Statement regarding limited exposure to European securities in TIAA-CREF portfolios

December 20, 2012

Background

With the European sovereign debt crisis still a source of concern for financial markets, it’s important to understand the nature of the crisis and why it matters to investors. Sovereign debt, which refers to bonds issued by a national government, historically has represented a major component of global bond markets and remains an essential cornerstone of fixed-income investing, offering a range of opportunities for investors seeking yield, total return and diversification benefits. As with any fixed-income sector, however, the credit quality of specific issuers and securities may vary.

Some, but not all, nations in the European Union (EU) have seen their sovereign debt come under pressure amid deteriorating economic and fiscal conditions. In some countries, this has increased the risk of a government default and the need for a bailout, such as occurred in Greece. Countries such as Spain and Italy have adopted budget austerity measures in an attempt to hit fiscal targets that would help them avoid such an outcome, but economic and political uncertainty in these nations continues to complicate the outlook for success. As a result, financial markets remain vulnerable to bouts of volatility related to the crisis.

In mid-2012, European Central Bank (ECB) president Mario Draghi reassured markets that his institution would do “whatever it takes” to support the European Union—a pledge later backed up with a plan for direct, unlimited ECB purchases of bonds issued by fiscally strapped eurozone governments. The ECB’s policy statements helped calm unsettled markets in the second half of the year by reducing the likelihood of a potential Greek exit from the euro or other “tail risk” event. In the meantime, the eurozone as a whole has remained economically weak, with record-high unemployment and recessionary conditions prevailing, although there have been some recent signs that the economy may be stabilizing.

Given the fragile state of the region’s financial health, we continue to closely monitor exposures to Europe within our investment portfolios. Overall, TIAA-CREF has very limited exposure to fixed-income securities originating in eurozone nations. In particular, our exposure to sovereign debt issued by the region’s weaker nations, including Greece, Italy, Ireland, Portugal and Spain (GIIPS), is minimal.

Fund and annuity account holdings as of September 30, 2012

  • As of September 30, 2012, TIAA-CREF held no sovereign debt issued by Greece, Ireland, Portugal or Spain in any of our mutual fund or variable annuity portfolios. Our sovereign debt exposure to Italy ranged from 0% to 0.12% of the assets of any single fund or annuity. This is equivalent to no more than 12 cents of every $100 invested.
  • Taking into account all debt, including sovereign and corporate, originating in the GIIPS countries, our exposure ranged from 0.09% to 1.13% of the assets of any single fund or annuity account. Note that corporate debt issued in these countries may include more highly rated securities that are less susceptible to credit and other risks associated with the sovereign bonds of these countries.
  • Exposure to sovereign debt issued by all eurozone nations (which include GIIPS as well as higher-rated countries such as Germany, France and the Netherlands, among others) ranged from 0% to 0.14% of the assets of any single fund or annuity.
  • Exposure to all debt, including sovereign and corporate, originating in all eurozone nations ranged from 0.18% to 5.83% of the assets of any single fund or annuity account.
  • Exposure to all debt, including sovereign and corporate, of all EU countries (including those that are EU members but do not use the euro as their currency, such as the United Kingdom, Switzerland and Norway, among others) ranged from 0.18% to 6.74% of the assets of any single fund or annuity account.
  • Exposure to all debt, including sovereign and corporate, of all European nations (both EU members and nonmembers), ranged from 0.18% to 7.03% of the assets of any single fund or annuity account.

TIAA General Account holdings as of September 30, 2012
The TIAA Traditional Annuity is a fixed annuity that provides a guarantee of principal and a minimum guaranteed rate of interest. The TIAA Traditional Annuity’s guarantees and claims-paying ability are supported by assets held in the TIAA General Account. The TIAA General Account is an insurance company account, does not present an investment return, and is not available to investors.

  • As of September 30, 2012, the TIAA General Account had no exposure to sovereign debt issued by Greece, Ireland, or Portugal. Sovereign debt exposure to Spain and Italy comprised 0.03% and 0.02%, respectively, of the General Account’s total assets. These exposures, plus holdings issued by Slovakia, resulted in combined eurozone sovereign debt exposure representing 0.06% of the General Account’s total assets.
  • Exposure to all debt, including corporate, originating in the GIIPS countries made up 0.40% of the General Account’s total assets. Note that corporate debt issued in these countries may include more highly rated securities that are less susceptible to credit and other risks associated with the sovereign bonds of these countries.
  • Exposure to all debt, including corporate, originating in all eurozone nations (which include GIIPS as well as higher-rated countries such as Germany, France and the Netherlands, among others) comprised 3.02% of the General Account’s total assets.
  • Exposure to all debt, including sovereign and corporate, of all EU countries represented 5.37% of the General Account’s total assets.
  • Exposure to all debt, including sovereign and corporate, of all European nations (both EU members and nonmembers) made up 6.03% of the General Account’s total assets.
  • Holdings of non-bond assets originating in Europe, such as commercial real estate and equity-based assets, comprised 1.92% of General Account assets as of September 30, 2012.
  • The TIAA General Account uses various forms of derivatives to hedge its foreign currency and credit-related exposures. European-related derivatives and counterparty exposures are not expected to have a material impact on the General Account

Please note that the percentages cited above include direct exposures only. Indirect sources of exposure to European debt (such as domestic banks that hold foreign bonds) are present to varying degrees throughout the potential investment universe but are more difficult to assess. In the event of a continued deepening of the crisis in Europe, indirect exposures could have a negative effect on a range of foreign and domestic companies and possibly on U.S. and global economic growth.

Summary tables of European debt holdings as of September 30, 2012
As shown in Table 1 below, as of September 30, 2012, TIAA-CREF portfolios had negligible exposure to the sovereign debt of the GIIPS countries at the heart of the European crisis and small exposure to the sovereign debt of all eurozone nations collectively. Table 2 summarizes our varying degrees of low to modest exposure to all types of debt, including sovereign and corporate, originating in these nations and in Europe more broadly.

Table 1. European Sovereign Debt Exposure (as % of portfolio assets)
 Greece
IrelandItaly PortugalSpainAll Eurozone (1)
TIAA-CREF Funds and CREF Variable Annuity Accounts0%0%0% - 0.12%0%0%0% - 0.14%
TIAA General Account0%0%0.02%0%0.03%0.06%
Table 2. European Total Debt Exposure, Including Sovereign and Corporate (as % of portfolio assets)
     All GIIPS 
All Eurozone (1)    All EU (2)     All Europe (3)
TIAA-CREF Funds and CREF Variable Annuity Accounts0.09% - 1.13%0.18% - 5.83%0.18% - 6.74%0.18% - 7.03%
TIAA General Account*0.40%3.02%5.37%6.03%
* In addition, holdings of non-bond assets originating in Europe, such as commercial mortgages, commercial real estate, and equity-based assets, comprised 1.92% of General Account assets as of September 30, 2012.
(1) The Eurozone consists of 17 European Union (EU) member nations that use the euro as their currency: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece. Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
(2) The European Union (EU) consists of 27 member nations, 17 of which use the euro as their currency (see footnote 1) and 10 that do not. The 10 non-euro EU members are Bulgaria, Czech Republic, Denmark, Latvia, Lithuania, Hungary, Poland, Romania, Sweden, and United Kingdom.
(3) In addition to the 27 EU member nations (see footnotes 1 and 2), Europe has up to 23 nonmember nations (depending on varying definitions and criteria of geographic and/or political inclusion), including Norway, Switzerland, Iceland, and others.

TIAA-CREF NEWS ARCHIVE

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