| BY EDGAR TRANSMISSION | |
| December 9, 2011 | |
| Ms. Christina DiAngelo | |
| Mr. Kieran Brown | |
| Division of Investment Management | |
| Securities and Exchange Commission | |
| 100 F Street, N.E. | |
| Washington, D.C. 20549 | |
| Re: | Principal Funds, Inc. |
| Response to SEC Staff Comments on: | |
| Registration Statement on Form N-14 | |
| Pursuant to Securities Act of 1933 | |
| Registration No. 333-178050 | |
| Dear Ms. DiAngelo and 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 on Friday, December 2, 2011 and Tuesday, December 6, 2011. Changes in response to staff | |
| comments will be made by the Registrant in a pre-effective N-14/A filing for the Proxy | |
| Statement/Prospectus related to the Reorganizations of the SmallCap Value Fund into the | |
| SmallCap Blend Fund and the SmallCap Growth Fund into the SmallCap Blend Fund. | |
| Comments from Ms. DiAngelo: | |
| Comment 1.Include accounting survivor analysis for the Reorganizations. | |
| ResponseThe criteria that are generally applied to determine the proper accounting survivor | |
| are outlined in the “AICPA Accounting and Audit Guide for Investment Companies” (the | |
| “Guide”). The Guide states that the legal survivor normally is considered the accounting survivor | |
| of a fund combination, but that continuity and dominance in one or more of the following areas | |
| might lead to a determination that the disappearing fund should be considered the accounting | |
| survivor: (1) portfolio management; (2) investment objectives, policies and restrictions; (3) | |
| portfolio composition; (4) expense structure and expense ratios; and (5) asset size. | |
| The Staff of the Commission has taken the position that these same factors generally should | |
| be considered in determining which fund’s historical performance should be presented following a | |
| fund combination. In this connection, the Staff has stated that the survivor of a fund combination | |
| for accounting purposes generally will be the fund whose historical performance may be used by a | |
| new or surviving fund. In making the determination of which fund’s performance to use, the Staff | |
| has stated that “funds should compare the attributes of the surviving or new fund and the | |
| predecessor funds to determine which predecessor fund, if any, the surviving or new fund most | |
| closely resembles” (North American Security Trust(pub. avail. Aug. 15, 1994). | |
| Page 2 |
| Based on its review, Principal Management Corporation (“PMC”) determined, with respect |
| to each Reorganization, that the Acquiring Fund will be the accounting survivor and that the |
| performance history of the Acquiring Fund will be used after the Reorganization. In this |
| connection, PMC concluded that: (1) the combined Fund will be advised by the portfolio |
| management team that currently advises the Acquiring Fund; (2) the combined Fund will be |
| managed in accordance with the investment objectives, policies and restrictions of the Acquiring |
| Fund; (3) the portfolio composition of the combined Fund will more closely resemble the portfolio |
| composition of the Acquiring Fund because the combined Fund will be managed by the Acquiring |
| Fund’s portfolio management team in accordance with the investment objectives, policies, and |
| restrictions of that Fund; (4) the expense structure and expense ratios of the combined Fund will |
| more closely resemble those of the Acquiring Fund; and (5) the Acquiring Fund is the larger of the |
| Funds involved in the Reorganization. |
| Comment 2.As noted previously, please include the significant redemption as an adjustment to |
| both the capitalization table and pro forma financial statements for the SmallCap Value Fund. |
| Please include in your correspondence the effect of the redemption on the fees and expenses of the |
| target fund. |
| Response.An adjustment to the capitalization table and the pro form financial statements has |
| been made to reflect the significant redemption made in the SmallCap Value Fund. The redemption |
| caused the fees and expenses to increase by approximately 40 basis points following the |
| redemption, however the actual costs to shareholders was insignificant due to contractual caps. |
| Comment 3.In section titled “Reorganization”, existing disclosure on page 3reads as follows: |
| “Moreover, the SmallCap Blend Fund, as a fund with greater assets, may be expected to afford |
