The Alternative Answer: The Nontraditional Investments That Drive The World's Best-Performing Portfolios

The Alternative Answer: The Nontraditional Investments That Drive The World's Best-Performing Portfolios

Book Review: The Alternative Answer: The Nontraditional Investments That Drive The World’s Best-Performing Portfolios by Bob Rice.

Bob is the Alternative Investments Editor for Bloomberg TV and is the Managing Partner of merchant bank Tangent Capital, and serves on boards of investment management firms with over $2 billion of ‘Alternative’ assets under management.

The Alternative Answer is divided into multiple sections:

The Alternative Manifesto
Major Alternative Strategies
Major Alternative Structures
Higher, Inflation-Protected Income (Job 1)
Broadening the Base for Risk Reduction (Job 2)
Long-Term Growth Enhancement (Job 3)
Purchasing Power Protection (Job 4)
Big Picture
At the Dealership
References/Glossary

Manifesto:  There are four mandatory tasks for investments:

  • Job 1: Generate income that is greater than typical fixed income (bonds), with focus on income that rises with inflation.
  • Job 2: Reduce overall risk by diversifying broadly across different strategies and asset classes.
  • Job 3: Enhance long-term growth with opportunities that have more upside than traditional investments (stocks).
  • Job 4: Protect Purchasing Power from inflation, currency devaluation and panics.

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Thrift Savings Plan Guidance for Federal Furlough

Thrift Savings Plan Guidance for Federal Furlough

You all know GubMints is a big fan of the TSP.  There was lots of TSP info that got buried in the news cycle last week-  Some good, some not so good.  The not-so-good is that it appears TSP is preparing to duplicate some of the functions of the Census Bureau.

TSP released results of a 4-Year study of Participant Behavior and Demographics.

Here are the key findings of the 2006-2010 TSP study: Continue reading

Thrift Savings Plan Guidance for Federal Furlough

GubMints is a huge fan of the TSP, so I eagerly downloaded this week’s podcast interview with the TSP Executive Director.  Here are some of the highlights of the discussion.

 Breakdown of the TSP:

  • 4M total participants
  •  1.3M of whom are separated/retired
  •  ~ $330B in assets invested the TSP
  •  Average FERS TSP account value is  $88,000
  • 43% of TSP assets are invested in ‘G’ Fund (1st place by asset size)
  • 23% of TSP assets are invested in ‘C’ Fund (2nd place by asset size)
  • Other fund (S-, F-, I-Fund) allocation percentages are smaller  but were not mentioned.

 Other TSP notes:

Since the October 2012 Roth TSP rollout, there are 73,000 participants so far.  Many of them are active military (Yay!)

Roth TSP has been implemented by all ‘large’ payroll offices, but DFAS has not completed to rollout to National Guard/Reservists.   Rollout to NG/Reserves should take place in 2013.

The TSP Executive Director re-iterated that the Treasury Secretary borrowing from the ‘G’ Fund is legal, has already been done 10 times in the history of the TSP, and that each and every time the TSP ‘G’ Fund has been made whole (as required by law).

 GubMints Analysis of the above TSP figures:

1) The $88K account balance per TSP participant seems low at first glance.  Let’s plug in some numbers. Given:

  • The average FERS employee age is 47.
  •  The “average public sector employee tenure” (per the BLS) is roughly 8 years .
  •  The average FERS salary is 90k, and
  •  Assume all FERS TSP participants save 10%/year of salary (employee defers 5% of salary and takes the maximum TSP ‘matching contribution’ of  5%).
  • Assume an average rate of return of a balanced fund is ~5% per year (we assume that with 43% of TSP assets invested in the ‘G’ Fund, the investment return behaves like a 50% stock/50% bond ‘balanced’ mutual fund).

THEN grab your HP-12C calculator (or use the 12C Calc app on your smartphone):

 90,000 [Enter] .1 X [Enter] [PMT] ;  8 [n];  5 [i];  0[PV];     [FV] = 85,942

 … well, I guess an average $88k balance per FERS employee is not that far off.

 

2) 43% of assets are in the ‘G’ Fund?  Wow.  Are we Feds that paranoid about the future outlook of the private sector?

Let’s assume the 1.3M ‘separated’ TSP participants are retired, living off income from the ‘L Income’ Fund, which is 74 % ‘G’ Fund:

The allocation of ‘G’ Fund assets attributable to TSP retirees is:

  (1.3M / 4M) X 74% =  .24  in ‘ G’ Fund assets, from separated participants alone

 Let’s assume the remaining 2.7M participants are of ‘average’ public sector employee age  at ~45 yrs old, invested in the Lifecycle fund that matures when they are projected to reach age 65 (~ L 2030), which is composed of 23% ‘G’ Fund.

The allocation of ‘G’ Fund assets attributable to active FERS employees and active military are:

(2.7M / 4M) x 23% = .16  in ‘G’ Fund assets, from wage slaves.

 Adding the G Fund allocation of TSP retirees + working stiffs is

 .24 + .16 = 40%.

Ok, pretty close to the 43% stated ‘G’ Fund allocation, so the math checks once again.  Once you also factor in that a ‘mature’ account is likely to have a higher balance than an ‘average’ working employee still accumulating TSP funds for retirement, this is probably enough to tilt the scales the additional 3% in favor of ‘G’ Fund allocation.

 

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(c) 1999 20th Century Fox

Post Update 2/26/2013: TSP Funds made Whole by the Treasury Dept-  ‘G’ Fund ‘raid’ is over (for now).

(c) 1999 20th Century Fox
‘Whassup, G?’

Recently the TSP Director issued a statement reassuring TSP members that their investments in the G Fund are safe, and that any short term borrowing performed by the Treasury as a part of its ‘extraordinary measures‘ in dealing with the debt ceiling will not affect TSP participants.

He referenced the recent GAO report reviewing the recent raid on the G Fund.

For those who do not wish to read all 39 pages of the GAO report, the key findings are:

  • G Fund investors during the previous ‘raid’ were made whole, and that the Treasury Department borrowing against the G Fund is legal as “required by subsection 8438(g) of title 5, United States Code” (page 19).
  • Treasury Yield spreads drop during the ‘raid’ periods (page 22).

When yield spreads drop, it gets more expensive for the Treasury to borrow.   So while the effect on the TSP G Fund investor is negligible, the overall effect on the U.S. Taxpayer is increased cost.

 

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