TIAA Real Estate Account, bond-like or Madoff-like?

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livesoft
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TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 2:35 pm

Update on 2013/12/25 with question, click to go to that new post:
http://www.bogleheads.org/forum/viewtop ... 9#p1897019

I own some shares in the TIAA Real Estate, but have not been one of the smart folks who "watches it" or "times it". The fund itself seems to hold a special status up on the altar of investments.

However, I am coming to the conclusion that this fund is simply manipulated by the TIAA folks and should not be used by anyone because of the manipulation going on. Below is Morningstar 10-year "growth-of" chart of the thing (note log scale on vertical axis):

Image

The blue line for TREA is too smooth and too delayed. If this was any other fund, all our Spidey senses would be tingling so much that we would suspect that Bernie Madoff was involved somehow.

Anyways, I think I am going get out of this fund and not recommend it to anyone.

(I know there is TIAA discussion group at M*.)
Last edited by livesoft on Thu Dec 26, 2013 3:15 am, edited 1 time in total.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by nisiprius » Fri Sep 13, 2013 3:05 pm

I think this is a well-known issue: the account holds illiquid assets that don't have a well-defined market value. For a REIT index fund, maybe nobody knows what each individual property would bring in a sale, but there is at least a marketplace judgement of the value of the REIT shares themselves. For the RE account, I don't know what methodology is used for attaching dollar numbers to properties, but it is bound to be questionable. I wonder how Yale puts a dollar value on the timberland it owns?

I bet the smoothing is deliberate and documented. Well, anyway, they have an FAQ that says, C1,
Each property is valued on a quarterly basis by independent third party appraisers who are MAI (Member, Appraisal Institute) or its European equivalent, RICS (Royal Institute of Chartered Surveyors) certified appraisers."
However,
"The Real Estate Account’s independent fiduciary oversees the entire valuation process and can also require additional appraisals if it believes a property’s value might have changed materially and such change is not reflected in the quarterly valuation review, or otherwise to ensure that the Account is valued appropriately. The independent fiduciary must also approve any valuation change where a property’s value changed by more than 6% from the most recent independent annual appraisal, or if the value of the Account would change by more than 4% within any calendar quarter or more than 2% since the prior month.
During normal times for normal properties that would tend to have a smoothing effect.

Whether the valuation is accurate, TIAA promises you can redeem it at that nice smoothly-changing value. But yeah, it sounds like there could be problems if there were a run on the bank and it turned out that the valuations were overstated. Definitely, if you are holding this unusual account, you are relying on the integrity of TIAA.

For the record, I owned this account from 1995 to 2007, i.e. I am an investment genius :) Actually I decided in 2007 to consolidate from three institutions (TIAA-CREF, Fidelity, and Vanguard) down to two, TIAA was the one I dropped, and the accounts, not being mutual funds, couldn't be transferred in kind and had to be sold. I paid very little attention to TIAA RE, and committed to selling it before realizing just how utterly different it was from Vanguard REIT Index Fund.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Fri Sep 13, 2013 3:12 pm

I'm significantly into TREA, as we call it.
There are some Commercial Real Estate indexes that we follow to keep abreast and plan for the near future.
The NAV of TREA on a daily basis is NOT a transparent process.
It's a combo of rental income received, plus changes in appraisals (for directly owned RE), plus roughly 9% of REITs presently owned to spice things up a bit (my interpretation).
I'm definitely keeping my TREA until such time as it starts another downturn...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 3:15 pm

So are you predicting that it will always maintain a 1 to 2 year "lag" vis-à-vis a REIT index?
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Fri Sep 13, 2013 3:26 pm

livesoft wrote:So are you predicting that it will always maintain a 1 to 2 year "lag" vis-à-vis a REIT index?
Less than one year lag using the Green Street CRE index.
It's just something to keep your eye on and it certainly provides diversification from other investments...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 3:29 pm

But I am going say that it provides useless diversification unless you learn the secret market-timing code for it. One certainly cannot rebalance with it because of the lag. Or can one?
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by mudfud » Fri Sep 13, 2013 3:36 pm

This is what I posted previously regarding the performance characteristics of the TIAA-RE account: "Due to the method of valuation, TIAA-RE behaves more like a moving average than a real time price indicator. Thus it has two characteristics: the price shows a lag AND there is smoothing. It appears to exhibit positive autocorrelation.". (Many others, including peter71 and esteban have posted similar thoughts here and in the Morningstar forum).

I think the best proxy of price movements for the TIAA-RE account is the Green Street Advisors Commerical Property Price Index (http://www.greenstreetadvisors.com/). There are three main differences, all of which have trivial explanations, and can be easily accounted for if you want to model price movements. First, the TIAA-RE lags GSA CPPI by about 9 months. This is mostly due the the method of valuation. Second, the short-term autocorrelation is lower in TIAA-RE. This is due to the inclusion of REIT ETFs in TIAA-RE. Third, the overall magnitude of change is slightly lower in TIAA-RE; this is due to the presence of cash-equivalents in the account.

