TIAA-CREF, the New York-based Teachers Insurance & Annuity Association-College Retirement Equities Fund, has a whopping US$279 billion in assets and is believed to be the world’s largest pension fund.
But this giant – which has 2.3 million members, mostly educators – is no monolith. It is giving some large US fund managers a run for their money in the retail market and has even been called “the other Vanguard”.
TIAA-CREF was started in 1918 by philanthropist and businessman Andrew Carnegie as a retirement plan for college teachers. It is now the 33rd largest company in the US and its insurance arm, TIAA, is the largest US life insurance company (Fortune, April 16, 2001).
CREF, which was established in 1952 as the US’ first variable annuity, now offers members eight variable annuity accounts, including the CREF Stock Account, the largest single-managed equity fund in the world, with assets of US$110 billion (as of 31/5/2001).
A turning point in TIAA-CREF’s history was the Taxpayer Relief Act of 1997, which stripped it of its previously enjoyed tax exemption status, but also lifted restrictions that had limited its ability to compete in the lucrative mutual funds market, allowing it to take on players like Fidelity and Vanguard, which had been encroaching on its pension business.
The changes have enabled TIAA-CREF to launch 11 mutual funds to the retail market, making use of its well-honed expertise in large cap stocks and bonds.
What sets these funds apart are their low expenses, the result of TIAA-CREF being not-for-profit and able to plow back profits into operations. Its expenses are at least 40 per cent to 70 per cent lower than annuity and mutual fund industry averages, and in the same league as index funds from managers like Vanguard.
Also different is TIAA-CREF’s trademark investment style, which shrewdly combines indexed investing with an active component, usually making up 40-60 per cent of a fund. And, the style has paid off with all funds performing above their benchmarks.
But it doesn’t stop there. TIAA-CREF’s funds are also easier to get into, requiring a minimum initial investment of just US$250, which is far less than most of its rivals.
On the pension side, TIAA-CREF offers members a range of innovative products, like the only inflation-indexed bond account available in an American pension plan, and the only real-estate account in which investors actually own the real estate. And, its Social Choice member investment option, with US$4 billion in assets, is believed to be the largest socially responsible investment option of its kind in the world.
TIAA-CREF has also been re-inventing itself as an institutional partner of colleges rather than simply a purveyor of financial services and has been targeting all educators. And, following the legislative changes of 1997, it established a trust company, offering services that include management and custody of endowments, planned-giving services and estate planning.
When asked recently what sets the pension fund apart from others, a TIAA-CREF spokesperson told Super Review: “There certainly is no financial institution that is like us in terms of our role and position in higher education. We are a successful and well regarded long-term investor, and we also operate a corporate governance program that is global in scope and highly regarded.”
Indeed, TIAA-CREF was one of the first institutional investors to work for better corporate governance in the US and was cited in a study as early as 1978 as one of the first leaders in what has come to be called “institutional activism”.
The company believes that its corporate governance initiatives — where it monitors the companies it invests in and presses for improved management when appropriate — is an important aspect of ensuring that its investments produce the highest possible returns.
Over the last few years, TIAA-CREF has developed a corporate assessment program that examines the US companies in CREF’s portfolios. CREF, one of Wall Street’s bigger institutional investors with stakes in around 4,000 firms, has created a database of these companies, listing all the characteristics of each firm that pertain to corporate governance.
