TSP is dumping bonds

[sol]

I'm a federal employee who is invested in the TSP Lifecycle funds.  These funds are a diversified mixture of asset classes, are designed to gradually get more conservative over time, and are a decent option for most types of investors.
 
Yesterday all TSP participants received notice of "Updated Lifecycle fund allocations" that gave the following vague description:

As a result of changes in long-term capital market assumptions and a review of the Lifecycle fund asset allocations, the TSP has revised the target asset allocations of the Lifecycle funds.

But there was no description as to how the allocations were changed.  Frantic alarm bells start to go off in my head when someone tells me they are changing my asset allocation without my express permission, so I did a little digging in the internet archives for previous versions of the Lifecycle fund allocation pages and compared them to the new allocations in effect as of today.
 
And what I found?  The TSP is moving everyone out of the F fund and into the G fund, meaning out of bonds and into short term treasuries.  The equity allocations for the the broad market index, small cap index, and international stock index remain unchanged.  They just traded about half of their bond exposure for government securities.
 
This is a broad market motion, effecting millions of people. The F fund holds a reported 23.6 billion dollars in the retirement accounts of federal employees, about half of which was just instantly liquidated.  If I'm doing the math right, it works out to roughly 30% of what the fed is spending on quantitative easing each month.
 
This decision was apparently made by Mercer Investment Consulting, the private firm that manages the TSP lifecycle funds.  I don't know if you should take this as a sign that bonds are going to be a terrible investment for you in the future, but at least one investment company believes that to be true so fervently that they just moved billions of dollars in one day.  Or maybe the move is big enough to depress bond prices and inflate securities?  Or maybe this is an attempt at market timing, an abandonment of their long term asset allocation strategy?  I don't claim to understand the implications, but the move seemed noteworthy to me.

[GoldenStache]

F was up 2.23% YTD, not bad for 3 months in a bond fund.

Do you do 100% lifecycle funds?

[reginna]

Thanks for the information Sol.  Interesting move.

[sol]

Do you do 100% lifecycle funds?

Inside of the TSP, yes we're 100% lifecycle funds.  That's how they're designed to be used.  The theory is that they roll down the efficient frontier as you age, trading long term returns for reduce volatility over time.  Modern portfolio theory suggests that deviating from these ratios by holding one of the other TSP funds out of proportion with the L funds will not generate any additional risk-adjusted return.

They're not perfect, of course.  Federal employees typically have some form of pension, too, which is basically an annuity that serves the same function as bonds in a traditional asset allocation strategy.  As a result, I think the L funds are too conservative for their given age ranges.  They are designed for people without pensions, but only available to people who have pensions.  I have chosen to balance this defect by holding a more aggressive allocation in my Roth IRA and taxable investment accounts.

[GoldenStache]

I think they are far too conservative for the age break downs as well, but I think they are too high in the international fund.  I am doing a 75/S 25/C, I keep an eye on them (tsptalk.com is a pretty good site, quick scroll to the bottom to check the funds) and if the market really starts to crash I will switch to G for a bit before switching back.

I find that I take higher risks in all of my investing because I have the pension.  I still have a lot of time left so maybe that will change down the road.       

[jexy103]

Do you do 100% lifecycle funds?

...
I think the L funds are too conservative for their given age ranges.
...

sol, have you considered choosing the Lifecycle fund for a younger age? For instance, if you are currently in L2040, you could invest in L2050 instead. Since it's designed for younger people, it will be more aggressive than the one you're in.

[sol]

sol, have you considered choosing the Lifecycle fund for a younger age?

Yes, I have considered and implemented that very strategy.  But the proportions are still skewed from what their own MPT suggest is optimal, because the pension effectively increases your exposure to domestic bonds only.  Forward weighting the Lfund target date just moves you up the EV curve for an allocation that is no longer accurate.

