Today’s profile in Barron’s features the TIAA-CREF Bond Fund (TIORX; Retail Class shares). This $3.5 billion no-load fund has a 0.62% expense ratio and an elevated 309% turnover. According to the article

[active management] has guided [this] low-cost fund to 4.5% average annual returns over the past three years—better than 85% of intermediate-bond funds tracked by Morningstar and ahead of the 4.2% average annual gains for the Barclays U.S. Aggregate Bond Index.

The current lead manager took the reins of the fund in late August 2011. Therefore, this analysis will span from September 2011 through June 2016.

The primary prospectus benchmark for the fund is the Barclays U.S. Aggregate Bond Index. One of the accessible implementations of this index is the iShares Core U.S. Aggregate Bond ETF (AGG). Alpholio™’s calculations show that in the above time frame the fund returned more than the ETF in approximately 91% of all rolling 36-month periods, 80% of 24-month periods and 68% of 12-month periods. The fund’s median cumulative (not annualized) outperformance over a rolling 36-month period was 2.1%.

A comparison of rolling returns tries to approximate the average holding period of the fund. However, it does not take the fund’s composition and volatility into account. To adjust for the latter, let’s apply the simplest variant of Alpholio™’s patented methodology. In this approach, a reference ETF portfolio with both fixed membership and weights is custom-built to most closely track returns of the analyzed fund. Here is the resulting chart and related statistics of cumulative RealAlpha™ for the TIAA-CREF Bond Fund:

Cumulative RealAlpha™ for TIAA-CREF Bond Fund (TIORX)

Over the entire analysis period, the fund added virtually no RealAlpha™. At 2.88%, the fund’s standard deviation (a measure of volatility of returns) was 0.08% higher than that of the reference portfolio. The fund’s RealBeta™ was close to zero, which implies very little correlation of the fund’s returns to those of the broad-market equity ETF.

The following chart and accompanying statistics illustrate the constant reference ETF portfolio for the fund:

Reference Weights for TIAA-CREF Bond Fund (TIORX)

The fund had major equivalent positions in the Vanguard Mortgage-Backed Securities ETF (VMBS), SPDR® Barclays Intermediate Term Corporate Bond ETF (ITR), iShares Intermediate Credit Bond ETF (CIU), Vanguard Intermediate-Term Corporate Bond ETF (VCIT), Schwab U.S. Aggregate Bond ETF™ (SCHZ), and PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS). The Other component in the chart collectively represents additional six ETFs with smaller weights. (Some of the weights in the above table are shown as zero due to rounding.)

Under current management, the TIAA-CREF Bond Fund added practically no value on a truly risk-adjusted basis. An investor could have achieved similar results with a simple reference ETF portfolio comprising just six to nine fixed positions. The article provides a likely explanation

…[the lead manager] is quick to give credit to the 13 managers who run individual “sleeves” of the portfolio.

It appears that all the intense trading of the fund’s holdings (re: turnover in excess of 300%) merely compensated for its substantial management expenses.

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