The Fundamental Index methodology is a unique approach to portfolio construction, in which company size, and therefore its index weight, is not made on the basis of price or valuation, but by fundamental factors; such as cash-flow, book value, dividend yield and sales.
Capitalisation weighted indices overweight overvalued securities and underweight undervalued securities. A RAFI® (Research Affiliates Fundamental Index) index avoids this problem, while retaining the benefits of index investing: full market representation, diversification, capacity, high liquidity and low turnover.
RAFI indices have outperformed their capitalisation-weighted counterparts by over 250 basis points per annum. Enhanced RAFI further improves the methodology, adding significant value through systematic accounting screening and active re-weighting/rebalancing.
Through a co-operation with GES Investment Services, IPM RAFI funds are screened for compliance with international conventions and guidelines on environment, human rights and business ethics. Non-compliance is dealt with through a combined engagement and exclusion process.
IPM also incorporates proxy voting according to best governance standards into the IPM ESG programme, through an agreement with the RiskMetrics Group.
At present, the following IPM RAFI Funds are currently in place: Global, Global GBP, US, Europe, Japan, and Emerging Markets. Others can be established upon client request.
Examples of Fact Sheets are attached below.
A Q2 RAFI commentary featuring Rob Arnott can be viewed here.