| shareholders of the SmallCap Value Fund, on an ongoing basis, greater prospects for growth and |
| efficient management.” |
| Please clarify that the SmallCap Blend Fund iscurrentlylarger than the SmallCap Value Fund- this |
| wasn’t the case prior to the significant redemption. |
| Response.The requested disclosure has been added. |
| Comment 4.In section titled “Reorganization”, existing disclosure on page 3reads as follows: |
| Existing disclosure on page 3reads as follows: |
| “The Funds have the same advisory fee rates and, although the SmallCap Blend Fund has higher |
| overall expense ratios than the Small Cap Value Fund with respect to certain share classes, PMC |
| has agreed to cap the expenses of the SmallCap Blend Fund for a two-year period following the |
| Reorganization.” |
| Please clarify what is meant by “higher overall expenses”? Be more specific. Do you mean gross |
| expenses, before waivers? For example, it appears as if the target fund generally has higher |
| expenses on a gross basis, but has lower expenses on a net basis than the acquiring fund. Note |
| however that Class C shares of the target fund have lower gross expenses and net expenses than the |
| Page 3 | |
| acquiring fund. Please make applicable changes to similar disclosure of SmallCap Blend/SmallCap | |
| Growth merger as required. | |
| Response. | The disclosure has been revised to reflect higher overall “net” expenses. |
| Comment 5.In section titled “Reorganization”, existing disclosurereads as follows: | |
| “PMC has agreed to cap the expenses of the SmallCap Blend Fund for a two-year period following | |
| the Reorganization.” | |
| Disclose what these expense caps are based on. For example, are the caps based on the existing | |
| expense levels of the target fund? Clarify in this section that after the contractual two year expense | |
| limitation period, the expenses could increase to a level that may be higher than currently | |
| experienced by shareholders of the target fund. Please make applicable changes to similar | |
| disclosure of SmallCap Blend/SmallCap Growth merger as required. | |
| Response. | The requested disclosure has been made. |
| Comment 6. | Please refer the readers to the Federal Income Tax consequences section and add |
| disclosure about the tax implications of these sales and the distributions resulting from these sales. | |
| Response. | The Registrant believes it already has included the information requested. Current |
| disclosure in the Reorganization section current reads as follows: | |
| In the opinion of legal counsel, each Reorganization will qualify as a tax-free | |
| reorganization and, for federal income tax purposes, no gain or loss will be recognized as a | |
| result of the Reorganization by the Acquired or Acquiring Fund shareholders. Please see | |
| “Information About the Reorganization – Federal Income Tax Consequences” for a discussion | |
| the tax consequences to the Acquired Fund and its shareholders of disposing of portfolio | |
| securities, as described below, and their relation to available pre-reorganization capital losses of | |
| the Acquired Funds. | |
| Comment 7.Clarify that the disposition of target fund portfolio securities will occur before the | |
| transaction. | |
| Response.The requested disclosure has been made. | |
| Comment 8. | With respect to the SmallCap Growth/SmallCap Blend merger, you state that the |
| shareholders of the acquired fund are not expected to experience increased fund operating | |
| expenses. This does not appear to be true. According to the fee tables on page 14, if only the two | |
| funds are combined, many share classes will experience higher expenses. | |
| Response.The increased operating expenses are due to an increase in “Acquired Fund Fees | |
| and Expenses”. The disclosure has been rewritten to explain the increase. | |
| Page 4 |
| Comment 9.On the fee table on page 6, Table (a): Class J shares of the SmallCap Value Fund are |
| presented as 1.57%. The audited financial highlights present 1.47% gross and 1.40% net. Was this |
| a voluntary waiver? |
| Response.The 1.57% included in the prospectus includes 0.10% of Acquired Fund Fees and |
| Expenses not included in the Financial Highlights. The net ratio of 1.40% reflects the voluntary |
| 12b-1 fee waiver that was in place at a rate of 0.05% from November 1, 2009 until June 30, 2010 |
| and 0.10% from July 1, 2010 through the date of the audited financial statement. |
| Comment 11.On the fee table on page 6, Table (b): Class B of the SmallCap Blend Fund is |
