Thread: Even more on the I fund

I did some digging on the I fund to try to answer some of the questions that we've all brought up here over the last few weeks. Here's what I've come up with. Be forewarned, this will likely be a brutally long and potentially dry post.

Morgan Stanley started an index called the EAFE. More recently, Barclay's started a fund to track that indexcalled the MSCI EAFE Index Fund. Our I fund is invested in this fund. The index can be tracked from the Morgan Stanley website under EAFE. The fund can be watched by using the ticker symbol EFA. Differences in the two can be attributed to several things. This from the TSP website:

The securities lending program of the Barclays EAFE Index Fund produces income that adds to the returns of the I Fund.

And:

A small portion of the Barclays EAFE Index Fund is invested indirectly in futures contracts to provide liquidity.

Additionally there are normal management fees associated with the fund but not the index.

There is also a ticker symbol, EFV, that we have discussed. This is the ishares Trust Index. According to a Barclay's rep I spoke with, this index represents the "underlying trading value" or the total of all the net asset values of the various stocks in the EAFE index. Way over my head but suffice it to say that it is not a fair reflection of the EFA fund or our I fund.

Next to the issue of the dollar's effect on the fund. The TSP website has this to say:

However, the I Fund also carries the risk of foreign currency fluctuations. The stock prices of the companies in the EAFE index are expressed in the currency of each respective country and then converted to U.S. dollars to determine the value of the EAFE index. Thus, the value of the EAFE index will rise as the value of the U.S. dollar falls — and fall as the value of the U.S. dollar rises — relative to the currencies of countries with companies that are represented in the EAFE index.

A Barclay's rep (not the first guy) had this to say in an e-mail he sent me:

Because each Index Fund's assets are generally invested in non-U.S. securities, and because a substantial portion of the revenue and income of each Index Fund is received in a foreign currency, the dollar value of an Index Fund's net assets is reduced by declines in the value of the relevant foreign currency relative to the dollar and are positively affected by increases in the value of that currency relative to the dollar. Because each Index Fund's net asset value is determined on the basis of U.S. dollars, you may lose money if you invest in any Index Fund if the local currency of a foreign market depreciates against the U.S. dollar, even if the local currency value of an Index Fund's holdings goes up.

They are both saying the same thing and it's nothing new to us here on this board. Unfortunately neither explains to what extent the dollar's price effects the fund's price. Furthermore it's already taken into account when we look at the EFA ticker during the day so it's not like we need to try to calculate this effect ourselves.

Now onto timing. Lucky thought that maybe he could take advantage of a good day in Japan's markets but moving his money into the I fund the next day. The Barclay's rep (the phone guy) explained to me that when the various markets close in our early morning hours, those prices will be reflected in that day's EFA closing price. He also said that while those markets are closed but the EFA is still trading over here, the price is driven largely by news and futures prices. In other words speculation, like Tom has already pointed out to us. The other Barclay's rep (the e-mail guy) explains it like this:

The pricing of the internationaliShares funds use fair value pricing. Essentially, the fund does notjust usethe closing prices of its stocks, but rather it estimatesthe NAV based on models of what a stock's price would be if the international exchange were open. Fair value pricing is designed to prevent the late trading scandals that have surfaced in the fund industry.

More specifically, the iShares prices fluctuate throughout the trading hours based on the value of those underlying securities that make up each particular fund. For the Far East Funds, the opening prices reflect the closing prices of the securities that trade on those foreign Stock Exchanges. When those foreign Stock Exchanges areclosed, the pricing of the iShares Funds primarily reflects price discoveryand currency fluctuations. Price discovery is the process by which an auction market sets values based upon all that is currently known about a security. The specialists/market makers will set the best outbid/ask based onnews and announcements of those underlying securities that cameafter their market closed. The price of the ETF share is updated throughout the day, and is determined by competitive market forces.

I liked phone guys explanation better because it was easier to understand.What it means to us is if the dollar is getting hammered during the overnight hours and the U.K. and Japan are both off to the races, we know that the EFA and our I fund are likely going to do well that day, but it is already way too late for us to take advantage of it.
Lastly, I want to address the slight differences in daily gains/losses between the EFA and our I fund. The TSP website has this to say about it:

The F, C, S, and I Funds are intended to track the performance of their respective indexes; however, from month to month, the returns of the TSP funds may differ from the returns of these respective indexes. There are three major reasons for these differences:

• The returns for the TSP funds are shown after accrued TSP administrative expenses, investment management fees, and trading costs have been deducted. The returns of the corresponding indexes do not reflect any such expenses.
  
• Some TSP money is invested in G Fund securities while awaiting investment in one of the four related index funds, or to make cash available to pay loans and withdrawals from the TSP.
  
• There may be differences between the returns of the related index funds in which the TSP funds are invested and the indexes themselves.

However I noticed that the differences, while not huge, were certainly more than the C or the S was experiencing. The Barclay's rep (e-mail guy) offered this:

The Barclays Global Investors funds that are in the Federal Governments' Thrift Savings Plan are not the same as the iSharesFunds. Even though there isafund that tracks the performance of the MSCI EAFE Index in the Thrift Savings Plan, it is not exactly the same fund as the iSharesMSCI EAFE Index Fund (EFA). The performance between the two funds may differ because of differences in the holdings and expense ratios associated with the funds.
I hope I didn't put anyone to sleep. I also hope that presented this in a way so as to be helpful, or useful, or at least interesting to a few of you.

Dave