Independent 

advice for 

the institutional 

investor 

I Fund Benchmark 

Evaluation for the 

Federal Thrift 

Savings Plan 

FINAL I FUND BENCHMARK EVALUATION 
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TABLE OF CONTENTS 

1 Executive Summary 

2 Non-U.S. Equity Benchmark Review 

3 Implementation of a Daily-Valued MSCI ACW exU.S. Index Fund 
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EXECUTIVE SUMMARY 

Ennis Knupp + Associates 1.1

Executive Summary 

The Federal Retirement Thrift Investment Board (FRTIB) requested that Ennis Knupp & Associates 

(EnnisKnupp) evaluate the appropriateness of changing the benchmark of the International Stock Index 

Investment Fund (I Fund) offered within the Thrift Savings Plan (TSP). The I Fund’s existing benchmark is 

the MSCI EAFE Index, which provides exposure to 21 developed non-U.S. equity markets across Europe, 

Australasia, and the Far East. In this report, we review the appropriateness of changing the I Fund’s 

benchmark to the MSCI All-Country World (ACW) ex-U.S. Index. The MSCI ACW ex-U.S. Index provides 

broader and more diversified coverage of the non-U.S. equity markets as it includes exposure to the 

emerging markets and Canada, in addition to the countries that are in the MSCI EAFE Index. 

In evaluating the appropriateness of making a change to the I Fund’s mandate, we took into consideration: 

 The criteria set forth in the Federal Employees’ Retirement System Act of 1986 (FERSA) that govern 

the selection of a benchmark for the I Fund and the investment of assets of the Fund. 

 The merits and challenges associated with moving to the more diversified benchmark and the 

appropriateness of the MSCI ACW ex-U.S. Index as a benchmark for the I Fund that is in line with the 

intent specified in FERSA. 

 BGI’s ability to manage a daily-valued fund benchmarked to the MSCI ACW ex-U.S. Index at a 

reasonable level of tracking error consistent with the guidelines provided in FERSA – i.e., to have a 

fund whose exposures are closely in line with that of the benchmark index. 

In Section 1 of this report, we compare the characteristics of the MSCI EAFE Index to that of the MSCI ACW 

ex-U.S. Index and the MSCI ACW ex-U.S. IMI. We conclude that the MSCI ACW ex-U.S. Index provides 

broader coverage of the international equity markets and better diversification of the I Fund’s international 

equity exposure. In addition to the investment merits, the MSCI ACW ex-U.S. Index also meets the criteria 

set forth in FERSA relating to the selection of a benchmark index for the I Fund. As such, we favor 

considering a move to a broader benchmark to the extent that BGI is able to manage a daily-valued fund at 

a reasonable level of tracking error and maintain exposures that are closely in line with the index. 

In Section 2 of this report, we evaluate the construction methodology proposed by BGI to implement a dailyvalued fund benchmarked to the MSCI ACW ex-U.S. Index. While BGI is able to create and manage a dailyvalued fund at a reasonable level of tracking error, the proposed construction methodology will result in 

rebalancing of portions of the fund on a weekly or bi-monthly basis. As a result, in between rebalancing 

periods, the Fund could have exposures that are different from that of the benchmark index, even though 

these differences may be small. This appears to be in conflict with the intent of FERSA, which requires the 

proportion of each security in the I Fund to closely match that of the benchmark index. As such, we 

recommend that the TSP defer a move to a broader benchmark for the I Fund until such time that BGI is 

able to manage a daily-valued fund at a reasonable level of tracking error, which is also rebalanced on a 

daily basis.
Ennis Knupp + Associates 1.2 

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NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.1 

Section 1: Non-U.S. Equity Benchmark Review 

This section of the report compares the characteristics and composition of the I Fund’s current benchmark, the MSCI 

EAFE Index, to that of the MSCI ACW ex-U.S. Index. We also provide a brief overview of the benefits and challenges 

associated with the TSP moving to a broader benchmark. 

For comparison purposes, we have also included the characteristics of the MSCI All-Country World ex-U.S. 

