Aon Hewitt 

Retirement and Investment

Benchmark Study 

Federal Retirement Thrift Investment Board 

Thrift Savings Plan 

October 2017
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Risk. Reinsurance. Human Resources. 

Table of Contents 

Page 

1. Executive Summary 1 

2. C Fund and S Fund 5 

3. F Fund 23 

4. I Fund 33 

5. Appendix 65 
Risk. Reinsurance. Human Resources. 

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 1 

EXECUTIVE SUMMARY 
 2 

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Executive Summary 

Risk. Reinsurance. Human Resources. 3

The Federal Thrift Savings Plan (TSP) requested Aon Hewitt Investment Consulting, Inc. (“AHIC”) review 

and evaluate the appropriate indexes to use for the following investment options: 

 Common Stock Index Investment Fund (C Fund) 

 Small Capitalization Stock Index Investment Fund (S Fund) 

 Fixed Income Index Investment Fund (F Fund) 

 International Stock Index Investment Fund (I Fund) 

As part of our analysis, we reviewed multiple indexes/benchmarks for each investment option, the 

construction methodology and opportunity set covered by each, the investability and liquidity of the indexes, 

acceptance of the indexes by the investment community, the appropriateness of the indexes for the TSP, 

and the estimated costs associated with making a change. We believe the above factors are the most 

relevant to consider when choosing a benchmark. Based on our review, we have the following 

recommendations: 

C Fund and S Fund 

Maintain the S&P 500 Index for the C Fund and the DJ U.S. Completion Total Stock Market Index for 

the S Fund 

Our recommendation is based on the following primary reasons: 

 The combination of the S&P 500 Index with the DJ U.S. Completion Total Stock Market Index provides 

100% coverage. 

 The stocks in the S&P 500 Index and DJ U.S. Completion Total Stock Market Index are liquid and trade 

frequently, allowing index fund managers to hold the majority of the stocks in these indices. 

 Total passive assets benchmarked to the S&P 500 and DJ U.S. Completion Total Stock Market Index 

are about six times of those benchmarked to the other combination considered: Russell 1000 and 

Russell 2000. 1

 The S&P 500 Index has high recognition value among non-investment professionals, which constitute 

the vast majority of the participants. 

F Fund 

Maintain the Bloomberg Barclays U.S. Aggregate Index 

We considered the Bloomberg Barclays U.S. Universal Bond Index and the Citigroup Broad Investment 

Grade (BIG) Bond Index as the main alternatives. Our recommendation is based on the following main 

reasons: 

 The Bloomberg Barclays U.S. Aggregate Index provides broad coverage to the investment-grade U.S. 

fixed income market and is the most widely recognized fixed income benchmark in the U.S. 

1

Assets are based on the passive providers’ ERISA-qualified institutional index fund
Executive Summary 

Risk. Reinsurance. Human Resources. 4

 The Bloomberg Barclays U.S. Universal Index provides broader coverage to an investor; however, it 

includes high yield debt which is more correlated to stocks, reducing the diversification benefit relative 

to the Bloomberg Barclays U.S. Aggregate. 

 The Bloomberg Barclays U.S. Universal Index and the Citigroup Broad Investment Grade (BIG) Bond 

Index have not received material traction in the institutional marketplace. None of the major index fund 

managers offer ERISA qualified DC index funds benchmarked to these indexes. 

I Fund 

Replace the MSCI EAFE Index with the MSCI All Country World ex-U.S. Investable Market Index 

Our recommendation is based on the following reasons: 

 The MSCI indices remain the most popular indices for U.S. based institutional investors investing in 

overseas equity markets. 

 The transition costs associated with the change in the I Fund benchmark are reasonable. 

 Market Exposure: 

– Canada is the fourth-largest equity market in the world, representing 6.6% of the developed nonU.S. equity opportunity set. 

– Emerging Markets represents 23.5% of the international non-U.S. equity investable universe. 

 Liquidity: 

– We believe the inclusion of emerging markets and international small cap equities to the I Fund will 

not hinder the ability to meet the TSP’s daily liquidity needs. 

– Overall, liquidity is managed through the use of the I Fund’s cash buffer and other tools such as 

optimization and derivatives. 

– Additionally, historical daily cash flow assessment scaled to 25% illustrates cash flow activity was 

at reasonable levels to be traded in emerging markets without adversely impacting the prices of 

securities. 

 Securities Lending: 

– The ACWI ex U.S. IMI generated the highest expected yield and percentage out on loan. 

– Across each of the last three calendar years, the income to the TSP is estimated to have been 

at least 1.5x more if the I Fund tracked the MSCI ACWI ex U.S. IMI instead of the MSCI EAFE 

index. 
Risk. Reinsurance. Human Resources. 5

C FUND AND S FUND 
Risk. Reinsurance. Human Resources. 6

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C Fund and S Fund 

Risk. Reinsurance. Human Resources. 7

C Fund and S Fund

We have reviewed the legislative guidelines related to the investment objectives for the Common Stock 

Index Investment Fund (C Fund) and the Small Capitalization Stock Index Investment Fund (S Fund), and 

have compared each of these Funds’ existing benchmarks to several reasonable alternatives. We find 

that the existing benchmarks, the S&P 500 Index for the C Fund and the Dow Jones U.S. Completion 

Total Stock Market Index for the S Fund, are appropriate. 

We therefore recommend no change in the benchmarks for the C and S Funds. 

Legislative Guidelines 

The goal or objective of any investment option or portfolio plays an important role in determining the 

appropriate benchmark for that investment. The Federal Employees Retirement System Act of 1986 

(FERSA), as amended, states the following regarding the C Fund and the S Fund, under section 8438 (b): 

C Fund 

(2)(A) The Board shall select an index which is a commonly recognized index comprised of common 

stock the aggregate market value of which is a reasonably complete representation of the United 

States equity markets. 

(B) The Common Stock Index Investment Fund shall be invested in a portfolio designed to replicate the 

performance of the index selected under subparagraph (A). The portfolio shall be designed such 

that, to the extent practicable, the percentage of the Common Stock Index Investment Fund that is 

invested in each stock is the same as the percentage determined by dividing the aggregate market 

value of all shares of that stock by the aggregate market value of all shares of all stocks included in 

such index. 

S Fund 

(3)(A) The Board shall select an index which is a commonly recognized index comprised of common 

stock the aggregate market value of which represents the United States equity markets excluding

the common stocks included in the Common Stock Index Investment Fund. 

(B) The Small Capitalization Stock Index Investment Fund shall be invested in a portfolio designed to 

replicate the performance of the index in subparagraph (A). The portfolio shall be designed such 

that, to the extent practicable, the percentage of the Small Capitalization Stock Index Investment 

Fund that is invested in each stock is the same as the percentage determined by dividing the 

aggregate market value of all shares of that stock by the aggregate market value of all shares of all 

stocks included in such index. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 8

The C Fund is benchmarked against the S&P 500 Index, which provides coverage of the large 

capitalization segment of the U.S. equity market. The FERSA guidelines for the C Fund do not specify 

that it should be benchmarked to a large capitalization U.S. stock index. If the C Fund were the only U.S. 

equity investment option available to TSP participants, it would have made sense to consider a broader, 

more inclusive benchmark that also includes smaller capitalization stocks, such as the Russell 3000 Index 

or the Dow Jones U.S. Total Market Index. 

We recognize, however, that the S Fund is meant to complement the C Fund, not to compete or overlap 

with it. This clearly implies that the C Fund should be benchmarked to a large capitalization U.S. index. 

As the C and S Funds are complementary, and in combination should represent the broad U.S. equity 

market, we have included the broad-based Russell 3000 Index and the Dow Jones U.S. Total Market 

Index in our analysis of benchmarks to aid the decision-making process. 

C Fund 

We began our review by first listing several broad U.S. equity benchmarks for the C Fund: 

 CRSP U.S. Large Cap Index (The top 85% of the U.S. equity investable market capitalization) 

 CRSP U.S. Total Stock Market Index (Broad U.S. equity universe across large, mid, small and micro 

capitalizations) 

 Dow Jones U.S. Large Cap Total Stock Market Index (The largest 750 names in DJ U.S. Total Stock 

Market Index Set) 

 Dow Jones U.S. Broad Stock Market Index (All names in DJ U.S. Total Stock Market Index, excluding 

those defined as micro-caps) 

 Dow Jones U.S. Total Stock Market Index (Including all U.S. equity issues with readily available 

prices, except for bulletin-board issues) 

 MSCI USA All Cap Index (Broad U.S. equity universe across large, mid, small and micro 

capitalizations) 

 MSCI USA Index (Captures the large and mid-capitalizations of U.S. equity universe) 

 MSCI USA Investable Market Index (IMI) (Captures the large, mid and small capitalizations of U.S. 

equity universe) 

 Russell 1000 Index (The largest approximately 1000 names in Russell 3000 Index) 

 Russell 3000 Index (The largest 3000 U.S. companies ) 

 Standard & Poor’s (S&P) 500 Index (500 leading companies in leading industries of U.S. economy – 

Current Benchmark) 

 S&P Composite 1500 Index (The combination of S&P 500, S&P MidCap 400 and S&P SmallCap 600 

Indexes) 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 9

From the perspective of U.S. based investors, the MSCI indices are the most commonly used indices to 

measure and benchmark the performance of international equity investments. MSCI adopts a building 

block approach constructing regional indices that can be combined to capture the full extent of the 

investable global equity opportunity set. MSCI U.S. indices have not, however, received material traction 

in the institutional marketplace. The MSCI indices lack significant assets managed to them, either actively 

or passively. The Dow Jones U.S. Large Cap Total Stock Market Index, the Dow Jones U.S. Broad Stock 

Market Index, and the S&P 1500 Index are also not widely used by the investment community. None of 

the major passive providers track ERISA qualified DC assets to this benchmark. 

As for the Center for Research in Security Prices (“CRSP”) indices, Vanguard is the only investment 

management firm out of the five major index fund providers in the U.S. that has assets benchmarked to 

CRSP’s U.S. indices. Although assets managed to CRSP U.S. indices through Vanguard index funds are 

meaningful in size, the benchmark is not common across the rest of the major passive providers. 

Additionally, competitive bidding would not be feasible if a CRSP index is recommended as the 

benchmark for the C Fund. 

We have therefore focused our analysis on the following four benchmarks (from lowest to broadest 

market coverage): 

 S&P 500 Index 

 Russell 1000 Index 

 Russell 3000 Index 

 Dow Jones U.S. Total Stock Market Index 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 10

Table 1 below provides a broad comparison of these benchmarks. 

Table 1: Benchmark Comparison (As of 6/30/2017) 

S&P 500 Russell 1000 Russell 3000 DJ U.S. Total Stock 

Market Index 

Inclusion criteria 

Market cap and 

other criteria such 

as profitability 

Largest 1,000 

stocks based on 

market cap 

Largest 3,000 

stocks based 

on market cap 

All stocks, subject to 

some liquidity 

considerations 

# of securities 505 990 3,000 3,799 

Market cap1 $20.8 Trillion $23.2 Trillion $25.1 Trillion $25.3 Trillion 

Largest 

company’s market 

cap 

$750.9 Billion $750.9 Billion $750.9 Billion $750.9 Billion 

Smallest 

company’s market 

cap 

$2.8 Billion $1.8 Billion $90 Million $1.7 Million 

Coverage of U.S. 

stocks 82% 92% 98% 100.0% 

Reconstitution 

frequency Quarterly Annual Annual Annual 

Turnover2 5.2% 3.1% 3.1% 5.8% 

Source: S&P, Russell, and DJ Index Service 

1 Float adjusted 

2 As of 12/31/2016 

The Russell 1000 Index and the Russell 3000 Index rely on market capitalization to determine which 

stocks are included in the index. Stocks are ranked from highest to lowest capitalizations; the largest 

1,000 stocks are included in the Russell 1000 Index and the largest 3,000 in the Russell 3000 Index. The 

Dow Jones U.S. Total Stock Market Index is generally all-inclusive. The S&P 500 Index is not made up of 

the largest 500 stocks by market capitalization. S&P uses some subjective criteria, most notable being the 

requirement for a stock to have “financial viability,” and that the index sector allocations should be 

representative of the sector allocations of all stocks with market capitalizations of $6.1 billion or more. 

We believe the Russell and Dow Jones indexes are superior from a construction methodology point of 

view, with little to no subjectivity involved. Nevertheless, we find the S&P 500 Index as an acceptable 

benchmark for U.S. large capitalization stocks as the S&P 500 Index provides very close coverage of the 

largest 500 U.S. stocks. 

As for CRSP U.S. equity indices, in 2013, Vanguard’s US equity index funds that were benchmarked to 

MSCI indices were changed to track against Center for Research in Security Prices (“CRSP”) indices. 

The primary reason given for the change was the desire to reduce costs for investors in these funds by 

reducing the licensing fees of index data. The methodologies of MSCI and CRSP are similar; however, 

 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 11

one difference is that MSCI approaches market capitalization segmentation by a fixed number of names; 

whereas, CRSP utilizes breakpoints based on the cumulative market capitalization. 

Performance 

Chart 1 below illustrates how $1 invested in each of the indexes over the longest common time period 

would have grown over time. As shown, all four indexes have tended to perform quite similarly over time.

Chart 1 

(As of 6/30/2017) S&P 500 Russell 1000 Russell 3000 

DJ U.S. Total Stock 

Market Index 

Value At The End 

of 30 Years $19.93 $20.26 $19.78 $19.65 

The correlation coefficients between each pair of indexes are shown on the following page in Table 2. 

