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If you have a 403b through TIAA-CREF, or want to read yet another
case for index funds this may be of interest.

I work at a University and have a 403b plan through TIAA-CREF. I'm generally quite happy with TIAA-CREF. The are a solid company that keeps expenses low. They offer various equity investment options including their flagship stock fund and an index fund. The index fund was added only recently. The stock fund has been there for 50+ years. It has a huge amount of money in it, something like 100 billion. The index fund is much much smaller.

Although the index fund has a history of only 6 years, it has consistently outperformed the the stock fund by 1-2 percent.

Over the past year, I have transfered all $ I had in the stock fund to the index fund and made a similar change my to my regular contribution allocation.

The following is an exchance of email I had with one of the TIAA-CREF news letter writers. From this exchange I would conclude that the "actively" managed part of the stock fund is dragging down the performance. The response from TIAA-CREF is that this is because the fund is diversified to include an international index. Perhaps, but I would argue someone made an active choice to include it. Given that many of the large companies in the Wilshire 5000 do business internationally already, that would seem to provide considerable diversification.

The following is the exchange.

Nick Janulis
TIAA-CREF Investment Forum

Dear Nick,

I think that TIAA-CREF does an very good job overall. I especially like the low fund expenses, the range of choices, and the convienent web site.

However, I have a concern that I would like to see addressed.

In the June 2000 issue of Investment Forum there is an article describing the investment stragegy of the CREF stock account. Part of the fund tries to match the Russell 3000 index. Part of the fund is "actively managed". Is this active management really helping? My reading of the 10 year return suggests that it is not.

Page 15 lists the 10 year return on the Stock account is 16.78% and the
10 year return on the Russell index is 18.60% If the passive part of the fund does indeed match the Russel index (less expenses), the actively managed part of the fund is lagging the Russell index and dragging down. The total performance. Suppose that half the fund is actively managed. Then the active part must be lagging the Russel index by roughly twice the difference between 18.60-16.78 or about 3.6%. Counting fund expenses, this difference might be smaller, but still significant. If the active part is less than half the total fund, it's performance must be even worst to have the same total drag on the total return. It is well known that 80% of actively managed equity funds have lagged the market average return over the past 10 years. My reading of the numbers is that the actively managed part of the CREF Stock fund falls somewhere with this 80%.

It would seem to me that over the long term a TIAA-CREF investor would be better served using the CREF Equity Index account rather than the CREF Stock account. The expenses are slightly lower. The 5 year return is better and less expenses is almost identical to the 5 year return of the Russell 3000. Over 20 years the difference in total return will be very significant.

Am I missing something important? I am considering moving my money now in the stock account to the equity index account. It is to the credit of TIAA-CREF that they offer this choice. What advantage does the stock account offer over the equity index account?

I suspect this has been the subject of much discussion at CREF. I would like to see an article in your the Investment Forum newsletter that address this specific issue frankly.


Lawrence Wiencke

The response was as follows

Regarding the CREF Stock Account, it's important to remember that about 20 percent of the portfolio is invested in international stocks. You were raising the issue of active management as the reason for the CREF Stock Account trailing the Russell 3000 Index for the 10-year period, but it is primarily the fact that international stocks have not performed as well as the Russell 3000 Index over most recent time periods (though not the past year). (The Russell 3000 Index only includes U.S.-based stocks.) The following table compares the performance of the Russell 3000 Index and the MSCI EAFE* & Canada Index (the benchmark for the CREF Stock Account's international

Annualized Returns (as of 3/31/00)
One Year Five Years Ten
Russell 3000 22.28 25.9 18.6
MSCI EAFE* & Canada 26.64 12.8 9.8

*MSCI EAFE ? Morgan Stanley Composite Index for Europe, Australasia, Far East

Although the international component has tempered the 10-year performance of the CREF Stock Account, this diversification has helped to reduce the volatility of the returns. Whether or not international diversification is something that make sense for you depends in part on your goals, risk tolerance and time horizon.

You also raise the issue of passive vs. active management. The CREF Stock Account uses a dual investment approach, where a certain percentage of the account is actively managed and the other portion uses enhanced indexing. The cover story for the June issue of Investment Forum provides more details on this subject. Whether this dual investment approach makes the most sense for you or whether you?re better off using strictly passive investing again depends on your particular situation.

I hope we've helped to address your comments. If you have any other comments on this or other Investment Forum topics, please feel free to contact me again.

Nick Janulis
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