SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
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TIAA - CREF Institutional Mutual Funds
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RESPONSES TO QUESTIONS SUBMITTED BY SCHOLARSHARE INVESTMENT
BOARD STAFF VIA E-MAIL
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Where will the profits from this increase go (to Teachers Advisors or somewhere
else) and what will they be used for?
o Teachers Advisors will use any profits earned from its management of
the Funds to provide for service enhancements for its clients.
However, as a subsidiary, any profits beyond what is needed to operate
and enhance its business would be given to its parent company, TIAA,
for the benefit of its participants.
Will any of the other 529 plans TFI administers experience increases in fees if
the underlying mutual fund fees increase?
o TFI manages 12 state programs and the Independent 529 Program. Of
those 12 state programs, 8 are unitary priced programs, including the
ScholarShare Program. There will be no impact on program fees for any
unitary priced program, including ScholarShare, for the length of each
state program's current contract term. The fees of the Independent 529
Program during its current contract term will also not be impacted by
increases in the TIAA-CREF Institutional Mutual Funds' fees.
o We are not able to comment on the impact on non-unitary programs.
In the proxy statement it says that if an increase is not approved funds may
need to be closed. Which funds are likely to close?
o As the TIAA-CREF Institutional Mutual Funds are still in the proxy
solicitation period, Teachers Advisors thinks it is premature to
comment on which funds it might recommend closing or liquidating if
the proposed investment management agreement is not approved.
If funds are closed how will TFI ensure that the asset allocation has
appropriate asset class representation?
o TFI will ensure that the ScholarShare Program has an appropriate asset
allocation strategy regardless of the outcome of the shareholder
meeting. In order to ensure that this is the case, TFI will take an
appropriately broad view on the universe of funds it uses to create
that strategy. The range of funds TFI could utilize would include
existing proprietary funds, new proprietary funds, and non-proprietary
funds.
Please quantify the expense and profit information.
o In the proxy statement, you will find the pro forma fees to be
collected by Teachers Advisors under the proposed fees (pp. 30-31).
The aggregate fees collected by Teachers Advisors would have been
$16.1 million for the year ended December 31, 2004 if the proposed
fees were in place. Please note that these amounts do not include the
contractual investment management fee waiver for Institutional Growth
Equity and Institutional Growth & Income Funds. Had these waivers been
in place, the fees for these Funds would reflect the amounts in the
current fee column, which would reduce the aggregate fees to be
collected to $13.2 million. The actual expenses of Teachers Advisors
during the year ended December 31, 2004 were approximately $12.2
million. This means that if the proposed investment management fees
had been in place during 2004, Teachers Advisors would have had
estimated operating earnings of $1.0 million and an operating profit
margin of 7.6%, which is considerably less than the profit margins of
most publicly traded asset management firms.
What would the operating profit margin have been had it not included the
contractual fee waiver for the Institutional Growth Equity and the Institutional
Growth & Income funds? Please include calculations.
o As noted above, the aggregate fees collected by Teachers Advisors
would have been $16.1 million for the year ended December 31, 2004
without the Growth Equity and Growth & Income Funds' waivers, which
would have made Teachers Advisors' profit margin 24%
Please indicate what the expected operating margin is anticipated to be upon
expiration of the fee waiver of these two funds.
o We are unable to respond. To derive an estimate, we would need to make
assumptions regarding net flow by fund, investment performance by
fund, as well as projections with regard to changes in expenses, cost
structure.
Please provide all pertinent information that would assist ScholarShare in
determining whether the level of fee increases in aggregate are reasonable from
an operating profit standpoint.
o Please refer to the attached research from Strategic Insight. The
category entitled "Operating Pre-Tax Margins 2004" includes data that
is directly comparable to the estimated profit margins we provided
above.
How did you determine the peer groups? We understand the methodology that Lipper
uses to determine similar funds, but we do not understand how the small groups
are formed--are they representative of the larger universe or are they chosen
because they are substantially similar in characteristics to the TIAA-CREF fund
versus the larger universe or is there some other determining factor?
o Teachers Advisors has been advised by Lipper that the smaller peer
groups were selected based on average net assets at the portfolio
level (including assets of all share classes). The peer universe was
sorted based on portfolio assets and peers are selected with both more
and less assets than the fund being analyzed (i.e., the TIAA-CREF
Institutional Mutual Fund). In most cases, seven funds with more
assets and seven funds with less assets were selected, however each
selected fund's assets must fall within a reasonable size range
relative to the fund being analyzed. Based on several of the screening
criteria, the smaller peer groups may not contain exactly the same
number of peers. The rationale for using this method is to measure
economies of scale relative to similarly-sized portfolios.
How much were the underlying mutual fund fees reduced in 2002? Please note that
we have asked this question twice before and have not received an answer.