Correlation coefficients can range from +1 to -1. A correlation of +1 between two indexes implies that the 

returns of the two indexes move in the same direction and in the same proportion, while a correlation of -1 

means that the returns move in opposite directions but in the same proportion. As can be seen, all the 

indexes are highly positively correlated to each other. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 12

Table 2: Correlation Matrix (As of 6/30/2017) 

S&P 500 Russell 

1000 

Russell 3000 DJ U.S. Total Stock 

Market Index 

S&P 500 1.00 

Russell 1000 1.00 1.00 

Russell 3000 0.99 1.00 1.00 

DJ U.S. 0.99 1.00 1.00 1.00 

 

(Longest common time period = 30 years) 

Table 3 referenced below details the cumulative annualized returns over several trailing historical periods. 

Table 3: Return History (As of 6/30/2017) 

S&P 

500 

Russell 

1000 

Russell 

3000 

DJ U.S. Total Stock 

Market Index 

1 Year 17.9% 18.0% 18.5% 18.5% 

3 Years 9.6 9.3 9.1 9.0 

5 Years 14.6 14.7 14.6 14.5 

10 Years 7.2 7.3 7.3 7.3 

15 Years 8.3 8.6 8.7 8.8 

20 Years 7.2 7.4 7.4 7.5 

25 Years 9.6 9.7 9.7 9.7 

30 Years 9.6 9.7 9.6 9.6 

35 Years 12.0 12.0 11.9 -- 

 *See appendix for annual returns 

While returns do vary year to year, long term returns tend to be in a very tight range. However, the 

numbers above do not indicate the risk incurred to earn these returns. Table 4 shows the annualized 

standard deviation over various time periods. The ten-year standard deviation of the S&P 500 Index of 

15.2% means that based on the last ten years of historical returns data, the return of the S&P 500 Index 

in any given year is expected to be in a range of +/- 15.2% around the average return, about two-thirds of 

the time. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 13

Table 4: Annualized Standard Deviation (As of 6/30/2017)

 S&P 500 Russell 

1000 

Russell 

3000 

DJ U.S Total 

Market Index 

3 Years 10.4% 10.5% 10.6% 10.6% 

5 Years 9.6 9.7 9.8 9.8 

10 Years 15.2 15.5 15.8 15.7 

15 Years 14.1 14.2 14.5 14.4 

20 Years 16.5 16.9 17.1 17.3 

25 Years 15.4 15.7 15.9 16.1 

30 Years 15.6 16.0 16.2 16.3 

35 Years 15.8 16.2 16.4 -- 

The risk, as measured by the standard deviation of returns, also tends to be in a narrow range. The 

Sharpe ratio measures excess return over the risk-free rate (such as T-Bills) per unit of additional risk. 

Sharpe ratios are appropriate for any kind of investment, including indexes and managers. The Sharpe 

ratio can be used to compare the risk-adjusted performance of two or more indexes, compare the riskadjusted performance of a manager with an index, or compare the risk-adjusted performance of two or 

more managers. A higher Sharpe ratio is always better. A positive Sharpe ratio means that the 

investment has produced a better return than the risk-free rate over the period analyzed. The Sharpe 

ratios for each of the indexes over various periods are shown below in Table 5. 

Table 5: Sharpe Ratios (As of 6/30/2017) 

 S&P 500 Russell 

1000 

Russell 

3000 

DJ U.S. Total Stock 

Market Index 

5 Years 1.47 1.46 1.43 1.42 

10 Years 0.50 0.50 0.49 0.50 

15 Years 0.55 0.57 0.56 0.58 

20 Years 0.38 0.39 0.39 0.39 

25 Years 0.51 0.51 0.51 0.51 

30 Years 0.47 0.47 0.46 0.45 

35 Years 0.57 0.56 0.55 -- 

Based on historical performance, we do not find evidence of superiority of one or more benchmarks 

relative to the others on a risk-adjusted basis. 

Investable & Liquidity 

A good benchmark should be investable, i.e. an investor should be able to earn a return similar to that of 

the index after costs. 

The stocks in the S&P 500 Index are liquid and trade frequently, allowing index fund managers to hold all 

the stocks at the appropriate index weights. The existence of an extremely liquid market for S&P 500 

futures contracts also allows index fund managers to manage cash flows more efficiently, resulting in 

tighter tracking of the Index. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 14

The Russell 1000 Index is also large cap-oriented and relatively liquid, allowing index fund managers to 

replicate the Index and control tracking error. As the opportunity set broadens to include small 

capitalization stocks, liquidity tends to decline. While the major index fund providers replicate their Russell 

3000 Index funds, they are willing to incur slightly higher tracking error due to the costs associated with 

trying to match the index weightings precisely for the Dow Jones U.S. Total Stock Market Index. Index 

fund managers typically do not hold all the stocks in their Dow Jones U.S. Total Stock Market Index 

funds; rather, they hold the largest stocks at approximately the market weights and use an optimization 

strategy for the smaller capitalization stocks. Optimization refers to the process of holding a 

representative, risk-controlled sample of the index constituents to avoid investing in the least liquid 

constituents in an effort to minimize trading costs. While this results in higher tracking error than say, an 

S&P 500 Index fund, it still tends to be within narrow bands. It should also be noted that index fund 

managers that have managed broad market strategies, such as the Dow Jones U.S. Total Stock Market 

Index, for long periods of time and have substantial passive assets benchmarked to such indices have 

over time been able accumulate most, if not all, the securities comprised in the broad market indices, 

trading opportunistically when liquidity opportunities present/have presented themselves. 

Table 6 compares the historical 5-year tracking errors of institutional index funds (ERISA-qualified1) 

managed by BlackRock, State Street Global Advisors (SSgA), Vanguard, Bank of New York Mellon (BNY 

Mellon) and Northern Trust, five of the major index fund managers in the world, for the S&P 500 Index, 

Russell 1000 Index, Russell 3000 Index, and Dow Jones U.S. Total Stock Market Index. While the 

tracking error increases as the index coverage increases, we consider the tracking error on the Dow 

Jones U.S. Total Stock Market Index funds to be reasonable. 

Table 6: Index Fund 5-Year Tracking Error1

 (As of 6/30/2017) 

S&P 500 Russell 1000 Russell 3000 

DJ U.S. Total Stock 

Market Index 

BlackRock 0.01% 0.01% 0.02% 0.07% 

SSgA 0.02 0.03 0.07 0.05 

Vanguard 0.01 0.06 0.06 N/A2

BNY Mellon 0.01 0.01 0.07 N/A 

Northern Trust 0.01 0.02 0.02 N/A 

Source: BlackRock, SSgA, Vanguard, BNY Mellon and Northern Trust 

1

 Stock tracking error is based on the passive providers’ ERISA-qualified daily valued institutional index fund. Majority of passive 

providers used non-securities lending products if they were available. 2 Vanguard’s Total Stock Market Index Fund is benchmarked to CRSP U.S. Total Stock Market 

Acceptance 

An important consideration for benchmark selection is the benchmark’s acceptance and use among the 

investment community. Table 7 displays the value of passively managed assets in all vehicles 

benchmarked to each of the four indexes by the above five index managers. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 15

Table 7: Assets Indexed to Benchmark (As of 6/30/2017) 

S&P 500 Russell 1000 Russell 3000 

DJ U.S. Total Stock 

Market Index 

Passive 

Assets1 $782 Billion $130 Billion $68 Billion $24 Billion 

1

Assets are based on the passive providers’ ERISA-qualified daily valued institutional index fund 

The S&P 500 Index has, by far, the greatest amount of assets indexed to it. The table only shows less 

than half of the total passive assets benchmarked to the S&P 500 Index. If the assets managed by other 

fund families are counted, the total passive assets benchmarked to the S&P 500 Index total 

approximately $2.2 trillion as of June 30th, 2017. Assets indexed to the Russell 3000 Index and the Dow 

Jones U.S. Total Stock Market Index are much lower, but still high on an absolute basis. In addition, 

based on the Russell 1000's share of the Russell 3000 and the DJ U.S. Total Stock Market Index on a 

market cap basis, we estimate that there is $168 billion managed to the Russell 1000 as a part of these 

broader passive U.S. equity mandates. Although the passive assets managed to CRSP U.S. Large Cap 

Index is low, the total passive assets benchmarked to CRSP U.S. Total Stock Market is high at $581 

billion. However, as mentioned previously, Vanguard is the only major passive provider that tracks to this 

benchmark which results in concentration risk in the event Vanguard decides to change passive providers 

in the future. 

Summary 

Although the Russell 3000 Index and DJ U.S. Total Stock Market Index provide broader coverage of the 

U.S. equity market than the S&P 500 Index and Russell 1000, both indexes could overlap with the 

benchmark for S Fund. Given that the C Fund and the S Fund are statutorily intended to be 

complementary and provide coverage of the entire U.S. opportunity set, we shortlist the large cap indices, 

namely the S&P 500 Index and the Russell 1000 Index, for further consideration. We believe the S&P 500 

Index and Russell 1000 Index are compatible by many criteria. 

Both indexes will be reviewed in conjunction with a recommendation for the benchmark for the S Fund to 

determine the most suitable combination for C and S Funds. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 16

S FUND 

Benchmarks Considered 

We considered the following U.S. equity mid/small capitalization indexes in our initial review of 

benchmarks for the S Fund: 

 CRSP U.S. Small Cap Index (U.S. companies that fall between the bottom 2%-15% of the investable 

market capitalization) 

 Dow Jones U.S. Small Cap Total Stock Market Index (including 751-2500th stocks in DJ U.S. Total 

Stock Market Index ranked by capitalization) 

 DJ U.S. Completion Total Stock Market Index (current benchmark, DJ U.S. Total Stock Market 

Index excluding S&P 500 Index members)

 MSCI USA Small Cap Index 

 Russell 2000 Index 

 S&P MidCap 400 Index 

 S&P SmallCap 600 Index 

 S&P 1000 Index (Combination of S&P 400 and S&P 600 Indexes) 

 S&P Completion Index (S&P Total Market Index excluding S&P 500 members) 

We eliminated the Dow Jones U.S. Small Cap Total Stock Market Index and the MSCI USA Small Cap 

Index as these indexes do not complement either of the two C Fund benchmarks under consideration, the 

S&P 500 Index and the Russell 1000 Index. While the S&P MidCap 400 Index complements the S&P 

500 Index, it fails to capture a significant portion of U.S. small capitalization stocks. The S&P SmallCap 

600 Index leaves out 400 mid-capitalization stocks when combined with the S&P 500 Index, and creates 

overlap when combined with the Russell 1000 Index. Though the S&P 1000 Index is more inclusive and 

complements the S&P 500 Index, it is not widely used, and lacks significant assets managed against it, 

either actively or passively. The S&P Completion Index complements the S&P 500 Index very well. The 

combination covers the entire U.S. opportunity set. 

However, with about $57 billion in passive assets, Vanguard is the only fund manager who offers a fund 

benchmarked to the S&P Completion Index. Competitive bidding would not be feasible if the S&P 

Completion Index is recommended as the benchmark for S Fund. 

As for the Center for Research in Security Prices (“CRSP”) indices, Vanguard is the only investment 

management firm out of the five major index fund providers in the U.S. that has assets benchmarked to 

CRSP’s U.S. indices. Although assets managed to CRSP U.S. indices through Vanguard index funds are 

meaningful in size, the benchmark is not common across the rest of the major passive providers. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 17

Additionally, competitive bidding would not be feasible if a CRSP index is recommended as the 

benchmark for the S Fund. 

We therefore focus our attention on the remaining two benchmarks: 

 Russell 2000 Index (as a complement to the Russell 1000 Index) 

 DJ U.S. Completion Total Stock Market Index (as a complement to the S&P 500 Index) 

A comparison between the two benchmarks is shown below in Table 8. 

Table 8: Benchmark Comparison (As of 6/30/2017) 

Russell 2000 DJ U.S. Completion Total Stock 

Market Index 

Inclusion criteria Stocks ranking from 1,001 to 

3,000 based on market cap 

All stocks in the DJ U.S. Total Market 

Index minus the stocks in the S&P 500

# of securities 2,010 3,290 

Market cap1 $1.9 Trillion $4.5 Trillion 

Largest company’s market 

cap 

$5.9 Billion $59.4 Billion 

Smallest company’s market 

cap 

$90 Million $1.7 Million 

Coverage of U.S. stocks 8% 18% 

Reconstitution frequency Annual Annual 

Turnover2 13.5% 21.4% 

Source: Russell, and DJ Index Service 

1Float adjusted 

2As of 12/31/2016 

While the Russell 2000 Index provides coverage to only 8% of the U.S. stock market as opposed to 18% 

by the DJ U.S. Completion Total Stock Market Index, it is more relevant to consider it in combination with 

the Russell 1000 Index – resulting in 98% coverage of the market. The combination of the S&P 500 Index 

with the DJ U.S. Completion Total Stock Market Index provides 100% coverage. 

Performance 

Chart 2 illustrates the growth of $1 invested in each of the indexes over the longest common time period. 

The DJ U.S. Completion Total Stock Market Index has performed better than the Russell 2000 Index due 

to the inclusion of more small-cap stocks. 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 18

Chart 2 

(As of 6/30/2017) Russell 2000 DJ U.S. Completion TSM Index 

Value At The End of 30 Years $16.49 $20.06 

The correlation between the indexes is shown below in Table 9. As shown, the correlation between the 

indexes is quite high. 

Table 9: Correlation Matrix (As of 6/30/2017) 

Russell 2000 DJ U.S. Total Stock Market Index 

Russel 2000 1.00 

DJ TSMI 0.97 1.00 

(Longest common time period = 30 years) 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 19

The cumulative annualized returns over several trailing historical periods are shown below in Table 10. 

Table 10 Return History (As of 6/30/2017) 

 Russell 2000 DJ U.S. Completion Total Stock Market Index 

1 Year 24.6% 21.4% 

3 Years 7.4 6.7 

5 Years 13.7 14.0 

10 Years 6.9 7.7 

15 Years 9.2 10.4 

20 Years 8.0 8.6 

25 Years 9.9 10.3 

30 Years 9.0 9.8 

 *See appendix for annual returns 

Given the substantial differences in market coverage between the two indexes, annual returns tend to 

differ by relatively large margins. The difference in returns narrows over long periods of time but is still 

higher than that of large capitalization indexes. 