Investable Market Index (MSCI ACW ex-U.S.IMI). This index, recently launched by MSCI, is broader than the MSCI 

All-Country World ex-U.S. benchmark and seeks to cover 99% of the investable international market including small 

cap securities. We are not, however, recommending a change to the MSCI ACW ex-U.S. IMI at this time given that it 

is not yet the mainstream benchmark for institutional investors or asset managers, the lack of significant index fund 

assets currently managed to this index, and the illiquidity that exists within the small cap segment of the benchmark. 

Characteristic Comparison 

Table 1 shows a comparison of the various characteristics of the three benchmarks. 

As of 12/31/2008 

 MSCI EAFE Index MSCI ACWI ex-U.S. 

Index 

MSCI ACWI ex-U.S. 

Investable Market 

Index 

Number of Countries 21 47 47 

Market Capitalization 

($ Float) 

$7.76 trillion $10.16 trillion $11.29 trillion 

Country Market 

Coverage (%) 

85 85 99 

Turnover (%) 0.86 0.95 0.76 

Largest Company 

(Market Cap) 

Nestle 

($149.7 billion) 

Nestle 

 ($149.7 billion) 

Nestle 

($149.7 billion) 

Smallest Company 

(Market Cap) 

Anglo Irish Bank Corp 

PLC 

PIK Group GDR 

($95.2 million) 

New Star Asset Mgmt. 

($4.7 million) 

 ($180.7 million) 

As shown above, the MSCI ACW ex-U.S. Index is a broader benchmark that includes Canada and the emerging 

markets (26 additional countries). In addition, the market capitalization of the MSCI ACW ex-U.S. Index is $10.2 

trillion versus MSCI EAFE’s market capitalization of $7.8 trillion. As previously mentioned, the MSCI ACW ex-U.S. 

IMI is a broader index than the other two international benchmarks and targets 99% versus 85% market capitalization 

coverage at the country level. The main reason for this is the MSCI ACW ex-U.S. IMI’s coverage of the small cap 

segment of the international market. This is evident when comparing the market capitalization for the smallest 

company in the MSCI ACW ex-U.S. IMI at $4.1million to that of the MSCI ACW ex-U.S. Index at $95.2 million.
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.2 

As shown in Table 2 on the following page, Canada is the fifth largest country in terms of market 

capitalization in the broad non-U.S. equity markets and has continued to grow as a percentage of the overall 

international market over the past few years. Further, the emerging market countries in aggregate make up 

approximately 17.2% of both the MSCI ACW ex-U.S. and 17.4% of the MSCI ACW ex-U.S. IMI indices. 

There are several emerging market countries (i.e. Brazil, China, Korea) that have higher market 

capitalizations than a few of the developed countries (i.e. New Zealand, Portugal, Ireland).
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.3 