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Prior Investment Current Investment
Fund Management Fee Management Fee
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International Equity 0.27% 0.09%
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Growth Equity 0.23% 0.08%
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Growth & Income 0.23% 0.08%
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Equity Index 0.18% 0.04%
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Social Choice Equity 0.19% 0.04%
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Bond 0.18% 0.08%
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Money Market 0.15% 0.04%
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Please note that the Funds that are not included in the chart were not
operational at the time of the fee reduction in 2002.
Presentation 1a - Primarily Mutual Fund Companies
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Comparative Growth and Profitability of Public Money Management Companies
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Cohen Eaton (d) Janus
AMVESCAP Calamos & Steers Vance (c) Federated Franklin Capital
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Assets Managed 12/04 ($B) 382.1 38.0 18.3 94.3 216.4 402.2 139.0
% Change From 12/03 3% 59% 57% 26% -10% 19% -8%
% Change From 12/02 15% 195% 176% 70% -6% 56% 0%
% Change From 12/01 -4% 307% 221% 67% -4% 51% -28%
% Change From 12/00 -5% 519% na 92% 21% 77% -46%
% Change From 12/99 7% na na 131% 30% 71% -46%
Operating Revenues '04 vs. '03 (a) 8% 95% 61% 39% 6% 28% -7%
Operating Expenses '04 vs. '03 (a) 9% 92% -10% 28% 7% 13% 10%
Operating Revenues '03 vs. '02 (a) -5% 74% 24% 6% 2% 10% -12%
Operating Expenses '03 vs. '02 (a) -4% 22% 12% 10% 3% 3% -13%
Operating Revenues '02 vs. '01 (a) -8% 66% 11% -4% 2% -27%
Operating Expenses '02 vs. '01 (a) -1% 18% 17% -8% 1% -12%
Operating Revenues '01 vs. '00 (a) -4% 11% 23% 0% -32%
Operating Expenses '01 vs. '00 (a) 1% 1% 25% 17% -30%
Operating Revenues '00 vs. '99 (a) 42% 14% 14% 4% 90%
Operating Expenses '00 vs. '99 (a) 35% 12% 9% 5% 72%
Operating Pre-Tax Margins 2004 (b) 26% 54% 62% 52% 42% 44% 28%
Operating Pre-Tax Margins 2003 (b) 27% 53% 32% 47% 43% 36% 39%
Operating Pre-Tax Margins 2002 (b) 27% 33% 25% 50% 43% 32% 38%
Operating Pre-Tax Margins 2001 (b) 32% 6% 52% 41% 31% 49%
Operating Pre-Tax Margins 2000 (b) 36% 25% 47% 42% 41% 50%
Operating Pre-Tax Margins 1999 (b) 33% 46% 39% 42% 44%
After-Tax Return On Equity 2004 na 104% n.m. 32% 42% 19% 6%
After-Tax Return On Equity 2003 na na na 27% 52% 14% 45%
After-Tax Return On Equity 2002 na 36% 71% 11% 5%
After-Tax Return On Equity 2001 na 42% 88% 12% 25%
After-Tax Return On Equity 2000 na 52% 117% 19% 71%
After-Tax Return On Equity 1999 na 8% 120% 19% na
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As a % of Assets Managed: (a)
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2004 Adv/Service/Sls Comm Rev. (est.) 0.60% 0.69% 0.64% 0.48% 0.37% 0.65% 0.67%
2004 Mgt. & Selling Expenses (est.) 0.44% 0.32% 0.26% 0.23% 0.21% 0.36% 0.48%
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Difference (Pre-Tax) 0.16% 0.37% 0.38% 0.25% 0.16% 0.29% 0.19%
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Comparative Growth and Profitability of Public Money Management Companies
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T. Rowe Waddell 14 Co.