Regards,

Mud
Last edited by mudfud on Fri Sep 13, 2013 3:37 pm, edited 1 time in total.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Fri Sep 13, 2013 3:37 pm

livesoft wrote:But I am going say that it provides useless diversification unless you learn the secret market-timing code for it. One certainly cannot rebalance with it because of the lag. Or can one?
Rebalancing is tough. We can only do one withdrawal per calendar quarter per contract ( I have 3 or 4 contracts containing it.)
Plus there's a $150K limit, beyond which transfers INTO TREA cannot be done online; but some of us get around it with Systematic Transfers.
Unclear whether the Systematic Transfer route will still be allowable after the next down-cycle.
I consider TREA part of my less volatile non-stock allocation so for now, I'm happy to have it...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Valuethinker » Fri Sep 13, 2013 3:48 pm

I think the use of the term 'Madoff like' plus the whole insinuation re TIAA RE is wrong, and extremely misleading.

This is a fund invested in *private assets* which are *externally appraised*. And the fund is audited (Madoff used a firm of accountants with 2 partners, one of whom was retired in Florida).

Private assets by their nature have uncertain valuation. The valuers will use purchases of the most comparable buildings to the ones held in the fund, within recent history. However both TIAA and its valuers would be open to legal action if they intentionally misrepresent the NAV of the fund.

The smoothness of moves largely results from the way RE is appraised. RE valuations don't show daily jumps like stock prices or RE prices. We might in practice say that 'actually that building sold for $105m, and 3 weeks ago it might have sold for $100m'. But in reality we can never know, and the value of buildings is based on sales of similar (but not identical) buildings that might have sold 3 weeks ago, or 6 months ago, plus adjustments for the general move in property yields (ie cap rates) since that point.
Valuation:
The risks associated with property valuations, including the fact
that appraisals can be subjective in a number of respects and the fact that
the Account’s appraisals are generally obtained on a quarterly basis and
there may be periods in between appraisals of a property during which the
value attributed to the property for purposes of the Account’s daily
accumulation unit value may be more or less than the actual realizable
value of the property;
From the Risk Factors in the fund's prospectus. So there you have it: the valuations may be wrong.

But the idea that they are intentionally manipulating to any significant extent to disadvantage investors is ludicrous. Are they engaging in 'smoothing'? Difficult to assess from my perspecitve how likely that is, but the fact that the NAV moves smoothly is not pure proof that they are.

Even if TIAA were so manipulating valuations it's also not Madoff. Madoff did not manipulate asset valuations-- he stopped having assets altogether. The fund was, simply, a Ponzi scheme, where payouts were funded by new money coming in, and the NAV was entirely fraudulent.

p57 below
VALUING THE ACCOUNT’S ASSETS
The assets of the Account are valued at the close of each valuation day and
the Account calculates and publishes a unit value, which is available on TIAA-
CREF’s website (http://www.tiaa-cref.org), for each valuation day. The values of the
Account’s properties are adjusted daily to account for capital expenditures and
appraisals as they occur.
With respect to the Account’s real property investments, following the
initial purchase of a property or the making of a mortgage loan on a property
by the Account (at which time the Account normally receives an independent
appraisal on such property), each of the Account’s real properties are
appraised, and mortgage loans are valued, at least once every calendar
quarter. Each of the Account’s real estate properties is appraised each quarter
by an independent external state-certified (or its foreign equivalent) appraiser
(which we refer to in this prospectus as an “independent appraiser”) who is a
member of a professional appraisal organization.
In addition, TIAA’s internal
appraisal staff performs a review of each of these quarterly appraisals, in
conjunction with the Account’s independent fiduciary, and TIAA’s internal
appraisal staff or the independent fiduciary may request an additional
appraisal or valuation outside of this quarterly cycle. Any differences in the
conclusions of TIAA’s internal appraisal staff and the independent appraiser
will be reviewed by the independent fiduciary, which will make a final
9
TIAA Real Estate Account

Prospectus
16159
determination on the matter (which may include ordering a subsequent
independent appraisal).

In general, the Account obtains appraisals of its real estate properties
spread out throughout the quarter, which is intended to result in appraisal
adjustments and thus adjustments to the valuations of its holdings (to the
extent adjustments are made) that happen regularly throughout each quarter
and not on one specific day in each period. In addition, an estimated daily
equivalent of net operating income is taken into consideration and is adjusted
for actual transactional activity. The remaining assets in the Account are
primarily marketable securities that are priced on a daily basis and are
included in the Account’s daily unit value.
As of December 31, 2012, the Account’s net assets totaled approximately
$14.9 billion. See “Valuing the Account’s Assets” on page 57 for more
information on how each class of the Account’s investments are valued.
VALUING REAL ESTATE INVESTMENTS
Valuing Real Property:
Investments in real estate properties are stated at
fair value, as determined in accordance with policies and procedures reviewed
by the Investment Committee of the Board and in accordance with the
responsibilities of the Board as a whole. Accordingly, the Account does not
record depreciation.
Fair value for real estate properties is defined as the price that would be
received to sell the asset in an orderly transaction between market participants
at the measurement date. Determination of fair value involves significant levels
of judgment because the actual market value of real estate can be determined
only by negotiation between the parties in a sales transaction. Property and
investment values are affected by, among other things, the availability of
capital, occupancy rates, rental rates, and interest and inflation rates. As a
result, determining real estate and investment values involves many
58
Prospectus

TIAA Real Estate Account
93391
assumptions. Amounts ultimately realized from each investment may vary
significantly from the market value presented. Actual results could differ from
those estimates. See “Risk Factors — Risks Associated with Real Estate
Investing — Valuation and Appraisal Risks” on page 19.