Table 2 

 MSCI EAFE MSCI ACWI ex-U.S. MSCI ACWI ex-U.S. IMI 

Developed Markets 

Australia 6.0% 4.6% 4.5% 

Austria 0.3 0.2 0.3 

Belgium 0.8 0.6 0.6 

Canada 0.8 6.4 6.4 

Denmark 1.4 0.6 0.7 

Finland 10.9 1.1 1.1 

France 8.7 8.3 7.8 

Germany 0.5 6.7 6.5 

Greece 2.0 0.4 0.4 

Hong Kong 0.3 1.5 1.5 

Ireland 3.7 0.2 0.3 

Italy 25.3 2.8 2.8 

Japan 2.4 19.3 20.1 

Netherlands 0.1 1.9 1.8 

New Zealand 0.6 0.1 0.1 

Norway 0.3 0.5 0.6 

Portugal 1.1 0.3 0.3 

Singapore 4.5 0.8 0.9 

Spain 2.0 3.5 3.3 

Sweden 8.4 1.5 1.6 

Switzerland 19.9 6.4 6.1 

United Kingdom 6.0 15.2 14.9 

Emerging Markets 

Argentina -- 0.0% 0.0% 

Brazil -- 2.2 2.1 

Chile -- 0.2 0.2 

China -- 3.1 3.1 

Colombia -- 0.1 0.1 

Czech Republic -- 0.2 0.1 

Egypt -- 0.1 0.1 

Hungary -- 0.1 0.1 

India -- 1.1 1.2 

Indonesia -- 0.3 0.3 

Israel -- 0.6 0.6 

Jordan -- 0.0 0.0 

Korea -- 2.3 2.4 

Malaysia -- 0.5 0.6 

Mexico -- 0.9 0.9 

Morocco -- 0.1 0.1 

Pakistan -- 0.0 0.0 

Peru -- 0.1 0.1 

Philippines -- 0.1 0.1 

Poland -- 0.3 0.3 

Russia -- 1.0 0.9 

South Africa -- 1.4 1.5 

Taiwan -- 1.9 2.1 

Thailand -- 0.2 0.3 

Turkey -- 0.3 0.3 

Total Developed 100.0% 82.8% 82.6% 

Total Emerging 0.0% 17.2% 17.4% 
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.4 

Chart 1 below shows the contribution of developed and emerging market countries to international Gross 

Domestic Product (GDP) for both 1997 and 2007. As shown, emerging markets make up a significant and 

growing portion of the world’s GDP. Over the last ten years, the contribution of emerging markets to 

international GDP has grown by 7%. 

Chart 1 

International Gross Domestic Product

As of 12/31/2007

Developed (ex-U.S.), 66%

Emerging, 34%

International Gross Domestic Product

As of 12/31/1997

Developed (ex-U.S .), 73%

Emerging, 27%
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.5 

Performance 

In Table 3, we show annual and trailing year performance for all three benchmarks. 

Table 3 

As of 12/31/2008 

 MSCI EAFE Index MSCI ACWI ex-U.S. 

Index 

MSCI ACWI ex-U.S. 

Investable Market 

Index 

1988 28.3% 27.6% -- 

1989 10.4 11.8 -- 

1990 -23.6 -23.0 -- 

1991 12.2 13.6 -- 

1992 -12.2 -11.3 -- 

1993 32.7 34.5 -- 

1994 7.8 6.4 0.3% 

1995 11.3 9.6 7.5 

1996 6.1 6.4 5.0 

1997 1.6 1.8 -3.4 

1998 20.1 14.1 11.9 

1999 26.7 30.6 37.7 

2000 -14.2 -15.3 -19.5 

2001 -21.4 -19.7 -19.8 

2002 -15.9 -15.0 -12.9 

2003 38.6 40.8 42.1 

2004 20.3 20.9 21.9 

2005 13.5 16.6 17.7 

2006 26.3 26.7 26.4 

2007 11.2 16.7 16.1 

2008 -43.4 -45.5 -46.0 

Trailing Periods 

3-Year -7.4% -7.0% -7.4% 

5-Year 1.7 2.6 2.6 

10-Year 0.8 1.9 2.3 

15-Year 3.5 3.8 -- 

The MSCI ACW ex-U.S. Index and MSCI ACW ex-U.S. IMI have earned higher returns relative to the MSCI 

EAFE Index over all trailing time periods shown above, with the exception of the MSCI ACW ex-U.S. IMI’s 

return over the trailing three-year period. Please note that the historical returns prior to June 2007 for the 

MSCI ACW ex-U.S. IMI are simulated returns. The positive returns relative to the MSCI EAFE over recent 

time periods can be mainly attributed to the strong returns of the emerging markets over the past several 

years. 
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.6 

Table 4 shows the correlations of the various indices, which indicates that the three indices are highly 

correlated with each other. 

Table 4 – Correlations 

As of 12/31/08 

 MSCI EAFE Index MSCI ACWI ex-U.S. 

Index 

MSCI ACWI ex-U.S. 

