Federal Retirement Thrift Investment Board during their May 31, 2017 meeting announced a number of TSP changes: Lifecycle funds would be in five (5) year sets [instead of the current decade (10)] and the makeup of the I (International) fund would be reviewed for possible inclusion of stocks from different countries (addition of Canada or other emerging markets).
Federal News Radio reprinted Lyn Alden’s detailed, intricate and devastating review of why TSP investors are not well served by the current I fund. Her analysis cites the underlying country choices in the I fund which dates from May 2001 with an annualized rate of return (4.23) and inflation adjusted rate of return (2.15%) but with as much risk as C/S.
“The I Fund, however, leaves a lot to be desired. Rather than following the entire international stock market (as, say, the Vanguard Total International Stock fund does), it only follows developed countries, and is heavily concentrated in just five of them. [graphics omitted] … This is actually a problem that all broad market cap-weighted international stock indices have; they’re heavily concentrated in Japan.
However, the MSCI EAFE (and by extension, the I Fund that follows it), magnifies the problem because it:
- Excludes emerging markets entirely.
- Excludes Canada, since it only invests in Europe, Australia and Asia.
By limiting the investment scope of the index, it even more heavily concentrates in Japan than most international indexes.
The UK, France and Switzerland have hurt the I Fund’s returns over the past two decades, while Germany has been strong. Fortunately, although those countries have low population growth, their companies are global and they have no absolute structural problems. They will likely do better over the next 20 years than they have over the last 20 years. I’m especially bullish on the UK, actually.
Japan, however, is another story.
As great as a country as it is, the population is shrinking, which has a devastating effect on national growth. Japan has high debt and an aging population along with among the highest life expectancy in the world.
The fact that literally a quarter of the I Fund is invested in Japan will very likely continue weigh it down for years to come.”
TSP investors who find Lyn’s analysis compelling will want to readjust their allocations, since the FRTIB will not be refining the I fund immediately.