| presented as 2.43% on a net basis. The net expense ratio at 10/31/10 was 2.74%. Was the expense |
| limit changed? |
| Response.An expense limit was added on October 1, 2010 at a rate of 2.38%. The difference |
| between the expense limit and the 2.43% shown in the prospectus is due to Acquired Fund Fees |
| and Expense where are not subject to the expense limit. |
| Comment 12.On the fee table on page 6, Table (b): Class J of the SmallCap Blend Fund is |
| presented as 1.57%. The financial highlights at 10/31/10 present 1.35% net and 1.42% gross. |
| Response.The other expenses listed in the prospectus are incorrect and should be disclosed at |
| 0.22%, making the Total Annual Fund Operating Expenses 1.47%. The difference between 1.47% |
| prospectus ratio and the 1.42% gross Financial Highlights ratio is due to 0.05% in Acquired Fund |
| Fees. |
| Comment 13.In the financial highlights for Class A shares of the SmallCap Blend Fund, there is a |
| note that the ratio reflects the Manager’s contractual expense limit. Were there any fees waived at |
| 10/31/10? |
| Response.The expense limit was not reached during the period and no fees were waived. |
| Comment 14.In the footnotes to the fee tables,the language describing what's excluded from the |
| expense limitation does not agree to the financial statements, but does agree to the prospectus-- the |
| financial statements exclude "interest the funds incur in connection with investments they make". |
| Ensure that the language is consistent among all disclosure documents going forward. |
| Response.We will ensure consistency going forward. |
| Comment 15.On the Expense Example sections for both proposals, disclose that the table reflects |
| the conversion of B shares to A shares after 8 years. |
| Response.The requested disclosure has been added. |
| Page 5 |
| Comment 16.With regards to the hypothetical expense example tables, what period was used in |
| the example calculations for the ProForma Combined Funds? The pro forma combined waivers are |
| in effect for two years. Were two years of net expenses used to calculate the hypothetical expense |
| examples? |
| Response.The expense examples have been updated to reflect the two year period of the |
| expense cap. |
| Comment 17.With regards to the hypothetical expense example tables, for the SmallCap Blend |
| Fund (Acquiring Fund) Pro Forma Assuming Reorganization (If you do not sell your shares) |
| example, why are the Class A hypothetical expense examples different from the “if you sell your |
| shares” examples? It shouldn’t matter with A shares’ front-end load; they should be the same. |
| Please also review the “if you do not sell your shares” calculation for Class B and C shares as well. |
| Response.The expense examples have been updated. |
| Comment 18.On Page 21, the following disclosure appears inconsistent with disclosure |
| elsewhere in the document regarding the payment of reorganization expenses: |
| “Under the Plan related to the Reorganization of the SmallCap Growth Fund into the SmallCap |
| Blend Fund, the SmallCap Growth Fund will pay all expenses and out-of-pocket fees incurred in |
| connection with the Reorganization.” |
| Response.The disclosure has been revised to properly reflect that PMC will be paying all out- |
| of-pocket fees incurred in connection with the Reorganization. |
| Comment 19.On page 30, consider updating the information- for example, what is the percentage |
| ownership of the SmallCap Value Fund after the significant redemption? |
| Response.As of 10/31/2011, no fund listed in the proxy was being used as a “fund-of-funds”. |
| Therefore, the description of “Underlying Funds” on page 30 has been deleted, along with |
| “underling fund risk” listed under “Comparison of Principal Investment Risks” for both proposals. |
| Comment 21.In the Statement of Additional Information, Pro Forma Financial Statements |
| section, in the second paragraph, why is the term “combined Acquiring funds” used? |
| Response.The disclosure has been appropriately revised. |
| Comment 22.In the Statement of Additional Information - Pro Forma Statement of Operations, |
| why is an adjustment being shown to Management fees--- the pro forma fee tables do not show a |
| drop in management fees. Is this a timing difference? |
| Response.The adjustment reflects breakpoints afforded the combined funds larger asset size. |
| Comment 23.Pro Forma Schedule of Investments- Confirm that investments in PennantPark |
