Funds success story
The ‘teachers’ funds’ are becoming more and more popular in the US. Not only they are popular, but also they are high performers and have very low costs. We are talking about the 11 mutual funds managed by Tiaa-Cref, the Teachers Insurance and Annuity Association-College Retirement Equities Fund, one of the largest and most respected pension funds in US.
For over 80 years Tiaa-Cref has provided pension products to employees at American colleges, universities and research institutions. Recently, the fund decided to share its expertise and successful investment strategy with individual customers.
A strong trend in the US pension fund industry – also in Europe – is the exact opposite: the mutual fund managers are increasing their market share and influence, through the 401(K) plans (individual retirement plans invested in mutual funds). That’s why the Tiia-Cref experiment is so interesting that the managers of a very large and ‘old’ pension fund should go to the market and compete as an alternative for private investors. Their weapons? A very good reputation and very low costs. Here is why it’s working.
The first six Tiaa-Cref mutual funds were launched in January 1998; last April five other funds were created. At the end of September, the 11 funds had $3.3 bn of assets under management and some 200,000 individual clients (compared to $300 bn and 2m members in the traditional teachers’ pension plans).
All the assets are managed in house, according to a ‘Dual Investment Management Strategy’, which combines quantitative indexing and active management. Each fund has two subportfolios: one seeks to outperform the fund’s target index, while limiting the risks of underperformance; the other holds a relatively small number ok stocks, that the fund managers believe are attractively priced and offer superior returns, based on fundamental analysis. The Tiaa subsidiary that manages the funds has waived a portion of its management fee through to July 1, 2003. So the annual expense charge - as a percent of average net assets - goes from a minimum 0.26 for the Equity index fund to a maximum of 0.49 for the International Equity fund.
Also the expenses for marketing are kept very low: very few advertisments are published in specialised magazines; there are no direct sale representatives, but the distribution is direct via telephone (with a toll-free number) and via internet (www.tiaa-cref.org/mfunds/, one of the earliest financial websites in US). So there are neither front-load nor back end-load sale fees.
As a result, the Tiaa-Creef mutual funds are among the lowest-cost investments on the US market today. That’s why they’ve got a very good coverage from the specialised press and the mutual funds’ rating agencies like Morningstar. They are seen as the first serious competitors to low cost, indexed mutual funds managed by the giant Vanguard group.
One of the most popular products of Tiaa-Cref’s is the Money Market fund, which is regularly listed in the ‘Wall Street Journal’ as one of the ten top performing funds in its sector, based on its 12-month annualised yield: 6% at the end of September 2000.
Very popular is also the Bond Plus fund, which invests mainly in investment-grade debt securities: at the end of September the 12-month performance was 7.1%, in the top 20% ranking of its category.
Ranking just below the top 20% products of their sector are the International Equity fund – which has a diversified portfolio composed mostly of foreign stocks – and the Managed Allocation fund, which invest in other funds of the Tiaa-Cref group. At the end of last September their 12-month performances were respectively 17.1% and 15.5%.
With a 17.7% annual performance at September 29, the Growth & Income fund was in the middle of its category’s ranking: it seeks long term-returns from a broad diversified portfolio of US common stocks.
According to the last quarterly WSJ review of mutual funds, the Growth Equity fund was the only Tiaa-Cref to perform poorly in the 12 months ending at September 29 at 24.5%, the bottom 20% of its ranking; it invests in American stocks with a potential for strong growth.
The other five funds, launched in April, are not ranked yet. One is the Equity Index fund, which invests in US common stocks, as represented by a broad market index. Three are bond funds, specialising in higher-yielding fixed-income securities (High Yield Bond fund), bonds with maturities of one to five years (Short-Term Bond fund) and municipal securities (Tax-Exempt Bond fund). The last one is the Social Choice Equity fund: invests in the US stock market, while giving special consideration to certain social criteria. For example it avoids companies that are not environmentally aware, have significant involvement in weapons manufacturing, produce and market alcoholic beverages or tobacco products, produce nuclear energy or are involved in the gambling business.