Investable Market 

Index 

MSCI EAFE 1.000 

MSCI ACWI ex-U.S. 0.995 1.000 

MSCI ACWI ex-U.S. IMI 0.995 1.000 1.000 

The annualized standard deviations of the three benchmarks over several trailing time periods are shown in 

Table 5 below. The volatility of the MSCI ACW ex-U.S. Index and the MSCI ACW ex-U.S. IMI are marginally 

higher than that of the MSCI EAFE Index over the trailing time periods shown in the table below. 

Table 5 – Standard Deviation 

As of 12/31/08 

 MSCI EAFE Index MSCI ACW ex-U.S. 

Index 

MSCI ACW ex-U.S. IMI 

5 Years 16.5% 17.9% 18.1% 

10 Years 16.4 17.2 17.4 

15 Years 15.6 16.3 N/A 

Table 6 shows the Sharpe Ratios for each of the indexes. Both the MSCI ACW ex-U.S. Index and the MSCI 

ACW ex-U.S. IMI exhibited higher Sharpe Ratios relative to the MSCI EAFE Index over the trailing time 

periods shown below. 

Table 6 – Sharpe Ratios 

As of 9/30/2008 

 MSCI EAFE Index MSCI ACW ex-U.S. 

Index 

MSCI ACW ex-U.S. IMI 

5 Years 0.04 0.10 0.10 

10 Years -0.04 0.03 0.06 

15 Years 0.09 0.10 N/A 
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.7 

Table 7 shows the average transaction costs that have been compiled based on a survey of leading 

transition managers. Transaction costs are higher for the MSCI ACW ex-U.S. Index, but only marginally 

higher. 

Table 7 – Transaction Costs 

Trade Size MSCI EAFE Index (bps) MSCI ACW ex-U.S. Index (bps) 

$25 mm 13 19 

$50 mm 14 21 

$100 mm 15 23 

$200 mm 16 26 

Analysis 

The MSCI ACW ex-U.S. IMI provides 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 in the MSCI ACW exU.S. Index. The MSCI ACW ex-U.S. IMI Index was launched in 2007 and it is not yet a commonly used 

benchmark across large institutional investment programs. Since it is a new index, it has yet to gain 

significant traction across the institutional investment community and the level of assets benchmarked to 

this index is low – especially passively managed assets. As such, given that the MSCI ACW ex-U.S. IMI is 

not as widely used in the institutional space and the lack of assets benchmarked to it, we limit our analysis 

to the MSCI ACW ex-U.S. Index. 

There are both positive and negative aspects to moving to the broader MSCI ACW ex-U.S. Index within the 

TSP investment plan. We summarize the benefits to changing benchmarks as well as the challenges while 

the following section of this report provides additional detail. 

The primary benefit of changing the I Fund benchmark to the MSCI ACW ex-U.S. Index from the MSCI 

EAFE Index is that investors in the I Fund will gain broader coverage of the international market with 

exposure to both Canada and the emerging markets. This will provide participants that choose to invest 

internationally with additional diversification within their investment portfolio. Fully diversified investment 

portfolios should closely reflect the market opportunity set. Both Canada and the emerging market countries 

comprise a significant portion of the international market. Further, emerging markets represent a significant 

and growing portion of international GDP and offer a higher return potential than developed markets alone. 

The challenges to moving to the broader benchmark include higher transaction costs and illiquidity within 

the emerging markets. It becomes more difficult within a defined contribution framework to manage tracking 

error and transaction costs given the high volume of daily cash flows from participants. In addition, the 

amount of defined contribution assets that are indexed to the MSCI ACW ex-U.S. Index as compared to the 

MSCI EAFE Index are low and therefore, the experience of index fund managers in managing this type of 

product is limited. 
NON-U.S. EQUITY BENCHMARK REVIEW 

Ennis Knupp + Associates 2.8 

We believe that the higher return potential, added diversification, and broader coverage of the international 

opportunity set more than outweigh the higher transaction costs associated with a broader benchmark that 

includes the emerging markets and Canada. 

The Federal Employees’ Retirement System Act of 1986 (FERSA), which governs the investment of the 

TSP’s assets, references the following requirements with reference to the benchmark index for the I Fund. 

