The dual investment management strategy, a low-cost philosophy, devotion to customers’ needs: these are the three pillars of TIAA-CREF (Teachers Insurance and Annuity Association-College Retirement Equities Fund), the premier pension system for people in education and research.
As of June 2000 (according to the semiannual report), TIAA-CREF had $298.9bn (e320bn) under management and ranked as the 19th-largest US company in the 2000 Fortune 500 list (based on 1999 revenues). It is a not-for-profit company, with 5,000 employees, headquarters in New York and offices in other 20 US cities. There are no plans to become a publicly held company. TIAA-CREF is managed by seven senior managers, led by chairman John Biggs and Martin Leibowitz, vice chairman and chief investment officer. TIAA and CREF each have a board of 16 trustees, representing university and college institutions. Above all there is the board of seven overseers, which includes Paul Volcker, the former chairman of the Federal Reserve Board.
Members are over 2.2m college faculty and staff people who can choose among 10 different retirement products. The oldest – established in 1918 – is the TIAA Traditional Annuity, which guarantees principal plus a 3% rate of interest. Since 1995, TIAA has been offering also a real estate account that directly owns and manages properties and does not guarantee any return.
In 1952 the CREF was founded, in spite of objections that it would be too risky to link retirement income to the stock market. Since the first CREF stock account, another seven variable annuity accounts (which do not guarantee principal or return) have been added: global equities, growth, equity index, bond market, inflation-linked bond, social choice, and money market.
In 1997, TIAA-CREF lost its tax-exempt status on annuities, but in the same time was emancipated from limitations that had prevented it from doing business with anyone but its traditional clientele, college and university institutions. Since then, TIAA-CREF has been able and willing to offer its products directly to faculty and staff members (instead of through the institutions) and to solicit also the general public for new products: mutual funds, tuition savings plans, life insurances and, through a trust company, estate planning and other advice (see IPE November 2000).
All the assets are managed internally, partly passively and partly actively. The main investments areas are two: TIAA invests mostly in fixed-income securities, like bonds, mortgages, real estate and short-term money markets instruments; CREF is among the nation’s largest equity investors.
The latest development in TIAA’s asset management is the commitment to invest in private equity 2–3% of its general account, that is about $2bn–3bn out of $100bn assets. So far $1bn has been invested. TIAA decided to explore the new field exactly in 1997, thanks to the new tax status and amid the whole effort to reinvent itself.
“TIAA traditionally invests in long-term assets, some of which are not listed,” explain Sheryl Schwartz and Herbert Mann, managing directors of the private equity programme. “Instead CREF has to calculate its market value every day. That’s why private equity can fit in TIAA’s long-term investment policy and portfolio diversification.” The programme is run by a team of four, who worked for one year to select the initial investments. Some 90% of the assets are invested through funds, 10% is invested directly in private companies, usually where TIAA is already an investor through funds. About 25–30% of the assets are in venture capital funds, 35–40% are in buy-out funds, 10% in emerging market funds, 10% in distressed debts and the rest in other kinds of private equity investments. “The programme is very well diversified in geographic areas, industry sectors, development stages,” say Schwartz and Mann. “Besides, we have a five-year outlook. So recent economic and financial crises haven’t affected our plans.” Among the funds’ managers are Texas Pacific Group, ING, Desai, Apax and Goldman Sachs.
CREF is one of the pioneers in indexed investing. More than 20 years ago Milton Friedman, the Nobel Prize-winning economist and former CREF finance committee member, suggested that CREF index the ‘core’ portion of the stock account. In recent years, CREF has moved away from a strictly ‘passive’ approach towards an ‘enhanced indexing’ model. As of June 2000, about 69% of the stock account portfolio was invested with the latter model (62% in domestic equities, 7% in international equities); about 31% was invested actively (18% in domestic equities, 13% in international equities).
The ‘secret’ of the ‘dual investment strategy’ is that there isn’t a fixed portion of the portfolio invested in the passive/active way; on the contrary, the two portions are very flexible. The enhanced index portion acts as a kind of shock-absorber: it can expand or contract depending on whether the account management team believes there are sufficient opportunities for actively investing.
The ‘enhanced indexing’ is a quantitative strategy for investing in a widely diversified sample of stocks, representing a broad market index, such as the Russell 3000 index (which means 98% of all US equities). CREF’s focus is on beating the market consistently, so its target margins of outperformance are small, of the order of half a percentage point (50 basis points) annually. CREF’s 15-member ‘quant’ team claims it actually beats the benchmark in nine of the past 10 years.
The CREF’s enhanced index portfolio slightly overweight or underweight each stock of the index, based on a quantitative scoring model, which has been developed internally. “Our valuation model uses a number of indicators to score stocks,” explains senior managing director Eric Fisher, who heads the quant team. “The score is based on such factors as forward-looking earnings yield, the direction of Wall Street analysts’ earnings estimates, signaling by companies and other factors. We are constantly researching new indicators and refining those in use as to outpace the competition.” Each day, CREF calculates scores for about 3,000 US and 1,200 international stocks. The scoring model also attempts to control the risk of underperformance by making sure the portfolio’s financial characteristics – for example volatility, dividend yield, industry weights – match those of the reference index.
The actively managed portion of CREF’s portfolio relies on the research of more than 30 industry analysts, who take a fundamental, long-term view, largely ignoring temporary market gyrations. They are not locked into either a value – or growth-oriented style, but they work in the way that makes the most sense, given the state of the industries they follow and the state of the economy. CREF’s analysts have years of investment experience and an in-depth understanding of each industry they follow; they get information from a variety of sources, including TIAA-CREF economists, brokerage firms, industry groups, the government and the companies themselves; and they are free to develop their own analytic methods.
The results of all these original strategies are well illustrated by the CREF Stock account performances: 15.65% average annual compound rate of total return for the 10 years ending June 30 last or 327.89% cumulative rate (for the same period), with an estimated annual expenses rate of 0.30%.
Talking about expenses, the low-cost philosophy is the second pillar of TIAA-CREF, as was earlier mentioned. “Low expenses ensure that more of our customers’ money keeps working,” say TIAA-CREF managers, “thanks to economies of scale, operational efficiencies, technological upgrades resulting in productivity gains and the choice not to have a commissioned sales force.”
Customer service uses all means to keep in touch with members: telephone, internet (, seminars (each year a thousand financial seminars nationwide are attended by over 80,000 people).