It’s always news when a team of respected money managers creates a group of low-cost mutual funds. For nearly a year, you’ve been able to pick from six new funds offered by TIAA-CREF.
TIAA-CREF (the Teachers Insurance and Annuity Association-College Retirement Equities Fund) is the world’s largest private pension fund. Its managers run $236 billion, for some 2 million participants from 8,200 schools, colleges and related organizations.
TIAA-CREF consistently gets high ratings from Morningstar, the investment reporting service, for the performance of its retirement annuities. This is the first time the general public has ever been able to tap its money management expertise.
Careful investors don’t buy brand-new funds. Early performance is iffy, even for managers with good track records. The funds may not live up to their reputations at least, not right away.
That’s because new funds have a different mix of investments than the managers’ old ones did. They buy smaller stocks; different amounts of investment capital flow in; they may need a shakedown period. Sometimes new funds pop, sometimes they stall.
Five of TIAA-CREF’s funds popped. In the first nine months of their existence, they landed among the top 15 percent of all similar mutual funds, as measured by Lipper Analytical Services.
The winners: the Growth & Income Fund (for dividend-paying blue chips); the Growth Equity Fund (mostly large and midsize growth companies); the Bond Plus Fund (the Plus means that some of its money goes into high-yield junk bonds, foreign bonds and bonds with no public market); the Managed Allocation Fund (invested in the other funds, with roughly 60 percent in stocks and 40 percent in bonds); and the Money Market Fund (for parking cash).
Only one the International Equity Fund turned in a below-average performance, because it owned too many Asian stocks.
As an investment record, of course, nine months is nothing. Over that short a period of time, buying stocks is a crap shoot.
But TIAA-CREF has a longer-term record, on the funds it provides for teachers’ retirement accounts. Both the 6-year-old Global Fund and 4-year-old Growth Fund have handily beaten their average competitors, and roughly matched the particular markets they invest in.
The granddaddy TIAA-CREF Stock Account started in 1952. Since inception, it has run just a bit below Standard & Poor’s 500-stock index (although it owns a broader mix of funds). Over the past five and 10 years, it has matched or slightly exceeded its average competitor.
This is pretty much what you’d expect from a well-run fund. Over very long periods of time, it’s hard to beat the market average, after costs.
TIAA-CREF gives you a head start, by charging some of the lowest fees in the industry. There’s no sales charge (to buy, call 800-223-1200) and no distribution fees. An annual money-management fee is deducted from your account, but it’s very small.
Two TIAA-CREF funds Money Market and International Equity charge a hair less than similar funds run by the industry’s low-cost leader, the Vanguard Group in Valley Forge, Pa. TIAA-CREF’s other four funds cost a little more, but they’re all under 0.5 percent a year.
By contrast, most managed mutual funds charge 1 percent to 1.5 percent a year, and sometimes higher. High-cost funds subtract from your investment return.
Another plus for TIAA-CREF: It lays out a welcome mat for truly small investors. You can open an account with as little as $250, compared with a $3,000 minimum at Vanguard.
You might also sign up for the automatic investment plan, for as little as $25 a month. Your money slides out of your bank account and into a TIAA-CREF mutual fund.
Mutual-fund analyst Sheldon Jacobs, publisher of the “The No-Load Fund Investor” newsletter in Irvington-on-Hudson, N.Y., calls TIAA-CREF “a very, very good deal for long-term investors looking to build a core portfolio.”
“Long-term” brings up another good point. TIAA-CREF managers tend to hold their investments for a while, rather than engaging in a blur of buy and sell. So they tend to cash in on fewer capital gains, which holds down the annual tax that investors owe.
TIAA-CREF managers aren’t gunslingers. “We don’t bet on which way interest rates are going or swing for home runs,” says Lisa Black, who runs the Bond Plus Fund.
But they’ve beaten a lot of gunslingers, and are worth a look.
Tax changes
It takes 808 pages for CCH Inc., a tax information service, to explain the new tax law. Most of the provisions are narrow. But when they affect you, they can make a big difference. For example:
? Did you overpay the IRS? You may have, if you forgot a deduction, filed an amended return, or if during an audit the IRS finds that you actually owe less. Starting in January, the IRS will pay interest on overpayments at the same rate it charges for underpayments currently 8 percent. Under the old law, overpayments earned 1 percentage point less.
? Are you fighting the IRS? In civil court cases, the IRS now bears the burden of proving that your tax returns are wrong. Previously, the law required you to prove that they were right. You get this privilege, however, only if you keep good records, make credible claims and cooperate with the IRS’s investigation. You won’t like this “reform.” The IRS may now have to investigate you more thoroughly and intrusively, to build its case. This change does not apply to regular audits. There, you still bear the burden of proving the income and deductions you claimed.
? Is your accountant representing you in a tax case? You can now talk to him or her in confidence, just as you can talk to a lawyer. But this privilege is limited, says Mark Luscombe, principal tax analyst for CCH. It doesn’t cover tax preparation, tax shelters or criminal matters. But it does shield conversations about an audit or civil court case.
? Are you thinking about converting a regular Individual Retirement Account (IRA) to a Roth IRA? There’s no tax on the money you earn in a Roth, assuming you follow all the rules. It can be left to heirs income-tax free.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