Requirements relating to the benchmark index for the I Fund

Title 5 U.S.C. Sect. 8438 (b)(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. 

We believe that the MSCI ACW ex-U.S. Index meets the criteria specified in the statute – namely: 

 The Index is a commonly recognized index 

 Provides a reasonably complete representation of the international equity markets 

Given the investment merits from broadening the mandate of the I Fund from the MSCI EAFE Index to the 

MSCI ACW ex-U.S. Index, and the fact that the MSCI ACW ex-U.S. Index meets the criteria set forth in 

FERSA, we favor a move to the broader mandate if the TSP’s index fund manager, BGI, is able to manage 

a daily-valued fund benchmarked to the MSCI ACW ex-U.S. Index. 
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.1 

Section 2: Implementation of a Daily-Valued MSCI ACW ex-U.S. Index Fund 

In this section of the report, we review BGI’s proposed implementation of a daily-valued fund benchmarked to the 

MSCI All-Country World ex-U.S. Index (ACW ex-U.S.) for the I Fund. As of December 31, 2008, the I Fund had 

approximately $14.6 billion in assets. 

I Fund – Existing Structure 

In order to review BGI’s proposed implementation, it is useful to understand the structure of the MSCI EAFE Index 

Fund, which is currently used by the I Fund. Chart 2 below graphically depicts the structure of the I Fund’s 

investment. 

 Chart 2 

Underlying 

Country Funds

Other daily 

valued 

401(k) plans

TSP I Fund

Cash & Futures Other ERISA 

qualified investors

BGI MSCI 

EAFE E Fund

BGI MSCI 

EAFE A Fund*

Underlying 

Country Funds

Other daily 

valued 

401(k) plans

TSP I Fund

Cash & Futures Other ERISA 

qualified investors

BGI MSCI 

EAFE E Fund

BGI MSCI 

EAFE A Fund*
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.2 

The I Fund’s assets are invested in BGI’s MSCI EAFE E Fund. The E Fund is a daily valued fund, meaning 

that it is available for transaction activity on a daily basis. Further, through the methodology described in the 

following paragraphs, BGI rebalances the Fund on a daily basis to ensure that weights of underlying 

securities in the Fund are closely in line with that of the benchmark index. 

The E Fund comprises, in addition to the TSP’s assets, investment of other defined contribution plans. The 

E Fund holds units (shares) of another commingled trust fund referred to as the A Fund. In addition to the 

units of the A Fund, the E Fund will also hold cash and futures positions to meet redemptions and to 

maintain appropriate exposure to the relevant market. 

The A Fund comprises investments from the E Funds, investments from other collective trust funds 

managed by BGI for retirement plans (defined benefit and defined contribution), and direct plan sponsor 

investments (defined benefit and defined contribution). The A Fund is managed in a modular basis and 

owns units in 21 underlying country funds in the proportion that these countries comprise the MSCI EAFE 

Index. 

Net transaction resulting from TSP participants’ daily buy and sell orders are aggregated at the I Fund level. 

The net transaction at the I Fund level results in a purchase / sale of units of the E Fund. This transaction is 

available to be unit crossed with transactions of other investors in the E Fund to the extent that there are 

such crossing opportunities. As depicted in the chart shown in the previous page, the E Fund holds cash, 

which is equitized using futures contracts, and units of the A Fund, which in turn owns underlying securities 

comprising the MSCI EAFE Index. 

Depending on the value of the net daily transaction activity resulting from all investors at the E Fund level, 

BGI may determine to initiate a transaction with the A Fund. Transactions initiated by the E Fund at the A 

Fund level are also available for unit crossing at the A Fund level with the net transaction activity of all other 

investors in the A Fund. 

