Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:37]

Thank you, Mary, and welcome to episode 81 of Risk Parity Radio. Today on Risk Parity Radio, we are not going to have the emails. We have a lot of them stacked up, but we will get to them in another episode, except for the one email that is the focus of this episode. And I will read it. It's from Eric S. Eric S writes, Frank, thanks for the great podcast. I'd like to get your take on the TIAA Real Estate Account, QREAX, as a diversifier in a RP style portfolio. The fund is available in 401, 403b and IRAs through TIAA. I am not sure how familiar you are with the account so I'm including the Prospectus and an FAQ from TIAA that shows correlations with other asset classes. The expense ratio is a bit high, but the account directly holds a lot of commercial real estate and as you can see is not very volatile unlike public REITs. They do have a liquidity guarantee. That's why 20 to 30% of the fund isn't fully invested in the property portfolio. I don't currently hold this fund but have in the past and perhaps would consider it again in the future. Thanks, Eric. Well, Eric, I looked at it, pulled the fact sheet and some other information from the interwebs and the TIAA site to analyze it, and we will go through the 10 questions to analyze any investment from David Stein like we usually do when we are considering new investments for our risk parity style portfolio. All right, question one. First off, what is it? Well, it's an interesting investment. It is an investment in real estate.

Mostly Voices [2:29]

You are correct, sir. Yes.

Mostly Uncle Frank [2:33]

So this fund holds a lot of commercial and residential real estate all over the country. It's like a REIT in that respect. It's the same idea that you pool a bunch of Money, you buy a bunch of properties and you rent them out and you generate income from them. Legally though, it's structured as an annuity product, which makes it a little bit complex. I don't think it means what you think it means. And so it is not an ETF. It is an annuity product. It's a contract with a fund essentially is what it is.

Mostly Voices [3:08]

That was weird wild stuff.

Mostly Uncle Frank [3:11]

And in terms of what is in it, Eric is correct that about 15 to 20% of this fund actually is not invested in real estate. It's just sitting there essentially in cash equivalents.

Mostly Voices [3:24]

You are correct, sir, yes.

Mostly Uncle Frank [3:31]

And to make sure I got this correct, I will read you a couple of things from the FAQ. And the FAQ says the account seeks to generate favorable total returns primarily through the rental income and appreciation of diversified property, of directly held private real estate investments, and real estate investment related investments while offering investors guaranteed daily liquidity. The account intends to have between 75 and 85% of its net assets actually invested in real estate. The account will invest the remaining portion of its assets in liquid fixed income securities, namely US Treasury securities, securities issued by the US or a foreign Government agencies or sponsored entities, corporate debt securities, asset-backed securities, money markets, instruments and stocks of companies that do not primarily own or manage real estate. The account targets to hold not less than 15% and not more than 25% of its net assets in such liquid fixed income securities. And then it goes on to say it may also invest in REITs and mortgage-backed securities and other things.

Mostly Voices [4:33]

Actually, it's the Buck and a Quarter, Quarter Staff, but I'm not telling him that. All right, question two.

Mostly Uncle Frank [4:40]

Is it an investment a speculation or a gamble? Well, we would characterize this as an investment since it is owning some income producing properties and it's using that money to pay its shareholders or its account holders in this case. So it is an investment and not a speculation or a gamble. All right, question three. What is the upside? Well, according to the fact sheet, its total returns year to date are 2.23% over one year, 1.26% average annual returns over three years, 3.55%, five years, 3.85%, ten years, 7%, and since inception in 1995, 5.99%. So it looks like it's returns used to be a lot higher than they are now and have declined over time. But that is basically the upside for it. So it looks like you would expect returns between 1% and 6% out of it going forward is my best estimate. All right, question four. What is the downside? Well, there are several downsides to this sort of thing. The investment returns themselves are not going to be that bad, although if you go back to the years of 2008 and 2009 for this fund, it really took it on the chin. It was down 14% one year and 27% the following year. So it could conceivably have another 40% drawdown. in there sometime if you have another real estate crisis like that. Stand, it's gone. What's all gone? The money in your account.

Mostly Voices [6:30]

It didn't do too well. It's gone.