The standard deviation of these benchmarks is shown in Table 11. 

Table 11 Annualized Standard Deviation (As of 6/30/2017) 

 Russell 2000 DJ U.S. Completion Total Stock Market Index 

3 Years 15.4% 13.2% 

5 Years 13.9 12.1 

10 Years 20.1 18.6 

15 Years 19.0 17.0 

20 Years 21.1 21.6 

25 Years 19.5 19.9 

30 Years 20.5 19.8 

The DJ U.S. Completion Total Stock Market Index has posted comparable returns over all historical 

periods at a similar to lower risk levels. The DJ U.S. Completion Total Stock Market Index has a higher 

Sharpe ratio over most of those periods. 

Table 12 Sharpe Ratios (As of 6/30/2017) 

 Russell 2000 DJ U.S. Completion Total Stock Market Index 

5 Years 0.99 1.14 

10 Years 0.41 0.47 

15 Years 0.50 0.60 

20 Years 0.37 0.40 

25 Years 0.46 0.47 

30 Years 0.37 0.41 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 20

Over the longest common time period, the DJ U.S. Completion Total Stock Market Index has 

outperformed the Russell 2000 Index on a risk-adjusted basis. However, in combination with the 

corresponding large capitalization indexes, these differences are diminished. 

Investable & Liquidity 

Most of the significant players in the index fund management business offer Russell 2000 Index funds 

and DJ U.S. Completion Total Stock Market Index funds. Managers for the DJ U.S. Completion Total 

Stock Market Index funds typically hold all the mid-cap stocks, as well as most of the small cap stocks, 

and optimize the balance of the micro-cap segment. Again, they have shown an ability to do this at 

reasonable costs and tracking error. Fund managers tend to hold all the stocks in the Russell 2000 Index 

as part of their investment strategy. 

Table 13 below compares the historical tracking errors of institutional index funds managed by 

BlackRock, SSgA, Bank of New York Mellon and Northern Trust (Vanguard does not manage stand-alone 

index funds benchmarked to DJ U.S. Completion Total Stock Market). All managers have been 

successful in earning the returns of the indexes within a reasonable level of tracking error. 

Table 13: Index Fund 5-Year Tracking Error (As of 6/30/2017)1

Russell 2000 DJ U.S. Completion Total Stock Market Index 

BlackRock 0.04% 0.15% 

SSgA 0.08 0.12

Vanguard 0.03 N/A2

BNY Mellon 0.05 0.09 

Northern Trust 0.03 0.08 

Source: BlackRock, SSgA, Vanguard, BNY Mellon and Northern Trust 

1

Stock tracking error is based on the passive providers’ ERISA-qualified daily valued institutional index fund. Majority of passive 

providers used non-securities lending products if they were available. 2 Vanguard’s Small-Cap Index Fund is benchmarked to CRSP U.S. Small Cap Index

Acceptance 

An important consideration for index benchmark consideration is the benchmark’s acceptance and use 

among the investment community. The following table displays the value of passively managed assets by 

the above leading fund managers and benchmarked to each of the two indexes. 

Table 14: Assets Indexed to Benchmark (As of 6/30/2017) 

Russell 2000 DJ U.S. Completion Total Stock Market Index 

Passive Assets1 $28 billion $83 billion 

1

Assets are based on the passive providers’ ERISA-qualified daily valued institutional index fund 

Both indexes are accepted passive benchmarks. The assets managed by the above fund managers’ 

account for half of the total passive assets benchmarked to the two indexes. If other fund families and 
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 21

assets that are part of other mandates are included, the total assets managed to these benchmarks are 

much larger. For example, the Russell 2000 Index fund could be managed on a stand-alone basis or 

within the mandate of a Russell 3000 index fund, which has a much larger asset base. The same holds 

true for the DJ U.S. Completion Total Stock Market Index being managed alone or within the DJ U.S. 

Total Stock Market Index. 

There is also a fairly large level of overlap that exists between the different small capitalization indices at 

the underlying security level. Given the large overlap in securities between the indices, providers hold and 

trade most of the same securities that are held in the DJ U.S. Completion Total Stock Market Index as 

part of their other small capitalization index strategies. As a result, we believe it is appropriate to consider 

assets managed to indices such as the S&P Completion Index and CRSP U.S. Small Cap Index by the 

five major providers, in addition to the Russell 2000 Index and the DJ U.S. Completion Total Stock Market 

Index, when assessing the size of total passive assets benchmarked to the indices discussed above. 

Table 15 (As of 6/30/2017) 

Russell 

2000 

DJ U.S. 

Completion Total 

Stock Market 

Index 

S&P 

Completion 

Index 

CRSP U.S. 

Small Cap 

Index 

Total U.S. 

Small 

Capitalization 

Stock Indexed 

Passive 

Assets1 $28 billion $83 billion $57 billion $77 billion $245 billion 

1

Assets are based on the passive providers’ ERISA-qualified institutional index fund

The greatest amount of assets is passively managed against the DJ U.S. Completion Total Stock Market 

Index directly. 

Benchmark Recommendation for the C and S Funds 

There are two combinations of benchmarks that make the most sense for the C and S Funds: 

1. The current combination of the S&P 500 Index for the C Fund and the DJ U.S. Completion Total 

Stock Market Index for the S Fund; and 

2. An alternate combination of the Russell 1000 Index for the C Fund and the Russell 2000 Index for the 

S Fund 

Either of these combinations would be consistent with the FERSA provisions. We recommend that the 

existing benchmarks be maintained for the C and S Funds for the following reasons: 

 Total passive assets benchmarked to the S&P 500 and DJ U.S. Completion Total Stock Market Index 

are about six times of those benchmarked to the combination of Russell 1000 and Russell 2000. 1
C Fund and S Fund 

Risk. Reinsurance. Human Resources. 22

 The costs associated with picking up the bottom 4% of market capitalization have not impacted index 

fund managers’ ability to track the DJ U.S. Completion Total Stock Market Index. 

 The S&P 500 Index has high recognition value among non-investment professionals, which constitute 

the vast majority of the participants. 
Risk. Reinsurance. Human Resources. 23

F FUND 
Risk. Reinsurance. Human Resources. 24

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F Fund 

Risk. Reinsurance. Human Resources. 25

F Fund 

Summary 

We have reviewed the Fixed Income Index Investment Fund’s (F Fund) legislative guidelines and 

compared its current benchmark the Bloomberg Barclays U.S. Aggregate Index to other leading fixed 

income market indices. We recommend the continued use of the Bloomberg Barclays U.S. Aggregate 

Index for the F Fund. 

Legislative Guidelines 

FERSA states the following as it relates to the F Fund: 

(B) The Board shall establish a Fixed Income Investment Fund under which sums in the Thrift Savings 

Fund are invested in— 

i. insurance contracts 

ii. certificate of deposits; or 

iii. other instruments or obligations selected by qualified professional asset managers, which 

return the amount invested and pay interest, at a specified rate or rates, on that amount during 

a specified period of time. 

The guidelines for the eligible instruments in which the F Fund may invest are very general in nature. 

There is no guidance on whether investments may be made in non-U.S. dollar denominated debt, noninvestment grade loans, U.S. dollar-denominated foreign debt, etc. 

The legislative guidelines specify that the F Fund may invest in insurance contracts and certificates of 

deposits. We note that the relative stability in returns provided by insurance contracts and certificates of 

deposit is already available to participants through the Government Securities Investment Fund (G Fund). 

Insurance contracts and certificates of deposit are not included in marketable security fixed income 

benchmarks. As participants have access to an investment option in the G Fund that provides the key 

elements of insurance contracts and certificates of deposit – return of capital and payment of interest – 

we believe that it is appropriate to offer participants exposure to a broad array of marketable fixed income 

securities as the F Fund currently provides. Therefore, we focus our attention on the leading broad-based 

fixed income indexes that comprise publicly traded fixed income securities. 

Benchmarks Considered 

We initially considered the following indices in our review of reasonable benchmarks for the F Fund: 

 Citigroup Broad Investment Grade (BIG) Bond Index 

 Citigroup World Government Bond Index 

 Bloomberg Barclays U.S Aggregate Index (Current Benchmark)
F Fund 

Risk. Reinsurance. Human Resources. 26

 Bloomberg Barclays Global Aggregate Index 

 Bloomberg Barclays U.S. Universal Index 

Chart 3 below provides a representation of the global investable fixed income market. The Bloomberg 

Barclays U.S. Aggregate Index, the most widely used benchmark by U.S. institutional investors, is broken 

out as a sub-component of the global fixed income markets. 

Chart 3 

Source: Barclays Global Investors, Multi-Verse Universe 

*Other is comprised of Euro Treasury High Yield and EM Local Currency Govt: Non GLA Eligible 

Benchmarks such as the Bloomberg Barclays U.S. Aggregate Index, Citigroup BIG Bond Index, as well 

as the Bloomberg Barclays U.S. Universal Bond Index, capture only about 40% to 50% of the global fixed 

income opportunity set. Global fixed income benchmarks, such as the Citigroup World Government Bond 

Index and Bloomberg Barclays Global Aggregate Bond Index, seem appealing given the broader 

coverage of the fixed income markets; however, there are little to no passive assets managed to such 

benchmarks. Additionally, global fixed income benchmarks are exposed to a meaningful amount of 

volatility associated with foreign currency exchange rate fluctuation and credit risk, which may not be 

appealing to a U.S. based investor in fixed income seeking stability in returns and principal. Our analysis, 

therefore, focuses on the Bloomberg Barclays U.S. Aggregate, Bloomberg Barclays U.S. Universal, and 

the Citigroup BIG indexes. 
F Fund 

Risk. Reinsurance. Human Resources. 27

Table 16 

Bloomberg Barclays 

U.S. Aggregate 

Bloomberg Barclays 

U.S. Universal Citigroup BIG 

Inclusion criteria U.S. Investment grade, 

dollar denominated, 

non-convertible, fixedrate instruments. 

Maturity greater than 

one year. 

Includes Treasuries, 

Agencies, mortgages, 

asset-backed 

securities, corporate 

debt. Minimum 

outstanding size $250 

million. 

Barclays U.S. 

Aggregate + U.S. high 

yield, Eurodollars,, U.S. 

dollar denominated 

emerging market debt, 

non-ERISA portion of 

the CMBS index, and 

the 144A index 

Similar to Barclays 

Aggregate, same 

minimum size on 

corporate and asset 

backed issues, but with 

higher minimum size 

requirements for 

Treasuries, Agencies 

and mortgage backed 

issues. 

# of securities 9,347 14,844 7,334 

Market cap $19.6 trillion $23.6 trillion $18.7 trillion 

Coverage of U.S. 

dollar denominated 

fixed income 

opportunity set 

83% 100% 80% 

Reconstitution 

frequency Monthly Monthly Monthly 

As of 6/30/2017 

Source: Bloomberg Barclays Global Investors and Citigroup 

The Citigroup BIG Index has far fewer securities as compared to both the Bloomberg Barclays U.S. 

Aggregate Index and the Bloomberg Barclays U.S. Universal Index. The number of securities in the 

Bloomberg Barclays U.S. Universal Index is about 50% higher than those in the Bloomberg Barclays U.S. 

Aggregate, although the market capitalization increases by only $4.0 trillion, indicating the relatively small 

market value of outstanding issues in high yield, dollar denominated emerging market debt, and 

Eurodollar debt. 
F Fund 

Risk. Reinsurance. Human Resources. 28

Performance 

Chart 4 below illustrates the growth of $1 invested in each of the indexes over the longest common time 

period. All three indexes have performed quite similarly over time. 

Chart 4 

Source: Investorforce, AonHewitt 

(As of 6/30/2017) Bloomberg 

Barclays U.S. 

Aggregate 

Bloomberg 

Barclays U.S. 

Universal 

Citigroup 

BIG 

Value At The End of 28 Years $5.09 $5.37 $5.17 
F Fund 

Risk. Reinsurance. Human Resources. 29

Table 17 shows the correlation between each of these fixed income indexes, as well as with equities. 

Table 17: Correlation Matrix (As of 6/30/2017) 

Barclays U.S. 

Aggregate 

Barclays 

U.S. 

Universal

Citigroup 

BIG 

Dow Jones 

U.S. Total 

Stock Mkt 

MSCI 

EAFE 

MSCI 

ACWI ex 

U.S. IMI

Barclays U.S. 

Aggregate 1.00 

Barclays U.S. 

Universal 0.98 1.00 

Citigroup BIG 1.00 0.97 1.00 

Dow Jones U.S. 

Total Stock Mkt -0.01 0.14 -0.04 1.00 

MSCI EAFE 0.01 0.15 -0.02 0.83 1.00 

MSCI ACWI ex 

U.S. IMI 0.01 0.16 -0.02 0.84 0.99 1.00

(Longest common time period = 23 years) 

As would be expected, all three fixed income indexes have a high correlation with each other. The 

correlation coefficient of the two investment grade indexes, the Bloomberg Barclays U.S. Aggregate and 

the Citigroup BIG, with U.S. and international stocks is low, pointing towards the diversification benefit 

they provide in a portfolio. While the Bloomberg Barclays U.S. Universal also provides a diversification 

benefit, the benefit is reduced because of a higher correlation due to the inclusion of high yield securities, 

emerging market debt, etc., which tend to have a modestly higher correlation to equities. 

The cumulative annualized returns over several trailing historical periods are shown below in Table 18. 

Table 18: Return History (As of 6/30/2017) 

 Bloomberg Barclays U.S. 

