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Fund Times

Fund Times: TIAA-CREF Pushes Backdoor Fee Hike

Plus, emerging-markets bandwagon gets overcrowded, and more.

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On April 21, TIAA-CREF took steps to engineer a backdoor fee hike for individual investors in its funds. The firm filed a proxy statement with the SEC asking shareholders to approve a plan that would fold its retail mutual funds into its institutional counterparts, which employ identical or very similar strategies but will charge significantly higher expense ratios next year. A shareholder vote is slated for Aug. 8, 2006.

The vote affects shareholders of TIAA-CREF's 10 retail funds-- TIAA-CREF Growth Equity (TIGEX),  TIAA-CREF Growth & Income (TIGIX),  TIAA-CREF International Equity (TIINX),  TIAA-CREF Equity Index (TCEIX),  TIAA-CREF Managed Allocation (TIMAX),  TIAA-CREF Bond Plus (TIPBX),  TIAA-CREF High-Yield Bond (TCHYX),  TIAA-CREF Short-Term Bond (TCSTX),  TIAA-CREF Tax-Exempt Bond (TCTEX), and TIAA-CREF Money Market. Under the proposal, the assets of the 10 funds would be dumped into the retail share classes of their institutional counterparts. For instance, shareholders of TIAA-CREF Growth Equity would own the retail share class of TIAA-CREF Institutional Growth Equity (TIEQX). (Confusingly, the firm's Institutional funds have institutional, retirement, and retail share classes, with the latter being the priciest.)

Typically, institutional funds are cheaper than retail funds. But in most instances, retail shareholders would end up paying much more under TIAA-CREF's proposal, especially after the firm begins implementing 12b-1 marketing fees in April 2007. TIAA-CREF Bond Plus' expense ratio is a modest 0.30% but would rise to 0.39% when merged with TIAA-CREF Institutional Bond Plus II. With a 0.25% 12b-1 fee, total expenses could rise to 0.64% annually, more than double the fund's current costs.

TIAA-CREF also announced that the retail funds would close to new investors on April 28.

Signs of a Market Top in Emerging Markets?
The emerging-markets bandwagon is getting pretty crowded, as new fund launches are approaching 1993 levels. ProFunds will even let you leverage your emerging-markets exposure.

ProFund Advisors this week launched ProFunds UltraEmerging Markets, which seeks daily investment results, before fees and expenses, that double the daily price performance of The Bank of New York Emerging Markets 50 ADR Index. ProFunds UltraShort Emerging Markets seeks double the inverse of the daily performance of that index, before fees and expenses.

ProFunds also launched two funds based on MSCI EAFE, which is a broad index of stocks outside the United States. ProFunds UltraInternational aims to double the EAFE's performance, while ProFunds UltraShort International seeks the opposite.

Meanwhile, Northern Trust is offering Northern Emerging Markets Equity Fund, which will track the performance of the MSCI Emerging Markets Index.

Finally, Artisan Partners laid the groundwork for launching its own emerging-markets fund by hiring an entire emerging-markets team from DuPont Capital Management. The firm hired Maria Negrete-Gruson and her team of analysts: Chen Gu, Meagan Nace, and Julie Pfeffer. Artisan hasn't yet launched an emerging-markets fund, but expect one soon.

Long-Term Government-Bond Funds Take It on the Chin
Although government-bond funds sound like the safest thing going, this year they're showing why they can actually court a lot of interest-rate risk. A spike at the long end of the bond market has long-term government-bond funds in the red. Government bonds are particularly vulnerable to rising interest rates because they pay lower yields than corporate bonds and thus have less income to cushion the blow to principal.

The average long-term government fund is down 4.54% for the year through April 24, 2006. The hardest hit are the category's two leveraged funds ProFunds U.S. Government Plus (GVPSX) and Rydex U.S. Government Bond (RYCGX), which are off 11.4% and 10.5%, respectively, this year. Plain-vanilla long-term government funds such as  T. Rowe Price U.S. Treasury Long-Term (PRULX) and  Vanguard Long-Term U.S. Treasury (VUSTX) are more in line with the average category loss. The T. Rowe fund has lost about 4.9%, and the Vanguard fund is down about 4.6% for the year to date.

Russel Kinnel does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.