| Investment Corp, a BDC is included in the AFFE calculation. |
| Response.PennantPark Investment Carp was included in the AFFE calculation. |
| Page 6 | |
| Comments from Mr. Brown: | |
| Comment 24.On the coversheet, please include a phone number for Principal Funds, Inc. | |
| Response.The requested disclosure has been added. | |
| Comment 25.On the coversheet, include a brief description of the investment objectives of the | |
| Acquiring Fund and the Acquired Funds. | |
| Response.The requested disclosure has been added. | |
| Comment 26.On the coversheet, please disclose that the Proxy Statement/Prospectus “concisely | |
| describes” the matters to be voted on at the meeting. | |
| Response.The disclosure has been revised as requested. | |
| Comment 28.On page one of the Proxy Statement/Prospectus, please disclose that shareholders | |
| may receive the Annual and Semi-Annual Reports, free of charge, upon written request. | |
| Response.The requested disclosure has been added. | |
| Comment 29.In section titled “Reorganization”, please clarify whether the Reorganizations will | |
| result in a material change to the exchange rights of shareholders of the funds. | |
| Response.The disclosure has been revised to reflect that the Reorganizations will not result in | |
| a material change to the exchange rights of shareholders. | |
| Comment 31.For both proposals, please clarify that PMC is the Investment Advisor for both the | |
| Acquired and the Acquiring Funds. | |
| Response.The requested disclosure has been added. | |
| Comment 32.For both proposals, please confirm the start date of each portfolio manager for | |
| both the Acquired and the Acquiring Fund. | |
| Response.The disclosure has been appropriately revised. | |
| Comment 33.For both proposals, please change the disclosure of the range of the indexes in | |
| the Principal Investment Strategies section to read $20 million instead of $0.02 billion. | |
| Response.The disclosure has been revised as requested. | |
| Comment 34.For both proposals, please move the Comparison of Principal Investment Risks so | |
| that it appears immediately after the Comparison of Investment Objectives and Risks. | |
| Response.The disclosure has been revised as requested. | |
| Comment 35.With regards to the Shareholder Fees section for both proposals, please clarify that | |
| the shareholder fees apply to both funds. | |
| Response.The disclosure has been revised as requested. | |
| Page 7 |
| Comment 36.For both proposals, please clarify that the CDSC that may be applied to made on |
| certain redemptions made within 18 months only applies to J shares. |
| Response.This footnote has been removed from this section in accordance with Form N-1A. |
| Comment 37.With regards to the SmallCap Value/SmallCap Blend reorganization, explain why |
| the total operating expense ratios for the pro forma fee table (assuming both reorganizations) is |
| higher than the total operating expense ratios for the pro forma fee table (assuming only the |
| proposed reorganization with the SmallCap Value Fund. |
| Response.The transfer agent costs are higher in SmallCap Growth Fund due to smaller |
| account sizes. This causes the combination of the three funds to have higher “Other Expenses” |
| than the combination of only SmallCap Value Fund and SmallCap Blend Fund. |
| Comment 38.For both proposals, explain what direct or indirect benefits the Board considered |
| that could derived by PMC. |
| Response.The requested disclosure has been added. |
| Comment 39.Please explain in the comment letter whether a possible merger into a non-affiliated |
| fund was considered by the Board for both proposals, and if not, why not. |
| Response.The Board did not consider a possible merger of the funds with a non-affiliated |
| fund as such efforts would not be economically efficient, especially given the sizes of the Acquired |
| Funds and the commonality of their investment objectives. |
| Comment 40.In the section titled “Reasons for the Reorganization” for both proposals, please |
| explain why a fund with greater assets may be expected to afford shareholders of the Acquired |
| Funds, on an ongoing basis, greater prospects for growth. |
| Response.Additional disclosure has been added as requested. |
| Please call me at 515-235-9328 or Jennifer Mills at 515-235-9154 if you have any questions. |
| Very truly yours, |
| /s/ Adam U. Shaikh |
| Adam U. Shaikh |
| Assistant Counsel |
| Principal Funds, Inc. |