Aggregate 

Bloomberg Barclays 

U.S. Universal Citigroup BIG 

1 Year -0.3% 0.9% -0.3% 

3 Years 2.5 2.8 2.5 

5 Years 2.2 2.7 2.2 

10 Years 4.5 4.7 4.6 

15 Years 4.5 4.9 4.6 

20 Years 5.2 5.4 5.3 

25 Years 5.6 5.8 5.7 

30 Years 6.4 -- 6.5 

35 Years 7.9 -- 7.9 

*See appendix for annual returns 

The returns of the Bloomberg Barclays U.S. Aggregate Index and the Citigroup BIG Bond Index track 

each other closely over most annual periods and over trailing annualized periods. The Bloomberg 

Barclays U.S. Universal differs more on an annual basis, but has generated similar returns as the other 

two indexes over long periods of time. 
F Fund 

Risk. Reinsurance. Human Resources. 30

Table 19 below shows the volatility (annualized standard deviation) of the indexes over several trailing 

historical periods; there is little to no difference over long time periods. 

Table 19: Annualized Standard Deviation (As of 6/30/2017) 

 Bloomberg Barclays U.S. 

Aggregate 

Bloomberg Barclays U.S. 

Universal Citigroup BIG 

3 Years 2.9% 2.8% 2.9% 

5 Years 2.9 2.8 2.9 

10 Years 3.3 3.3 3.4 

15 Years 3.4 3.4 3.5 

20 Years 3.5 3.2 3.6 

25 Years 3.8 3.6 3.8 

30 Years 4.2 -- 4.2 

35 Years 5.2 -- 5.3 

Sharpe ratios for each of the indexes over various periods are shown in Table 20. The Bloomberg 

Barclays U.S. Universal has a higher Sharpe ratio over the trailing periods referenced below relative to 

the other benchmarks, indicating slightly better performance on a risk-adjusted basis. 

Table 20: Sharpe Ratios (As of 6/30/2017) 

 Bloomberg Barclays U.S. 

Aggregate 

Bloomberg Barclays U.S. 

Universal Citigroup BIG 

5 Years 0.73 0.92 0.73 

10 Years 1.21 1.26 1.19 

15 Years 0.94 1.05 0.94 

20 Years 0.92 1.04 0.91 

25 Years 0.82 0.92 0.82 

30 Years 0.78 -- 0.79 

35 Years 0.80 -- 0.80 

Investable & Liquidity 

While the sheer number of securities in the Bloomberg Barclays U.S. Aggregate Index make it almost 

impossible to replicate the index precisely, index fund managers are able to track the benchmark quite 

closely by matching the industry, sector, duration, maturity, and quality characteristics of the Index. 

Passive managers that have assets managed against the Bloomberg Barclays U.S. Aggregate Index 

have over the years been able to accumulate a greater portion of the securities comprised in the index by 

investing securities when liquidity opportunities have presented themselves. For example, BlackRock held 

7,495 securities to replicate the index, while State Street held 6,633 as of June 30th, 2017. 

The major index fund managers do not offer ERISA qualified DC passive funds benchmarked to the 

Bloomberg Barclays U.S. Universal Bond Index or the Citigroup BIG Bond Index. The high yield segment 

of the Barclays U.S. Universal can also present some challenges in terms of trading costs and tracking 

error due to optimization, and can result in higher tracking error. 
F Fund 

Risk. Reinsurance. Human Resources. 31

Table 21 compares the historical tracking error of institutional index funds managed to the Bloomberg 

Barclays U.S. Aggregate Index by leading index fund providers. Most of managers have been able to 

track the Bloomberg Barclays U.S. Aggregate Index closely. Vanguard’s higher tracking error is primarily 

attributable to the timing of when the fund’s net asset value (NAV) is struck, which is different than that of 

the index, and the use of a different pricing source than that of the index. 

Table 21: Index Fund 5-Year Tracking Error (As of 6/30/2017) 

Bloomberg Barclays 

U.S. Aggregate 

Bloomberg Barclays 

U.S. Universal 

Citigroup BIG 

BlackRock 0.11% -- -- 

SSgA 0.04 -- -- 

Vanguard 0.25 -- -- 

Bank of NY Mellon 0.08 -- -- 

Northern Trust 0.09 -- -- 

Source: BlackRock, SSgA, Vanguard, BNY Mellon and Northern Trust 

1

Stock tracking error is based on the passive providers’ ERISA qualified daily valued institutional index fund. Majority of passive 

providers used non-securities lending products if they were available. 

Acceptance 

Table 22 displays the value of passively managed assets benchmarked to each of the three indexes by 

five leading index fund providers. As noted previously, the five index managers do not offer products 

indexed to the Bloomberg Barclays U.S. Universal of Citigroup BIG indices. 

Table 22: Assets Indexed to Benchmark (As of 6/30/2017) 

Bloomberg Barclays 

U.S. Aggregate 

Bloomberg Barclays 

U.S. Universal 

Citigroup BIG 

Passive Assets1 $257 Billion -- -- 

1

Assets are based on the passive providers’ ERISA qualified daily valued institutional index fund 

The Bloomberg Barclays U.S. Aggregate is a widely-followed performance benchmark that is tracked by 

hundreds of billions of dollars in institutional assets. It is the most widely used fixed income benchmark by 

U.S.-based institutional investors. The Bloomberg Barclays U.S. Universal has still not gained acceptance 

as a passive benchmark, with no ERISA qualified DC products offered by the five major index managers. 

Similarly, there are no passive assets benchmarked to the Citigroup BIG Index. 
F Fund 

Risk. Reinsurance. Human Resources. 32

Benchmark Recommendation for the F Fund 

We recommend that the Bloomberg Barclays U.S. Aggregate Index be maintained as the benchmark for 

the F Fund. The main reasons for our recommendation are as follows: 

 The Bloomberg Barclays U.S. Aggregate Index provides broad coverage to the investment-grade 

U.S. fixed income market. 

 It is the most widely recognized fixed income benchmark in the U.S. 

 There are no material benefits associated with a change to the Citigroup BIG Bond Index in addition 

to the fact that the Citigroup BIG Index is not a commonly used benchmark across the institutional 

space and there are no ERISA qualified DC products that track to this benchmark across the major 

passive providers. 

 The Bloomberg Barclays U.S. Universal Bond Index provides broader coverage to an investor; 

however, it includes high yield debt which is more correlated to stocks, reducing the diversification 

benefit relative to the Bloomberg Barclays U.S. Aggregate. 
Risk. Reinsurance. Human Resources. 33

I FUND 
Risk. Reinsurance. Human Resources. 34

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I Fund 

Risk. Reinsurance. Human Resources. 35

I Fund 

Summary 

We have reviewed the International Stock Index Investment Fund’s (I Fund) legislative guidelines and 

compared its current benchmark index, the MSCI EAFE Index, to other leading international equity 

indexes. 

Legislative Guidelines 

The legislative guidelines that describe the I Fund are stated below: 

(4)(A) The Board shall select an index which is a commonly recognized index comprised of stock the 

aggregate market value of which is a reasonably complete representation of the international equity 

markets excluding the United States equity markets. 

 (B) The International Stock Index Investment Fund shall be invested in a portfolio designed to replicate 

the performance of the index selected under subparagraph (A). The portfolio shall be designed 

such that, to the extent practicable, the percentage of the International Stock Index Investment 

Fund that is invested in each stock is the same as the percentage determined by dividing the 

aggregate market value of all shares of that stock by the aggregate market value of all shares of all 

stocks included in such index. 

Benchmarks Considered 

We initially short-listed the following benchmarks for the I Fund: 

 Dow Jones Developed World ex-U.S. Index 

 MSCI Europe, Australasia, Far East (EAFE) Index (Current Benchmark) 

 MSCI World ex-U.S. Index 

 MSCI All Country World ex-U.S. (ACW ex-U.S.) Index 

 MSCI All Country World ex-U.S. Investable Market Index (ACW ex-U.S. IMI) 

 FTSE All World Developed ex-North America Index (AWD ex-N.A.) 

 FTSE All World ex-U.S. Index (AW ex-U.S.) 

 S&P/Citigroup Broad Market Index (BMI) 

We eliminated the Dow Jones Developed World ex-U.S. Index and the S&P/Citigroup index from further 

consideration based on the lack of significant passive assets managed to them. None of the major index 

fund managers offer funds indexed to these benchmarks, either in the U.S. or internationally. 

As for the FTSE indexes, Vanguard is the only investment management firm out of the five major index 

fund providers in the U.S. that has assets benchmarked to FTSE indices. Although assets managed to 
I Fund 

Risk. Reinsurance. Human Resources. 36

FTSE indices through Vanguard index funds are meaningful in size, the benchmark is not common across 

the rest of the major passive providers. Additionally, competitive bidding would not be feasible if a FTSE 

index is recommended as the benchmark for the I Fund. Therefore, we excluded both FTSE indexes in 

further study. 

We compare the broad characteristics of each of the remaining benchmarks in Table 23. 

Table 23: Benchmark Comparison (As of 6/30/2017) 

1

 Float adjusted 

2 As of 12/31/2016 

Table 24 compares the country allocation of each of the indices. Among developed countries, Canada is 

the fourth-largest country by market capitalization after Japan, United Kingdom, and Germany. Canada 

comprises 8.6% of the MSCI World ex-U.S. Index, which provides coverage of large and mid-cap stocks 

across developed countries. 

It is also important to note that several emerging market countries have market capitalizations that are 

greater than several developed countries. 

MSCI 

EAFE 

MSCI ACWI ex 

U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World ex 

U.S. 

Inclusion criteria 

Targets 85% 

market-cap 

coverage of each 

country 

(Large and Mid Cap)

Targets 99% 

market-cap 

coverage of each 

country (Large , 

Mid and Small 

Cap) 

Same as MSCI 

EAFE 

Same as MSCI 

EAFE 

Country coverage 

21 developed 

market countries 

22 developed 

countries + 24 

emerging market 

countries 

22 developed 

countries + 24 

emerging market 

countries 

22 Developed 

countries 

(EAFE plus 

Canada) 

Coverage of nonU.S. equity 

markets 

60% 99% 85% 65% 

# of securities 927 6,195 1,866 1,021 

Market cap1 $13.7 trillion $22.9 trillion $19.6 trillion $15.0 trillion 

Reconstitution 

frequency Quarterly Quarterly Quarterly Quarterly 

Turnover2 5.2% 6.1% 5.8% 5.1% 
I Fund 

Risk. Reinsurance. Human Resources. 37

For instance, when evaluating the MSCI All-Country World ex-U.S. Index, which provides coverage of the 

large and mid-cap stocks across developed and emerging countries, countries such as Brazil, China, 

India, Korea, South Africa, and Taiwan have market capitalizations that are greater than those of several 

EAFE countries (Austria, Denmark, Ireland, New Zealand, Norway, Portugal, and Singapore). 

Table 24: Country Allocations (As of 6/30/2017) 

 MSCI EAFE 

MSCI ACWI 

ex U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

ex U.S. 

Developed Markets 

 Australia 7.1% 4.9% 4.9% 6.5% 

 Austria 0.2 0.2 0.2 0.2 

 Belgium 1.1 0.9 0.8 1.0 

 Canada -- 6.6 6.6 8.6 

 Denmark 1.8 1.3 1.3 1.7 

 Finland 1.0 0.8 0.7 0.9 

 Israel 0.7 0.6 0.5 0.6 

 France 10.5 6.7 7.3 9.6 

 Germany 9.5 6.3 6.6 8.7 

 Hong Kong 3.5 2.3 2.4 3.2 

 Ireland 0.5 0.4 0.3 0.4 

 Italy 2.3 1.8 1.6 2.1 

 Japan 23.5 17.0 16.3 21.4 

 Netherlands 3.5 2.3 2.5 3.2 

 New Zealand 0.2 0.2 0.1 0.2 

 Norway 0.6 0.5 0.4 0.6 

 Portugal 0.2 0.1 0.1 0.1 

 Singapore 1.3 0.9 0.9 1.2 

 Spain 3.5 2.3 2.4 3.2 

 Sweden 2.9 2.3 2.0 2.7 

 Switzerland 8.5 5.6 5.9 7.8 

 U.K 17.7 12.4 12.3 16.1 
I Fund 

Risk. Reinsurance. Human Resources. 38

 MSCI EAFE 

MSCI ACWI 

ex U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

ex U.S. 

Emerging Markets 

 Brazil -- 1.5 1.6 -- 

 Chile -- 0.3 0.3 -- 

 China -- 6.3 6.6 -- 

 Colombia -- 0.1 0.1 -- 

 Czech Rep. -- 0.0 0.0 -- 

 Egypt -- 0.0 0.0 -- 

 Greece -- 0.1 0.1 -- 

 Hungary -- 0.1 0.1 -- 

 India -- 2.2 2.1 -- 

 Indonesia -- 0.6 0.6 -- 

 Korea -- 3.7 3.7 -- 

 Malaysia -- 0.6 0.6 -- 

 Mexico -- 0.9 0.9 -- 

 Pakistan -- 0.1 0.0 -- 

 Peru -- 0.1 0.1 -- 

 Philippines -- 0.3 0.3 -- 

 Poland -- 0.3 0.3 -- 

 Qatar -- 0.2 0.2 -- 

 Russia -- 0.7 0.8 -- 

 South Africa -- 1.5 1.6 -- 

 Taiwan -- 3.1 3.0 -- 

 Thailand -- 0.6 0.5 -- 

 Turkey -- 0.3 0.3 -- 

 UAE -- 0.2 0.2 -- 

Total Developed 100.0% 76.5% 76.2% 100.0% 

Total Emerging 0.0% 23.5% 23.8% 0.0% 

Total Index 100.0% 100.0% 100.0% 100.0% 

Source: MSCI Index Service 
I Fund 

Risk. Reinsurance. Human Resources. 39

Performance 

Chart 5 below represents the growth of $1 invested in each of the indexes over the longest common time 

period. MSCI World ex U.S. and MSCI EAFE Indexes were launched in 1969, and MSCI ACWI ex U.S. in 

May 1994. MSCI ACWI ex U.S. IMI, the newest among the four, was launched in 2007.The performance 

of MSCI ACWI ex U.S. IMI in the following chart is back filled for illustration. Over the past 23 years, the 

MSCI ACWI ex U.S. Index has outperformed the other three indexes, primarily driven by favorable returns 

in the emerging markets over the last two decades. Emerging markets also outperformed international 

small cap, which modestly boosted performance for the MSCI ACWI ex U.S. versus the MSCI ACWI ex 

U.S. IMI. 

