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May 21, 2003
TIAA-CREF Adds Positive Screens and Replicates Russell 3000 Performance
by William Baue
TIAA-CREF constitutes its Social Choice Equity Fund based on the KLD Broad Market Social Index to
track the returns of its new benchmark, the Russell 3000 Index.
Last year, the Teachers Insurance and Annuity
Association-College Retirement Equities Fund (TIAA-CREF) changed the benchmark for its Social Choice
Equity (ticker: TCSCX), a decision that also expanded the fund's social and environmental
screening. When the fund was launched in April 2000, it used the S&P 500 as its benchmark and
employed negative screens on alcohol, tobacco, gambling, nuclear power, and weapons. In July 2002,
it began attempting to track the return of the Russell 3000 Index by investing in companies
included in KLD Research & Analytics ' Broad
Market Social Index (BMSI).
"When KLD developed the Broad Market Social Index, we
were very interested because for the first time we had a low-cost alternative to our process that
also encompassed more comprehensive screens," said Joan Deneher, the portfolio manager for the
The BMSI consists of Russell 3000 companies that pass KLD's social and environmental
screens. The model for the BMSI is similar to the model used for the Domini 400 Social Index
(DSI), which consists predominantly of S&P 500 companies. The essential difference between the S&P
500 and the Russell 3000 is the size of constituent companies; as the former focuses on the largest
U.S. companies while the latter also includes small and mid-sized companies.
BMSI allows TIAA-CREF to retain its original negative screens while adding KLD's positive screens
that recognize strong social and environmental performance in such areas as product safety,
corporate citizenship, recycling, and diversity.
It also allows TIAA-CREF to manage the
fund less actively and hence maintain a low annual expense charge of .27 percent. The low expense
charge is a priority for TIAA-CREF.
"It's not an active strategy in that we're not doing
the screening inhouse," Ms. Deneher told SocialFunds.com. "It's also not a passive strategy in
that we're not simply doing index replication."
"We take the names that are in the Broad
Market Social Index, and we re-weight them in such a proportion that the risk characteristics
approach the Russell 3000," Ms. Deneher explained.
In other words, the Social Choice
Equity Fund tries to replicate the performance of the Russell 3000 using the BMSI's more limited
universe of companies. TIAA-CREF seeks to minimize the risk of a restricted universe by recreating
the characteristics of the benchmark as closely as possible.
This strategy seems to be
working, as the fund's year-to-date return of 4.79 percent closely tracks the Russell 3000's
year-to-date return of 4.88 percent, as of April 30, 2003. The BMSI gained 5.35 percent for the
same period. The fund's three-year annualized return of -12.25 percent also mirrors that of the
Russell 3000 at -12.57 percent.
As of March 31, 2003, the Social Choice Equity Fund's
top holding was Johnson & Johnson (JNJ), which
represented 3.04 percent of the portfolio's total net assets of $66.7 million. The remaining top
three holdings included Microsoft (MSFT), representing 2.82
percent of the portfolio, and Merck (MRK) at 2.35 percent.
Ms. Deneher concluded by distinguishing the Social Choice Equity Fund from its peers.
"No one's trying to do what we do; it's a very unique process in that we are trying to manage
risk," Ms. Deneher explained. "We feel that we can minimize the risk of getting something
different from what our investors expect in comparison to a major market benchmark."
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