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Research Affiliates Awarded Patent for Fundamental Index Investment Methodology
Wednesday, November 18, 2009
Award-Winning Methodology Continues to Outperform Traditional Cap-Weighted Indexes
Newport Beach, CA -- Research Affiliates LLC today announced that the United States Patent and Trademark Office has approved the issuance of U.S. Patent No. 7,620,577 for the company's innovative Research Affiliates Fundamental Index® ("RAFI®") indexing methodology, which selects and weights securities using fundamental metrics of company size rather than by market capitalization.
"We are deeply gratified that the United States Patent and Trademark Office has awarded us this patent," said Robert Arnott, chairman and founder of Research Affiliates. "Our business model differs from most registered investment advisors, in that our core business is developing and licensing new product ideas. So, unlike most asset managers, we have only our ideas to sell; we can protect these ideas as trade secrets or with patents. As we want to encourage wide use of these ideas, we favor the latter.
"Fundamental Index® products have been a tremendous success by every significant measure. Over 20 licensed affiliates use the RAFI® concept to manage products that exceed $25 billion in assets under management, after less than five years from publication of our research. The Fundamental Index® methodology has earned prestigious industry awards, and now Research Affiliates has been granted a patent on its innovative indexing method." Mr. Arnott added, "above all else, we're pleased that the Fundamental Index® approach has produced results, on live assets, that are consistent with our research and have directly benefited investors all over the world."
FTSE RAFI® Index Series
The Fundamental Index® methodology was developed to address the structural return drag created by traditional capitalization-based indexing strategies, which systematically overweight overpriced securities and underweight underpriced securities. According to Research Affiliates' original work on the Fundamental Index® concept, the historical return drag associated with this structural flaw is typically 2% to 4% per annum, globally.
Research Affiliates partnered with FTSE to create the FTSE RAFI® Index Series in 2005. Index constituents are selected and weighted using four fundamental factors, including total cash dividends, free cash flow, total sales and book equity value. Presently, there are well over 100 FTSE RAFI® indexes, covering a broad range of global developed and emerging equity markets.
Mr. Arnott commends the indexing community, but points out an Achilles' Heel in conventional indexes, saying "index funds have served investors well for over 25 years, providing broad stock market exposure at a fraction of the price of actively managed funds. But for all their benefits, capitalization-weighted indexes suffer a structural flaw that leads to overweighting overpriced securities and underweighting underpriced securities. This failing came to a head in the 2000-2002 bear market where a relatively few stocks, notably in the technology sector, led to woeful index fund returns. The Fundamental Index concept cures this deficiency while preserving the many and substantial advantages of index fund investing. Our research shows consistent, significant long-term outperformance of the Fundamental Index ® approach compared to applicable cap-weighted indexes, no matter where the equity market."
Through October 31, 2009, FTSE RAFI® indexes have outperformed their market capitalization-weighted counterparts in 41 of 45 countries, since the launch date of the indexes. The FTSE RAFI® All World 3000 has outpaced the MSCI All Country World Index® by some 4.8% per annum since FTSE first introduced these indexes in November of 2005.
Through October 31, 2009, the FTSI RAFI® 1000 Index, which comprises large cap U.S. equities, outperformed the S&P 500® by 14.39% in 2009, by 1.47% annualized for three years, and by 1.94% annualized since inception of the index. The FTSE RAFI® Developed ex US 1000 Index, which comprises large cap developed foreign market stocks, outperformed the MSCI EAFE Index® by 12.71% for 2009, by 3.48% over three years annualized, and 3.18% since inception. More information on the performance of popular FTSE RAFI® indexes and comparable indexes is available online from Research Affiliates at: http://rallc.com/rafi/performance.htm.
About Research Affiliates
Research Affiliates, a global leader in innovative investing and asset allocation strategies, has operated worldwide from its base in California since 2002. Dedicated to solving complex investment issues, the firm creates innovative strategies that respond to the current needs of the market. Leveraging its strong research focus, Research Affiliates distributes products in partnership with some of the world's leading financial institutions. These affiliations take the form of direct asset management, sub-advisory services, and licensing agreements.
The firm is majority employee-owned and employs a team of over 40 dedicated professionals. Research Affiliates offers advisory services, sub-advisory services, and custom solutions to meet a client's investment needs.
Over $43 billion in assets are managed worldwide using investment strategies developed by Research Affiliates, as of September 30, 2009.
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