To really be consistent with the theory, you should hold an age-appropriate Lfund, your pension, and then the other individual TSP funds besides the chosen L fund and excluding the F fund to get back to the correct asset allocation including your pension.  That's a lot of work, though.  I've instead chosen a more distant date L fund and accepted that this effectively underweights me in a few things (like international stocks) which I then try to hold outside of the TSP, like in my roth and taxable accounts.  Those only get rebalanced annually, instead of daily like the TSP, and it's easier because you still get most of the benefits of the Lfund for a lot less work than building a "correct" Lfund equivalent using the individual TSP component funds.

Or, you know, they could just finally figure out that virtually everyone who has access to the TSP also has some form of pension and adjust the Lfund weights to reflect that.

Now that I say that out loud, I've realized that's sort of what they've done with the re-allocation mentioned in the OP.  If only they had bought C, S, and I instead of G after dumping F, I'd be totally on board with going straight up L.  Man that was a weird sentence.

[dragoncar]

Is there an advantage over rolling your own lifestyle fund with a mix of available funds?  I only looked at TSP offerings once but I remember being pissed about the expense ratios (I don't have a TSP).  I'd personally avoid active fund management like that, but there could literally be any reason they moved out of bonds.

[sol]

Is there an advantage over rolling your own lifestyle fund with a mix of available funds?  I only looked at TSP offerings once but I remember being pissed about the expense ratios (I don't have a TSP). 

I'm not sure we're talking about the same thing.  The TSP is the 401k equivalent plan for federal employees, and it has the lowest expense ratios of any fund investment I've ever encountered.  It's one of the best perks of being a fed.  Vanguard's VTSAX has an expense ratio of 0.05%, a phenomenal deal.  The TSP equivalent C fund has an expense ratio of 0.029%, almost half of what Vanguard charges.

The down side of "rolling your own" L fund from the individual TSP funds is that you lose the automatic daily tax free rebalancing and apportioning of new contributions to maintain the chosen asset allocation.  Maybe not a big deal if you like managing your investments, and if you don't get stuck buying or selling when things are way out of whack.

[dragoncar]

Is there an advantage over rolling your own lifestyle fund with a mix of available funds?  I only looked at TSP offerings once but I remember being pissed about the expense ratios (I don't have a TSP). 

I'm not sure we're talking about the same thing.  The TSP is the 401k equivalent plan for federal employees, and it has the lowest expense ratios of any fund investment I've ever encountered.  It's one of the best perks of being a fed.  Vanguard's VTSAX has an expense ratio of 0.05%, a phenomenal deal.  The TSP equivalent C fund has an expense ratio of 0.029%, almost half of what Vanguard charges.

The down side of "rolling your own" L fund from the individual TSP funds is that you lose the automatic daily tax free rebalancing and apportioning of new contributions to maintain the chosen asset allocation.  Maybe not a big deal if you like managing your investments, and if you don't get stuck buying or selling when things are way out of whack.

Buying and selling when things are way out of whack is referred to as a rebalancing bonus, and some people do it on purpose (although there's no guarantee it will exist going forward).  I don't think rebalancing once a year is really that onerous.  Good to know the fees are low.

[hodedofome]

Guess they are making a bet that rates are going to rise. Only time will tell if they're right. Personally, I'd rather have a thesis and allow the market to confirm my theory before acting on it, but whatever.

[hoppy08520]

This article goes into some depth about the changes:
http://www.fedsmith.com/2014/03/27/changing-allocations-for-tsp-funds/

We have been in a period of very low interest rates for some time, due in large part to actions by the Federal Reserve to buy government bonds and to keep interest rates low. This has been an incentive to invest in stocks and stock prices have gone up significantly.

The Federal Reserve is now cutting back on bond purchases and interest rates may start to go up again. If that happens, the value of F fund shares are likely to decline as there is a correlation between interest rates and bond prices. If interest rates go up, the value of shares in the F fund are likely to go down.

