What to replace TIAA Real Estate Account with.

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555
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What to replace TIAA Real Estate Account with.

Post by 555 »

I currently own some TIAA Real Estate Account (almost 10% of portfolio), which I treat as part of my "bond" allocation. It appears low risk with high returns.

But I know the history, and it's not really bond-like. And the expense ratio is awful. I'd like to replace it.

So the theoretical question I'd like to ask is, what combination of Vanguard index funds would be the best approximation of TREA?

If the portfolio context is relevant, if one has 80% stock, untilted, with no REITs, 10% TREA and 10% bonds, how could one get rid of the TREA but keep the overall portfolio similar?
MN Finance
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Re: What to replace TIAA Real Estate Account with.

Post by MN Finance »

I won't ask why you would want to get rid of it, but that's a good question nonetheless. It shouldn't be because of the ER, because as discussed here many times before the expenses are unlikely greater than a conventional REIT fund, . They're just not hidden within the REITs themselves. You can't replicate it at VG. You could try to substitute some combo of REITs and bonds, but unless you can run a daily history of hypothetical portfolio combinations it's probably very difficult. I would absolutely NOT count it in my bond allocation as you do. I would count it as it's own class (ex: 45/45/10), or as a mix (like half bond half REIT) or as a REIT.
tibbitts
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Re: What to replace TIAA Real Estate Account with.

Post by tibbitts »

555 wrote:I currently own some TIAA Real Estate Account (almost 10% of portfolio), which I treat as part of my "bond" allocation. It appears low risk with high returns.

But I know the history, and it's not really bond-like. And the expense ratio is awful. I'd like to replace it.

So the theoretical question I'd like to ask is, what combination of Vanguard index funds would be the best approximation of TREA?

If the portfolio context is relevant, if one has 80% stock, untilted, with no REITs, 10% TREA and 10% bonds, how could one get rid of the TREA but keep the overall portfolio similar?
The expense ratio is complicated, but you can't necessarily assume the ratio is "awful", for the reasons already stated. You can treat it as a bond allocation if you want, but I wouldn't. Maybe somebody will come up with some combination of convertibles, high yield, emerging market, or other relatively exotic bond funds that might somehow have performed similarly historically, but I don't think you're going to even come close to emulating it with something as simple and low-cost as TBM, if that's what you had in mind.

One caution I'd suggest about TREA is that the experience from the last downturn may have left some people over-confident in the ability to easily avoid losses by timing out of and back into the fund.
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Re: What to replace TIAA Real Estate Account with.

Post by The Wizard »

ER doesn't matter with TREA.
It cannot be replaced.
Keep it and be happy....
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555
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

I don't really treat TREA as a bond fund. I treat it as a stable value fund with a 10% interest rate. :happy Just kidding, I know better, but that's how it's behaving recently.

As to the ER, Vanguard runs funds "at cost", but while TREA may have various legitimate expenses, including ones that other funds don't have, there may also be expenses that include profit for indiviuals or companies. How much of the ER is "profit". I don't want to pay that.

Of course, you can't find a combination of funds that will track TREA accurately, and that's not what I'm asking for. Instead the question is how to replace the TREA portion of a portfolio with some combination of funds, so that the overall portfolio has similar or better risk/return characteristics.

People say that TIAA-CREF has some "unique" funds, but if you want/need/have to move away from T-C the question is how do you replace those funds.
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Re: What to replace TIAA Real Estate Account with.

Post by livesoft »

There really is no equivalent of the TREA fund. It has a 6 to 12 month lag behind the index it tracks. That would be like Vanguard Total Stock Market return having values from 6 months ago, but you would know exactly where it is going since you know what the index has done in the past 6 months.

Maybe you could replace TREA with a mix of TIAA traditional annuity and Vanguard REIT index, but then again maybe not.
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555
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

Some people say you should "take your risk on the equity side". By this principal, there should be a way to shift TREA (as part of a larger portfolio) to a mixture of stocks and low risk bonds, to get a preferable portfolio. Any ideas how?
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Re: What to replace TIAA Real Estate Account with.