In accordance with the Account’s procedures designed to comply with Fair
Value Measurements and Disclosures in U.S. Generally Accepted Accounting
Principles (“GAAP”), the Account values real estate properties purchased by
the Account initially based on an independent appraisal at the time of the
closing of the purchase, which may result in a potential unrealized gain or loss
reflecting the difference between an investment’s fair value (
i.e.
, exit price) and
its cost basis (which is inclusive of transaction costs).
Subsequently, each property will be valued each quarter by an independent
appraiser and the property value will be updated as appropriate.
In general,
the Account obtains independent appraisals of its real estate properties spread
out throughout the quarter, which is intended to result in appraisal
adjustments, and thus, adjustments to the valuations of its holdings (to the
extent such adjustments are made), that happen regularly throughout each
quarter and not on one specific day in each quarter.

Further, management reserves the right to order an appraisal and/or conduct
another valuation outside of the normal quarterly process when facts or
circumstances at a specific property change (for example, under certain
circumstances a valuation adjustment could be made when bids are obtained for
properties held for sale). The Account’s independent fiduciary, Real Estate
Research Corporation, oversees the Account’s entire appraisal process and,
among other things, must approve all independent appraisers used by the
Account.
TIAA’s internal appraisal staff oversees the entire appraisal process
and reviews each independent quarterly appraisal, in conjunction with the
Account’s independent fiduciary, prior to the value reflected in that appraisal
being recorded in the Account. Any differences in the conclusions of TIAA’s
internal appraisal staff and the independent appraiser will be reviewed by the
independent fiduciary, which will make a final determination on the matter
(which may include ordering a subsequent independent appraisal).

Real estate appraisals are estimates of property values based on a
professional’s opinion. All appraisals are performed in accordance with
Uniform Standards of Professional Appraisal Practices, the real estate
appraisal industry standards created by The Appraisal Foundation. Appraisals
of properties held outside of the U.S. are performed in accordance with
industry standards commonly applied in the applicable jurisdiction. Further,
these independent appraisers (as well as TIAA’s internal appraisal staff) are
always expected to be MAI-designated members of the Appraisal Institute (or
its European equivalent, Royal Institute of Chartered Surveyors) and state
certified appraisers from national or regional firms with relevant property type
experience and market knowledge. Under the Account’s current procedures,
each independent appraisal firm will be rotated off of a particular property at
59
TIAA Real Estate Account

Prospectus
05541
least every three years, although such appraisal firm may perform appraisals of
other Account properties subsequent to such rotation.
We intend that the overarching principle and primary objective when valuing
our real estate investments will be to produce a valuation that represents a fair
and accurate estimate of the fair value of our investments. Implicit in our
definition of fair value is the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby:

Buyer and seller are typically motivated;

Both parties are well informed or well advised, and acting in what they
consider their best interests;

A reasonable time is allowed for exposure in the open market;

Payment is made in terms of cash or in terms of financial arrangements
comparable thereto; and

The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale.
The Account’s net asset value will include the value of any note receivable
(an amount that someone else owes the Account) from selling a real estate-
related investment. We’ll estimate the value of the note by applying a discount
rate appropriate to then-current market conditions.
Development Properties.
Development properties will be carried at fair value,
which is anticipated initially to equal the Account’s cost, and the value will be
adjusted as additional development costs are incurred. At a minimum, once a
property receives a certificate of occupancy, within one year from the initial
funding by the Account, or the property is substantially leased, whichever is
earlier, the property will be appraised by an independent external appraiser
approved by the independent fiduciary. We may also have the properties
independently appraised earlier if circumstances warrant.
Property Portfolios.
The Account may, at times, value individual properties
together (whether or not purchased at the same time) in a portfolio as a single
asset, to the extent we believe that the property may be sold as one portfolio.
The Account may also realize efficiencies in property management by pooling a
number of properties into a portfolio. The value assigned to the portfolio as a
whole may be more or less than the valuation of each property individually.
The Account will also, from time to time, sell one or more individual properties
that comprise a portfolio, with the Account retaining title to the remaining
individual properties comprising that portfolio. In such a circumstance, the
Account could determine to no longer designate such remaining properties as
one portfolio.
Because of the nature of real estate assets and because the fair value of our
investments is not reduced by transaction costs that will be incurred to sell the
investments, the Account’s net asset value won’t necessarily reflect the net
realizable value of its real estate assets (
i.e.,
what the Account would receive
Valuation Adjustments:
General.
Management reserves the right to order
an appraisal and/or conduct another valuation outside of the normal quarterly
process when facts or circumstances at a specific property change. Also, the
independent fiduciary can require additional appraisals if it believes a
property’s value may have changed materially and such change is not reflected
in the quarterly valuation review
, or otherwise to ensure that the Account is
valued appropriately. For example, under certain circumstances a valuation
adjustment could be made when bids are obtained for properties held for sale
by the Account. In addition, adjustments may be made for events or
circumstances indicating an impairment of a tenant’s ability to pay amounts
due to the Account under a lease (including due to a bankruptcy filing of that
tenant). Also, adjustments may be made to reflect factors (such as sales values
for comparable properties or local employment rate) bearing uniquely on a
particular region in which the Account holds properties. We may not always be
aware of each event that might require a valuation adjustment, and because
our evaluation is based on subjective factors and we give different weight to
different factors, we may not in all cases make a valuation adjustment where
changing conditions could potentially affect the value of an investment.
Required Approvals.
The independent fiduciary will need to approve
adjustments to any valuation of one or more properties or real estate-related
assets that:

is made within three months of the annual independent appraisal, or

results in an increase or decrease of

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Fri Sep 13, 2013 4:03 pm

VT knows Quite A Bit about TREA given that he can't invest in it from the UK.
And Livesoft's shock-value Madoff quip didn't really bother any regulars, I don't think. There IS an element of obscurity in determining the daily NAV...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by jjustice » Fri Sep 13, 2013 4:39 pm

I enjoyed seeing Livesoft in his tinfoil hat.