Mostly Uncle Frank [6:34]

The other downside is it's got kind of a stiff expense ratio, as Eric noted. It's the 0.78 for this account or fund. So that's pretty high by today's standards. It was probably a reasonable fee back in 1995, but really these days it's on the high side, especially for what it does. That's not an improvement. I'm going to take the next two questions together because I think they're related in this case. Question five is who is on the other side of the trade? And question six is what is the investment vehicle? 7,000 horsepower, nitro burning suicide machines. This kind of account is a product put forward by a financial services entity, in this case, TIAA, which used to be TIAA-CREF. And it is designed to be part of a family of accounts or funds or variable annuities is what these things are structured as. You keep using the word. I don't think it means what you think it means. In my mind, this is what I would call a bronze age construction. It's a managed product that was formed by a company. These were very common back in the 1980s or 1990s. The idea is you put all your investments with this company and they would create these products and sell them to you. You still see this going on, but it's less common and it's not very common for do-it-yourself investors. A lot of this is still present in 403Bs in particular, which are often run by insurance companies or other entities that create products and put them out there for the customers to use. I do what I'm told. So this is part of a family of products that TIAA has. This also leads to another downside that I didn't mention, which is from the FAQ page 8, Participant Transactions, How often can I transfer sell units in or out of the real estate account? And it says, Transfers out of the account to a TIAA or CREF account or into another investment option can be executed at any time but are limited to once per calendar quarter. Although some plans may allow systematic transfers that result in more than one transfer per calendar quarter and certain other limited exceptions to this restriction apply. So that is a big restriction that these kind of restrictions were common in the past. And again, the idea was that you put all your money with this one company and they would create these products, but you had to keep it all there and they kind of restricted how much you could move it around. I do what I'm told. And so, what this is designed to do, and I'm reading from page nine of the FAQ, it says, under this limitation, an internal funding vehicle transfer means the movement or attempted movement of the accumulations from any of the following to the account：a TIAA traditional annuity accumulation, a TIAA real estate account accumulation from one contract to another, a companion college retirement equities fund, CREF certificate, other TIAA insurance separate account accumulations, and any other funding vehicle accumulation that is administered by TIAA or CREF on the same record keeping system as the contract. Which gets you to that question six, what is the investment vehicle? It is a contract, and who is on the other side of this contract? It is TIAA. acting as this financial company with its annuities creating these products for its customers to purchase and keep in their ecosystem. I do what I'm told. Alright, question seven. What does it take to be successful? Well, not a whole lot. You just move your money into this thing and let it sit there. You do have to wait to get it out. But in terms of effort, it takes very little effort other than to make the transfer. And as Eric says, this exists inside of these retirement accounts. One thing that doesn't make too much sense to me is why you would put an annuity behind an IRA or a 403b or 401k construction simply because the purpose of annuity is to have some tax benefits. You're not going to realize any of those behind a wall like that. So that part of this doesn't really make too much sense. I don't think it means what you think it means. Okay, question eight. Sorry to mix up my questions and answers. Who is getting a cut? Well, it's TIAA that's getting a cut. They get their 0.78 percentage annually. In exchange, they manage this. fund. They hire people to manage the real estate that is underneath it, and that's how they get paid. I don't know whether TIAA has other fees associated with having one of these accounts. That would have been the usual practice for these sorts of things, but that's not clear from any of this information as to whether in order to get into this account you obviously have to be in this TIAA ecosystem and whether there are any fees associated with that. But that would be something I would want to look at. Okay, question nine. How does it impact your portfolio? Well, as Eric mentions, this does have a relatively low correlation with other asset classes.

Mostly Voices [12:33]

You know, I got friends of mine who live and die by the actuarial tables and I say, Hey, it's all one big crapshoot, anywho.

Mostly Uncle Frank [12:40]

