My Optimized TIAA-CREF Portfolio

Posted on January 10, 2015 by

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TIAA-CREF

Like many of my colleagues, my retirement funds are held at TIAA-CREF as part of a 403(b) plan.  My investment options there include a choice of 54 funds that include some managed by TIAA-CREF and others that are managed by outside vendors.  Figuring out which funds to invest in and how much to invest in each is a complicated affair.  Here’s how I approached the task…

Note: This is not investment advice. Please see the full disclaimer at the end of this post.

A focused portfolio

Rather than “sprinkle” my holdings across a large number of funds, I choose to focus on a few of the best assets.  Even though I’m only in 9 funds, I’m strongly diversified because each of these funds is broad, most of them with hundreds of individual positions:

Symbol Asset Class Name Allocation
N/A Special TIAA Real Estate Account Max Out
TISPX US Equity TIAA-CREF S&P 500 Index Fund 20%
TILIX US Equity TIAA-CREF Large-Cap Growth Index Fund 15%
TISEX US Equity TIAA-CREF Small-Cap Equity Fund 15%
REREX International Equity American Funds EuroPacific Growth Fund 5%
TCIEX International Equity TIAA-CREF International Equity Index Fund 5%
TPINX Bonds Templeton Global Bond Fund  15%
TIHPX Bonds TIAA-CREF High-Yield Fund 15%
TIREX Real Estate TIAA-CREF Real Estate Securities Fund 10%

I provide more information on each of those funds, as well as my rationale for arriving at these allocations below.

First, max out the TIAA Real Estate Account

Before I consider asset allocation to other TIAA-CREF funds, I first put as much as possible into the TIAA Real Estate Account.  This is a truly unique instrument that is unlike anything I’ve seen elsewhere. It is an asset class all it’s own.  I reviewed this fund in a separate blog back in July 2014 (see it here). Its performance is impressive, with a Sharpe Ratio greater than 5.0. In terms of risk-adjusted return, it outperforms every other TIAA-CREF fund since 2009 and nearly every hedge fund I’m aware of.

That is not to say it is risk free, and it did suffer a significant downturn with the market in 2008-2009, but I believe risk in this account can be mitigated by observing one or more of the various Real Estate indices, as they are leading indicators for this asset.  If the REIT indexes take a significant dive, then I will exit.

Selecting the other assets

The list of funds available to employees at any particular university or college is negotiated individually with TIAA-CREF, so the list you have access to may be different from mine. In my case there are 54 funds available.

Sorting through the details of TIAA-CREF's 54 funds.

Sorting through the details of TIAA-CREF’s 54 funds.

Rather than “diversify” by randomly buying a bit of this and a bit of that, I want to focus my holdings to a group of about 8 of the strongest performers, then refine my allocations using a portfolio optimizer. As a first triage, I discarded any fund that did not have at least a 3-star rating by Morningstar.  Next, I discarded funds that significantly underperformed their benchmarks recently.  Finally, I did not consider TIAA-CREF’s “lifecycle” products because I don’t believe in that approach (this is a subject for a separate future blog).

I sorted the remaining funds into four folders:

  • US Equity
  • International Equity
  • Fixed Income
  • Real Estate

Within each folder, I ranked the funds according to:

  • Morningstar rating
  • Recent performance versus benchmark
  • Total return

Then I picked the top few assets in each folder for my portfolio.  Here are the winners:

US Equity

TISPX: TIAA-CREF S&P 500 Index Fund

This is essentially the S&P 500. 4-star rating by Morningstar. ‘nuf said.

TILIX: TIAA-CREF Large-Cap Growth Index Fund

Similar to the S&P 500 but with a tilt towards growth stocks.  4-star Morningstar rating.  I added this so the optimizer can have a bit of diversity to work with in large cap.

TISEX: TIAA-CREF Small-Cap Equity Fund

We need small-cap for diversity in the US Equity folder.  It has also been shown that small-cap offers stronger growth than large-cap, but with greater volatility.  TISEX only has a 3-star rating from Morningstar, but I like it because:  A) It is actively managed — not just tracking an index — and B), It has been getting progressively better recently by outperforming its benchmark in recent years. This indicates an improving methodology or management team.  Another fund I considered as a close second to this one is the Eagle Small-Cap Growth Fund (HSIIX).

International Equity

REREX: American Funds EuroPacific Growth Fund

5-star Morningstar rating. Strongly outperforming its benchmark. Morningstar describes this fund as a “core” player in an investment portfolio, saying, “This is the only international fund most investors need.”

TCIEX: TIAA-CREF International Equity Index Fund

3-star Morningstar rating. TCIEX tracks the MSCI EAFE index. This one is solid, not great, but is the best of the remaining international funds in the folder. I want to have more than one international holding.

Fixed Income (Bonds)

TPINX: Templeton Global Bond Fund

A superstar: TPINX has a 5-star rating, it has been crushing its benchmark. It also provides another mechanism for gaining international exposure besides the equity funds above.

TIHPX: TIAA-CREF High-Yield Fund

3-star. I’m not fantastically excited about this one, but it is the best of the remaining bond funds that passed my screen and it provides additional diversity in fixed income.

Real Estate

TIREX: TIAA-CREF Real Estate Securities Fund

This is my only choice for Real Estate (other than the Real Estate fund I listed above).  4-star rating.

How I determined the allocations to each fund

Once I narrowed down the list of funds to consider, I entered them into a portfolio on Lucena’s QuantDesk(R).  I set some minimum and maximum allocations based on my experience with related portfolios (such as Lucena’s BlackDog).  The allocations above are based on that optimization.

If you have questions, please feel free to shoot me an email (tucker@lucenaresearch.com).

Disclosures and Disclaimers

Disclaimer: This information has been prepared by Lucena Research Inc. and is intended for informational purposes only. This information should not be construed as investment, legal and/or tax advice. Additionally, this content is not intended as an offer to sell or a solicitation of any investment product or service.

Please note: Lucena is a technology company and not a certified investment advisor. Do not take the opinions expressed explicitly or implicitly in this communication as investment advice. The opinions expressed are of the author and are based on statistical forecasting based on historical data analysis. Past performance does not guarantee future success. In addition, the assumptions and the historical data based on which an opinion is made could be faulty. All results and analyses expressed are hypothetical and are NOT guaranteed. All Trading involves substantial risk. Leverage Trading has large potential reward but also large potential risk. Never trade with money you cannot afford to lose. If you are neither a registered nor a certified investment professional this information is not intended for you. Please consult a registered or a certified investment advisor before risking any capital.

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