RAFI Strategies

RAFI Bonds

RAFI bond indices use a transparent rules-based methodology to weight bonds using economic measures of company or country size and are thus tilted toward higher credit-quality firms or countries with lower risk of downgrade or default.

At a Glance


 

Emphasizes debt-service capacity

Capitalizes on observable inefficiencies

Focuses on implementation

RAFI™ Bonds strategies sever the link between debt and weight.

RAFI Bond indices are based on a transparent rules-based methodology that weights bonds using economic measures of company or country size. The results are indices correlated with debt service capacity—tilted toward higher credit-quality firms or countries with lower risk of downgrade or default.

Reduces potential overexposure to lower-quality firms or countries.

Traditional bond indices, which are weighted by the amount of debt outstanding, may not always be optimal for passive solutions. In traditional indices, the most indebted issuers receive the largest index weights. Weighting according to the debt appetite of bond issuers can leave investors overexposed to firms with poor credit quality, without compensation for the added risk they take on.

Thoughtfully designed to deliver for investors

Emphasizes debt-service capacity
Fundamental measures are used to sever the link between outstanding debt and portfolio weight. This approach avoids overexposure to companies or countries with high debt burdens, resulting in higher credit quality and improved risk-adjusted returns.

Capitalizes on observable inefficiencies
RAFI Bonds utilizes a systematic rebalancing process that takes advantage of mean reversion in credit spreads—buying bonds that are inexpensive and selling bonds that have increased in price. By taking advantage of value opportunities, the portfolio seeks to deliver higher returns.

Benefits the investor
The beneficial attributes of passive indexing—namely, low cost, transparent, rules based, and highly implementable—are preserved.


 

Investment Strategies

RAFI Bonds US Corporate is an index series that weights a company’s debt according to fundamental measures of a firm’s debt-service capacity—book value of assets, gross sales, gross dividends, and cash flow—rather than the amount of debt outstanding. This is intended to result in an index with lower credit risk, lower volatility, and better risk-adjusted returns over full market cycles.

Citi RAFI World Corporate Investment Grade Bond is an index series that weights a company’s debt according to fundamental measures of a company’s debt-service capacity—namely, long-term assets and cash flow—instead of the amount of debt outstanding. This process removes firms that may be vulnerable to future bond rating downgrades by tilting the index toward bonds from firms with higher debt coverage and consequently lowers the index’s aggregate leverage.

Citi RAFI Sovereign Bond is an index series that weights a country’s debt instruments according to fundamental measures of a country’s size relative to the world economy—specifically, GDP, population, energy consumption, and rescales land area—rather than amount of debt outstanding. This results in greater diversification, less exposure to debt-laden countries, and the potential for better long-run risk-adjusted returns.

 


 

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