At the E Fund level, BGI may decide to transact with the A Fund primarily on account of one or both of the 

following reasons: 

 Level of cash at the E Fund level is higher than the threshold required to maintain a tight tracking error 

to the benchmark 

 Natural unit level crossing opportunity at the A Fund level exists based on the net transaction flow of all 

other investors in the A Fund 

Finally, the net transactions at the A Fund level, i.e., a purchase or sale of underlying securities, are eligible 

for an internal security-level cross with corresponding order flow within BGI. 

Crossing results in significant savings in transaction costs to investors since buys or sells of investors are 

offset by corresponding sells or buys of other investors without necessitating an underlying securities trade 

in the open market. 
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.3 

In 2008, the average monthly crossing rate, including unit and security level crosses, averaged 5%. The 

crossing rate achieved in 2008 was higher than the average of the previous two years. The average monthly 

crossing rates were approximately 4% and 3% in 2007 and 2006, respectively. 

I Fund – Proposed Structure

The chart below provides a schematic description of the vehicle structure proposed by BGI were the TSP to 

change the benchmark of the I Fund from the MSCI EAFE Index to the MSCI ACW ex-U.S. Index. 

 Chart 3 

TSP I Fund

Underlying 

Country Funds

Funds structure below 

this level same as shown 

in Chart 2

BGI MSCI ACW 

ex-U.S. T Fund

BGI MSCI EAFE 

E Fund

BGI MSCI Emerging 

Markets A Fund

BGI MSCI 

Canada A Fund

Other ERISAqualified Investors

TSP I Fund

Underlying 

Country Funds

Funds structure below 

this level same as shown 

in Chart 2

BGI MSCI ACW 

ex-U.S. T Fund

BGI MSCI EAFE 

E Fund

BGI MSCI Emerging 

Markets A Fund

BGI MSCI 

Canada A Fund

BGI MSCI EAFE 

E Fund

BGI MSCI Emerging 

Markets A Fund

BGI MSCI 

Canada A Fund

Other ERISAqualified Investors
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.4 

BGI currently offers a daily-valued fund benchmarked to the MSCI ACW ex-U.S. Index. As of November 30, 

2008, this fund had one investor (a defined contribution plan) and total assets of approximately $72 million. 

BGI has proposed the creation of a separate custom fund for the TSP. Under the proposed structure, the I 

Fund’s assets would be invested in a custom fund created by BGI, which would be benchmarked to the 

MSCI ACW ex-U.S. Index. We refer to this custom fund as the ACW ex-U.S. T Fund (note that we use this 

fund reference for discussion purposes in this report and does not represent the official fund name that BGI 

has proposed). The ACW ex-U.S. T Fund would hold units of the following funds in the proportion that they 

make up the MSCI ACW ex-U.S. Index. 

Table 8 

Fund Benchmark Approximate Allocation* 

BGI MSCI EAFE E MSCI EAFE Index 74.1% 

BGI MSCI Canada A MSCI Canada Index 7.4 

BGI MSCI Emerging Markets A MSCI Emerging Markets Index 18.5 

*based on September 30, 2008 weights of the MSCI ACW ex-U.S. Index 

The I Fund is currently invested in the MSCI EAFE E Fund. This fund would account for approximately 75% 

of the I Fund should its mandate change. The MSCI EAFE E Fund is a daily-valued fund – meaning that the 

fund’s net asset value (NAV) is struck daily and investors are allowed to transact in the fund on a daily 

basis. The MSCI Canada A Fund is a weekly valued fund and the MSCI Emerging Markets A fund is a bimonthly valued fund. The MSCI Canada A Fund and the MSCI Emerging Markets A Fund had 

approximately $1.2 billion and $3.0 billion in assets, respectively. The MSCI Emerging Markets A Fund is 

managed in a modular basis. The fund holds units in 25 country funds in the proportion that these countries 

comprise the MSCI Emerging Markets Index. BGI manages approximately $7.0 billion in aggregate across 

these underlying country funds. 

