After the Thrift Savings Plan fund prices are processed through the 9 TSP Pilot fund timing systems every trading day, the resulting equity curves are then additionally processed through a series of selection criteria. The idea here is to determine the relative strength of the risk adjusted returns for each of the TSP funds and systems. We then use the final optimized fund timing and fund selection results to develop the specific Thrift Savings Plan fund balance and allocation percentages for our subscribers in our periodic updates.
When notified by TSP Pilot of the newest fund balance and allocation update percentages, subscribers then simply plug those final percentages directly into the TSP website for their accounts. The TSP Pilot fund selection process further increases the returns of subscriber TSP accounts over fund timing alone by allocating the largest percentage commitments to those funds having the highest risk adjusted returns and momentums--and therefore the greatest prospect of future profits.
Most of TSP Pilot's fund selection criteria are based on the recently developed Dominant Market Theory (DMT). TSP Pilot's DMT fund selection criteria are:
The Dominant Market Theory is an extension of the work presented in 1997 by Don Beasley, an important mutual fund money manager. The theory supports two basic conclusions about dominant market environments based on the relative strength of the OTC Composite Index to the NYSE Composite Index:
- The most severe declines take place while the NYSE is the higher relative strength, i.e. dominant market.
- Both OTC and NYSE markets are strong when the OTC is the dominant market.
The second conclusion indicates that most diversified funds will do well in a market environment in which the small caps are dominant. Under this theory the bellwether Russell 2000 Index (RUT-I) needs to be in an uptrend for the general investment environment to be considered favorable. The DMT conclusion is that there are identifiable market environments that are highly productive and relatively low in volatility and other environments that are much lower in productivity and much more volatile.
The DMT supports the notion that there are identifiable market environments exhibiting the desirable mutual fund investment characteristics of high productivity and low volatility and often lasting for months at a time.
It can be shown that in a market in which the Russell 2000 is dominant most funds and portfolios will chalk up almost all of their gains for the year. Even the S&P500 is 3 times more productive during such strong small cap markets. Clearly, tracking the trend of the small cap indices has value even if you invest primarily in large cap mutual funds since on average large cap funds are 5 times more productive and less than half as volatile during strong small cap (RUT-I) markets. Nearly all stock funds and sectors are capturing their entire net annual returns or more during the 60% of the time that the small cap markets are in an uptrend.
During the remaining 40% of the time those funds and portfolios will go nowhere or even suffer losses. Since the Russell 2000 is only dominant some 60% of the year, the theory indicates that bond fund positions are often the best choices for the remaining 40% of the time. Since the market cycles in which the Russell 2000 is dominant are interspersed irregularly throughout the year, a number of RUT-I based indicators are often used to make such determinations.
It is through the use of those and similar DMT indicators that TSP Pilot makes many of its Thrift Savings Plan fund allocation decisions. Since the DMT allows portfolios to remain invested in the safer, less volatile bond portfolios, such as the G and F Funds, the total risk exposure of the TSP Pilot Portfolios is reduced substantially while still providing for above market returns.
Since the intent of the TSP Pilot Portfolio is to be invested only during those productive market environments under the DMT, using the Sharpe ratio, NCAlpha, RSI and other risk-adjusted metrics to find the best choices among the Thrift Savings Plan equity funds (C, S, I Funds) will help to ensure that the plan participant remains 100% invested in the strongest funds through the entire market cycle.
The non-Correlated Alpha (NCAlpha) represents the "productivity" of a fund or portfolio—how much “bang for the buck” you get for a given level of risk versus that provided by a benchmark index. The “father” of NCAlpha, Werner Ganz, expresses it as
The Sharpe Ratio demands that market returns come from something other than increasing volatility. Simple arithmetic will show that a 50% increase in returns created by a 50% increase in standard deviation is a loser. This ratio can be used as the basis of a ranking system that measures the fund manager’s performance more than it measures the fund’s performance.