In a way, it does kind of function as if you did have this kind of real estate investment on the side as a side business that's not really related to your other things in your portfolio. So it's pretty close to a zero correlation in most instances with it. What you don't get out of it is what you would get if you actually own some real estate, which are all the tax and depreciation benefits from that. You wouldn't get that out of this. it should be in a portfolio to generate income, but looking at what it's been generating, it looks like it's more dead weight than anything else. I think the problem with this is the returns have been low and also it's got this big pile of cash sitting there as part of its makeup. So in effect, every $10 you put into it, two of those dollars are just sitting there in effectively a money market, which doesn't make a whole lot of sense. The alternative obviously is that you could invest, say, $8 of that in a REIT and then put $2 in the money market or invest it somewhere else and you're probably going to get better returns out of that kind of structure. Don't miss the second annual Reduce, Reuse, Winky Cookoff! REITs are also going to be a lot less costly than this 0.78% expense fee. So I would think if you put this in most portfolios, it would kind of just end up being a drag on the portfolio because other things would be generating more income or more returns than it would. And because it's got this slug of cash just sitting there in it, it would not be a drag on a portfolio that was already extremely conservative. So if you had something that looked like a 3070 portfolio, like that all seasons portfolio, it's one of our sample portfolios at www.riskparadioradio. com, I could see putting something like this in that kind of portfolio because it's already designed to have a low stable kind of income. But if you put this into one of our regular sort of 60-40 comparable risk parity style portfolios like the Golden Butterfly or the Golden Ratio or the Risk Parity Ultimate. It would tend to be just a drag on the portfolio overall. And so we get to question 10. Should you invest? And the answer for this is probably not for a number of reasons. First, for most portfolios, this will tend to be a drag on it and will not really improve its returns. So you would only want to use something like this if you already had a very conservative portfolio and so you were swapping some very conservative bond fund, say, in and out for this thing. I could see using it in that space. I employed some Kiara Scurro shading and But the other problems with it are that you have to be inside this TIA a ecosystem to even access this thing and it just wouldn't be worth it to get involved with that unless you're already there as some people may be. This just may be something that's offered inside of your retirement portfolio in a 403b for example. But I think the other reason you wouldn't want to invest in this is because of those restrictions as to when you can get your money out. Being able to have only quarterly access, that's really 20th century nonsense. We shouldn't be dealing with investments that are so restrictive that we can't even get at our money in a 90-day time period. Great. We can just put that into your retirement account and make it go to work for you and it's gone. In the days of no fee trading and ETFs and all of the advancements and opportunities we have out there, this really becomes kind of a non-starter unless you're just stuck with it. And this also just leads me to a general critique of the business models of a lot of actors in the financial services industry. they are acting as if we were in the 1980s and 1990s. And a lot of these business practices and products need to be essentially creatively destroyed and gotten rid of because they're really not great for the investing public. They're great for the purveyors of these things who want to get people's money into their ecosystem and sell them different kinds of products but keep them locked up into their system. I do what I'm told. That is the traditional way that these companies were run, mutual fund companies were run this way, TIAA is run this way, insurance companies are run this way. All of those sorts of entities from days gone by, that was their business model. Get as much money into these accounts, and then sell the customers a variety of products, but only our products. And so the front-facing client-facing people were essentially salesmen of the products that the company had created. Always be closing. Because only one thing counts in this life. Get them to sign on the line which is dotted. It doesn't mean all of their products were bad, but Usually their products were more expensive or not as good as other things that were available on the marketplace and certainly today not as good as other things that are available out there for the do-it-yourself investor. My analogy for this would be going to a car dealership and they're trying to sell you engines that are using an old-fashioned carburetor, a mechanical device. as opposed to electronic fuel injection, which we all have today in all of the cars. You would never do that unless you wanted to drive an antique around. And so a lot of these sorts of setups, these products, are really carburetors in a fuel injected age. Down the quarter mile of death in their 7,000 horsepower nitro burning suicide machines as they shake hands with the devil. when they scream through the burning gates of hell. But thank you for bringing this to our attention, Eric, because I realize that a lot of people are still faced with situations like this and these sorts of products being offered to them. And maybe they don't have a choice and that's the best they can do. But in most circumstances, I would think that you could do better on your own outside of that ecosystem. I would just roll, roll my account away at the first instance into a self-directed IRA and work on it from there. But I was glad that you brought one of these out because it really does illustrate to me what is still wrong with much of the financial services industry, at least from the customer or the do-it-yourself investor. It always reminds me of the great book called Where Are the Customers' Yachts? by Fred Schwed, which was written in 1940. when things were even worse and brokers would just sell all kinds of things to their customers. But the same idea prevails that this ends up being things that are sold and not things that you would necessarily want to buy if you had a choice, which you generally do these days. Everything that has transpired has done so according to my design. But now I see our signal is beginning to fade. I think we'll probably have another bonus email episode in the next couple days here, simply because I've got a really big stack of them and I will get to yours eventually. If you submitted it this week, it might be next week or the week following before we get through all of them, but there are a lot of interesting questions and a lot of things that I think are applicable to a lot of different people. So we will be working through those. If you have comments or questions for me, you can send them to frank@riskparityradio.com that email is frank@riskparityradio.com and you can also go to the website www.riskparityradio.com and fill in a contact form there and I can get your message that way if you prefer. If you haven't had a chance to go to Apple Podcast or pick this podcast up and leave it a five-star review because that helps get the word out there even more. Thank you once again for tuning in. This is Frank Vasquez with Risk Parity Radio signing off. The Risk Parity Radio Show is hosted by Frank Vasquez.

Mostly Mary [22:11]

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