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Citi and Research Affiliates Launch Fundamentals-based Global Corporate Bond Index

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.

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