Some of you may be wondering how these ideas translate ...



Some of you may be wondering how these ideas translate into an actual set of allocations of UK retirement money under TIAA-CREF. Here is a simple benchmark portfolio that could easily be implemented by any UK employee for TIAA-CREF retirement dollars.

This portfolio assumes that overall the stock market through the end of the year will continue to be choppy and sloppy. I am guessing that the Dow will continue to be trading in a range day to day with a low of about 10,200 and a high in the 11,500-11,700 range. No telling where we will end the year as to whether we will be on the low side of that or the high side. If the Dow starts showing clear evidence of moving beyond 12,000 and staying there, I would probably modify this portfolio--a little, but not a lot. Further, if the Dow starts looking like it’s going to drop below 10,000 and stay there I would likely make a different set of modifications. But this is where we are currently. The overall idea here is to focus on being somewhat defensive and on dealing with a market not unlike what we had the first half of the year. Still, this portfolio has some strong up-side potential, as we saw so far during the first half of the year.

Here is the portfolio:

40% TIAA Real estate account YTD up 9.55%

20% Large Cap Value Index TRCVX YTD up 8.91%

15% Mid Cap Value Index TRVUX YTD up 6.20%

10% Small Cap Value Index TRSVX YTD up 6.94%

7.5% Real Estate Securities fund TRRSX YTD up 13.33%

7.5 % International Equity fund TRERX YTD up 10.70%

All of these options are readily available to any UK employee, and a portfolio like this is easily set up from their Web site.

Commentary:

$100,000 allocated January 1 2006 in this fashion would currently be worth $109,188.25 for a 9.188% return YTD. This contrasts with a YTD return for the big old CREF stock account of 3.9%. In other words, this scheme would have netted you $9,188 rather than $3900 for the CREF stock account per 100,000 invested so far this year.

Notes:

CREF has lots of funds available to UK employees many with very similar names. For example there is a large cap growth fund TRLCX and a large cap growth index fund TRCVX. The funds with index in their names are low expense (0.34% annually) index funds, rather than higher expense, actively managed funds. I have been watching the comparative performance of the two, and conclude that the actively managed versions usually do worse than the low cost indexed version, and in particular the indexed versions hold up better on market sell off days. In other words the CREF active managers generally aren't earning their marginal costs. If we had a strongly upward-trending market the data might convince me to go with the actively managed version of the fund but I would need to see the data for a few months. So for right now at least you can reduce downside risk as well as maximize your gains by choosing the index over the actively managed version.

A recent market trend has seen the market moving up in market cap, hence the 20 % allocation to large cap, 15% to mid and 10% to small. This has been gradually evolving over the 1st six months of the year and could reverse itself, but generally I don't expect this reversal to happen unless the overall market starts showing clear signs of trending upward. Small and mid cap are taking a bit of a breather after many months of outperformance relative to large cap.

There is a 7.5% allocation to a diversified, actively managed international fund TRERX. There is an indexed version of this fund as well, but so far it appears to me that the active managers of this fund are covering their marginal costs.

The "wild and crazy" part of this portfolio is the 7.5% allocation to real estate securities TRRSX. Be warned that this behaves like a real estate sector fund, and can be quite volatile day to day in comparison with the rest of the portfolio. But also keep in mind that the stocks of real estate-related firms often do not move in the same direction as the overall market on any given day. The move by the Fed to stop raising interest rates should be a plus for real estate and real estate related funds.

Keep in mind also that TRRSX is much more volatile than the TIAA real estate fund, in which the latter invests in physical properties, not securities. The data for the latter just keeps looking better and better. The 10-year performance now exceeds the CREF stock fund, north of 9 %, now is ahead of the 10-year performance of the CREF stock account, with drastically lower downside risk. Keep in mind that while TIAA allows you to make any number of transfers into this account from their web site, transfers out are limited to one per quarter and you must phone them in order to make the transfer. Since the fund owns physical properties, they aren’t liquid like securities are when cash outflows exceed inflows. The other funds you can move in and out of daily, with no limits on the number of moves or expense charges.

Here are the actual numbers for the account for 10 years. They have not lost investors any money since inception year over year, and only occasionally lose a few cents per share day over day. The worst year since inception was a 3.4% gain for the year in 2002. Keep in mind that the S&P 500 lost 22% that year!

|TIAA Real Estate Account | |

|1995 part year |1.296% |

|1996 |8.331% |

|1997 |10.067% |

|1998 |8.075% |

|1999 |8.169% |

|2000 |10.658% |

|2001 |6.292% |

|2002 |3.413% |

|2003 |7.498% |

|2004 |12.574% |

|2005 |14.022% |

|2006 ytd |9.550% |

| | |

| | |

I "eat my own cooking" in the sense that I have my own TIAA-CREF funds allocated this way, and I have been quite pleased with the results. Assuming the 40% real estate account allocation there is no good reason to hold any money in the big old TIAA account as the real estate account supplies similar diversification. If the Fed starts lowering interest rates and bonds appear to be the place to be, some of the other equity funds can be reallocated to a bond account, but its too early to start that right now, as we are not entirely certain the Fed is off the rate hike mode yet. I think I will continue to hold the 40% TIAA real estate allocation regardless of short-term movements in the equity markets as it adds a lot of stability to a portfolio that otherwise could be significantly more volatile, with still strong upside potential. I expected the returns to the TIAA real estate account to drop off as the Fed increased interest rates, but that did not happen at all, indeed the return increased.

Will I ever move out of the Value indices and into the growth or blend side? That is an interesting question, and I have a bunch of models I have built that provide an early warning should that sort of rotation occurs. In general, when in doubt, stay on the Value side.

Is this portfolio too conservative for younger people far from retirement? I don't think so! I would rather like to think of it as sensible given the times we are living in.

David Debertin

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download