A recent study has led the Executive Director of the Federal Retirement Thrift Investment Board (FRITB), the agency which oversees operation of the TSP, to request a change to the index tracked by the I Fund.
Study of Fund Indexes
The study, which was conducted by Aon Hewitt Investment Consulting, Inc. at the behest of the TSP, is the impetus for the potential change. The purpose was to evaluate the appropriate indexes to use for the C, F, S and I Funds.
Aon Hewitt reviewed indexes/benchmarks for each of these funds and determined that for the C, F and S Funds, they were best served by continuing to track each of their current indexes.
C, S, and F Fund Indexes
The C Fund currently tracks the S&P 500 Index, and the S Fund tracks the Dow Jones U.S. Completion Total Stock Market Index. Aon Hewitt recommended the TSP stay with these indexes because the entire U.S. stock market is covered by these two indexes, whereas the other combination considered (the Russell 1000 and 2000 Indexes) would only cover 98% of the U.S. market.
Aon Hewitt also recommended that the F Fund continue to track the Bloomberg Barclays U.S Aggregate Index. The study looked at four alternative Indexes in lieu of the current one, but the conclusion of the study was that the Bloomberg Barclays U.S Aggregate Index provides the widest coverage of the investment grade bond market and is the most widely recognized fixed income benchmark in the U.S.
Recommended Changes for the I Fund
The study also looked at eight non-U.S. stock indexes as possible alternatives to use for the I Fund. Currently, the I Fund tracks the MSCI Europe, Australasia, Far East (EAFE) Index.
Aon Hewitt recommends changing to the MSCI All Country World ex U.S. Investable Market Index (IMI) based on the study results. This would offer TSP participants who invest in the I Fund exposure to markets they do not have access to currently: Canada, emerging markets and international small cap equities.
A summary document on the Index describes it as follows:
The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. With 6,149 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
Besides access to the additional markets, the study concluded that the transition costs associated with the change were “reasonable.” Aon Hewitt said it expected the cost to average approximately $57 million. This is based on the expected trading costs to make the transition and the asset value of the I Fund, which, as of June 30, 2017, was $42 billion.
Recommendation from FRTIB Executive Director
Based on the study results, Ravindra Deo, the Executive Director of the FRTIB, said in a memo to board members that he was seeking their approval for the change in indexes for the I Fund. He said he felt the most appropriate time to initiate the transition would be during the next re-compete of the I Fund’s investment management which would be in the calendar year third quarter of 2018.
The memo said it was expected that the transition would take place over three to six months and be done no later than the end of the first half of calendar year 2019.
“Based on the study conducted by AHIC, including costs and other information provided in its written report and presentation with regard to transition related issues, we believe that it is appropriate to change the benchmark index for the I Fund,” wrote Deo.
“I am asking for the Board’s approval for the FRTIB to change the I Fund’s benchmark index to the MSCI ACWI ex – U.S. Investable Market Index from the current benchmark of the MSCI EAFE Index, to be executed by the single investment manager chosen with the next re-compete of investment management.”
TSP Benchmark Study, November 2017
