Teachers expands its curriculum - interview with TIAA-CREF - CSIV

Chief Executive, The, Nov, 1998 by Jennifer Pellet

No, I don't think so. For-profit companies do that, whereas we might take on the 401K of a not-for-profit firm. It's a question of how big - and how diversified - you want to be. My feeling is that we will be most successful by concentrating on our market of two million people and keeping our roots in academia and our style and values arriving out of that.

We're comparable in some ways to the United States Automobile Association (USAA) [insurance provider for military personnel] in terms of the kinds of service we offer and the customer loyalty we have. I think USAA made a mistake by going with products that are not as good as their core products. Our feeling is that if we're not in the top 5 percentile with a product, we shouldn't be in that business. We could lose the confidence of our customers. We don't want to try to be all things to all people. If it's not something we can consider worthy independent of our other offerings, let the people get it someplace else.

Why would someone choose your six trust funds as opposed to the hundreds of options offered by Fidelity or Vanguard?

We came into the mutual fund business with a Vanguard-type product in terms of expenses. Everybody else is charging 1 percent to 1.5 percent for asset management. Our funds are all at 35 and 45 basis points. We have an international mutual fund that has a 45 basis point charge. You can't buy that anywhere else. But that's consistent with being not-for-profit.

Having a concentrated size also distinguishes us from the others because we can keep our expenses very low. We have fewer funds, but they're huge, so the actual administration and operation is a lot cheaper. If our funds don't get to be $1 billion in size, we get very concerned. So I'm very conservative when it comes to adding funds. Right now we're debating whether we want to add a municipal bond fund, and whether we can do it at 25 basis point charges. Nobody else in the market offers that, so we're trying to see if we can do it.

What's your investment strategy?

The best way I can describe what we do is by talking about the growth fund that we started last fall with $50 million from TIAA as seed money. We immediately indexed that $50 million to the Russell 2000 and then used an enhanced index approach that should give us an extra quarter percent to half percent return over the pure index. But it's an actively managed fund so that as the money came into it, the portfolio manager invests when he can beat the Russell 2000 growth index. When he can't, he just puts it back into the enhanced index. We describe it as an accordion, the index fund. Today, probably 60 percent of that growth fund is in active positions, but the guy running it doesn't have to immediately go in, as a typical mutual fund manager does, and spread the money out on a bunch of investments. He's got his core and if he can't beat the index, he shouldn't be there. So it's a different style and it's worked wonderfully for us.

Shareholder power grew Immensely during the great bull run of the past 16 years. Can it survive in a bear market?