Fedweek

The move follows several years of controversy over the I fund that started with the TSP commissioning studies of whether that fund should be expanded. Image: Bjoern Wylezich/Shutterstock.com

The TSP has said it will switch its international stock I fund to an index that reflects stocks of more countries and of a wider range of companies in terms of size, following recommendations of a consultant’s study.

The change, to occur during 2024, will replace the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) index that has been in use since the I fund began with the MSCI All Country World ex USA ex China ex Hong Kong Investable Market Index.

The former includes 798 large- and mid-cap stocks in 21 developed markets representing 55 percent of the value non-U.S. stocks, while the latter includes 5,621 large, middle, and small capitalization stocks in 21 developed markets and 23 emerging markets representing more than 90 percent of the value of non-U.S. stocks, it said.

The move follows several years of controversy over the I fund that started with the TSP commissioning studies of whether that fund should be expanded. In 2020, the it was on the verge of adopting a broader index for the fund, including emerging markets. But it suspended that plan after the Trump White House, some members of Congress and some outside interest groups objected on grounds that the index would include stocks of Chinese companies linked to that country’s government.

Since then, bills have been introduced in Congress to bar inclusion of such companies, although those measures have not advanced. The pending change to an index that does not include stocks of companies of China (and dropping the portion of the I fund reflecting stocks of companies in Hong Kong) may bring an end to that controversy.

In its announcement, the TSP said the consultant found the new index has outperformed the current one over time and “is expected to outperform” it moving forward.

It added: “Tensions between the U.S. and China have been building, with the latest developments being the technology investment restrictions and export ban of U.S. technology to China. If the current investment restrictions on China are the beginning of further restrictions spanning China and Hong Kong investments, this level of uncertainty can outweigh the benefits of expanding the I Fund to include China and retaining exposure to Hong Kong, based on the TSP’s specific circumstances.”

The I fund is the second-smallest of the five core TSP funds, holding $68 billion of the $770 billion total in accounts as of the end of October, counting its portions of the lifecycle L funds. The bond F fund is the smallest, with $30 billion.

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