You have to be an enthusiastic conspiracy spotter to think that TIAA is scamming us.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by DickBenson » Fri Sep 13, 2013 4:55 pm

My concern with TREA is the "cashability" feature of the fund. However, this 'timing" capability is what makes it attractive to most others.

If I was in a real estate partnership with a bunch of other investors, I would not like them (especially if some were "high-rollers") to be able to abandon ship if things got a little rough,.... especially if they could somehow have advance notice of potential problems, either by their own active monitoring or by the recommendations of their financial advisors.

Wholly owned TIAA real estate investments are still in the Traditional Account, although now a smaller percentage (around 5% I believe), and that is where they belong. There, they are not subject to the impact of investor decisions.

Dick

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 5:20 pm

Is there a ticker for the Green Street Advisors Commerical Property Price Index that the M* charting tool knows about (much like one I found for TREA)?

I would also like to point out that international mutual funds have impletemented "fair-value pricing" to prevent certain practices of the past. It seems that if the GSA CPPI is available that TIAA-CREF could implement some kind of fair-value pricing to avoid the multi-month lag if they wanted to. Yes, they have implemented some trading restrictions, but is that really enough to "protect shareholders"?
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by happymob » Fri Sep 13, 2013 5:35 pm

The Wizard wrote:...plus roughly 9% of REITs presently owned to spice things up a bit (my interpretation).
That's purely to have liquid assets to handle redemptions. I think the outflows during 2008 surprised them a bit. They could simply hold cash, but they decided since they are a RE fund, they might as well hold REITs with the liquid portion of the portfolio.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Levett » Fri Sep 13, 2013 5:57 pm

Valuethinker has said what needs to be said:

"But the idea that they are intentionally manipulating to any significant extent to disadvantage investors is ludicrous."

If someone thinks otherwise, report it to the SEC and be sure to cc David Swensen.

And, hey, don't forget to include the payouts from TIAA Traditional (another mystery) despite the fact that its books are poured over by state insurance commissions as well as the ratings agencies.

Lev

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by raywax » Fri Sep 13, 2013 6:24 pm

happymob wrote:
The Wizard wrote:...plus roughly 9% of REITs presently owned to spice things up a bit (my interpretation).
That's purely to have liquid assets to handle redemptions. I think the outflows during 2008 surprised them a bit. They could simply hold cash, but they decided since they are a RE fund, they might as well hold REITs with the liquid portion of the portfolio.
No that is not the reason for REITS. T-C has written two papers in the past decade as to the justification of REITS in the REA one of which is reasonably reason and it that one it was the return of REITS over the long-term (10 years if I remember correctly) was the main reason.

Ray

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by ofcmetz » Fri Sep 13, 2013 7:43 pm

Livesoft, what are you going to put your money toward that you have in the TREA fund?

I have learned all I can about the TREA fund from reading here and the M* forum. I would say that it is not at all Madoff like. That is a sensationalist statement. I do agree that there's a bit of mystery in the daily NAV changes of the fund. In my opinion appraisals themselves are somewhat a form of an art form as opposed to being an exact science. How can one know exactly what a piece of commercial real estate is worth on a day to day basis?

I own the fund because I like the ways it differs from stock and bond funds. After reading Swenson and as well as other investment authors I think owning real estate is a good way to diversify ones assets. This fund gives me a chance to own an asset type that without the availability of this fund I would never be able to own. I lowered my stock allocation to own this fund rather than my fixed income allocation.

I look forward to more posts on this thread.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 8:15 pm

So I downloaded the GSA CPPI history (conveniently available as an Excel spreadsheet file) and charted it.

There is a peak 6 years ago 2007-August. The peak in the TREA chart is 9 to 12 months afterwards as already mentioned.

I also see that while TREA is still below the 2007 high, the CPPI is 4% higher nowadays. TREA needs to gain about 13% to reach where CPPI is today. Thus I think the CPPI is predicting that TREA will go up by 10% to 13% by March 2014. I will wait for that to happen and make a decision on what to do then. :)

As for statements that the fund is a unique diversifier, I am no longer sold on that. I want a diversifier that makes more money than a bond fund. Otherwise, I would just use a bond fund. I have always considered TREA more bond-like than stock-like and the long-term returns seem to bear that out.

(As always, I reserve the right to change my mind.)
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by MN Finance » Fri Sep 13, 2013 8:25 pm

The Wizard wrote:Rebalancing is tough. We can only do one withdrawal per calendar quarter per contract ( I have 3 or 4 contracts containing it.)
Plus there's a $150K limit, beyond which transfers INTO TREA cannot be done online; but some of us get around it with Systematic Transfers.
Unclear whether the Systematic Transfer route will still be allowable after the next down-cycle.
I consider TREA part of my less volatile non-stock allocation so for now, I'm happy to have it...
You mean OUT can't be done online, just IN.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Garco » Fri Sep 13, 2013 8:43 pm

Transfers IN to TIAA Real Estate both below and above the $150K barrier can be done online, or rather as part of a monthly automated contribution from salary -- since salary contributions are one type of "systematic transfer" that is permitted. Transfers IN under the $150 barrier can also be done from another TIAA-CREF fund such as Stock or Bond. Transfers IN above the $150K barrier can also be done (by phone call) by other types of systematic transfers. Transfers OUT OF TIAA Real Estate Account always have to be made via phone call, no matter how much money you have invested in the account.