The G fund, on the other hand, is less volatile. The bonds in the G fund are short-term bonds and the rate changes each month with bonds that are just being issued specifically for the TSP. In some investing environments, an investor is likely to have a better return in the F fund because interest rates paid to investors may be higher and the value of the fund will go up if interest rates drop.

I'll also make this point: if you look more carefully at the allocation changes, you'll see that the bigger shifts from F Fund to G Fund were in the more "far out" funds (L 2050, L 2040). The funds for older folks (L Income, L2020) already had a higher G:F ratio. But the L2050 and L2040 have low fixed income allocations anyway, so a big percentage change in a small slice of the pie is not really a huge deal.

Personally, I model the fixed-income portion of my own portfolio off the TSP Board's recommendations. There are many opinions out there on what role the G Fund should play in your portfolio, and I happen to follow the advice of the TSP Board since I don't know what else to believe. So, I have shifted part of my F Fund allocation to the G Fund. My overall portfolio is 70/30 stocks/fixed-income, and within fixed-income I was around 70/30 G Fund/F Fund. I recently shifted to 80/20 G/F. That change is a 3% shift in my total portfolio from F Fund to G Fund.

My asset allocation philosophy (based on what I've read) is to "take your risk on the equity side". In other words, rather than speculate on riskier higher-yielding bonds (junk bonds, etc.), just hold the safest fixed-income you can (which is the G Fund) and instead take risk on the stock side of your portfolio, either by shifting more of your portfolio to stock funds, or holding riskier stock funds (small, value, etc.) or a combination of both.

[jexy103]

Or, you know, they could just finally figure out that virtually everyone who has access to the TSP also has some form of pension and adjust the Lfund weights to reflect that.

Just because federal employees have access to a pension, it doesn't mean they are ever going to be able to eligible for it. I'm 29 with 1.5 years of federal civilian service; my Minimum Retirement Age (MRA) is 57, which means I'll need to be a GS employee for another 28 years or something very un-mustachian/anti-FIRE before I'm eligible to retire with their pension (possibly four years less from active duty service or at 50 with 20 years of service for their "Early" Retirement provision). I don't know what my life looks life 18 months from now, let alone 24-28 years from now. It is highly likely that I'll leave the GS system when I leave my current location in 6-24 months. At this point, I have my eye on getting my 1% vested at the three-year mark, never mind a pension. :-) I imagine a lot of military spouses feel the same- trying to get the years of service and MRA while moving every few years is a challenge at best. And not all military members do or can stay in the full 20 years for the active duty pension; I wouldn't factor a military pension into my AA until about year 18 of service.

[sol]

Just because federal employees have access to a pension, it doesn't mean they are ever going to be able to eligible for it.

If you accrue a total of three years of federal service, you are eligible.  None of us get to claim a pension until our MRA, but you can work three years from ages 26 to 29, quit federal service, and then collect your pension at your MRA.  It's just a very small pension.

I'll need to be a GS employee for another 28 years or something very un-mustachian/anti-FIRE before I'm eligible to retire with their pension

This is a common misconception among federal employees.  You can withdraw from federal service at any point and still keep the pension benefits you have earned up to that point.  I don't intend to work past age 40 and I'm counting on my pension at ate 62 to provide a significant portion of my retirement income, since my expenses in retirement will be so much lower than my income while working.

I imagine a lot of military spouses feel the same- trying to get the years of service and MRA while moving every few years is a challenge at best

They actually just changed the rules on this a few months back specifically to make it easier for military spouses.  All of your partial credit is now cumulative and counts towards both your vesting and your payout.

[Nords]

And not all military members do or can stay in the full 20 years for the active duty pension; I wouldn't factor a military pension into my AA until about year 18 of service.

I know that the rough percentage of military veterans receiving a pension is about 17% (from a low of 8% for Marines to over 30% in the Air Force).

Are there public statistics on federal civil-service pensions?  It'd be interesting to see what percentage vest in a retirement, the median amount, and what contribution came from buying into the civil-service pension calculation from military service.