Chart 5 

(As of 6/30/2017) MSCI EAFE MSCI ACWI 

ex U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

ex-U.S. 

Value At The End 

of 23 Years $3.05 $3.17 $3.28 $3.17 
I Fund 

Risk. Reinsurance. Human Resources. 40

Table 25 shows the correlation between the indices under consideration. As expected, the correlation 

between the indices is high. 

Table 25: Correlation Matrix (As of 6/30/2017) 

 MSCI EAFE MSCI ACWI ex 

U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

ex U.S. 

MSCI EAFE 1.00 

MSCI ACWI ex U.S. IMI 0.99 1.00 

MSCI ACWI ex U.S. 0.99 1.00 1.00 

MSCI World ex U.S. 1.00 0.99 0.99 1.00 

(Longest common time period = 23 years) 

Table 26 compares the correlation for the indices under consideration for the I Fund with those 

recommended for the C, S, and F Funds. 

Table 26: Correlation Matrix (As of 6/30/2017) 

Bloomberg 

Barclays 

Aggregate 

S&P 

500 

DJ U.S. 

Completion

MSCI 

EAFE 

MSCI ACWI 

ex U.S. IMI 

MSCI 

ACW 

ex U.S. 

MSCI 

World 

ex U.S. 

Bloomberg 

Barclays 

Aggregate 

1.00 

S&P 500 0.01 1.00 

DJ U.S. 

Completion -0.05 0.85 1.00 

MSCI EAFE 0.01 0.83 0.77 1.00 

MSCI ACWI 

ex U.S. IMI 0.01 0.82 0.80 0.99 1.00 

MSCI ACWI 

ex U.S. 0.01 0.83 0.79 0.99 1.00 1.00 

MSCI World 

ex U.S. 0.01 0.83 0.78 1.00 0.99 0.99 1.00 

(Longest common time period =23 years) 
I Fund 

Risk. Reinsurance. Human Resources. 41

The cumulative annualized returns over several trailing historical periods are shown below in Table 27. 

As shown in the table below, the broad non-U.S. stock indices have outperformed the non-U.S. 

developed index over longer-time periods. 

Table 27: Return History (As of 6/30/2017) 

 MSCI EAFE MSCI ACWI ex U.S. 

IMI MSCI ACWI ex U.S. MSCI World ex U.S. 

1 Year 20.3% 20.4% 20.5% 19.5% 

3 Years 1.1 1.1 0.8 0.7 

5 Years 8.7 7.6 7.2 8.1 

10 Years 1.0 1.4 1.1 1.0 

15 Years 6.3 7.3 6.9 6.4 

20 Years 4.3 4.7 4.7 4.4 

25 Years 5.9 -- 6.3 6.1 

30 Years 5.0 -- -- 5.1 

35 Years 9.4 -- -- 9.3 

40 Years 9.4 -- -- 9.3 

*See appendix for annual returns 

Table 28 shows the volatility (cumulative annualized standard deviation) of the indexes over several 

trailing historical periods. The MSCI ACWI ex U.S. Index and the MSCI ACWI ex U.S. IMI indices have 

exhibited modestly higher volatility over the majority of periods for which comparative data is available as 

compared to the MSCI EAFE and the MSCI World ex-U.S. indices. The volatility of the MSCI EAFE and 

the MSCI World ex-U.S. indices are comparable over all time periods. 

Table 28: Annualized Standard Deviation (As of 6/30/2017) 

MSCI 

EAFE 

MSCI ACWI ex 

U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

ex U.S. 

3 Years 12.4% 12.4% 12.4% 12.2% 

5 Years 11.7 11.5 11.6 11.5 

10 Years 18.6 19.2 19.1 18.6 

15 Years 17.0 17.5 17.5 17.0 

20 Years 19.2 20.0 19.7 19.2 

25 Years 17.6 -- 18.0 17.6 

30 Years 18.3 -- -- 18.1 

35 Years 18.9 -- -- 18.7 

40 Years 18.6 -- -- 18.4 
I Fund 

Risk. Reinsurance. Human Resources. 42

The realized Sharpe ratios for each of the indexes are shown in Table 29. 

Table 29: Sharpe Ratios (As of 6/30/2017) 

MSCI EAFE MSCI ACWI ex 

U.S. IMI 

MSCI ACWI ex 

U.S. 

MSCI World ex 

U.S. 

5 Years 0.76 0.68 0.65 0.73 

10 Years 0.12 0.14 0.13 0.12 

15 Years 0.38 0.42 0.40 0.38 

20 Years 0.21 0.23 0.22 0.21 

25 Years 0.27 -- 0.29 0.28 

30 Years 0.19 -- -- 0.19 

35 Years 0.37 -- -- 0.37 

The MSCI ACWI ex U.S. index and the MSCI ACWI ex U.S. IMI indices have registered higher Sharpe 

ratios than the MSCI EAFE and the MSCI World ex U.S. indices over the majority of periods for which 

comparative data is available. This is attributed to the inclusion of emerging markets and international 

small cap equities, which have outpaced developed market equities over the last 15 years. 

Investable & Liquidity 

All the benchmarks under consideration take into account the liquidity of stocks for inclusion in the index. 

Although some stocks in certain smaller countries can be difficult to trade, index fund managers still hold 

most, if not all stocks, though they may have a higher tolerance for mis-weights as the benefit from fully 

replicating the benchmark can be more than offset by transaction costs. 

Investors have become increasingly interested in the non-U.S. equity markets over the past decade. 

Institutional investors have embraced non-U.S. equity as an essential asset class in the asset allocation 

plan. Liquidity in the non-U.S. equity related index products has increased substantially as a result. 

More specifically, liquidity in the markets related to the four indexes has reached sizeable level, as shown 

in Table 30. 

Table 30: Average Daily Trading Volume (ADV) (As of 6/30/2017) 

MSCI 

EAFE 

MSCI ACWI ex 

U.S. IMI 

MSCI ACWI ex 

U.S. 

MSCI World 

ex U.S. 

30 Days 4,299,936,324 37,833,435,795 25,615,107,977 28,048,460,329 

3 Months 4,396,403,506 37,457,362,338 23,979,717,683 26,292,377,152 

Source: Bloomberg 

The five-year tracking errors of institutional index funds managed by four top index fund managers 

benchmarked to the MSCI family of indexes are shown in Table 31. As shown, most managers have been 

able to track the indexes quite closely. You will find the indices with the broadest market coverage have 
I Fund 

Risk. Reinsurance. Human Resources. 43

the lowest tracking error. BNY Mellon’s tracking error is higher than the rest given it holds ADRs 

(American Depository Receipts), which are not held in the benchmark. 

Table 31: Index Fund 5-Year Tracking Error (As of 6/30/2017) 

MSCI 

EAFE 

MSCI ACWI ex 

U.S. IMI 

MSCI ACWI ex 

U.S. 

MSCI World 

Ex U.S. 

BlackRock 0.12% 0.09% 0.09% 0.11% 

SSgA 0.11 0.09 0.09 N/A 

BNY Mellon 1.9% N/A 0.16% N/A 

Northern Trust 0.13% 0.11% 0.12% 0.12% 

Source: BlackRock, SSgA, BNY Mellon and Northern Trust 

1

Stock tracking error is based on the passive providers’ ERISA-qualified daily valued institutional index fund. Majority of passive 

providers used non-securities lending products if they were available. 

Acceptance 

The MSCI indexes are the most widely followed non-U.S. stock indexes for U.S. based institutional 

investors. Table 32 shows the assets indexed to each of the international MSCI indexes. 

Table 32: Assets Indexed to Benchmark (As of 6/30/2017) 

MSCI EAFE MSCI ACWI ex 

U.S. IMI 

MSCI ACWI 

ex U.S. 

MSCI World 

Ex U.S. 

Passive Assets1 $142 billion $64 billion $92 billion $18 billion 

1

Assets are based on the passive providers’ ERISA-qualified daily valued institutional index fund 

*In the chart above, we illustrate the amount of assets that are benchmarked to the underlying index. This 

information represents assets indexed to each unique benchmark and does not factor any overlap in 

indexed assets between the different benchmarks. 

While the MSCI EAFE Index has the greatest amount of passive assets benchmarked to it as compared 

to the other indices, the MSCI World ex-U.S. Index, MSCI ACWI ex U.S. IMI Index and the MSCI All 

Country World ex-U.S. Index all have considerable passive assets managed against them as well. We 

also note that the index fund providers that offer an MSCI ACWI ex U.S. strategy use a combination of 

different country and regional funds to create their offering, or may offer standalone emerging markets 

funds. Hence assets benchmarked to the MSCI ACWI ex U.S. Index are several times greater than the 

$92 billion would suggest. Further to that point, while the amount of assets managed to the MSCI World 

ex-U.S. appears lower than the other benchmarks, the assets within this index are a considerable portion 

(>50%) of the MSCI ACWI ex U.S. and MSCI ACWI ex U.S. IMI. 
I Fund 

Risk. Reinsurance. Human Resources. 44

The MSCI ACWI ex U.S. IMI provides the broadest coverage of the international opportunity set in that it 

also includes smaller capitalization stocks across the non-U.S. equity markets that are not included in the 

MSCI ACWI ex U.S. Index. The MSCI ACWI ex U.S. IMI Index was launched in 2007 and is a commonly 

used benchmark across large institutional investment programs. 

Analysis of International Equity Benchmarks

Modern portfolio theory suggests that the “market portfolio” is the most efficient portfolio (in terms of 

risk/return trade-off) that an investor can hold. The “market portfolio” is a market-cap weighted sum of all 

available asset classes/regions/countries. Excluding segments of the market limits investors’ opportunities 

(return and/or diversification potential). 

In general, we recommend constructing equity portfolios with the broadest possible market coverage. For 

instance, we recommend the DJ U.S. Total Stock Market Index, which provides complete coverage of 

large, mid, and small-cap stocks, as the benchmark for the broad U.S. equity market. 

The C and S Fund’s recommended benchmarks, the S&P 500 Index and the DJ U.S. Completion Total 

Stock Market Index, respectively, when combined, provide coverage of the broad U.S. equity opportunity 

set that is very similar to the coverage provided by the DJ U.S. Total Stock Market Index. 

The I Fund’s existing benchmark, the MSCI EAFE Index, excludes Canada and the emerging markets. As 

noted earlier, the Canadian equity market is the fourth-largest equity market outside of the United States 

and emerging markets represent nearly a fourth of the non-U.S. equity opportunity set. Moreover, 

emerging markets represent a significant and growing portion of global growth or GDP and an 

increasingly larger portion of the world equity market capitalization. Over the past two decades, emerging 

economies, such as Brazil, China, India, Russia and South Africa, have expanded at a much faster pace 

than developed countries. 

Today, emerging markets contribute to 39% of global GDP as compared to 27% in 1997 (shown in Chart 

6). 

Chart 6: World GDP Breakdown 
I Fund 

Risk. Reinsurance. Human Resources. 45

Source: The Conference Board of Global Economic Outlook 

With the growth in emerging economies, several of the world’s top-500 companies by market 

capitalization are based in the emerging markets (See Chart 7). 

Chart 7: Emerging markets presence in the global capital markets 

As of 6/30/2017 

Source: Financial Times 

Market participants broadly expect emerging economies to continue to grow at a faster pace than 

developed economies. Reasons include: 

 Favorable demographics and a growing middle class 

 Growth in local consumption demand 

 Improving economic, legal and regulatory systems 
I Fund 

Risk. Reinsurance. Human Resources. 46

 Disciplined fiscal and monetary policies 

Emerging countries today run surplus budgets and are much less burdened by massive amounts of public 

debt as compared to their developed counterparts (Chart 8). Several emerging market countries have 

also accumulated massive amounts of foreign currency reserves (Chart 9), which have proven to provide 

a cushion against external economic shocks. The growth in foreign currency reserves, combined with 

growth in domestic consumption, helped many emerging economies soften the impact of the global 

economic downturn. 
I Fund 

Risk. Reinsurance. Human Resources. 47

Chart 8 

As of 6/30/2017 

Source: CIA World Factbook 

Chart 9 

As of 6/30/2017 

Source: IMF 

Along with the growing economic power of emerging markets as a whole, the capital markets in several 

emerging countries have also evolved over the past decade. Data from The World Federation of 

Exchanges shows that, assessed by total market capitalization and trade value, China’s two major stock 

exchanges, if combined, rank the third-largest in the world after the New York Stock Exchange and 

NASDAQ. Other emerging countries such as Brazil, India, Korea, and Taiwan also claimed spots within 

the top-20 stock exchanges at the end of 2016. With the improved liquidity and transparency, lower 
I Fund 

Risk. Reinsurance. Human Resources. 48

transaction costs, and improved property rights and legal protections, institutional investors have become 

more comfortable investing in emerging markets. 

While the case for investing in emerging markets has become more compelling, emerging markets have 

experienced, and, in our opinion, will experience greater volatility than that of developed markets. Some 

of the risks in emerging markets include: 

 Political risk (rogue regimes, expropriation of assets, etc.) 

 Slowing down or a reversal of favorable economic and monetary policies 

 A higher willingness based on historical experience to default or devalue their currencies 

 Growth that is heavily dependent on or tied to growth in developed markets (exports, commodities, 

etc.) 