I don't think this is hard to understand. Also, as others have said, although the method of adjusting TREA's NAV by the rolling appraisals of real property holdings is a bit mysterious, the process has been described in TIAA documents. Each property is appraised at least once every quarter and its adjusted valuation affects the NAV. These rolling appraisals, plus income from rents collected, plus net additions from sales of property, minus administrative costs and property management costs, minus losses from property sales, lead to a daily change in the NAV. Since all of these actions occur throughout the year (and appraisals arrive at different times of the month and year), the NAV changes with it. Some small part (less than 10%) of TREA's AUM is held in more liquid form, including REITS. The profits/losses from this holding also figures into the NAV, including daily adjustments of it.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 8:54 pm

@mudfud, thanks for linking the earlier thread, where everyone noted how easy it was/is to time TREA:
Alex Frakt wrote:I got out at an average of $299.31. Got back in in April at $189.927.

I still can't believe they haven't made fundamental changes to this account. Market timing should not be this easy.
I feel like such a chump here because I didn't jump on the market timing bandwagon back then. No one should invest in TREA unless they commit to market timing with it. "keep an eye on it" and "watch it" are not strong enough terms. Folks should be told, "Be sure to market time it."

Suppose Vanguard had a special Total US Stock Market Index fund that had an NAV that was simply the NAV of the regular Total US Stock Market Index fund except from 9 months ago. Would you invest in it? Or would you question its legality? :twisted:
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 9:16 pm

If Green Street Advisors can come up with a reasonable more "real-time" metric, then the TIAA folks can do it as well or hire GSA to do it for them. Not to do so is manipulation.

Note also that I did not say that TREA was Madoff-like. I asked if it was Madoff-like. Big difference. :twisted:
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by ofcmetz » Fri Sep 13, 2013 9:21 pm

livesoft wrote:
Note also that I did not say that TREA was Madoff-like. I asked if it was Madoff-like. Big difference. :twisted:
This reminds me to much of the way lawyers talk in court. :oops:
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Fri Sep 13, 2013 9:21 pm

Sustained!
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by tibbitts » Fri Sep 13, 2013 9:40 pm

My understanding is that there has been only one of these "timing events" in the history of the account, so possibly there won't be another, at least not in most people's investing lifetimes. And it's not certain that TIAA hasn't learned from that experience and won't make some additional adjustments to the fund terms should they perceive a need, beyond the revisions in account limits and appraisal frequencies that have already been made. I wouldn't have guessed they would have changed the IRA terms the way they have, to already-established accounts, so further changes to TREA wouldn't surprise me.

What would surprise me is that timing the account will ever work again exactly the way it turned out to worked in, approximately, 2007 - 2009.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by MN Finance » Fri Sep 13, 2013 10:46 pm

I don't think theres any real risk of placing additional restrictions on during another "timing event" as it's being put. Limiting the balances to 150k is a huge change that (my guess is) will limit most of the negative fund flows. Further, TIAA itself takes all the liquidity risk in a crisis which is may times larger - and presumably long term profitable for the parent co since the risks show up at the worst time (best to invest) and the parent co time horizon is infinite. I agree that the algorithms used for marking to market are slightly opaque, but year over year the valuations still have to ultimately reflect the hard asset values. The upside of the lack of market is that youre unlikely to log in and see the find down 10% in a day/week (since they would never value the property with extreme fluctuations even if the market was totally illiquid) which could happen in REITs pretty easily.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Browser » Fri Sep 13, 2013 10:49 pm

Seems to me that it might have been Roger Gibson who voiced similar suspicions about TREA (though he didn't name it specifically) in the most recent edition of his Asset Allocation book. He advised avoiding it due to lack of transparency. While we're at it, what about TIAA Traditional? How in the world can you continue to get 3% minimum interest in these days of financial repression? I know it derives a portion of it's returns from TREA as well. I'm still heavily invested in both and hope that Bernie is alive and well and living at TIAA-CREF. :wink:
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Sat Sep 14, 2013 1:41 am

Browser wrote:Seems to me that it might have been Roger Gibson who voiced similar suspicions about TREA (though he didn't name it specifically) in the most recent edition of his Asset Allocation book. He advised avoiding it due to lack of transparency. While we're at it, what about TIAA Traditional? How in the world can you continue to get 3% minimum interest in these days of financial repression? I know it derives a portion of it's returns from TREA as well. I'm still heavily invested in both and hope that Bernie is alive and well and living at TIAA-CREF. :wink:
They've actually upped the Trad payout for new money in GRAs to 3.45 or 3.65%, don't feel like looking it up right now...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Sat Sep 14, 2013 2:28 am

tibbitts wrote:My understanding is that there has been only one of these "timing events" in the history of the account, so possibly there won't be another, at least not in most people's investing lifetimes. And it's not certain that TIAA hasn't learned from that experience and won't make some additional adjustments to the fund terms should they perceive a need, beyond the revisions in account limits and appraisal frequencies that have already been made. I wouldn't have guessed they would have changed the IRA terms the way they have, to already-established accounts, so further changes to TREA wouldn't surprise me.

What would surprise me is that timing the account will ever work again exactly the way it turned out to worked in, approximately, 2007 - 2009.

