Thursday, June 29, 2006

TIAA-CREF and the Principles of Responsible Investment: Stay Tuned

I believe that on the whole we, as law professors and educators, support the principles of responsible investment launched at the NYSE in April by the UN Secretary-General.  The principles call for integration of environmental, social, and corporate governance issues into mainstream investment decision-making.  If we support those principles, it seems that our primary financial investor, TIAA-CREF, should endorse those principles and follow them.  See original post 6/5/06

On June 19th, I posed some questions to TIAA-CREF.  My questions were:

Has TIAA-CREF pledged to follow the Principles of
Responsible Investment released in April?  If not,
why not?  What is the procedure for urging adoption
of those principles?

TIAA-CREF response of 6/27 was:

Dear Ms. Smith, 

Thank you for your inquiry.  It is a pleasure to be
of assistance.

We think a financial strategy should stand the test
of time. At TIAA-CREF, our ability to spell out
long-term objectives and pursue them in a systematic
and dependable manner has been crucial to our
success. Unlike many companies that rely heavily on
outside investment managers, we manage our funds
in-house, so that our approach remains consistent
across different accounts and market cycles.

Our long-term investment philosophy, our low-cost*
structure, our commitment to investor choice and
guidance, and our policy of managing risk through
diversification have proven successful again and
again, through technological upheavals,
entrepreneurial shifts, and market swings.

Every financial analyst has his/her own way of
selecting investments. And that strategy comes
greatly into play when evaluating whether or not you
want to invest with a particular company for the long
term. While past returns are obviously important to
assessing an investment company, they do not, in
themselves, give the full picture. Shifting economic
and market conditions, as well as the effect of new
and emerging industries, can radically alter the
financial landscape. So what seemed like a winning
strategy at one point won't necessarily stand the
test of time. That's why you should know how past
returns were achieved and whether an investment
company has a long-term strategy that can respond
effectively to change.

Basically, an investment fund can try to meet its
financial objectives in one of two ways. It can
invest actively -- having its analysts seek out
specific stocks, bonds and other instruments that
they feel are good investments to meet the goals of
the portfolio. The downside here is that the managers
might simply choose wrong -- at least part of the
time. What's more, the fund may not be able to find
enough attractive investments to make full use of the
money it's taking in. So an inordinate amount of cash
may be invested in a "parking place" like the money
market while fund analysts either scramble to uncover
more opportunities and increase their investments in
current holdings. Alternatively, the fund can use a
passive approach -- by simply finding an index for
funds similar to itself and then trying to match the
performance of that index by buying all or many of
the securities it holds. With this approach, the risk
of underperforming the market may be minimized --
you're going with somewhat of a "surer thing" -- but
there's also less potential for the kind of success
that can be achieved by putting all your money in a
stock that may be undervalued and under recognized,
but turns out to be a real winner.

TIAA-CREF has developed a uniform investment
approach for its stock accounts (except for those
which are fully indexed or use social screens). Its
Dual Investment Management Strategy® integrates two
equity management techniques: Active Managers select
specific stocks that they believe represent more
potential for growth, while Quantitative Managers
build an overall portfolio designed to reflect the
basic financial and risk characteristics of the
fund's benchmark index. Quantitative Managers may
also attempt to boost performance by slightly varying
the amount of certain holdings versus the index,
based on proprietary scoring models designed to
identify over- and underperforming stocks. The Dual
Investment Management StrategySM seeks to achieve
higher returns over each Fund's benchmark index,
while attempting to maintain a risk profile for each
Fund similar to its benchmark index.

Using the Dual Investment Management StrategySM, we
have the flexibility to allocate between active and
quantitative management based upon investment
opportunities that we perceive to be available at any
particular time. Team members seek to create value
and limit the additional volatility usually
associated with active stock selection.

Overall, the approach enables the Funds to remain
fully invested when investment opportunities for
active management are limited, and more diversified
than active management alone would typically provide.

My 6/29/06 follow-up was:
Obviously, you didn't answer my questions.  Could you try again?

Stay tuned!!!

http://lawprofessors.typepad.com/environmental_law/2006/06/tiaacref_and_th.html

Economics, Governance/Management, International, North America, Sustainability, US | Permalink

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