the F Fund .. what is it?

The Thrift Savings Plan Fixed Income Index Investment Fund, or F Fund for short, is a bond-based investment with relatively low risk, that exceeds the returns of money market funds over the long term. By law, it must be invested in fixed-income securities.

The objective of the F Fund is to match the performance of the Barclays Capital U.S. Aggregate Bond Index. The earnings are comprised of interest income on the securities, and gains, or losses, in the value of the securities. The risk in the F Fund is primarily due to market risk of the underlying securities declining in value, and due to prepayment risk (payment of the bond before it matures).  The risk of nonpayment of the bonds (credit risk) is very low, because only investment-grade securities are used and there is broad diversification.

The bond portfolio is comprised of 40% government-related Treasury and Agency bonds (government- and corporate-issued, government-backed), 30% asset-backed securities (mortgages, credit cards, auto/home loans, etc.), and 30% corporate and non-corporate bonds (standard credit).

The 10-Year (2005-2014) annual return was 4.89%, and since its inception in January 1988, it has gained 6.66%. There is about $24 Billion of assets in the F Fund, which charges 2.9 basis points ($0.29 per $1000) to manage. It is administered by the BlackRock Institutional Trust Company.

The average duration of the bonds is about 5 years and the yield at maturity is 2.25%.

Both the Plus and Basic utilize the F Fund during downturns in the stock market, and is a solid option for good gains during these times.

TSP Fund Information – March 2015

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TSPinvestor Basic, Plus and Apex .. what are they?

The TSPinvestor has three investment allocation strategies – called the Basic, Plus, and the Apex. These are formulas that recommend monthly Thrift Savings Plan allocations for the individual G, F, C, S and I funds.

A simulation of implementing the Basic, Plus and Apex was done and the 10-year annual return (2005-2014) for the Basic was 12%, the Plus was 19%, and the Apex was 23% (see the comparative annual returns here).

The following link is to a third party site that I use to accurately capture the allocation returns. I have been using this since Dec 2015. So while the data thus far is limited, it is a confirmed and accurate accounting of the performance of these funds. I do recommend checking this out.

The development of the model and formulas relied upon a human decision. But these models are not tweaked or adjusted, nor is there any human decision regarding the monthly allocations.

DEVELOPMENT

The Basic has a model/formula that is solely based upon historical returns of the TSP G, F, C, S and I Funds. The Plus model/formula is based upon historical returns of the individual TSP funds, as the Basic does, but also includes several leading economic indicators.

The Basic, Plus and Apex models, and formulas were derived using mathematical and statistical techniques. A full compliment of factors/variables were considered and selected based upon their effect on matching the historical data. The historical data used was from January 2003 through the present.

The Basic uses only the TSP fund historical data to feed the model/formula. The Plus additionally uses three leading economic indicators. And the Apex uses the Plus model – but then determines if it’s optimal to invest 100% in the top allocation recommendation for that month.

Is It Right For You?

The decision to allocate your TSP account is a serious one. The strategy to allocate (buy) and then don’t change (hold) comes easy, and often is very predictable over the long run. For example, an aggressive strategy in the mid 2000’s to invest 50% in the C Fund and 50% in the S Fund over the course of 12 years yielded about 8-9% per year, which is a fairly good return on your investment. However, there is no doubt that the monthly allocation strategy will yield a higher return. And the risk is less than the aggressive buy and hold strategies, such as the example above.

IMPLEMENTATION

The first step in implementing the TSPinvestor strategy is to choose which fund is best – the Basic, Plus or the Apex. At first glance the 19% return of the Plus, or the 23% of the Apex seem obvious choices. However the 12% return of the Basic may be your choice. Look at some historical data to help decide. Either way, pick one and stick to it for the long term.

The implementation of the allocations is done on a particular day of each month. The Basic is allocated on the last business day prior to the 2nd of the month; The Plus and Apex are allocated on the last business day prior to the 10th of the month. The recommended percentage for each fund should be changed within the TSP website for the fund distribution (via interfund transfers) and also future contributions.

the G Fund .. what is it?

The G Fund, or Government Securities Investment Fund, in the Thrift Savings Plan is the lowest gaining, least volatile fund. It will not lose money, but it also doesn’t give much of a return either. However there are months where the G Fund out gains the other funds and is a solid option during a depressed stock market.

The G Fund money is invested in short-term U.S Treasury securities specifically issued to the TSP. The payment of the principle and interest is guaranteed by the U.S. Government. The goal of the fund is to maintain a higher return than inflation. The interest rate is set every month and is based upon a weighted average of outstanding Treasury notes and bonds that have more than four years to maturity. The earnings are entirely based upon the interest income of the security fund.