Paul
TREA began in 1995. If the Green Street spreadsheet Livesoft downloaded is the same one I have on my wall at home, you can see that there was another CRE downturn in the 1991-92 timeframe but nothing since then except 2007-08. So yes, it's hard to say what the duration and depth of the next one might be...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Valuethinker » Sat Sep 14, 2013 3:21 am

Browser wrote:Seems to me that it might have been Roger Gibson who voiced similar suspicions about TREA (though he didn't name it specifically) in the most recent edition of his Asset Allocation book. He advised avoiding it due to lack of transparency. While we're at it, what about TIAA Traditional? How in the world can you continue to get 3% minimum interest in these days of financial repression? I know it derives a portion of it's returns from TREA as well.


If you could source the Roger Gibson quote that would be interesting and valuable, referring to it as you have doesn't shed much light for me.

He 'doesn't name TREA specifically' but he 'voiced similar suspicions' about it? What do we make of that? What was he saying? And about what?

It does not seem to me that TREA valuation is not transparent-- or rather that's not the issue. What it is is subjective (to an extent) and with uncertainty.

These are the norm in private asset funds. In the classic Limited Partnership structure that matters nought, because returns are simply measured cash to cash (ie the investors are locked in until they get returns-- usual legal life is 10 years with a vote to extend). WIth TREA the NAV matters only when you go in or go out of units, the cash flow from the fund is easily measured.

In the case of the open ended structure of TIAA RE that opens up the possibility of 'market timing' to the disadvantage of investors who stay in-- that is a significant issue, there's a siphoning of performance going on (advertent or inadvertent by those taking money out).
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Valuethinker » Sat Sep 14, 2013 3:24 am

The Wizard wrote:
tibbitts wrote:My understanding is that there has been only one of these "timing events" in the history of the account, so possibly there won't be another, at least not in most people's investing lifetimes. And it's not certain that TIAA hasn't learned from that experience and won't make some additional adjustments to the fund terms should they perceive a need, beyond the revisions in account limits and appraisal frequencies that have already been made. I wouldn't have guessed they would have changed the IRA terms the way they have, to already-established accounts, so further changes to TREA wouldn't surprise me.

What would surprise me is that timing the account will ever work again exactly the way it turned out to worked in, approximately, 2007 - 2009.

Paul
TREA began in 1995. If the Green Street spreadsheet Livesoft downloaded is the same one I have on my wall at home, you can see that there was another CRE downturn in the 1991-92 timeframe but nothing since then except 2007-08. So yes, it's hard to say what the duration and depth of the next one might be...
Always unknown re CRE cycles ('this time it's different' ;-)) but there is something about that 14 year periodicity (ie roughly twice the normal GDP cycle).

Generally in finance there is this 20 year thing, because careers are short, and so after 20 years the people who were around for the last crash and consciously and unconsciously sought to avoid it, have gone. There were not, in 2006-07, people still in power on Wall Street who remembered the 1970s.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Levett » Sat Sep 14, 2013 8:07 am

VT,

Back in 2008 you participated in a discussion re Gibson and the TIAA Real Estate fund.

Hope the link opens. http://www.bogleheads.org/forum/viewtopic.php?t=28754

The thread was entitled: "TIAA Real Estate Performing Like A "Hedge Fund."

Your comments were valuable, as usual.

Gibson's specific comments can be found in a recent book called The Prudent Professor (I found them via Google). Nothing terribly new nor alarming, in my view.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Browser » Sat Sep 14, 2013 9:29 am

Unfortuately, I'm away from home for several weeks yet and didn't think to bring my Gibson book with me :oops: I have the most recent edition (4th I believe). If I get a chance to go to Barnes & Noble before they fold, I'll see if i can find a copy on the shelf -- there's always the library of course. I'm becoming surer that he did reference TREA (not identifying it). As I recall, when he was showing the results of optimization, TREA got a big loading. He pointed out that he didn't believe in the credibility of those results because he didn't believe in the credibility of TREA's reported returns. As I recall, he thought that using REITs made more sense for the real estate allocation.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Artsdoctor » Sat Sep 14, 2013 10:57 am

Livesoft,

I struggled with the TIAA Real Estate account for several years before selling it in 2007 like Nisi. I held it since the mid-1980s when my first job used TIAA-CREF for its sole retirement account. I wish I could say that I made an intelligent decision to sell it all based on an informed piece of information but I did not. I became fed up with the expense ratios of all of TIAA's funds creeping up and the RE fund appeared to me to be creeping up faster than most (this is from memory and may not be totally accurate). Although I loved the concept of holding commercial real estate in its own "special category," it just rubbed me the wrong way to be paying almost 1% to hold the fund. And then, miraculously, the retirement account started offering Vanguard Institutional shares in additional to TIAA's line-up and that was that.

To me, the real estate fund is a great concept. But it's hard to understand how they value it, and it's expensive. There may be other options out there that would suit your needs better.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 11:19 am

Since I know it is going to go up smoothly another 10% over the next 6-9 months, I now know that I should certainly not sell it until that happens.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by nisiprius » Sat Sep 14, 2013 11:39 am

livesoft, people are always moaning about how people rich enough to invest in hedge funds get access to all sorts of wonderful asset classes denied to the hoi polloi. Well, a lot of those wonder-assets are illiquid and have valuation problems.