Post by The Wizard »

555 wrote:Some people say you should "take your risk on the equity side". By this principal, there should be a way to shift TREA (as part of a larger portfolio) to a mixture of stocks and low risk bonds, to get a preferable portfolio. Any ideas how?
Sure, just put the money half in REITs (VNQ) and half in TIPS (VIPSX).
That's the best you can do...
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MN Finance
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Re: What to replace TIAA Real Estate Account with.

Post by MN Finance »

I still disagree with the ER question. But regardless, if you want to move and simply keep your risk the same, you should just count it as half risk. Ie, if you're 80/10/10 , that's probably like 85/15 in conventional stock/bond investments. You can't specifically find a replacement portfolio with similar risk/return characteristics. I've put the RE data into a portfolio optimize before and if you let the tool pick the most efficient portfolio based on MPT it will come back 100% RE because of the historical mean vs Sd data.
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Re: What to replace TIAA Real Estate Account with.

Post by Valuethinker »

555 wrote:I currently own some TIAA Real Estate Account (almost 10% of portfolio), which I treat as part of my "bond" allocation. It appears low risk with high returns.

But I know the history, and it's not really bond-like. And the expense ratio is awful. I'd like to replace it.

So the theoretical question I'd like to ask is, what combination of Vanguard index funds would be the best approximation of TREA?

If the portfolio context is relevant, if one has 80% stock, untilted, with no REITs, 10% TREA and 10% bonds, how could one get rid of the TREA but keep the overall portfolio similar?
It's a mistake to treat it as bond or fixed income.

You are investing in the equity side of real estate projects, not the debt. Therefore you have equity risk. Payouts from RE investments are variable: tenants can go broke, the market for Commercial RE is closely timed with the economic cycle, etc.

You could treat it as a low beta equity investment (I don't know, but I would guess the unlevered betas of RE companies are around 0.6?).

But it's not a bond.

If you sold it and bought the Vanguard VNQ REIT index fund, which I believe has a beta of 1.2, then your equity weighting would be unchanged, but your overall beta would have risen.
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

It sounds like that people are saying that (if I want to force a square peg into a round hole) TREA "is" roughly half REITs and half bonds/tips. (Valuethinker's comments about beta seem to support that too.)

Also I get that some people say just keep it, but sometimes fund lineups change (TREA already disappeared from one account I have, and it could disappear from another) so you have to figure out how to reallocate the assets into the new available funds (across all acounts).

And if in terms of riskiness my portfolio is really like 85% stock rather than 80%, then I should know that, so I need to understand how to classify TREA (just like some people say you should treat junk bonds as 25% stock).
MN Finance wrote:I still disagree with the ER question. But regardless, if you want to move and simply keep your risk the same, you should just count it as half risk. Ie, if you're 80/10/10 , that's probably like 85/15 in conventional stock/bond investments. You can't specifically find a replacement portfolio with similar risk/return characteristics. I've put the RE data into a portfolio optimize before and if you let the tool pick the most efficient portfolio based on MPT it will come back 100% RE because of the historical mean vs Sd data.
I was hoping someone had crunched numbers. This reminds me of a story I heard in a Linear Programming class where we were told the Army set up a linear program to figure out the best nutrition at lowest cost and the result was to feed the soldiers 100% beans.

So I take that result with a grain of salt. There is something weird about the way TREA is valued. It seems to hide the true volatility that must really be there. When it is valued too high (or low) then some investors can sell (or buy) to the detriment of the other investors.

It seems to be the kind of fund where I can say, "I'll stay in while it does well, then I'll get out", but that's normally a mug's game, so if it works with TREA then there must be something wrong with TREA.
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Re: What to replace TIAA Real Estate Account with.

Post by tibbitts »

You say that you don't like the way TREA is valued, but what would you propose as an alternative to the current method? The frequency of valuations has already been increased, and every increase in frequency costs in terms of a higher expense ratio. Would you prefer daily valuations and a 2x increase in expense ratio?

Regarding number crunching, I'll guess that whatever number crunching that might have been done prior to 2008 would have yielded completely different results/conclusions from that done post-2008.
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Re: What to replace TIAA Real Estate Account with.

Post by ResearchMed »

I don't think there is any real "combo" of other funds that would really "replace" TREA.
If there is, we don't know about it.

