I Fund Benchmark Evaluation

I Fund Benchmark Evaluation

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Independent advice for the institutional investor FINAL I Fund Benchmark Evaluation for the Federal Thrift Savings Plan I FUND BENCHMARK EVALUATION (This page left blank intentionally) TABLE OF CONTENTS 1 Executive Summary 2 Non-U.S. Equity Benchmark Review 3 Implementation of a Daily-Valued MSCI ACW ex-U.S. Index Fund (This page left blank intentionally) ƒƒƒEXECUTIVE SUMMARY 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 ...

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Independent advice for the institutional investor
FINAL
I Fund Benchmark Evaluation for the Federal Thrift Savings Plan  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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TABLE OF CONTENTS    Executive Summary   Non-U.S. Equity Benchmark Review   Implementation of a Daily-Valued MSCI ACW ex-U.S. Index Fund             
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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EXECUTIVE SUMMARY   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: ƒ  The criteria set forth in the Federal Emplotiyr e emse nRt eSystem Act of 1986 (FERSA) that govern the selection of a benchmark for the aI nFd utnhde  investment of assets of the Fund. ƒ 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. ƒ  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 cshtiacrsa ocft etrhie 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 mabrketettesr  adnivde rsification of the I Funds international equity exposure. Ind itaidon to the investment merits, the AMCSWC eI x-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  t h ea te BxtGeIn its able to mgaen 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 daily valued fund benchmarked to the MSCI ACW ex-U.S. Index. While BGI is able to create and manage a daily valued 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 securithye i In  Ftund 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 reasvoenl aobfl ter laecking error, which is also rebalanced on a daily basis. Ennis Knupp + Associates 1.1
 
                      
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NON-U.S. EQUITY BENCHMARK REVIEW   Section 1: Non-U.S. Equity Benchmark Review This section of the report compares the charactde ricsotimcsp oasnition of the I Funds current benchmark, the MSCI EAFE Index, to that of the MSCI ACW ex-U.S. Insdoe xp. roWvei dael 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 (I MASCCW ex-U.S.IMI). This index, recue n ctlhy elda by MSCI, is broader than the MSCI All-Country World ex-U.S. benchmark and seeks to cofo tvheer  i9n9ve%s table inter n a tliomarket including small cap securities. We are not, however, recommendingt oa t hceh aMngSeC I 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 ind assets currently managed to this index, and the illiquidity that exists within the small cap segment of the be  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.SM. SCI ACWI ex-U.S. Index Investable Market Index Number of Countries 21 47 47 Market Capitalization $7.76 trillion $10.16 trillion $11.29 trillion ($ Float) Country Market 85 85 99 Coverage (%) Turnover (%) 0.86 0.95 0.76 Largest Company Nestle Nestle Nestle (Market Cap) ($149.7 billion) ($149.7 billion) ($149.7 billion) Smallest Company Anglo Irish Bank Corp PIK Group GDR New Star Asset Mgmt. (Market Cap) PLC ($95.2 million) ($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 eme markets (26 additional countries). In addition, t hcea pmit a rlikzeattion of the MSCI ACW ex-U.S. Index is $10.2 trillion versus MSCI EAFEs market capitalizatioinl li o f n$. 7A.8s  tprreviously mentioned, the MSCI ACW ex-U.S. IMI is a broader index than the other two international benchmarks and targets 99% versus 85% market ca coverage at the country level. The main reason for this is the MSCI ACW ex-U.S. IMI’s coverage of the sm segment of the international market. This is evident when comparing the market capitalization for the small company in the MSCI ACW. Se. xI-MUI at $4.1million to that of the MSCI ACW ex-U.S. Index at $95.2 million. Ennis Knupp + Associates 2.1
    
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NON-U.S. EQUITY BENCHMARK REVIEW   Table 2  Developed Markets Australia Austria Belgium Canada Denmark Finland France Germany Greece Hong Kong Ireland Italy Japan Netherlands New Zealand Norway Portugal Singapore Spain Sweden Switzerland United Kingdom Emerging Markets Argentina Brazil Chile China Colombia Czech Republic Egypt Hungary India Indonesia Israel Jordan Korea Malaysia Mexico Morocco Pakistan Peru Philippines Poland Russia South Africa Taiwan Thailand Turkey Total Developed Total Emerging
MSCI EAFE  6.0% 0.3 0.8 0.8 1.4 10.9 8.7 0.5 2.0 0.3 3.7 25.3 2.4 0.1 0.6 0.3 1.1 4.5 2.0 8.4 19.9 6.0  -- -- --  -- -- -- -- ---- --  ---- --  ----  ---- -- -- --  -- -- -- ---- 100.0% 0.0%
MSCI ACWI ex-U.S.  4.6% 0.2 0.6 6.4 0.6 1.1 8.3 6.7 0.4 1.5 0.2 2.8 19.3 1.9 0.1 0.5 0.3 0.8 3.5 1.5 6.4 15.2  0.0% 2.2 0.2 3.1 0.1 0.2 0.1 0.1 1.1 0.3 0.6 0.0 2.3 0.5 0.9 0.1 0.0 0.1 0.1 0.3 1.0 1.4 1.9 0.2 0.3 82.8% 17.2%
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MSCI ACWI ex-U.S. IMI  4.5% 0.3 0.6 6.4 0.7 1.1 7.8 6.5 0.4 1.5 0.3 2.8 20.1 1.8 0.1 0.6 0.3 0.9 3.3 1.6 6.1 14.9  0.0% 2.1 0.2 3.1 0.1 0.1 0.1 0.1 1.2 0.3 0.6 0.0 2.4 0.6 0.9 0.1 0.0 0.1 0.1 0.3 0.9 1.5 2.1 0.3 0.3 82.6% 17.4%
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Emerg ing , 34%
   
Inte rnational Gross Domestic Product As of 12/31/2007
Chart 1
Internat ional Gross Dom estic Product As of 12/31/1 997
Develo ped (ex-U.S.), 66%
  
Developed (ex-U.S .), 73%
Em erging, 27 %
by 7%.