Where Eggheads Put Nest EggsJeffrey M. Laderman
Want to emulate learned investors? Consider putting money in one of the no-load, low-expense mutual funds that are now offered by Teachers Insurance & Annuity Assn.-College Retirement Equities Fund (TIAA-CREF), the $200 billion giant that manages tax-deferred retirement accounts for 2 million current and former faculty and staff members of 6,000 colleges and universities.
The funds, with $400 million in assets, were launched in September to meet demand from clients who wanted to invest more with TIAA-CREF than their pension plans would permit. Now, those funds have been opened to all.
The funds' records are good--but short (table). Nevertheless, TIAA-CREF variable annuities do have a history. Morningstar Inc. gives three of the group's annuity funds five stars, its highest rating, and three get four stars. "They have below-average risk and above-average returns," says Morningstar analyst Todd Porter. "Over the years, that puts them in the top 25%."
TAX HITCH. The new mutual funds come with some attractive features. One is an unusually low minimum investment for no-load funds, just $250. Expense ratios are low, too, ranging from 0.49% for the international portfolio to 0.29% for the money fund. That's because TIAA-CREF is waiving an additional 0.5% in fees and guarantees the waiver until July 1, 2000.
The problem in exporting the TIAA-CREF approach to funds is taxes. Managers for the retirement plans can trade as often they like, since the profits are tax-deferred. But these funds are taxable, and frequent trading could result in short-term capital gains, which face the same tax rates as ordinary income. TIAA-CREF is aware of this problem. "We're taking steps to minimize tax exposure," says Scott Evans, manager of CREF Investments.
The fund lineup is basic: two domestic equity funds, Growth Equity and Growth & Income; the International Equity Fund; Bonds Plus; the Money Market Fund; and Managed Allocation, which is a blend of the other five. The allocation fund levies no fees, since it invests in others that do. "These are not cowboy funds," says Martin Leibowitz, TIAA-CREF's chief investment officer. "They're not going to swing back and forth 20%--and they're not going to protect you from losses if the market tumbles."
TIAA-CREF's investment approach is a mix of indexing and active stock-picking. At the core of the Growth Equity Fund, for instance, is a portfolio of stocks that acts like the Russell 3000 Growth Index. That's an index of some 1,800 of the 3,000 largest stocks, and they're selected for their above-average price-to-book ratios and forecast growth rates. The fund manager attempts to enhance the index' return by selectively overweighting or underweighting holdings to take advantage of pricing discrepancies. The enhanced index portion of the mutual fund can range from 20% to 80% of its assets.
For the remainder, the manager has free rein to focus on a relatively few stocks--large-cap or small-cap, growth or value--that he or she thinks will beat the index handily. The advantage of the passive-active approach is that the index part is always invested, so managers are not forced to buy stocks with incoming cash.
SIMILAR TACKS. The other CREF funds take similar tacks, but with different benchmarks. Growth & Income uses the Standard & Poor's 500-stock index, and International the Morgan Stanley Europe, Australia, and Far East (EAFE) Index. Bonds Plus tracks the Lehman Brothers Aggregate Bond Index and the Plus portion can invest in commercial mortgage-backed securities, junk bonds, and even private placements. The 30-day annualized yield is 5.76%--nearly one percentage point higher than the average intermediate-term bond fund.
To obtain a prospectus for the new funds, call TIAA-CREF at 800 223-1200, or go to www.tiaa-cref.org on the World Wide Web. Even if you're not interested in the funds, the Web site is a must-visit. The investment education material is top-notch, and it includes primers and scholarly articles. What else would you expect from an institution that caters to professors?