New index offers higher quality, lower risk access to investment-grade corporate bond market
NEWPORT BEACH, Calif. & LONDON--(BUSINESS WIRE)-- Citi and Research Affiliates have launched a new global investment-grade corporate bond index based on fundamental measures. The new smart beta solution offers a transparent means of implementing credit portfolios.
“Traditional bond indices, which give the largest weights to the biggest debtors, are great tools for benchmarking performance but we think they are suboptimal as the basis for investment funds,” said Rob Arnott, chairman and chief executive officer of Research Affiliates, LLC. “We believe there is a better way to construct bond indices for investment purposes.”
The Citi RAFI World Corporate Investment-Grade Bond Index is based on the RAFI® Fundamental Index® concept developed by Research Affiliates, LLC. Research Affiliates is the global leader in developing smart beta solutions, with more than $118 billion managed worldwide based on its Fundamental Index equity solutions. The new corporate bond index is available for licensing from Citi.
“The demand for alternatively weighted indices continues to grow,” said Richard Burns, global head of The Yield Book and Citi Fixed Income Indices. “Citi is pleased to further our relationship with Research Affiliates and extend the fundamental weighting concept to investment-grade bonds in the corporate sector. This index will provide the opportunity for the creation of investable products, offering investors exposure to this sector in a unique way.”
The index offers a transparent, rules-based foundation for investment that has low implementation costs, high capacity, and provides broad, diversified access to the fixed income markets. The index has generated higher risk-adjusted returns to comparable market value-weighted bond indices, largely due to lower volatility, based on historical simulations. The index values are calculated and published by Citi using the Fundamental Index methodology provided by Research Affiliates.
“Our research reveals that investors’ reach for yield is often not properly compensated,” said Shane Shepherd, senior vice president and head of fixed-income research for Research Affiliates. “This new index offers lower credit risk, lower volatility, and better risk-adjusted returns over full market cycles than traditional market value-weighted indices.”
The index uses two factors in weighting bonds in the portfolio: long-term assets, which represents the portion of assets that long-term bondholders have a claim on, and cash flow, which reflects debt service capacity. Weighting by long-term assets systematically underweights companies with high leverage and overweights low leverage companies, while weighting by cash flow systematically underweights companies with low debt coverage and overweights those with high debt coverage. In addition, financial ratios are used to reduce exposure to companies that are more susceptible to downgrades.
The new index is the latest offering in the Citi RAFI Bonds Index Series. Other indices in the series, which was launched in 2012, cover sovereign developed markets and sovereign emerging markets local currency debt. Further information about the index series can be found on Citi Fixed Income Indices website at http://www.yieldbook.com/m/indexes/citi-rafi-bond-index-series/. Data on the Citi RAFI World Corporate Investment-Grade Bond Index also can be found on Bloomberg; the ticker symbol is CRFWCIGU.
Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management.
CITI is a registered trademark and service mark of Citigroup Inc. or its affiliates, is used under license by Research Affiliates, LLC and is used and registered throughout the world.
About Research Affiliates, LLC
Research Affiliates, LLC is a global leader in smart beta and asset allocation strategies. Dedicated to creating value for investors, the firm seeks to have a profound impact on the global investment community through its insights and products. The firm is built on a strong research base, led by Rob Arnott and Jason Hsu, and delivers solutions in partnership with some of the world's leading financial institutions. Research Affiliates was founded in 2002 and is based in Newport Beach, California, USA. As of December 31, 2013, about $166 billion in assets are managed worldwide using investment strategies developed by Research Affiliates.
Fundamental Index®, the non-capitalization method for creating and weighting an index of securities, is patented and patent-pending proprietary intellectual property of Research Affiliates, LLC. (See all applicable US patent and pending patent disclosures located at http://www.researchaffiliates.com/Pages/legal.aspx#d, which are fully incorporated herein.)
Source: Research Affiliates, LLC