The comparison of the G Fund to the short-term marketable Treasury securities (T-Bills) is often drawn. However the G Fund earns about 1.8% more annually than the T-Bills. That is because the G Fund earns an intermediate rate, whereas the T-bills earn a short-term rate.

The administrative expenses for the fund is 2.9 basis points, or $0.29 per $1000 account balance.

The 10-Year (2005-2014) annual return was 3.19%, and since its inception in April 1987 the return is 5.43% annually. There is about $200 billion invested in the G Fund.

Both the Plus and Basic utilize the G Fund heavily during times of loss in the stock funds (C, S and I).

TSP Fund Information – March 2015

Analysis of TSPinvestor Plus during the Great Recesssion (2008-09)

In looking at how the TSPinvestor Plus performs during market transitions, it is interesting to analyze how it did so well during that 18 month period from December 2007 through June 2009, now called the Great Recession – a positive 17% annual return, while the C Fund (-27%), S Fund (-22%) and I Fund (-30%) all lost heavily.

There Great Recessionare several months and periods to mark:

  1. June 2008 – the Plus changes the allocation to 100% G Fund prior to the stocks dropping about 7-8% during the month – thus not taking big losses. In the previous months, the Plus was heavily invested in the stocks.
  2. July 2008 – the stock markets rebound for about a 2% gain – and the Plus was 80% back in the stocks to match the 2% gain.
  3. August 2008 through February 2009 – the Plus moves almost exclusively to the G and F funds as the stock market suffers big losses in 6 of the those 7 months. It avoids large losses.
  4. March to May 2009 – the stock market rebounds for large gains – and the Plus was back heavily invested in the stocks and realizes the large gains.

Looking at those periods, it is not difficult to see how the TSPinvestor Plus performed so well.

Again, these are simulated returns using the model and historical data.  Will it translate to future recession periods? I do believe so, indeed.

TSPinvestor Basic November 2015 allocations

The TSPInvestor Basic Thrift Savings Plan allocations for November 2015 are:

G Fund – 67%

F Fund – 30%

C Fund – 3%

S Fund – 0%

I Fund – 0%

Last month’s TSP returns were:

G 0.2%; F 0.0%; C 8.4%; S 5.6%; I 7.1%

This was the highest monthly return for the stocks in quite some time. The C had 7.4% and I had 3.5% in Sep 2013; the S had 7.0% in Oct 2011.

So the TSP Basic has no confidence the market will continue to gain in November 2015 and has most of the investment in G and F funds.

The TSPInvestor Basic has shown a nominal 12% annual return on its monthly allocations, that are based upon historical fund data only.

To implement this allocation, login to your account and change the fund allocations (via interfund transfer) and your new contributions to the recommended percentage.  These usually take effect the next business day. These allocations are meant to be done on the last business day prior to the 2nd of the month.

NOTE:  This was originally published on the 31st of October as a page .. I have copied it to here so it will appear as a blog post.Nov 2015 Allocations

TSPinvestor Plus November 2015 allocations

The TSPinvestor Plus is a nominal 19% annual return. It is allocated the last business day before the 10th of the month.

The recommended Thrift Savings Plan (TSP) allocations for November 2015 are:

G Fund – 10%

F Fund – 24%

C Fund – 12%

S Fund – 54%

I Fund – 0%

This is the first allocation recommendation ever done for the Plus.  I do have historical data and allocations that show the Plus has great potential.  But until it is shown here, recommending an allocation and then realizing the returns, it remains unproven.

Had a recommendation been done last month, it would’ve been 5% G, 13% F, 27% C, 55% S and 0% I. The returns since the 9th of last month were G 0.2%; F (0.7); C 4.4%; S 2.5%; I (0.2) with negatives in parenthesis.  This would’ve resulted in the TSPinvestor Plus return of 2.5%.Nov 2015 Allocations

confirmation of allocating on the 9th

The TSPinvestor Plus is partially based upon economic data that has a release date as late as the 8th of the month.

The development of the Plus model/formula was done using the TSP fund data from the end of the month, not the 9th. I needed to verify that using the returns/gains from the 9th of the month would be nominally the same.

And so I set forth to verify. I computed the TSP monthly gains for each fund on the last business day prior to the 9th (which would allow for reallocation on the 9th). I ran these through the existing model/formula, and was surprised that it actually made the annual return rate improve by 0.5%.

So I am comfortable with allocating the Plus on the 9th of the month.

I might at some point recompute the model/formula based upon the new data – and it may improve the returns. But for now I’m leaving it as is.