By golly, what TIAA has done in the real estate fund--and the reason it looks unusual to you (and me)--is to put you right on a footing with the Yale endowment fund and give you entrée to the opportunity to participate in direct ownership of scores of business properties all across this great wide wonderful land of ours. When I held the account I always kept thinking I really should take the time to take a trip to one of them and take a look at it for myself, but I never got around to it. But these days there are so many, it probably would not be that hard to do. I think you should drive out to one of them, see if it's really there--they used to have little pictures of them but I think they stopped doing that?--I was going to say, see if their picture is a good likeness or whether it's been Photoshopped. Do they have tenants? Is the property being kept up?

I mean, really, the one time in your life the Big Guys invite you to join their Inner Circle, and you're talking about Madoff? I mean, suit yourself, if YOU don't want in on this marvelous opportunity TIAA can't just keep holding it open for you forever, you know. They're busy people, and it's not as if there aren't plenty of others ready to jump at the chance.

Why do you have these trust issues, livesoft? Have a little confidence, man! These are your kind of people, good, honest, university profs and such, disciples of Dale Carnegie or was it Andrew, I never can get those guys straight. Why, some of them belong to the same alumni association as you.

You don't want to get TIAA ticked off at you or they may not let you in on the TIAA Forest Products and Trendy Outdoor Boots account they're planning to--oops, I shouldn't have said that.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 12:26 pm

OK, the real reason I am annoyed is that I didn't do all the easy market timing that everyone else did. TIAA has made me feel stooopid.

As for the analogy to hedge funds, it ain't the same because I don't know if one can time hedge funds the way one can time TREA.

If anyone recommends TREA as an option (as is often done on the forum), then in the same sentence they should state that this is a fund for market timers and they should be prepared to market time along with all their other fellow shareholders. Or simply link to this thread.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Levett » Sat Sep 14, 2013 12:59 pm

Page 128 of the TIAA Real Estate prospectus (I'll simply quote the lead sentence and the worriers and timers can ponder the rest):

"TIAA reserves the right to reject any purchase or exchange request with respect to the Account, including when it is believed that a request would be disruptive to the Account's efficient portfolio management."

I put it in boldface for the shamefaced.

The market timers may be in for a Great Big Surprise if there's a repeat of the events from several years ago. :evil:

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 1:26 pm

^ The bold-faced text does not mention a "sale request", so it doesn't appear that I will have any problems selling when I want to.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Levett » Sat Sep 14, 2013 1:51 pm

That's correct, which means unhampered sales depend on the continuation of the Liquidity Guarantee.

I believe the General Account has now sold all the Liquidity Units it purchased during the near-panic.

I would suggest market timers better bail out when and if TIAA removes the Liquidity Guarantee.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 1:52 pm

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Sat Sep 14, 2013 1:53 pm

livesoft wrote:Since I know it is going to go up smoothly another 10% over the next 6-9 months, I now know that I should certainly not sell it until that happens.
The Wisdom of Crowds actually projected closer to a 9% gain for this calendar year, I believe. The gain projected above would be way above the present trend...
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 1:59 pm

The calendar year 2013 ends in 3.5 months and would require only a further 2% gain in that time to get to 9%. TREA is up about 7% YTD.

So yes, 10% in 9 months would be a bit much.

Isn't it totally amazing how we can be so confident in a trend with an investment? TREA is like a huge cruise ship or oil tanker with lots of momentum.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by The Wizard » Sat Sep 14, 2013 2:13 pm

livesoft wrote: ...Isn't it totally amazing how we can be so confident in a trend with an investment? TREA is like a huge cruise ship or oil tanker with lots of momentum.
Clearly you're starting to see the light now.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by DickBenson » Sat Sep 14, 2013 2:41 pm

livesoft wrote:^ The bold-faced text does not mention a "sale request", so it doesn't appear that I will have any problems selling when I want to.
Not positive about this, but I think they use the term "exchange request" in place of a "sale request", since the funds would have to be transferred into one of the other funds of TIAA,..... money market, traditional, etc.

It should be noted that they also have the ability to close and dissolve the fund.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by livesoft » Sat Sep 14, 2013 2:44 pm

^At this point in time I can simply rollover my 403(b) to another financial institution.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Valuethinker » Sun Sep 15, 2013 10:33 am

Browser wrote:Unfortuately, I'm away from home for several weeks yet and didn't think to bring my Gibson book with me :oops: I have the most recent edition (4th I believe). If I get a chance to go to Barnes & Noble before they fold, I'll see if i can find a copy on the shelf -- there's always the library of course. I'm becoming surer that he did reference TREA (not identifying it). As I recall, when he was showing the results of optimization, TREA got a big loading. He pointed out that he didn't believe in the credibility of those results because he didn't believe in the credibility of TREA's reported returns. As I recall, he thought that using REITs made more sense for the real estate allocation.
Browser.

Thank you for the reply.

Gibson deserves respect. Yes, conventional optimizers tend to put very high weightings in to CRE, because it does not correlate with stocks. This is understood by most asset allocators (professional ones, who work for pension funds etc.) to be largely a statistical illusion. RE funds (private LPs) are valued backwards looking (historic transactions basis) which lags what quoted markets do. The real correlation is much higher.

Also there is serial correlation. Ie there is a trend in CRE performance year on year, it's not a random walk. There is a secular cycle in CRE (around 14 years in length) which means you tend to get a run of good years, then a run of bad years (that doesn't necessarily help you call the turn, btw). When William Bernstein posted about future returns from REITs we had a spirited discussion about that here and you can read my thoughts-- I am not a market fundamentalist who believes the market always gets its valuation right, ie that the valuation of a sector sends no signal about its future prospects. (that doesn't mean however that I am a big fan of market timing).

