Wednesday, March 19, 2008

Are Professors Better Market-Timers?

I showed in a previous post that many of the investors in the TFS Market Neutral Fund were poor market timers. I just received the CREF Annual Report, which also contains data that is useful for assessing market timing, though not at the same level of detail. The following table gives the distribution across funds and asset classes of the CREF and TIAA Real Estate variable annuities (similar to mutual funds in this case). I've estimated the holdings of the TIAA Real Estate based on data for September 30th, 2007 and projecting that the growth rate of assets in the fourth quarter was equal to that in the first three quarters of the year:

CREF also has regular mutual funds available under some retirement plans though their assets are still small. There is also the massive TIAA Traditional Account which is a kind of life insurance annuity. It's assets are just as big as those of the CREF variable annuity scheme.

At the end of 2002 the investors held 82% of their assets in stocks, 9% in bonds, 6% in cash and 3% in real estate. 2003 was a strong year or stocks and not surprisingly the allocation to stocks rose but in subsequent years of the bull market the stock allocation was gradually reduced. This might be evidence of rebalancing following the 2003 run up. In 2007 there was a sharper reduction in stocks. I'd have to dig into the quarterly data to find out whether this occurred in the first or second half of the year. It could represent either good or bad market timing. 2008's allocation will be interesting. Assets were reallocated across the spectrum but the real estate fund which was performing well through the end of 2007 was the greatest beneficiary. Stocks and real estate performed about as well as each other in 2006. Therefore, there was a clear reallocation to real estate in the year. So far putting money into the real estate fund has proven very worthwhile. It has only had one minorly negative month since October 2002 returned an average of 0.9% per month over the period with a Sharpe Ratio of 4.08. So it's hard to say whether investors are "chasing returns" or appreciating quality when they see it.

Within the equities category funds have been shifted towards global equities fund (50/50 US and foreign shares) from the massive "Stock Fund". CREF's Growth and Equity Index funds have underperformed the Stock Fund and have not seen big shifts towards them. Foreign stocks outperformed US stocks throughout this period. Looking deeper into the accounts, while investors continued to pay premia into the Global Equities fund through 2007 at a fairly constant rate, the fund saw big switches into it in 2006 and much smaller switches out in 2007. Again I don't know in which half of the year these occurred.

In conclusion the professors and other education workers invested in the TIAA-CREF accounts do not seem to be too bad at market-timing and rebalancing. There is a little evidence of return chasing but also of rebalancing. In any case, no movements as dramatic as in the TFS Capital Market Neutral Fund.


Anonymous said...

Why don't you have an RSS feed? i like your blog but often forget to check it

mOOm said...

I do, here it is:


On my browser (Safari) there is a button you can click for it. Maybe I can add another button.