or delete the information if it is |
| irrelevant to this fund. |
| Response: (a), (b), and (c): The policies described in the “Frequent Purchases and |
| Redemptions” section apply equally to underlying funds, funds of funds, and omnibus accounts. |
| (d) The following sentence will be deleted: “The harm of undetected excessive trading in shares |
| of the underlying Funds in which the Principal LifeTime Funds or Strategic Asset Management |
| Funds invest could flow through to the Principal LifeTime Funds and Strategic Asset Management |
| Funds as they would for any Fund shareholder.” |
| Comment 14.The following language appears in the “Frequent Purchases and Redemptions” section: |
| “The Fund has reserved the right to accept or reject, without prior written notice, any exchange requests. |
| In some instances, an exchange may be completed prior to a determination of abusive trading. In those |
| instances, we will reverse the exchange and return the account holdings to the positions held prior to the |
| exchange. We will give the shareholder that requested the exchange notice in writing in this instance.” |
| Explain how this is consistent with Investment Company Act Rule 22c-1. |
| Response: When excessive trading is discovered, the Fund applies the NAV in effect at the time |
| of the trade deemed to be excessive. |
| Comments on the Statement of Additional Information |
| Comment 15.In the list of Fundamental Restrictions, items 4 and 5 note that the Fund may do certain |
| things to the extent permitted by the 1940 Act [“4) Borrow money, except as permitted under the 1940 Act, |
| as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having |
| jurisdiction, from time to time” and “5) Make loans, except that the Fund may a) purchase and hold debt |
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| obligations in accordance with its investment objectives and policies, b) enter into repurchase |
| agreements, c) participate in an interfund lending program with affiliated investment companies to the |
| extent permitted by the 1940 Act or by any exemptions that may be granted by the Securities and |
| Exchange Commission, and d) lend its portfolio securities without limitation against collateral (consisting |
| of cash or liquid assets) equal at all times to not less than 100% of the value of the securities lent. This |
| limit does not apply to purchases of debt securities or commercial paper. This restriction does not apply to |
| the Preferred Securities Fund.”]. The Staff would like the Registrant to describe the relevant Investment |
| Company Act limitations. |
| Response: The Registrant notes that Form N-1A General Instruction C.1.(c) states in relevant |
| part: “Responses to the Items in Form N-1A should be as simple and direct as reasonably |
| possible and should include only as much information as is necessary to enable an average or |
| typical investor to understand the particular characteristics of the Fund. The prospectus should |
| avoid: including lengthy legal and technical discussions; simply restating legal or regulatory |
| requirements to which Funds generally are subject Brevity is especially important in describing |
| the practices or aspects of the Fund’s operations that do not differ materially from those of other |
| investment companies. Avoid excessive detail, technical or legal terminology, and complex |
| language.” Nevertheless, the Registrant will add language to state substantially as follows: |
| There are limits to a Fund’s ability to borrow money. For example, a fund may not borrow money, |
| except that a fund may borrow for temporary or emergency purposes (not for leveraging or |
| investment) in an amount not exceeding 33S% of the fund’s total assets (including the amount |
| borrowed) less liabilities (other than borrowings). |
| In general, a fund may not lend more than 33 1/3% of total fund assets. |
| Comment 16.Fundamental restriction 4) states the Fund may not “Borrow money, except as permitted |
| under the 1940 Act, as amended, and as interpreted, modified, or otherwise permitted by regulatory |
| authority having jurisdiction, from time to time.” If the Fund does borrow money from time to time, disclose |
| in the Statement of Additional Information the risks of borrowing money. |
| Response: The Registrant will add language to state substantially as follows: |
| Borrowing |
| If a Fund invests the proceeds of borrowing, borrowing will tend to exaggerate the effect on net |
| asset value of any increase or decrease in the market value of a fund’s portfolio. If a Fund |
| invests the proceeds of borrowing, money borrowed will be subject to interest costs that may or |
| may not be recovered by earnings on the securities purchased. A fund also may be required to |
| maintain minimum average balances in connection with a borrowing or to pay a commitment or |
| other fee to maintain a line of credit; either of these requirements would increase the cost of |
| borrowing over the stated interest rate. |
| Comment 17.In the tables describing the directors in the “Management Information” subsection, even |
| though Form N-1A does not specify it, the Staff would like the Registrant to add “During Past 5 Years” to |
| the column heading that currently states, “Other Directorships Held by Director.” |
| Response: The Registrant will make the requested revision. |
| Comment 18.In the “Investment Advisors” subsection, include the general nature of the business for |
| BlackRock Financial Management, Inc. |
| Response: The Registrant will add disclosure that states substantially as follows: “BlackRock |
| and its affiliates manage investment company and other portfolio assets.” |
| Comment 19.In the “Codes of Ethics” subsection, the following sentence appears: “In certain |
| circumstances, personal securities trading is permitted in accordance with procedures established by the |
| Codes.” The Staff would like to know if that includes securities held by the Fund. |
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| Response: Access Persons may trade securities held by the Fund, but may not engage in |
| transactions in a manner that would be inconsistent with Investment Company Act of 1940 Rule |
| 17j-1. |
| Comment 20.In the “Portfolio Manager Disclosure” section for Edge Asset Management, Inc., the |
| following sentence appears in the “Compensation” subsection: “Investment performance is 70% of a |
| Portfolio Manager’s incentive compensation and is based on a comparison of the Portfolio Manager's |
| investment performance with the performance of peer groups as measured equally by 1-3-5 year |
| performance.” The Staff would like to know what is meant by “peer groups.” |
| Response: “Peer groups” refers to Morningstar categories. |
| We understand that the Registrant is responsible for the accuracy and adequacy of the disclosure in the |
| filing and that staff comments or our changes to the disclosure in response to the staff comments do not |
| foreclose the Commission from taking any action with respect to the filing. In addition, the Registrant may |
| not assert staff comments as a defense in any proceeding initiated by the Commission or any person |
| under the federal securities laws of the United States. |
| Please call me at 515-235-9154 or Adam Shaikh at 515-235-9328 if you have any questions. |
| Sincerely, |
| /s/ Jennifer A. Mills |
| Jennifer A. Mills |
| Assistant Counsel, Registrant |