I have tended, here, to suggest a maximum 10% weighting in TREA is appropriate. That gives diversification benefits (a CRE LP like TIAA RE is likely to give you more of those than a REIT index fund) but does not overexpose to management risk, fund risk nor sectoral risk.

I have encountered on the web people who claim to be 20 , 30, 40% in the fund, and that's rash and foolish. In fact I first read the Prospectus after someone on usenet asked for help-- their father had 90% of his retirement money in that fund (which, to that point, had never had a negative year-- this was about 2007 ;-)).

What you should get is greater inflation protection than you would experience with just a stock/ bond portfolio (nominal bonds). Plus a decent management track record.

If Gibson really feels there are doubts about the stated performance that's very interesting, but it's quite an aggressive view. It could imply something up to and including fraud, on the scale of 10s of billions of dollars-- if there was a systematic bias in the valuations and returns reported.

What I prefer to see is uncertainty. When you buy in, and when you exit, you are not getting the 'true' value of the fund, but an estimate of it, which is always changing.

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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by ofcmetz » Mon Sep 16, 2013 8:00 am

Valuethinker wrote: I have tended, here, to suggest a maximum 10% weighting in TREA is appropriate. That gives diversification benefits (a CRE LP like TIAA RE is likely to give you more of those than a REIT index fund) but does not overexpose to management risk, fund risk nor sectoral risk.

I have encountered on the web people who claim to be 20 , 30, 40% in the fund, and that's rash and foolish. In fact I first read the Prospectus after someone on usenet asked for help-- their father had 90% of his retirement money in that fund (which, to that point, had never had a negative year-- this was about 2007 ;-)).

What you should get is greater inflation protection than you would experience with just a stock/ bond portfolio (nominal bonds). Plus a decent management track record.
VT, I always value your comments and thoughts. I had been shooting for a 15% allocation. Just checked my spreadsheet and my actual is closer to 14% due to the run up in US equities this year. Reading this is making me consider letting this fall to 10%.

I'm hoping they do more in the future to protect long term shareholders of this fund and make more restrictions on market timers. Otherwise, I have to agree with livesoft that you should definitely follow this fund pretty closely with the plan of timing things if necessary.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by nisiprius » Mon Sep 16, 2013 10:52 am

I bought TIAA RE when it was first offered due to Burton Malkiel, who was a big booster of having a real estate allocation in A Random Walk Down Wall Street, and incidentally I think his recommendations there have been more stable over time than some of this others. Of course he was recommending doing it through REITS in general, and (implicitly) Vanguard REIT Index Fund (VGSIX), once it was created. Anyway, my point is that even he is talking about 10%-15% of portfolio (increasing with age because he thinks the high dividend payouts make it more suitable for retirees).

I've gotten completely skeptical about all this and currently have neither TIAA RE nor VGSIX, but anyway the point is that even he is only recommending 10-15%.
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Re: TIAA Real Estate Account, bond-like or Madoff-like?

Post by Valuethinker » Mon Sep 16, 2013 11:26 am

ofcmetz wrote:
Valuethinker wrote: I have tended, here, to suggest a maximum 10% weighting in TREA is appropriate. That gives diversification benefits (a CRE LP like TIAA RE is likely to give you more of those than a REIT index fund) but does not overexpose to management risk, fund risk nor sectoral risk.

I have encountered on the web people who claim to be 20 , 30, 40% in the fund, and that's rash and foolish. In fact I first read the Prospectus after someone on usenet asked for help-- their father had 90% of his retirement money in that fund (which, to that point, had never had a negative year-- this was about 2007 ;-)).

What you should get is greater inflation protection than you would experience with just a stock/ bond portfolio (nominal bonds). Plus a decent management track record.
VT, I always value your comments and thoughts. I had been shooting for a 15% allocation. Just checked my spreadsheet and my actual is closer to 14% due to the run up in US equities this year. Reading this is making me consider letting this fall to 10%.

I'm hoping they do more in the future to protect long term shareholders of this fund and make more restrictions on market timers. Otherwise, I have to agree with livesoft that you should definitely follow this fund pretty closely with the plan of timing things if necessary.
Honestly officer, I didn't see that stop sign ;-).

I am no guru. There's probably not much in it, whether you are 10% or 15%.

My main issue is that you are betting on *one* manager, *one* fund, *one* sector. That's not particularly diversified. I am reasonably persuaded that they have a diverse portfolio of high quality commercial assets scattered around the USA (I note they sold their one major London property at a big loss, and that they have folded their European property management business in with Henderson, a long established UK fund management business and real estate investor). So I think they know what they are doing-- down to admitting they cannot 'go it alone' in Europe.

If you are prepared to play the timing game then you can ride it up to 15% and hopefully have some early warning that allows you to sell out. In principle I revile this game, but it is there.

Generally I think sheer prudence says you want to be closer to 10% than 15%. I take Malkiel's point that in retirement the higher income matters (although that's not a good logic: conventional (and correct) BH wisdom is that you should not distinguish between capital gains and income in retirement, except for tax purposes).

As a sectoral view I don't think US CRE is likely to crash any time soon (Calculated Risk blog is an excellent way of keeping an eye on US residential and commercial property trends-- he's one of the best applied economists around). You are not likely to get exciting returns from this fund, conversely you are not likely to get awful ones.

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