TREA isn't everyone's cup of tea, as is easily shown in just this Forum.

And it does warrant watching, although "in the long run" (20, 30 years) as with other holdings, it might be less important.

I think the main risk now is IF there is another "2008" (which isn't too likely, but then, most of us didn't see 2008 coming, either!), then TIAA-CREF might limit withdrawals.
It's a risk we are willing to take.

As with other parts of our portfolio (which is high %age equities), we've done "well enough" that "taking a hit" and waiting for a (hopefully) recover is/should be okay long term.

Time will tell.
If not, fewer nice vacations, or fewer or none any-kind-of-vacation but we won't be eating cat food, unless that is all that is being made... in which case there are far bigger problems...

RM
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

tibbitts wrote:You say that you don't like the way TREA is valued, but what would you propose as an alternative to the current method?
It's not the method. It's the end result. Is it really plausible that the daily value assigned to TREA really reflected its true value? If everyone knew in late 2008 that it was going to slide down a long way, then its value should have plummetted immediately in response to that knowledge.
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Re: What to replace TIAA Real Estate Account with.

Post by grok87 »

Valuethinker wrote:
555 wrote:I currently own some TIAA Real Estate Account (almost 10% of portfolio), which I treat as part of my "bond" allocation. It appears low risk with high returns.

But I know the history, and it's not really bond-like. And the expense ratio is awful. I'd like to replace it.

So the theoretical question I'd like to ask is, what combination of Vanguard index funds would be the best approximation of TREA?

If the portfolio context is relevant, if one has 80% stock, untilted, with no REITs, 10% TREA and 10% bonds, how could one get rid of the TREA but keep the overall portfolio similar?
It's a mistake to treat it as bond or fixed income.

You are investing in the equity side of real estate projects, not the debt. Therefore you have equity risk. Payouts from RE investments are variable: tenants can go broke, the market for Commercial RE is closely timed with the economic cycle, etc.

You could treat it as a low beta equity investment (I don't know, but I would guess the unlevered betas of RE companies are around 0.6?).

But it's not a bond.

If you sold it and bought the Vanguard VNQ REIT index fund, which I believe has a beta of 1.2, then your equity weighting would be unchanged, but your overall beta would have risen.
I like the framework for discussion in terms of betas and leverage.

In unconventional success, David swensen says that direct real estate investments are a hybrid between a bond-like investment and an equity like investment. It varies by type of investment. Stable properties like office buildings with long term tenants and fixed rate leases are relatively bond-like (keep in mind he wrote the book before 2008). In other they are say 20/80 equity/bonds. At the other extreme, hotel properties with very short term tenants/guests and the ability to change room rates at will are relatively equity like, say 80/20 equities/bonds.
RIP Mr. Bogle.
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Re: What to replace TIAA Real Estate Account with.

Post by grok87 »

ResearchMed wrote:
I think the main risk now is IF there is another "2008" (which isn't too likely, but then, most of us didn't see 2008 coming, either!), then TIAA-CREF might limit withdrawals.
It's a risk we are willing to take.

RM
Can you please elaborate? I recently saw TIAA did something funky with the share classes for this fund. I think they closed the existing share class and opened a new share class in its place. Is the potential ability for TIAA to limit withdrawals part of the new class terms and conditions?
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Re: What to replace TIAA Real Estate Account with.

Post by ResearchMed »

grok87 wrote:
ResearchMed wrote:
I think the main risk now is IF there is another "2008" (which isn't too likely, but then, most of us didn't see 2008 coming, either!), then TIAA-CREF might limit withdrawals.
It's a risk we are willing to take.

RM
Can you please elaborate? I recently saw TIAA did something funky with the share classes for this fund. I think they closed the existing share class and opened a new share class in its place. Is the potential ability for TIAA to limit withdrawals part of the new class terms and conditions?
I'm not sure about any new "share class".

Why don't you take a look at the TIAA-CREF description of this:

https://www.tiaa-cref.org/public/tcfpi/ ... stment=REA

You might also want to look at the FAQs for this fund:

https://www.tiaa-cref.org/public/pdf/pe ... _Final.pdf

Where I saw the note about possible changes in withdrawals might have been when looking at our particular holding. I'll try to find that for you. (IIRC, this is something potentially different from the current "once per quarter" withdrawal that is allowed.)

