TSP

Emerging markets now represent the majority of global GDP and global population, and are growing faster than developed markets, so the TSP’s lack of investment options for emerging market exposure remain its one area of major divergence from other retirement systems.

Lyn Alden

All of the TSP Funds are in positive territory year-to-date as of late last week:

Chart Source: FEDweek

ADVERTISEMENT

The G Fund is moderately positive, although due to low interest rates is not really keeping up with inflation.

The F Fund was the better bond performer this year, as the bonds in that fund have a longer maturity profile and were able to gain some capital gains from the reduction in interest rates this year. Going forward, however, there are very low rates in this fund as well.

The C and S Funds were next in line, as the top performers of all of the funds.

The worst-performing equity fund so far this year was the I Fund, which is unfortunate, considering how often they have been the worst-performing equity fund. Years ago, consulting firm Aon Hewitt recommended adding emerging markets to the I Fund, which would be in line with other index fund managers like Vanguard. The TSP Board agreed with the decision and was planning to implement it, but was pressured by politicians to stop that move, since it would allocate some funds to Chinese stocks.

The MSCI emerging markets index outperformed the MSCI EAFE index that the I Fund follows by over 7% year-to-date, and has approximately doubled the cumulative returns of the I Fund’s index since the inception of the I Fund nearly twenty years ago. Emerging markets now represent the majority of global GDP and global population, and are growing faster than developed markets, so the TSP’s lack of investment options for emerging market exposure remain its one area of major divergence from other retirement systems.

Tracking error among all TSP funds has been low, and the expense ratios remain exceedingly low – the TSP is a good deal.

During this time, the TSP continues to modernize its offerings of low-cost index funds and target-date retirement funds.

Asset Manager De-Risking in Progress

Several years ago, consulting firm Aon Hewitt also identified the TSP’s sole asset manager, BlackRock, as a risk, albeit a small risk. The TSP has hundreds of billions of dollars under management, and all of their funds (except the G Fund) were managed by the same company, BlackRock.

As of October, the TSP now has two asset managers: BlackRock and State Street, which are both some of the largest asset managers in the world. The TSP Board is targeting to get 10-20% of its funds managed by State Street by the end of Q1 2021.

This improves competition and ensures that if something were to happen to one of the asset managers, the other one is already in place to take over the operation of the funds.

L Funds Gain Share

Since the launch of the L Funds, they have steadily gained market share among TSP participants, and that trend accelerated over the past five years as they became the default for new participants. The TSP has introduced a larger number of L Funds, targeting more retirement dates in 5-year intervals rather than 10-year intervals.

Chart Source: FRTIB

The power of the L Funds is that they are diversified into all of the other funds, and automatically rebalance themselves, which minimizes the risk of human error, such as emotionally buying high and selling low based on headlines or recent performance.

TSP: Post-Election Bullish Market Move; Emerging Market Value (Nov 9)

Small Change in TSP Contribution Can Have Huge Impact

President, Stock Market Face a Slowing Economy (Nov 4)

What it Takes to Be a TSP Millionaire
As of Q3 2020, there are over 55,000 TSP accounts with over a million-dollar account balance, and well over 300,000 …More


Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.

TSP Investors Handbook, New 7th Edition