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IPE special report May 2018

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TIAA-CREF expands

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Six years after taking the helm as president and CEO of the Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA-CREF), Roger Ferguson announced the acquisition of Nuveen Investments in April for $6.25bn (€4.5bn), including debt. The deal, which should be complete by the end of 2014, is the largest in asset management since BlackRock acquired Barclays Global Investors for $13.5bn in 2009. 

Nuveen and TIAA-CREF will have combined AUM of approximately $800bn, and will become the fifteenth largest mutual fund firm in the US, according to research firm Morningstar.

TIAA-CREF’s move is a further step in a diversification strategy it began in 1997 when the organisation entered the mutual fund business and surrendered its tax-exempt status. Previously a not-for-profit, it was founded by the philanthropist Andrew Carnegie in 1918 to provide low-cost retirement plans and insurance for teachers and researchers in the academic, medical and cultural fields. 

Albert Einstein was famously one of its members. Initially there was only the Teachers Insurance and Annuity Association of America, which mostly held bonds. In 1952, the College Retirement Equities Fund was created and stocks were added to its investment portfolio.

In 2002, the transformation of TIAA-CREF leapt ahead with the appointment of the Wall Street veteran Herbert Allison as CEO. After a 28-year career at Merrill Lynch, he wanted to bring a more corporate culture to the company and expand its clientele int o the retail market. Some critics labelled his strategy the ‘Merrillisation’ of TIAA-CREF; others credited him with bringing more efficiency and less bureaucracy into the company.

Roger Ferguson took over in 2008 with a stellar reputation as an economist – among other duties he was the vice-chairman of the board of governors of the Federal Reserve System – but some mutual fund industry consultants were concerned that he was too ‘ivory tower’ to run a business operation.

TIAA-CREF has been facing increased competition from other financial-services firms in its core higher-education business, perhaps one reason to acquire Nuveen, which manages approximately $221bn. It has a leading position in closed-end funds, tax exempt mutual funds and a growing presence in speciality funds, and also has better distribution channel in the US and abroad, where TIAA-CREF does not market its mutual funds.

Moody’s Investors Service said it would likely downgrade the triple-A financial-strength rating of the TIAA-CREF’s insurance unit if the deal is completed because of the size and scope of the acquisition. S&P’s ratings services does not share this view and will not change its rating. 

Fitch said: “This transaction provides a strong complement to TIAA’s existing asset management platform, significantly strengthens TIAA’s third-party distribution capabilities, and could potentially enhance the company’s market-leading position in the retirement market.”

A more sceptical comment about the deal came from John Rekenthaler, vice-president of research for Morningstar, who pointed out that Nuveen – after conducting several of its own, smaller acquisitions over the past 15 years – is no longer a compact, comprehensible business. “Its investment-management operations are spread across the country, in what Nuveen calls a ‘multi-boutique’ system,” wrote Rekenthaler on Morningstar.com. Since they will continue to operate independently, it is unclear how much value they will add. “It’s hard for a fund company to achieve overall excellence if its investment management tasks are spread among multiple offices, often with portfolio managers who barely know employees at other offices.”

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