RM
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Re: What to replace TIAA Real Estate Account with.

Post by Call_Me_Op »

The Wizard wrote:ER doesn't matter with TREA.
It cannot be replaced.
Keep it and be happy....
Agree
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

Call_Me_Op wrote:
The Wizard wrote:ER doesn't matter with TREA.
It cannot be replaced.
Keep it and be happy....
Agree
Fine. What if your fund lineup is being changed and you will no longer have access to TREA and have to shift current assets from TREA to something else? What do you suggest?
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Re: What to replace TIAA Real Estate Account with.

Post by tibbitts »

555 wrote:
tibbitts wrote:You say that you don't like the way TREA is valued, but what would you propose as an alternative to the current method?
It's not the method. It's the end result. Is it really plausible that the daily value assigned to TREA really reflected its true value? If everyone knew in late 2008 that it was going to slide down a long way, then its value should have plummetted immediately in response to that knowledge.
But it wasn't arbitrarily "assigned", it was calculated according to the valuation methods in place at the time. As I said there has to be some balance between the frequency and cost of purchasing appraisals. When you say "everyone" knew that TREA was going to "slide down a long way", are you basing that on NCREIF data, or something else?
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Re: What to replace TIAA Real Estate Account with.

Post by jjustice »

555,

Are you sure that you have to "shift your current assets?" In all cases that I know of plan administrators do not have the right to "map" TIAA-CREF annuity accounts to other funds upon change of plans. They are ordinarily accounts which you personally control. I would double-check with an administrator before proceding. It may be that all that is happening is that the account will no longer be available for new contributions.

John
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Re: What to replace TIAA Real Estate Account with.

Post by MN Finance »

I would sayays John's comment is a good point. Historically, mapping to new funds didn't mean you had to leave the annuity accounts. Though in the most recent mapping at our local university, they did indeed map all funds. It's probably contract dependent.
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

jjustice wrote:555,

Are you sure that you have to "shift your current assets?" In all cases that I know of plan administrators do not have the right to "map" TIAA-CREF annuity accounts to other funds upon change of plans. They are ordinarily accounts which you personally control. I would double-check with an administrator before proceding. It may be that all that is happening is that the account will no longer be available for new contributions.

John
Hmm, yes I guess this is correct.
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Re: What to replace TIAA Real Estate Account with.

Post by The Wizard »

555 wrote:
Call_Me_Op wrote:
The Wizard wrote:ER doesn't matter with TREA.
It cannot be replaced.
Keep it and be happy....
Agree
Fine. What if your fund lineup is being changed and you will no longer have access to TREA and have to shift current assets from TREA to something else? What do you suggest?
Is this really happening or are you making this up?

Note: my dim-witted employer DID remove access to CREF Global and Equity Index a few years ago, so stuff like this DOES happen...
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Re: What to replace TIAA Real Estate Account with.

Post by 555 »

A while back (and I'm remembering the details better now) our 401 changed and the new fund lineup had none of the T-C "variable annuities". New contributions had to go to the new lineup in the new 401, while old assets could stay in the old 401 or shift (one way only) to the new 401 at the discretion of the participant.

Anyway, that's a distraction from the original question.
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Re: What to replace TIAA Real Estate Account with.

Post by Aptenodytes »

I don't get what is so difficult with this. As Livesoft pointed out, TREA is essentially a REIT fund that is out of phase with its benchmark. Over the long run we don't care about being out of phase. So just replace it with the Vanguard REIT or whatever your 2nd-favorite REIT fund is.

I have funds in both TIAA and Vanguard, and a while ago decided that the biggest comparative advantage of TIAA was the TRAD fund. So I put all my TIAA in TRAD, and direct new contributions regularly into TRAD. I had previously had money in TREA but decided that those holdings were in effect limiting my exposure to TRAD (because my TIAA holdings are quite a bit smaller than my Vanguard holdings), so I liquidated the TREA position and increased the Vanguard REIT position by the same amount. I never gave it a second thought.
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