While several of these risks are not easily quantified, we do believe investors get compensated for these 

risks on a risk-adjusted basis. The volatility of emerging markets has been higher than developed markets 

over the last decade or two, but emerging markets have been able to outperform developed markets on a 

risk-adjusted basis. 

Table 33 shows Aon Hewitt’s expected returns and risk (volatility) for developed and emerging markets 

over the long-term. These represent 30-year forward looking expectations. 

Table 33: Aon Hewitt – Capital Market Expectations (Q3 2017) 

Expected Return Expected Risk 

Developed Markets 7.3% 20.0% 

Emerging Markets 7.7% 30.0% 

As shown, we expect emerging markets to perform favorably as compared to developed markets, but at a 

materially higher level of risk. 

As for non-U.S. small cap stocks, because commonly used benchmarks for international equity, MSCI 

EAFE and MSCI ACWI ex U.S. indices, do not contain small cap names, we believe that non-U.S. small 

cap stocks are under-invested relative to their U.S. small cap peers. Additionally, relative to larger peers, 

smaller companies in the index are covered by a smaller pool of sell-side analysts. This under-investment 

and lack of analyst coverage may lead to less market efficiency and a greater return potential. 

Non-U.S. small cap stocks are also tied more to their local economies than to the global economy. The 

lack of connection from the global economy should provide lower correlations to the broader equity 

market. Consequently, we believe that adding non-U.S. small cap exposure will likely improve the Sharpe 

ratio of the overall non-U.S. equity portfolio. 
I Fund 

Risk. Reinsurance. Human Resources. 49

The broad non-U.S. equity market is of significant market size and index assets under management are 

large. The broad non-U.S. equity market provides diversification across country, sector, and market 

capitalization. By broadening the exposure of the I Fund, increases stock coverage by 939 stocks in the 

case of the MSCI ACWI ex U.S. Index and 5,268 stocks in the case of the MSCI ACWI ex U.S. IMI as of 

June 30, 2017. 

Overall, we favor a benchmark that includes Canada, emerging markets, and international small cap 

equities as it provides broader coverage of the international equity markets, more fully captures global 

growth, and provides enhanced diversification of the international equity portfolio. From a theoretical 

standpoint, we recommend that clients utilize the MSCI ACWI ex U.S. or MSCI ACWI ex U.S. IMI as 

these indices provide complete coverage of the global equity opportunity set. 

However, as we consider an appropriate benchmark for the I Fund, it is important to take into account the 

Thrift Savings Plan’s unique circumstances. These include: 

 Need to provide daily-liquidity 

 Transition cost and planning 

 Securities lending income 

 Administrative complexities: coordinating custody account openings in emerging markets, which are 

generally more complex and time consuming. 

Considerations in Expanding the I Fund benchmark to Index Emerging Markets 

As we review the I Fund’s current benchmark, the MSCI EAFE Index, the case to include Canada is very 

compelling and obvious given that it is the fourth-largest equity market outside the U.S. and a country that 

participants should have familiarity with. 

The case for the inclusion of emerging markets and international small cap equities, while compelling, we 

will further investigate within this report. The foremost consideration in expanding the I Fund benchmark 

to include emerging markets and international small cap equities is the need to provide daily liquidity. A 

sufficient level of cash must be maintained in the fund to meet participant withdrawal needs. As an 

example, BlackRock, the existing manager of the I Fund, holds approximately 0-3% of the Fund’s assets 

in cash in order to meet routine liquidity needs. The cash is equitized to the markets using futures 

contracts. While the use of futures contracts minimizes the cash drag on the portfolio, the futures 

contracts may not always track the benchmark precisely (if multiple country futures contracts are used to 

track a benchmark) or may not have adequate levels of liquidity. This could lead to potential sources of 

tracking error. 
I Fund 

Risk. Reinsurance. Human Resources. 50

Liquidity 

We reviewed the TSP I Fund’s daily cash flow activity over the three-year period ending June 30, 2017. 

As of June 30, 2017, the I Fund’s assets stood at $41.8 billion, as compared to $36.2 billion in July 2014 

(directly/indirectly through the L Fund). This period was characterized by moderate volatility across most 

major capital markets, but the emerging markets experienced high volatility. 

We focused our attention on withdrawals out of the I Fund over the three-year period in order to assess 

the ability to provide liquidity on a daily basis to meet participant redemption requests. The average daily 

withdrawal over the period was $55 million, which on an asset base of $42 billion represents about 0.13% 

of assets. The largest single cash withdrawal out of the I Fund was $376 million, which occurred on June 

21st, 2016. This cash flow represented 1.1% of the I Fund’s assets as of that day. While the data shown 

on the following page does not include 2008, we do note that in January 2008 there were four 

consecutive days where the total net cash flow equaled approximately $1.4 billion, illustrating an extreme 

outcome that should be noted and considered when evaluating the cash flow needs of the TSP. 

While the average daily cash withdrawal and the largest single day withdrawal are well within the cash 

buffer that it maintained to meet ongoing liquidity, as mentioned earlier, withdrawals tend to spike around 

periods of poor market performance. We reviewed aggregate cash flows over consecutive days of 

withdrawals out of the I Fund over a three year period. There were 24 instances when aggregate 

withdrawals over consecutive days exceeded $200 million over this period and 10 instances when 

aggregate withdrawals over consecutive days exceeded $300 million. Chart 10 shows the trend in 

aggregate withdrawals over consecutive days over the three-year period. 

There has been one instance where cash flows over multiple days equaled approximately $950 million 

(which occurred between June 20th, 2016 and June 24th, 2016), illustrating an extreme outcome that 

should be noted and considered when evaluating the cash flow needs of the TSP. 
I Fund 

Risk. Reinsurance. Human Resources. 51

Chart 10 

As we think about the inclusion of emerging markets into the benchmark for the I Fund, it is critical to take 

into consideration the liquidity needs of the TSP. While the liquidity in emerging markets has generally 

improved, we typically see a flight to quality from emerging markets (and other riskier markets) in times of 

market stress. Liquidity can be adversely impacted in times of market stress. 

Based on discussions with index fund managers, they indicate that they are normally able to trade about 

$200 million to $300 million in emerging market flow on a daily basis through the use of futures contracts, 

without impacting the prices of securities adversely. 
I Fund 

Risk. Reinsurance. Human Resources. 52

Chart 11 shows the withdrawals over consecutive days for the I Fund at 25% of the actual cash flow. 

Emerging markets represent approximately 25% of non-U.S. equity markets and hence this analysis 

gives us a sense for the potential extent of emerging market flows. 

Chart 11 

While the average cash outflow (from the I Fund scaled to 25%) over this period appears to be well within 

the $200 - $300 million range that managers indicate that they are able to comfortably trade in emerging 

markets, there is one instance where the cash flows over consecutive days aggregated within the $200 - 

$300 million range (which occurred between June 20th, 2016 and June 24th, 2016). 

Further, it is important to note that these cash flows represent I Fund (developed market) cash flows 

scaled to 25%. The inclusion of emerging markets in the I Fund benchmark could result in a higher level 

of cash withdrawals in times of market stress given the higher volatility of emerging markets. 

We have taken in consideration the projected increase of inflows to the TSP program, which is driven by 

the expected growth in the number of participants compounded by the upcoming addition of military 

personnel to the TSP program. The expected growth is projected to be about $1-1.5 billion in net inflows 

into the I Fund (directly/indirectly through the L Fund) annually over the next ten years. During periods of 

large flows, futures can be used to quickly gain or divest exposure. When expanding the coverage of the I 

Fund to track to the ACWI ex U.S. IMI, the investment strategy is to fully replicate the benchmark by 

owning the majority of the names in the benchmark, if not all. However due to liquidity challenges in 

certain markets, the small cap portion may be optimized at any given time. Since the small cap segment 

of the index represents 14%, the impact on tracking error is expected to be marginal. Overall, liquidity is 

managed through the use of the I Fund’s cash buffer and other tools such as optimization and derivatives. 

Derivatives play a role in managing I Fund liquidity during time periods where local foreign markets are 

closed. The existence of a liquid market for emerging market futures contracts also allows index fund 

managers to manage cash flows more efficiently, resulting in tighter tracking of the Index. Derivatives also 
I Fund 

Risk. Reinsurance. Human Resources. 53

mitigate daily tracking error since futures contracts are traded during U.S. market hours and incorporate 

fair value pricing (FVP). FVP is an adjustment made by passive providers to align the closing price or 

NAV of a passive fund with the current value of that Fund's underlying holdings. FVP is typically used in 

international equity funds that are priced at the U.S. market close. Therefore, there may be price 

adjustments made to foreign securities from the local market close to the U.S. market close due to events 

or news that impacted the securities’ price after the local market close. In order to mitigate tracking error, 

U.S. index managers typically trade closer to the U.S. market close. Since international local markets are 

generally closed by then, the manager will utilize futures contracts to get exposure to the equity market or 

can close out of future contracts in the event liquidity is needed. Over time, the index manager will close 

out of futures contracts and rebalance the portfolio through physical securities. Therefore, the liquidity of 

the derivatives market for emerging markets is critical in this analysis. In August 2017, emerging market 

futures contracts traded approximately $2.8 billion a day. Futures exposure is not available for 

international small cap exposure; therefore small cap exposure would be obtained through physical 

securities and potentially ETF instruments to assist in cash management needs. The daily tracking error 

when not owning international small cap is estimated to be between 2 to 3 bps a day. We believe the 

inclusion of emerging markets and international small cap equities to the I Fund will not hinder the ability 

to meet the TSP’s daily liquidity needs. The TSP’s historical daily cash flow activity over the last three 

years have been at reasonable levels where the activity can be traded in emerging markets without 

adversely impacting the prices of securities. As mentioned earlier, the trading would likely be conducted 

through derivatives, a market with ample liquidity. In the event cash flow activity is above the $200-$300 

million trade size for emerging markets, the index manager may have to trade futures contracts across a 

longer time period than trading at the market close, which may increase the tracking error of the mandate. 

Transaction Costs & Planning 

Table 34 details the estimated costs involved in transitioning the Fund’s benchmark from the MSCI EAFE 

Index to the indexes under review. The estimated cost in dollars is based on expected trading costs and 

the asset value of the I Fund as of June 30, 2017, which was $42 billion. 

Table 34: Trading Costs for Multi-Tranche Transition 

 MSCI ACWI ex U.S. IMI MSCI ACWI ex U.S. MSCI World ex U.S. 

bps $ bps $ bps $ 

Commissions 2.0 9,086,743 2.0 8,174,568 0.0 1,346,824 

Taxes 3.0 12,432,423 2.0 7,195,272 0.0 162,293 

Bid/Ask Spread 3.0 13,851,323 2.0 8,535,685 0.0 1,233,350 

Market Impact 3.0 12,988,306 2.0 10,127,249 0.0 1,403,012 

FX Cost 2.0 9,130,495 2.0 9,052,494 0.0 1,955,712 

Mean Expected 

Cost 13.0 $ 57,489,291 10.0 $43,085,267 1.0 $6,101,190 

Opportunity cost +/-15.0 +/-$65,077,507 +/-15.0 +/-$63,786,286 +/-7.0 +/-$28,037,955 

Source: BlackRock 
I Fund 

Risk. Reinsurance. Human Resources. 54

The transaction cost associated with transitioning the I Fund’s benchmark from the MSCI EAFE Index to 

the MSCI ACWI ex U.S. IMI is expected to be about 13 basis points or approximately $57 million on 

average. Depending on market activity at the time of the transition, we would expect the actual cost of 

transition to range between a cost of 28 bps ($122.6 million) or a gain of 2 bps ($7.6 million) about 67% of 

the time. We believe that these transition costs are reasonable given the overall shift from developed 

markets to emerging markets as well as into international small cap. 

We recommend that the transition be conducted in a phased, methodical manner over a period of time as 

liquidity opportunities present themselves, as opposed to a transition in a day or a few days. To rebalance 

from MSCI EAFE to MSCI ACWI ex U.S. IMI, will result in approximately a 59% overlap between the 

legacy and target portfolios. To help lower bid/ask spread and market impact costs associated with the 

transition, it is expected that 10 to 12 trading tranches will be required to achieve 99% of the rebalance. 

The residual 1% is expected to take an additional few weeks to reach 100% completion. The tranches will 

occur every 2 to 5 days over the span of 1 to 2.5 months. Each tranche would be built to match the 

composition of the target index. Tranche size will depend on the liquidity of the required rebalance trade 

with an expected size of $3.6 billion. 

The analysis assumed the transition trading will be executed at the same commission levels that the TSP 

currently pays to execute global equity trades. Therefore, the analysis assumed the TSP will not pay 

additional commissions over what they generally would incur. 

We recommend using a transition account to build each tranche; therefore assets for each tranche will be 

transferred out of the legacy account to the transition account. Once the tranche is built to match the 

composition of the target index, assets are transferred to the target portfolio account. Performance will be 

tracked separately for the legacy, target, and transition accounts and participants will experience the 

return of all three accounts as the performance of all three accounts will be rolled up into a composite 

return. In this fashion, the historical return stream of the legacy I Fund may be maintained and not 

impacted by the transition. The legacy portfolio will continue to track the MSCI EAFE Index and the target 

portfolio will track the new target benchmark. This is feasible since the transition will be done in multiple 

tranches and each tranche will be rebalanced in the transition account and then transferred to the target 

portfolio. This approach is also cleaner from a portfolio management stand point, since the portfolio 

manager will manage the legacy and target portfolio accounts while the transition management team will 

manage the transition account. Please note securities lending would be occurring in the legacy and target 

portfolio accounts and would also need to be setup in the transition account in order to not impact 

securities lending revenue. Since the legacy portfolio has almost 60% overlap with the target portfolio, 

each tranche in the transition account will have the same level of overlap. Since not all securities are lent 

out at a given time, securities out on loan that are transferred to the transition account will be maintained 

throughout the transition event and any loans opened on emerging market stocks will be transferred to 

the target portfolio once tranche is rebalanced. The setup process for securities lending can be done with 

rest of the transition setup and would not be expected to delay transition start date. 
I Fund 

Risk. Reinsurance. Human Resources. 55

In this scenario, the performance benchmark during the transition period would generally be daily asset 

weighted between MSCI EAFE Index and the target benchmark. The legacy portfolio will be 

benchmarked against the MSCI EAFE Index and the transition and target portfolio accounts would be 

benchmarked against the target benchmark. The tracking error between the I Fund’s performance and 

the custom benchmark would be due to the transaction costs associated with the benchmark change. 

