Dear Dagen: TIAA-CREF Has a Thing or Two to Teach Investors

I am puzzled by the lack of mention of the TIAA-CREF group of funds now available to the public. This group has performed very well with low fees and, of course, no load. What is your view of TIAA-CREF?

-- Dan Chambers

Dan,

Fidelity, Vanguard and TIAA-CREF.

It sounds like Olivier, Brando and Bob Dishy.

Like the aforementioned (but little-known) character actor, TIAA-CREF sports an impressive reputation with an incredibly low profile.

TIAA-CREF, which stands for the rambling Teachers Insurance and Annuity Association -- College Retirement Equities Fund, has been managing money for professors, university employees and other educators for more than 80 years and currently runs $291 billion in assets (vs. $955 billion for Fidelity and $540 billion for Vanguard).

You would think a giant money manager that's older than the TV set would be more widely recognized.

Not yet.

TIAA-CREF has only been offering its services to the less-erudite public for about 2 1/2 years.

Right now, a scant six TIAA-CREF funds with a total of $2.1 billion in assets are available to retail investors: the (TIGEX Quote) Growth Equity, (TIGIX Quote)Growth & Income, (TIINX Quote)International Equity, (TIPBX Quote)Bond Plus, (TIMAX Quote)Managed Allocation and a money-market fund.

Teachers' Pet TIAA-CREF, managers of teachers' pension plans, has a small stable of retail mutual funds
Fund	One-year return	% Rank in category
(TIGEX Quote)Growth Equity	18.9%	60
(TIGIX Quote)Growth & Income	11.6	33
(TIINX Quote)International Equity	50.3	21
(TIPBX Quote)Bond Plus	-1.6	32
(TIMAX Quote)Managed Allocation	12.6	10
Date through Jan. 28. Source: Morningstar.

TIAA-CREF is, however, preparing to expand its small collection. In April, the group will launch five new funds: one that follows the Russell 3000, a broad market index, the Social Choice (read socially responsible) Equity fund and three fixed-income funds investing in short-term, high-yield and tax-exempt bonds.

Even with its new funds hitting the market, you shouldn't expect to see any extravagant, celebrity-filled ad campaigns from this nonprofit organization. Occasionally, a subtle print ad might appear in a publication like Fortune or The Wall Street Journal, but TIAA-CREF has never run any TV ads touting its mutual funds, says spokesman Tom Pinto.

"We're not, frankly, an organization that's out for growth for growth's sake. We're not trying to do things just to gather assets," says Martin Leibowitz, vice chairman and chief investment officer. "That's never been our motivation."

Indeed, one hallmark of TIAA-CREF's mutual funds is their very low cost. The Growth Equity fund, for example, carries an expense ratio of 0.45% -- dramatically lower than the 1.26% average for large-blend funds, according to Morningstar. All of TIAA-CREF's funds have annual expense ratios ranging from 29 to 49 basis points, or expressed another way, from 0.29% to 0.49%. The fees are low because TIAA-CREF is waiving a portion. These waivers are in place until at least July 1, 2003.

This attention to fees often leads to the inevitable comparison with Vanguard, the ruler of low-cost indexing.

But TIAA-CREF's investment approach is different.

In its stock funds, the organization combines enhanced indexing with stock picking. "We do believe in active management," says Leibowitz. "And we feel there will be times when active management will do better than quantitative or passive management."

For example, a portion of the $696 million TIAA-CREF Growth Equity fund is linked to the Russell 3000 Growth index, while part of it is actively managed. For the Growth & Income fund, some of the assets are tied to the S&P 500 index.

And even for the portion of the portfolio that is indexed, TIAA-CREF managers have the freedom to deviate slightly if, for example, its quantitative models identify possible trading prospects. The quantitative or indexed portion of each stock fund typically ranges from 30% to 70%, says Leibowitz.

In fact, the rest of the fund industry is gravitating toward this two-pronged approach used by TIAA-CREF.

"As assets in fund companies grow, it's like gravity pulling them into the orbit of indexing," says Morningstar's Russ Kinnel. In other words, with some larger mutual funds, you wind up getting index-like performance even though you think you're buying pure active management.

TIAA-CREF is just "out of the closet in saying its funds are part index and part active management," says Kinnel.

The combination seems to work.

In 1999, the TIAA-CREF Growth Equity fund produced a 33% return, beating the S&P 500 by 12 percentage points. In 1998, the fund delivered a 36% return, again beating that index.

Its Growth & Income fund returned 24.5% last year, 5 percentage points ahead of its Morningstar category.

The firm's range of funds may seem meager, but you'll find another notable benefit to opening an account at TIAA-CREF.

You can open an account with $25 up front if you enroll in the automatic investment program. Otherwise the minimum is $250.

Those low numbers should be enough incentive for some.

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