Since the TSP’s I Fund is a daily-valued fund, BGI has proposed sourcing daily liquidity from the MSCI 

EAFE E Fund to meet TSP participants’ daily transaction activity – meaning that the ACW ex-U.S. T Fund 

will transact units of the MSCI EAFE E Fund in order to meet daily liquidity. As such, all daily transaction 

activity at the MSCI EAFE E Fund level will have access to the same liquidity sources and crossing 

opportunities as described earlier in this report (under current structure). 

At the ACW ex-U.S. T Fund level, BGI will buy and sell units in the MSCI Canada A Fund at its weekly 

opening date and the MSCI Emerging Markets A Fund at its bi-monthly opening date in a manner such that 

the allocation between the three components shown in the table above are consistent with benchmark 

weights. Transactions in both these funds will be eligible to unit and security level crossing opportunities as 

described earlier with respect to the MSCI EAFE E Fund. Over the two year period ending November 30, 

2008, the unit crossing rate at the MSCI Emerging Markets A Fund was approximately 43% and at the MSCI 

Canada A Fund was approximately 55%. 

Since BGI will transact only the MSCI EAFE component of the MSCI ACW ex-U.S. Index on a daily basis to 

provide liquidity, the allocations between the three components of the ACW ex-U.S. T Fund can vary relative 
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.5 

to the weights of these components in the benchmark index. BGI has indicated that they would seek to 

maintain any misweights within 5% of the benchmark weights between rebalancing periods (weekly for the 

Canada component and bi-monthly for the Emerging Markets component). 

At a 5% maximum misweight, BGI expects that the incremental predicted tracking error of the I Fund on an 

annualized basis will be 0.17 percentage points – i.e., the fund benchmarked to the MSCI ACW ex-U.S. 

Index is expected to experience an additional 0.17 percentage points of tracking error as compared to the 

fund benchmarked to the MSCI EAFE Index. 

Further, BGI has indicated that if the misweights between the components exceed 5% of the benchmark 

weights, they will seek to rebalance the ACW ex-U.S. T Fund prior to the official liquidity date of the MSCI 

Canada A Fund or the MSCI Emerging Markets A Fund. This will be achieved through a special opening / 

liquidity date at these fund levels – meaning that the these funds will accept transactions from the ACW exU.S. T Fund outside of their official liquidity dates. Such transactions should ensure that weights between 

components of the ACW ex-U.S. T Fund remain closely in line with benchmark weights; however, between 

rebalancing dates, the actual allocations between the components in the ACW ex-U.S. T Fund will vary 

relative to the weight of the three components in the MSCI ACW ex-U.S. Index. 

The Federal Employees’ Retirement System Act of 1986 (FERSA), which governs the investment of the 

TSP’s assets, references the following requirements with reference to the investment of the I Fund’s assets. 

Requirements relating to the investment of I Fund assets

Title 5 U.S.C. Sect. 8438 (b)(4)(B). The International 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 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 stocks included in such index. 

The language in the statute, specifically, the requirement that the percentage of the I Fund be invested in 

each stock in the same percentage that the stock comprises the index (to the extent practicable), appears to 

indicate that the intent is to maintain a fund that is replicated to the extent possible. 

We believe that the construction methodology and the manner in which BGI will implement the I Fund will 

provide appropriate exposure to the MSCI ACW ex-U.S. Index over time at a reasonable level of tracking 

error. However, between rebalancing dates, we believe that the weight of the components of the I Fund will 

deviate from the weight of these components in the benchmark. This appears to be at odds with the intent of 

the statute. 

Therefore, while we believe that there are merits to considering a move to a broader mandate for the I Fund, 

we do not recommend the move at this time. Our recommendation stems from the fact that construction 

methodology proposed by BGI will result in a fund that is not managed in accordance with the intent of the 

statute. 
IMPLEMENTATION OF A DAILY-VALUED MSCI ACW EX-U.S. INDEX FUND 

 Ennis Knupp + Associates 3.6 

Further, we believe it remains appropriate for the TSP to continue to consider a move to a broader 

benchmark, if and when BGI is able to manage a daily-valued fund that is rebalanced on a daily basis to 

maintain benchmark-like exposure at all times at a reasonable level of tracking error.