The main considerations in this scenario are the setup of securities lending for an additional account 

(transition account) and the additional operational step in the movement of assets as securities will need 

to be moved to the transition account and then to the target portfolio. We believe the benefits outweigh 

the considerations given the portfolio manager accounts are isolated from the transition account, 

performance benchmarking can be easily tracked, and historical MSCI EAFE return stream should not be 

impacted by the transition. 

Another option is to conduct the rebalancing in the legacy account where the existing portfolio is 

rebalanced over multiple tranches and each tranche will be transferred to the target portfolio as they are 

completed. Having two accounts instead of three may result in less operational work given assets will 

only need to be transferred to the target portfolio. If the rebalance takes place in the legacy portfolio, 

transition related performance is not easily tracked and historical strategy performance for the I Fund can 

be impacted. It will also not be as clean for the portfolio manager to manage the legacy assets and 

transition team to manage the transition when all assets will be held in the same legacy account until 

each tranche is completed. 

Performance benchmarking in this scenario would not be as clean given the legacy assets are being 

managed in the same account as the transition is taking place. Therefore, the legacy account including 

the transition assets would be benchmarked against the MSCI EAFE Index and the target portfolio would 

be benchmarked against the target benchmark. 

A benefit of this scenario relative to the first scenario is not having to setup securities lending in the 

transition account. Another benefit is fewer custodial asset movements. We believe the considerations 

outweigh the benefits largely due to the potential for heightened operational risk given that the portfolio 

manager and transition team are managing assets in the same account. However, major passive 

providers typically have the capabilities to conduct the transition in the legacy account if desired. 

Additionally, the transition assets would not be benchmarked against the target benchmark since the 

assets would be held in the legacy account. 
I Fund 

Risk. Reinsurance. Human Resources. 56

Securities lending 

The market demand for lending emerging markets and international small-cap equity is generally greater 

than developed large and mid-cap names. The higher demand is primarily driven by the lack of supply of 

small capitalization securities available for lending. The same reason applies to emerging markets, 

although demand is not as prominent. Other reasons for the higher demand for these two segments are 

the higher volatility associated with these two markets and less public information compared to developed 

large and mid-cap names. 

The following tables outline the expected yield and utilization changes as a result of a move from the 

EAFE to either ACWI ex U.S. or ACWI ex U.S. IMI. The yields for EAFE listed below are actual yields that 

the TSP has experienced as part of the I Fund. The yields referenced below incorporate both intrinsic and 

reinvestment yield and only account for the net yield to the TSP. The ACWI ex U.S. IMI generated the 

highest expected yield and percentage out on loan. We applied the average daily market value of the I 

Fund to the below estimated yields in order to derive the estimated yield in dollars. The following table 

illustrates that across each of the last three calendar years, the income to the TSP is estimated to have 

been at least 1.5x more if the I Fund tracked the MSCI ACWI ex U.S. IMI instead of the MSCI EAFE 

index. 

Table 34: Securities Lending Yield Estimates

Yield to TSP (bps)

 EAFE ACWI ex U.S. ACWI ex U.S. IMI

2014 7.1 7.3 9.3 

2015 8.1 8.8 12.6 

2016 8.1 9.6 14.8 

2017 (YTD)* 5.7 6.6 10.7 

Yield to TSP ($ millions)

EAFE ACWI ex U.S. ACWI ex U.S. IMI

2014 $24 $25 $32 

2015 28 31 44 

2016 27 32 50 

2017 (YTD)* 22 25 41 

 On-Loan %

 EAFE ACWI ex U.S. ACWI ex U.S. IMI

2014 3.4% 3.5% 4.4% 

2015 3.2% 3.6% 4.9% 

2016 3.9% 4.8% 6.2% 

2017 (YTD)* 3.2% 4.2% 5.5% 

Source: BlackRock 

* 2017 YTD is annualized using data through 7/31/2017 

Operational Considerations 

Please note the following custody considerations apply to international strategies managed in separate 

accounts. Most of the world's largest custodians do not have custody operations in every country, 

requiring these organizations to contract with a local custodian that does have these local capabilities. 

Requiring global custody services introduces additional risks including: 
I Fund 

Risk. Reinsurance. Human Resources. 57

 Failure or default of sub-custodian that could result in losses if proper segregation of securities and 

cash is not in place 

 Lack of contingency planning and/or sufficient contractual protection by main custodian for adverse 

organizational events 

 Settlement and other operational-related risks if the sub-custodian does not have strong controls & 

processes in place 

We believe the above risks are generally mitigated across the world’s largest custodians since the 

custodian is responsible for selecting the foreign custodian (sub-custodian), which is typically based on a 

very robust, in depth, and complex due diligence process. Custodians also monitor their sub-custodian 

relationships on an ongoing basis to ensure financial stability, monitor changes in personnel, and identify 

any changes to the business (technology, client service structure, etc.) that warrants a change. 

Settlement Risk 

Settlement cycles vary across market; settlements tend to range from T+1 to T+5. This can cause out of 

market balances, overdrafts, or leverage. Passive managers may use broker-facilitated short settlements 

and their FX trading desk to ensure settlement cycles match up. 

Local Account Openings 

Majority of market accounts are expected to take no longer than 8 weeks to open with an exception to 

India that is projected to take 6 months to open. During the 6 months, passive managers can obtain 

exposure to the Indian market by using ADRs/GDRs, ETFs, derivatives, and potentially omitting. This can 

cause potential for delays in a full replication strategy and also potential for higher tracking error. 

Transferability of Stocks 

In emerging markets, a number of countries do not allow for shares to be transferred between accounts 

nor do they allow for change of beneficial ownership. If the market does allow assets to be transferred, 

there is generally an associated charge around exchange fees, stamp taxes, registration fees, etc. 

Restricted Currencies 

There are emerging market currencies that are restricted, which means currency trades can only be 

traded by the local sub-custodian whereas in developed markets, currency trades can be auctioned to a 

number of banks in order to receive the most favorable rate. Restricted currencies can result in higher 

tracking error. Major passive providers tend to have a rigorous due diligence framework before utilizing 

local FX agents. They also conduct ongoing monitoring and review of FX executions. 

Local tax advisor 

The client is generally responsible for hiring local tax advisors in some emerging markets such as 

Pakistan, Taiwan, and India. Passive providers may assist the TSP in hiring a local tax advisor in these 

countries depending on the account structure the TSP has in place. Given the TSP’s existing account 
I Fund 

Risk. Reinsurance. Human Resources. 58

structure, the passive manager would generally provide meaningful amount of assistance in hiring a local 

tax advisor in these countries. 

Foreign ownership limits 

International companies may impose foreign ownership limits on their stock. Passive managers tend to 

optimize around foreign ownership limits. Foreign ownership limitations can result in potential higher 

tracking error. 

Repatriation issues 

In markets where repatriation issues exist such as Egypt, custodial standing instructions may be used to 

begin the repatriation process. Passive managers may also choose to reduce the size of the fund’s 

exposure to such a country to mitigate the risk of delayed repatriation. This can result in potential delay in 

receiving proceeds in USD and thus can result in potential higher tracking error. 

Political Risk 

Political risk is managed on a case-by-case basis, in consultation with passive provider. Passive 

managers may use various strategies to mitigate emerging market political risk to the extent possible. 

One example is shifting exposure from local currency names to depository receipts to mitigate liquidity 

risk in a market that may be at risk for capital restrictions/sanctions. 

Potential for Higher Custody Cost 

Custody costs for the safekeeping of international assets could potentially be higher than current fees 

given the exposure to less developed markets. We list below the typical range for asset based custody 

fees by benchmark. 

 MSCI EAFE: 0.65 bps – 1.20 bps

 MSCI ACWI ex U.S. IMI: 1.65 bps – 2.75 bps

 MSCI Emerging Markets: 3.75bps – 7.20 bps

As for transaction fees, these fees are charged each time a security is bought or sold and are used to 

cover the costs associated with clearing and settlement. The actual transaction fee in any given year can 

vary based on trading volume. Per trade cost typically range from $20 per trade to $100 per trade based 

on emerging market country. The average per trade cost across the countries that make up the MSCI 

Emerging Market index is approximately $50. Please note custody fees vary and are highly dependent on 

specific client size, composition, and other circumstances. 

Source: BlackRock 
I Fund 

Risk. Reinsurance. Human Resources. 59

Account Timeline and Documentation 

Table 35 lists the estimated time frame of the account opening process for each country. Majority of 

market accounts are expected to take no longer than 8 weeks to open with an exception to India that is 

projected to take 6 months to open. 

Table 35: Custody Account Timeline

Global Market Acct Open Timeframe 

BRAZIL 1-4 weeks 

CHILE 4-5 weeks 

CHINA 2-4 weeks 

COLOMBIA 2-4 weeks 

CZECH REPUBLIC 5-7 weeks 

EGYPT 3-6 weeks 

GREECE 5-10 days 

HUNGARY 2-10 days 

INDIA 6-12 months 

INDONESIA 2-5 days 

MALAYSIA 2 weeks 

MEXICO 2-5 days 

PAKISTAN 8-12 weeks 

PERU 5-10 days 

PHILIPPINES 2-5 days 

POLAND 5-7 weeks 

QATAR 4-8 weeks 

RUSSIA 5-8 weeks 

SOUTH AFRICA 2-5 days 

SOUTH KOREA 3-5 weeks 

TAIWAN 5-6 weeks 

THAILAND 1-2 weeks 

TURKEY 5-7 weeks 

UAE 5-7 weeks 

Source: BlackRock 

Country specific custodial documentation is required in order to trade in international markets. The table 

on the following page outlines the required documentation for registration by emerging market country. 

Given the TSP’s existing account structure, the TSP’s responsibility should be reduced as the passive 

manager would generally take on some of the market opening responsibilities. It is anticipated that the 

TSP would be responsible primarily for attestation letters and 8802 forms. 
I Fund 

Risk. Reinsurance. Human Resources. 60

Listed on table 36 is a list of documents required by country and the TSP’s role in providing 

documentation. 

Table 36: Documentation Requirements 

Market Documents for Registration Version Need from Client? 

Brazil TBD - Brazil requirements 

changing TBD TBD 

Chile 

Authorized Signatory List (ASL) Copy No, on file 

Attestation of True Copy for 

Authorized Signers List Original TBD - Passive Manager may complete, if not, may need on client letterhead 

EIN Letter (SS4) or Certificate of 

Residency (COR) Copy Yes - Provide completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of EIN or COR Original TBD - Passive Manager may complete, if not, may need on client letterhead 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

China (HK) No additional client 

documentation required N/A 

China A shares will be added to ACWI Index 

May of 2018 - Will trade via Stock Connect, 

may require additional client docs 

Colombia No additional client 

documentation required N/A N/A 

Czech 

Republic 

No additional client 

documentation required N/A N/A 

Egypt 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Greece No additional client 

documentation required N/A N/A 

Hungary No additional client 

documentation required N/A N/A 

India 

Authorized Signatory List (ASL) Copy No, on file 

CRS Forms / FATCA Copy Yes - May need CRS form 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Indonesia No additional client 

documentation required N/A N/A 

Malaysia 

Attestation Letter, declaring the 

beneficial owner of securities in 

the account 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 
I Fund 

Risk. Reinsurance. Human Resources. 61

Market Documents for Registration Version Need from Client? 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Mexico No additional client 

documentation required N/A N/A 

Pakistan 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Peru 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Philippines No additional client 

documentation required N/A N/A 

Poland 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Qatar 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Russia No additional client 

documentation required N/A N/A 

South 

Africa 

No additional client 

documentation required N/A N/A 

South 

Korea 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Taiwan 

Broker Accounts Request Original TBD - Passive Manager will complete, 

may need supporting client docs 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Thailand No additional client 

documentation required N/A N/A 
I Fund 

Risk. Reinsurance. Human Resources. 62

Market Documents for Registration Version Need from Client? 

Turkey 

Client Attestation and/or 

Certification Letter (Tax ID or 

Address) 

Original Yes - Provide completed 8802 

(SSB obtain 6166) 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

UAE 

Authorized Signatory List (ASL) Copy No, on file 

Attestation of True Copy for 

Authorized Signers List Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Proof of Legal Existence and/or 

Constitutive Document Copy Yes - Provide Formation document or 

completed 8802 (SSB obtain 6166) 

Attestation of True Copy for Proof 

of Legal Existence and/or 

Constitutive Documents 

Original TBD - Passive Manager may complete, 

if not, may need on client letterhead 

Source: BlackRock 

Table 37 on the following page outlines the account structures that would be used to open the emerging 

market accounts for the I Fund. Regardless of the account structure, the TSP would always be 

considered the legal and beneficial owner of the assets. However, in the case where the account 

structure is an omnibus account, the TSP’s existing manager may be the registered owner of the assets 

on the local exchange. The third column of the table highlights which party is the registered owner. We 

have also outlined which securities are permitted to be transferred in-kind to another account held in the 

name of the TSP in the event the TSP were to move to an independent custodian in the future. There are 

conditions to consider that are country specific and may include increased documentation, disclosure to 

the local regulator, pre-approval to trade, and fees. Please note the account structure and registered 

owner of assets may change upon the existing manager’s planned custody conversion. 
I Fund 

Risk. Reinsurance. Human Resources. 63

Table 37: Account Structure

Market Acct 

Structure Legal/Registered Owner In-Kind Permitted 

Brazil Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Chile Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

China (HK) Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan No 

Colombia Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Czech 

Republic Omnibus Current Manager Yes 

Egypt Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan No 

Greece Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Hungary Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes 

India Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Indonesia Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Malaysia Omnibus Current Manager Yes – conditions apply 

Mexico Omnibus Current Manager Yes 

Pakistan Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Peru Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Philippines Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Poland Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Qatar Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Russia Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

South Africa Omni Current Manager Yes – conditions apply 

South Korea Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Taiwan Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Thailand Omnibus Current Manager Yes 

Turkey Omnibus 

(Umbrella) 

Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

UAE Segregated Federal Retirement Thrift Investment Board - 

Thrift Savings Plan Yes – conditions apply 

Source: BlackRock 
I Fund 

Risk. Reinsurance. Human Resources. 64

Benchmark Recommendation for the I Fund

We recommend replacing the I Fund’s benchmark, which is currently the MSCI EAFE Index with the 

MSCI All Country World ex-U.S. Investable Market Index. 

