RAFI Fundamental Index

​RAFI Fundamental Index is Research Affiliates' breakthrough solution for smart beta investing in equities.
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Markets are not always efficient

Look at stock prices during the Tech Stock Bubble of the late 1990s and its subsequent deflation and the nightmarish collapse of banking stocks during the Global Financial Crisis. Capitalization-weighted equity indices incorporate these inefficiencies, overweighting overpriced stocks and underweighting undervalued stocks. These inefficiencies lead to a drag on returns of about 2% a year in developed markets and more in less efficient markets, according to our research.

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Potential outperformance and passive benefits

In contrast, RAFI Fundamental Index equity strategies select and weight securities by their fundamental measures of size. They offer the opportunity to achieve superior performance while retaining the benefits of traditional passive investing—broad market exposure, diversification, liquidity, transparency, and low cost access to equity markets.

Dynamic value and size tilts

Fundamental Index strategies have a value tilt and a slight small-cap tilt. These tilts, however, are dynamic: When value stocks are out of favor and thus are cheap, Fundamental Index strategies tend to increase their allocation to deep value stocks. This phenomenon was vividly displayed in March 2009 when financial, industrial and consumer discretionary stocks were priced at bargain-basement levels. When value is in favor, the value tilt is much milder because these stocks tend to be priced higher. Rebalancing into unloved stocks and out of the most popular stocks—which we call "contra trading"—provides the majority of RAFI strategies' added value.

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RAFI equity strategies:

 

RAFI Fundamental Index
These strategies are appropriate for core equity portfolios. They can be used as an alternative to traditional index funds and as a complement to active management. FTSE and Russell, leading global index providers, calculate respective index series using the Fundamental Index methodology. The index series are available for U.S., global, emerging markets, and many individual countries.

Long/Short
The RAFI US Equity Long/Short Index offers an absolute-return option in the RAFI series of indices. The index has produced equity-like returns that are uncorrelated to equities, fixed income, and even other absolute-return strategies at somewhat lower risk levels, based on simulations. Please see the factsheet for more information.

 

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