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Retirement and Tax Planning

Direct real estate’s potential to improve returns and reduce risk for target date funds

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As target date funds have become more popular, portfolio managers have tried to improve diversification and risk management by adding asset classes. Many now hold high-yield bonds, emerging markets equity and real estate investment trusts (REITs). Until recently, however, no target date mutual fund offered exposure to direct real estate — a separate asset class with investment characteristics distinct from equity and fixed income.1

What are target date funds?

Target date funds (also commonly referred to as “lifecycle funds,” “retirement funds” and “age-based funds”) are managed based on the specific retirement year (target date) and assumes an estimated retirement age of approximately 65. In addition to age or retirement date, investors should consider factors such as their risk tolerance, personal circumstance and complete financial situation before choosing to invest in a target date fund. These funds are generally designed for investors who expect to invest in a fund until they retire (the target date), and then begin making gradual systematic withdrawals afterward. There is no guarantee that an investment in a target date fund will provide adequate retirement income, and investors can lose money at any stage of investment, even near or after the target date.

Direct real estate versus REITs: Key differences
Direct real estate's investment characteristics

Figure 1 (image)

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Charts do not represent the past performance of any TIAA-CREF or Nuveen fund. For fund performance visit nuveen.com.
Source: Morningstar Direct, NCREIF. Past performance is no guarantee of future results. Performance assumes the reinvestment of income and no transaction costs or taxes. U.S. equity: Russell 3000 Index; Non-U.S. equity: MSCI ACWI ex USA Index; U.S. bonds: Bloomberg U.S. Aggregate Bond Index; Direct real estate: NCREIF Property Index-Open End Funds(NPI-OE); REITs: FTSE NAREIT All Equity REITs Index. Different benchmarks, economic periods, methodologies and market conditions will produce different results. There is no assurance that any asset class or index will provide positive performance over time. See below for important disclosures regarding asset class related risks and definitions of each representative asset class. It is not possible to invest directly in an index.
What about liquidity?

Direct real estate’s less frequent transactions don’t necessarily pose a challenge to maintaining target allocations.

 

Conclusion

Direct investment in real estate offers the potential to improve the outcomes of target date funds. A record of high returns, low volatility, and low correlations suggests this distinct asset class may provide superior portfolio diversification than public REITs — the dominant form of real estate exposure in target date funds.

Endnotes

1.The TIAA-CREF Target Date Funds exposure to direct real estate is gained through investment in the TIAA-CREF Real Property Fund LP, a private fund, which is not available for investment by the general public.

Asset class related risks

Different types of asset investments have different types of risks, which may provide higher returns but also greater volatility. In general, equity securities tend to be more volatile than fixed income securities. Foreign investments may involve exposure to additional risks such as currency fluctuation and political and economic instability. The value of, and income generated by, debt securities will decrease or increase based on changes in market interest rates. Real estate investments can be hurt by economic downturns or by changes in real estate values, rents, property taxes, interest rates, tax treatment, regulations, or the legal structure of REITs. An investor should consider all of the risk factors for each asset class before investing.

Glossary

Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation co-efficient of -1) means that securities will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their movements in relation to one another are completely random.

Sharpe Ratio (Risk-Adjusted Return) is a risk-adjusted return measure calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the historical risk-adjusted performance. Standard Deviation (Risk) is a statistical measure of the historical volatility of a mutual fund or portfolio; the higher the number, the greater the risk.

The Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency). The FTSE NAREIT All Equity REITs Index contains all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets (DM) countries (excluding the US) and 23 Emerging Markets (EM) countries. With 1,853 constituents, the index covers approximately 85% of the global equity opportunity set outside the US. The NCREIF Property Index-Open End Funds provides a historical measurement of property-level returns to increase the understanding of, and lend credibility to, real estate as an institutional investment asset class. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is not possible to invest directly in an index. The principal value of the fund(s) is not guaranteed at any time, including at the target date.

A word on risk

Mutual fund investing involves risk; principal loss is possible. There is no guarantee the Fund’s investment objectives will be achieved and the target date is an approximate date when investors may begin withdrawing from the Fund. Target-date mutual funds are actively managed, so the asset allocation is subject to change and may vary from that shown and after the target date has been reached, the Fund may be merged into another with a more stable asset allocation. The Fund is a fund of funds subject to the risks of its underlying funds in proportion to each Fund’s allocation. These risks include those of fixed-income underlying funds risks which may be susceptible to general movements in the bond market and are subject to credit and interest rate risks as well as those of equity underlying funds risks, such as foreign investment and issuer risks. Credit risk arises from an issuer’s ability to make interest and principal payments when due, as well as the prices of bonds declining when an issuer’s credit quality is expected to deteriorate. Interest rate risk occurs when interest rates rise causing bond prices to fall. The Fund’s income could decline during periods of falling interest rates. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These fixed-income underlying funds risks, such as call, extension, and income volatility risks as well as other risk considerations, such as active management risk, equity underlying funds risks and direct real estate risks, are described in detail in the Fund’s prospectus.

Before investing, carefully consider fund investment objectives, risks, charges and expenses. For this and other information that should be read carefully, please request a prospectus or summary prospectus from your financial professional or Nuveen at 800.752.8700 or visit nuveen.com.

Nuveen Solutions comprises a team of investment professionals who are shared within both Nuveen Asset Management, LLC and Teachers Advisors, LLC, registered investment advisers and affiliated entities of Nuveen Securities, LLC, member FINRA and SIPC.

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