Our recommendation is based on the following reasons: 

 The MSCI indices remain the most popular indices for U.S. based institutional investors investing in 

overseas equity markets. 

 The transition costs associated with the change in the I Fund benchmark are reasonable. 

 Market Exposure: 

– Canada is the fourth-largest equity market in the world, representing 6.6% of the developed nonU.S. equity opportunity set. 

– Emerging Markets represents 23.5% of the international non-U.S. equity investable universe. 

 Liquidity: 

– We believe the inclusion of emerging markets and international small cap equities to the I Fund 

will not hinder the ability to meet the TSP’s daily liquidity needs. 

– Overall, liquidity is managed through the use of the I Fund’s cash buffer and other tools such as 

optimization and derivatives. 

– Additionally, historical daily cash flow assessment scaled to 25% illustrates cash flow activity 

was at reasonable levels to be traded in emerging markets without adversely impacting the 

prices of securities. 

 Securities Lending: 

– The ACWI ex U.S. IMI generated the highest expected yield and percentage out on loan. 

– Across each of the last three calendar years, the income to the TSP is estimated to have been at 

least 1.5x more if the I Fund tracked the MSCI ACWI ex U.S. IMI instead of the MSCI EAFE 

index. 
Risk. Reinsurance. Human Resources. 65

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Risk. Reinsurance. Human Resources. 66

APPENDIX 
Risk. Reinsurance. Human Resources. 67

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APPENDIX 

Risk. Reinsurance. Human Resources. 68

Appendix 

The below table outlines some of the transfer restrictions that apply across emerging market countries. 

The table also lists which countries have restricted currencies. 

Global Market Change of Beneficial Owner (CBO) 

Movement 

FX 

Considerations 

BRAZIL Client Cross Market Restricted Market - Agent FX 

CHILE Client Cross Market Restricted Market - Agent FX 

CHINA -- 

Settled against HKD on SHENZHEN 

exchange 

COLOMBIA 

No Free movement with No Change 

of Beneficial Owner (NCBO) or CBO Restricted Market - Agent FX 

CZECH REPUBLIC -- -- 

EGYPT Client Cross Market 

Restricted Market - Agent FX 

Sells settle T+2 from day of clearing funds 

(trade settlement). Buys can settle same 

day. Cannot be executed on a greater than 

Spot (T+2) basis. 

GREECE Client Cross Market -- 

HUNGARY -- -- 

INDIA 

Client Cross Market / NCBO Free of 

Payment (FOP) = client must have 

SEBI (Indian Exchange) Approval for 

FOP. Must write letter to SEBI 

requesting approval, takes from a few 

days to a few weeks. Restricted Market - Agent FX 

INDONESIA -- Restricted Market - Agent FX 

MALAYSIA Client Cross Market 

Restricted Market - Agent FX 

Transfers of MYR can only be done as 

NCBO.

MEXICO 

Client must make determination of 

NCBO (No Costs) or CBO. If CBO, 

the 

official procedure per local securities

laws would require crossing thru a 

broker. However, this can be 

achieved 

without crossing as long as the client

understands they bear the risk of any

repercussions which might result from

not following the official procedures. -- 

PAKISTAN 

Shares can be moved Free of 

Payment Restricted Market - Agent FX 

PERU Client Cross Market 

PHILIPPINES Client Cross Market Restricted Market - Agent FX 

POLAND -- -- 

QATAR Client Cross Market Restricted Market - Agent FX 

RUSSIA Agent Registration Fees USD Settlement 

SOUTH AFRICA -- -- 
APPENDIX 

Risk. Reinsurance. Human Resources. 69

Global Market Change of Beneficial Owner (CBO) 

Movement 

FX 

Considerations 

SOUTH KOREA Client Cross Market Restricted Market - Agent FX 

TAIWAN Client Cross Market 

Can only net currencies if trades are done 

with the same broker 

THAILAND -- 

Restricted Market - Agent FX -2 account 

structure: NRBS for trading activity & NRBA 

for free cash moves). Cannot transfer cash 

between acct structures. 

TURKEY 

FOP is allowed, however for tax 

purposes the client should provide 

details of the underlying 

purchase/sale 

price they agree upon. BlackRock will 

handle on TSP’s behalf. -- 

UAE 

Client Cross Market. Securities must 

be moved/held in a Designated 

Trading account in order to execute 

trades at broker. -- 

Descriptions: CBO is Change in Beneficial Owner. NCBO is No Change in Beneficial Owner. If a transfer is CBO, all assets are reregistered to the new owner. Any stamp tax required for market trades are applied. For an NCBO, no stamp tax is due. Client Cross 

Market means that currency can move between accounts that the client holds. Currency cannot move from a commingled fund to a 

separate account. 

Source: BlackRock 
APPENDIX 

Risk. Reinsurance. Human Resources. 70

Return History 

Table below details the annual return histories of the following indices.

S&P 

500 

Russell 

1000 

Russell 

3000 

DJ U.S. Total Stock 

Market Index 

1971 14.3% -- -- -- 

1972 19.0 -- -- -- 

1973 -14.7 -- -- -- 

1974 -26.5 -- -- -- 

1975 37.2 -- -- -- 

1976 23.9 -- -- -- 

1977 -7.2 -- -- -- 

1978 6.6 -- -- -- 

1979 18.6 22.3% 24.1% -- 

1980 32.5 31.9 32.5 -- 

1981 -4.9 -5.1 -4.4 -- 

1982 21.5 20.3 20.7 -- 

1983 22.6 22.1 22.7 -- 

1984 6.3 4.7 3.4 -- 

1985 31.7 32.3 32.2 -- 

1986 18.7 17.9 16.7 -- 

1987 5.3 2.9 1.9 2.3% 

1988 16.6 17.2 17.8 17.9 

1989 31.7 30.4 29.3 29.2 

1990 -3.1 -4.2 -5.1 -6.2 

1991 30.5 33.0 33.7 34.2 

1992 7.6 9.0 9.7 9.0 

1993 10.1 10.2 10.9 11.3 

1994 1.3 0.4 0.2 -0.1 

1995 37.6 37.8 36.8 36.4 

1996 23.0 22.4 21.8 21.2 

1997 33.4 32.9 31.8 31.3 

1998 28.6 27.0 24.1 23.4 

1999 21.0 20.9 20.9 23.6 

2000 -9.1 -7.8 -7.5 -10.9 

2001 -11.9 -12.5 -11.5 -11.0 

2002 -22.1 -21.7 -21.5 -20.9 

2003 28.7 29.9 31.1 31.6 

2004 10.9 11.4 11.9 12.5 

2005 4.9 6.3 6.1 6.4 

2006 15.8 15.5 15.7 15.8 

2007 5.5 5.8 5.1 5.6 

2008 -37.0 -37.6 -37.3 -37.2 

2009 26.5 28.4 28.3 28.6 

2010 15.1 16.1 16.9 17.5 

2011 2.1 1.5 1.0 1.1 

2012 16.0 16.4 16.4 16.4 

2013 32.4 33.1 33.6 33.5 

2014 13.7 13.2 12.6 12.5 

2015 1.4 0.9 0.5 0.4 

2016 12.0 12.1 12.7 12.6 
APPENDIX 

Risk. Reinsurance. Human Resources. 71

Return History 

Table below details the annual return histories of the following indices.

 Russell 2000 DJ U.S. Completion Total Stock Market Index 

1979 43.1% --

1980 38.6 --

1981 2.0 --

1982 24.9 --

1983 29.1 --

1984 -7.3 --

1985 31.1 --

1986 5.7 --

1987 -8.8 -3.5% 

1988 24.9 20.5 

1989 16.2 23.9 

1990 -19.5 -13.5 

1991 46.1 43.4 

1992 18.4 11.9 

1993 18.9 14.6 

1994 -1.8 -2.7 

1995 28.4 33.5 

1996 16.5 17.2 

1997 22.4 25.7 

1998 -2.5 8.6 

1999 21.3 35.5 

2000 -3.0 -15.8 

2001 2.5 -9.3 

2002 -20.5 -17.8 

2003 47.3 43.8 

2004 18.3 18.1 

2005 4.6 10.0 

2006 18.4 15.3 

2007 -1.6 5.4 

2008 -33.8 -39.0 

2009 27.2 37.4 

2010 26.9 28.6 

2011 -4.2 -3.8 

2012 16.3 17.9 

2013 38.8 38.1 

2014 4.9 7.6 

2015 -4.4 -3.4 

2016 21.3 15.7 
APPENDIX 

Risk. Reinsurance. Human Resources. 72

Return History 

Table below details the annual return histories of the following indices.

 Bloomberg Barclays U.S. 

Aggregate 

Bloomberg Barclays 

U.S. Universal Citigroup BIG 

1976 15.6% -- -- 

1977 3.0 -- -- 

1978 1.4 -- -- 

1979 1.9 -- -- 

1980 2.7 -- 2.8% 

1981 6.3 -- 6.5 

1982 32.6 -- 31.8 

1983 8.4 -- 8.2 

1984 15.2 -- 15.0 

1985 22.1 -- 22.3 

1986 15.3 -- 15.4 

1987 2.8 -- 2.6 

1988 7.9 -- 8.0 

1989 14.5 -- 14.4 

1990 8.9 8.6% 9.1 

1991 16.0 16.4 16.0 

1992 7.4 7.5 7.6 

1993 9.8 10.4 9.9 

1994 -2.9 -3.1 -2.8 

1995 18.5 18.5 18.5 

1996 3.6 4.5 3.6 

1997 9.7 9.8 9.6 

1998 8.7 7.3 8.7 

1999 -0.8 0.2 -0.8 

2000 11.6 10.8 11.6 

2001 8.4 8.1 8.5 

2002 10.3 9.8 10.1 

2003 4.1 5.8 4.2 

2004 4.3 5.0 4.5 

2005 2.4 2.7 2.6 

2006 4.3 5.0 4.3 

2007 7.0 6.5 7.2 

2008 5.2 2.4 7.0 

2009 5.9 8.6 5.1 

2010 6.5 7.2 6.3 

2011 7.8 7.4 7.9 

2012 4.2 5.5 4.2 

2013 -2.0 -1.3 -2.0 

2014 6.0 5.6 5.9 

2015 0.5 0.4 0.5 

2016 2.6 3.9 2.7 
APPENDIX 

Risk. Reinsurance. Human Resources. 73

Return History 

Table below details the annual return histories of the following indices.

 MSCI EAFE MSCI ACWI ex U.S. IMI MSCI ACWI ex U.S. MSCI World ex U.S. 

1970 -11.7% -- -- -14.4% 

1971 29.6 -- -- 31.8 

1972 36.3 -- -- 39.1 

1973 -14.9 -- -- -11.4 

1974 -23.2 -- -- -19.6 

1975 35.4 -- -- 31.0 

1976 2.5 -- -- 2.3 

1977 18.1 -- -- 16.1 

1978 32.6 -- -- 31.4 

1979 4.8 -- -- 9.4 

1980 22.6 -- -- 23.5 

1981 -2.3 -- -- -3.9 

1982 -1.9 -- -- -1.3 

1983 23.7 -- -- 23.8 

1984 7.4 -- -- 2.9 

1985 56.2 -- -- 50.8 

1986 69.4 -- -- 65.3 

1987 24.6 -- -- 24.2 

1988 28.3 -- 27.6% 27.5 

1989 10.5 -- 11.8 11.1 

1990 -23.4 -- -23.0 -23.1 

1991 12.1 -- 13.6 12.0 

1992 -12.2 -- -11.3 -12.3 

1993 32.6 -- 34.5 32.2 

1994 7.8 -- 6.4 7.3 

1995 11.2 7.5% 9.6 11.4 

1996 6.0 5.1 6.4 6.9 

1997 1.8 -3.3 2.0 2.3 

1998 20.0 12.0 14.5 18.8 

1999 27.0 37.7 30.9 27.9 

2000 -14.2 -19.4 -15.1 -13.4 

2001 -21.4 -19.8 -19.7 -21.4 

2002 -15.9 -12.9 -14.9 -15.8 

2003 38.6 42.3 40.8 39.4 

2004 20.2 21.9 20.9 20.4 

2005 13.5 17.7 16.6 14.5 

2006 26.3 26.5 26.7 25.7 

2007 11.2 16.1 16.7 12.4 

2008 -43.4 -46.0 -45.5 -43.6 

2009 31.8 43.6 41.4 33.7 

2010 7.8 12.7 11.2 8.9 

2011 -12.1 -14.3 -13.7 -12.2 

2012 17.3 17.0 16.8 16.4 

2013 22.8 15.8 15.3 21.0 

2014 -4.9 -3.9 -3.9 -4.3 

2015 -0.8 -4.6 -5.7 -3.0 

2016 1.0 4.4 4.5 2.7 
APPENDIX 

Risk. Reinsurance. Human Resources. 74