Nuveen Price & Reed Composite
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Assets Managed 12/04 ($B) 115.5 235.2 38.7 2,718.6
% Change From 12/03 21% 24% 6% 11%
% Change From 12/02 45% 67% 37% 20%
% Change From 12/01 69% 50% 18% -8%
% Change From 12/00 86% 41% 5% 3%
% Change From 12/99 93% 31% 4% 9%
Operating Revenues '04 vs. '03 (a) 17% 29% 12% 17%
Operating Expenses '04 vs. '03 (a) 12% 19% 10% 15%
Operating Revenues '03 vs. '02 (a) 13% 9% 4% 2%
Operating Expenses '03 vs. '02 (a) 14% 5% 4% 0%
Operating Revenues '02 vs. '01 (a) 5% -11% -9% -6%
Operating Expenses '02 vs. '01 (a) 11% -8% 0% -2%
Operating Revenues '01 vs. '00 (a) 0% -15% -6% -3%
Operating Expenses '01 vs. '00 (a) -5% -11% 4% 3%
Operating Revenues '00 vs. '99 (a) 4% 17% 47% 31%
Operating Expenses '00 vs. '99 (a) 5% 18% 42% 27%
Operating Pre-Tax Margins 2004 (b) 49% 41% 36% 42%
Operating Pre-Tax Margins 2003 (b) 47% 37% 35% 39%
Operating Pre-Tax Margins 2002 (b) 48% 35% 35% 37%
Operating Pre-Tax Margins 2001 (b) 51% 34% 41% 38%
Operating Pre-Tax Margins 2000 (b) 48% 37% 47% 40%
Operating Pre-Tax Margins 1999 (b) 48% 38% 45% 41%
After-Tax Return On Equity 2004 29% 22% 52% 31%
After-Tax Return On Equity 2003 31% 18% 33% 25%
After-Tax Return On Equity 2002 30% 18% 66% 28%
After-Tax Return On Equity 2001 28% 19% 84% 34%
After-Tax Return On Equity 2000 28% 31% 104% 47%
After-Tax Return On Equity 1999 30% 35% 49% 41%
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As a % of Assets Managed: (a)
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2004 Adv/Service/Sls Comm Rev. (est.) 0.46% 0.62% 0.87% 0.59%
2004 Mgt. & Selling Expenses (est.) 0.23% 0.36% 0.31% 0.33%
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Difference (Pre-Tax) 0.23% 0.26% 0.56% 0.26%
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(a) May include items related to distribution.
(b) Excludes some distribution-related income and expenses where applicable.
(c) Assets as of October 2004 fiscal year end.
(d) Federated Advisory/Service/Sales Commission asset ratios are calculated
including assets under administration.
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Presentation 1b - Institutionally-Oriented Companies
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Comparative Growth and Profitability of Public Money Management Companies
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Affiliated Alliance 14 Co.
Managers Grp Cap L.P. BlackRock Gabelli Composite
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Assets Managed 12/04 ($B) 129.8 538.8 341.8 28.7 2,718.6
% Change From 12/03 42% 13% 10% 4% 11%
% Change From 12/02 83% 39% 25% 35% 20%
% Change From 12/01 60% 18% 43% 16% -8%
% Change From 12/00 67% 19% 68% 22% 3%
% Change From 12/99 58% 46% 108% 31% 9%
Operating Revenues '04 vs. '03 (a) 33% 12% 20% 24% 17%
Operating Expenses '04 vs. '03 (a) 34% 19% 22% 17% 15%
Operating Revenues '03 vs. '02 (a) 3% 1% 2% -1% 2%
Operating Expenses '03 vs. '02 (a) 3% -1% 2% 11% 0%
Operating Revenues '02 vs. '01 (a) 18% -7% 5% -15% -6%
Operating Expenses '02 vs. '01 (a) 21% -3% 2% -20% -2%
Operating Revenues '01 vs. '00 (a) -11% 29% 9% -4% -3%
Operating Expenses '01 vs. '00 (a) -13% 34% 9% -10% 3%
Operating Revenues '00 vs. '99 (a) -12% 33% 25% 33% 31%
Operating Expenses '00 vs. '99 (a) -10% 31% 22% 31% 27%
Operating Pre-Tax Margins 2004 (a) 44% 35% 29% 42% 42%
Operating Pre-Tax Margins 2003 (a) 44% 38% 30% 39% 39%
Operating Pre-Tax Margins 2002 (a) 45% 37% 30% 45% 37%
Operating Pre-Tax Margins 2001 (a) 46% 40% 29% 42% 38%
Operating Pre-Tax Margins 2000 (a) 45% 42% 29% 38% 40%
Operating Pre-Tax Margins 1999 (a) 46% 41% 27% 37% 41%
After-Tax Return On Equity 2004 12% 18% 19% 18% 31%
After-Tax Return On Equity 2003 10% 9% 23% 14% 25%
After-Tax Return On Equity 2002 10% 15% 24% 18% 28%
After-Tax Return On Equity 2001 10% 15% 25% 26% 34%
After-Tax Return On Equity 2000 12% 29% 27% 33% 47%
After-Tax Return On Equity 1999 18% 94% 31% 11% 41%
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As a % of Assets Managed: (a)
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2004 Adv/Service/Sls Comm Rev. (est.) 0.65% 0.53% 0.19% 0.84% 0.59%
2004 Mgt. & Selling Expenses (est.) 0.36% 0.34% 0.14% 0.48% 0.33%
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Difference (Pre-Tax) 0.29% 0.19% 0.05% 0.36% 0.26%
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(a) Excludes some distribution-related income and expenses where applicable.
(b) May include items related to distribution.
2