Since I became a participant in 1976, the CREF Stock Fund has been a major part of my retirement investments. I'm embarassed to say that I had overlooked until now a discreet sentence in the May 1, 2004 prospectus, describing a major change in the Investment Strategy, to “Enhanced Index”. Since it’s by far the largest CREF fund, a vast number of participants can be assumed to have overlooked the same sentence. I've added bold-facing to the key sentence.
The 2003 prospectus language was: Under normal circumstances, the Stock Account invests at least 80% of its assets in a broadly diversified portfolio of common stocks. The account uses the Dual Investment Management Strategy. The active managers concentrate on individual companies rather than sectors or industries. They look for stocks that they believe are attractively priced based on an analysis of the company's prospects for growth in earnings, cash flow, revenues or other relevant measures. They also look for companies whose assets appear undervalued in the market. In general, they focus on companies with shareholder-oriented managements dedicated to creating shareholder value. The account may invest in companies of any size.
The 2004 prospectus language is: Under normal circumstances, the Stock Account invests at least 80% of its assets in a broadly diversified portfolio of common stocks. The account uses an enhanced indexing strategy. The active managers concentrate on individual companies rather than sectors or industries. They look for stocks that they believe are attractively priced based on an analysis of the company’s prospects for growth in earnings, cash flow, revenues or other relevant measures. They also look for companies whose assets appear undervalued in the market. In general, they focus on companies with shareholder-oriented managements dedicated to creating shareholder value. The account may invest in companies of any size.
The Investment Objective remains "A favorable long-term rate of return through capital appreciation and investment income by investing primarily in a broadly diversified portfolio of common stocks." This can't be changed without a vote.
Among the issues this change raises are:
I take it for granted that “Enhanced Index Funds” were invented by full-price, full-service companies in a desperate effort to put something, anything, up against Vanguard Index Funds and their low costs. But why should I pay more than Index Fund costs to maybe, barely, outperform the index? Recent years of regression towards the mean suggest that a tarted-up Index Fund may not provide enough of the increase for future needs that TIAA-CREF hopes to provide. I don’t make this statement without evidence: I kick myself every time I recall allowing a broker to sell me “UBS Enhanced S&P 500” (management fee 0.40%), which was folded into “UBS S&P 500” (management fee 0.20%), after no one else bought it, and it failed to beat the index!
Although his Annual Meeting remarks are not transcribed for us, I remember that the Chief Investment Officer made an observation (oversimplifying it, because I happen to agree), that the old twin TIAA Traditional-CREF Stock Fund allocation “might well-serve” many participants. While I have no desire for the CREF Stock Fund to become more aggressive, I have to question whether this statement remains accurate with the transformation to a less-active fund. The fund strategy also affects our life-and-death marketing plans: I’ve recruited many participants over the years. I don’t have the restrictions on me that CREF has regarding citation of past performance. So I can recall that CREF Stock Fund’s failure to have a down year in 1987 was reassuring to the people I spoke to in the years following that “crash”. But an Enhanced Index Fund would certainly have had a loss in calendar 1987.
I would hate to think that my agitation about costs (if it has had any result at all) contributed to a decision to emasculate a fund that’s been a good investment for many years. If their strategies are now related, there is not enough difference between the expense ratios of the CREF Stock Fund and the Equity Index fund. Speaking only for myself, I have not yet used the words “performance” or “risk” in my speeches at the CREF annual meetings. I hate to think that we’re looking forward to saying, “Sure, the benchmark was way down this year, but look, we’re within 1% of those results.” Would that be an achievement?
Note: I'm not licensed to give investment advice. Beyond the facts stated, these are my opinions.
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