Year-in and year-out portfolio managers face a couple of heavy duty challenges---outperforming like funds plus the index that is their benchmark. Here's a fund with an investment strategy developed to do just that.
TIAA-CREF has been in the business of managing money for those in the non-profits and education for decades. Understanding that over the long haul, it's difficult for many equity funds to beat the averages, in the 1980s this fund family came up with dual investment management strategy that represents a combination of stock picking and enhanced indexing.
The goal is to have a portion of an equity fund's assets invested in both well-researched companies and a portion in the index benchmarked to the fund. That portion is quantitatively managed and enhanced to pick up a little juice and, if all goes well, outperform the index by about one-quarter to one-half of one percent per year.
"Where we are different from other actively managed funds in how we use both fundamental analysis and our quantitative technology to give you, (the investor), sort of the best of both worlds, " says Carlton Martin, lead portfolio manager of the TIAA-CREFF Growth and Income Fund (800-223-1200).
The S & P 500 is the index that is the benchmark for the Growth and Income Fund. Here's more about how the fund is managed:
Q: How do you decide how much of the portfolio is to be actively managed and how much will be invested in the index?
Martin: We have always been active managers for the most part, but how much is actively managed depends upon the numbers of opportunities and ideas that find in the market place and whether we think we can add value to the fund. If we are finding a lot of ideas, we can go as high as 80 percent of the fund being actively managed.
What you'll usually find is that if the market sells off a lot and we think that we can add value, we up the actively managed portion of the fund. The reverse is also true; if we think it is undervalued.
Q: Can the fund invest in both large and small-cap companies?
Martin: Operationally, we try to look at companies with a market capitalization greater than $1 billion. So, most of our ideas come from the larger caps. If, for example, there is an area that is doing very well and there are some smaller players in it that we like, we'll buy a few of them to capture that essence.
We did that a couple of years ago when the Internet was hot and we wanted to have exposure in that area without having a big exposure to any one company.
Q: How many stocks are actively managed now in the portfolio?
Martin: Currently, the fund has a mix of pretty close to 50 percent enhanced indexing and 50 percent actively managed . That mix can change from quarter to quarter, however. Now there are about 100 stocks in the actively managed portion of it.
That number was lower, in the 60 to 70 range, but because of market volatility we are apt to take smaller over- or under-weightings than we do when we have more confidence in the market's direction. I think you sort of lower your risk by having more names.
Q: Which areas of the market are you invested in?
Martin: Actually, we cover them all.The areas that we like now include health care and find it attractive because of the demographics and the consistency of earnings growth. We also have an overweighting in basic industries but we look much more carefully on that because it's a cyclical industry and while there is an overweight in it for the first quarter of this year, that could changed in the second quarter. And, we've been overweighted in energy ever since the middle of last year. You've seen what's happened to energy prices and that group had been depressed for quite a while but it actually did very well for us last year.
Q: Does the fund stay fully invested?
Martin: Yes, we're 100 percent invested at all times.
TIAA-CREFF's Growth and Income Mutual Fund
|TOP HOLDINGS||General Electric, Cisco, Exxon Mobil, Intel and Microsoft as of Sept. 30, 2000.|
|PERFORMANCE||Year-to-date through Jan 17, up 0.03 percent. In 2000, the fund's total return was down 7.3 percent, and in 1999, up 24.46 percent.|
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