Follow The Teacher

By Daniel Kadlec

The individual investor will never be king on Wall Street. But you've come a long way in the '90s, baby, and at least now you're living on the palace grounds. That's why institutional brokerages have been rushing to merge with retail houses, and mutual funds have been multiplying like rabbits. Everyone wants to serve the little guy, who these days may have $100,000 or more sitting in a 401(k) plan. Titans of finance haven't yet figured out how to sell you a fairly priced IPO, but there are enough of you out there to make the big boys bow in your direction.

And that's terrific news. In general, it means you get access to timely research, lower commissions, better service and, increasingly, Wall Street's top money managers. A few years ago, Warren Buffett created a lower-priced Berkshire Hathaway stock, dubbed "Baby Berkshires," to satisfy retail demand. Now the venerable pension-fund manager Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), also known as the Teachers, has gone downmarket.

One year ago, the Teachers launched six open-end mutual funds, and so far they have been standouts. The Growth Equity fund and the Growth and Income fund are both up 21% since inception last September through last week, vs. an 18.5% gain for the Standard & Poor's 500, Morningstar reports. Ordinarily, I wouldn't write about a fund with less than a year's history. But these are irresistible in their simplicity, low expenses and minimums, proven record on the institutional side and now market-beating numbers on the retail side.

The Teachers, with a staggering $236 billion under management, was founded in 1918 by Andrew Carnegie to provide retirement security for educators. Its funds have never before been available outside education circles. The flagship CREF Stock Account was started in 1952, and since then has returned an average annual 11.7%--under the S&P 500's 12.7%, but a noteworthy return in that it invests in a broader range of stocks that makes it less risky. The open-end funds are run much like the highly successful institutional funds, which are focused on the long term, engage in limited trading to keep costs down and avoid anything exotic. "There won't be any big surprises," says Martin Leibowitz, the firm's chief investment officer and a friend of John Bogle, the penny-pinching chief at fund company Vanguard.

Taking a cue from Bogle, Leibowitz's funds have some of the lowest expense ratios anywhere: the domestic stock funds' ratios are under 0.5% of assets, in contrast to about 1.4% for the average comparable fund. Another plus is the funds' low minimum investments of $250 (only $25 if you set up automatic withdrawal).

The most unusual feature is that each fund has an index component designed to match its benchmark--the S&P 500, Russell 3000 or some other. The index portion can run as high as 80% of the fund. Manager picks make up the rest of the portfolio. The funds hold virtually no cash. This unusual approach ensures that the funds will track the market when fund managers see few bargains, but gives them room to tilt hard toward favorite stocks--and outrun the market--when greater values emerge. Of course, it's a matter of how well they pick stocks. That's why 80 years of success managing pensions is so comforting.