Are there parts of the economic cycle where the strategy underperforms the cap-weighted index?
In looking at the performance of RAFI corporate fixed income during different economic cycles, we examined performance during bull and bear markets and during periods of rising and falling interest rates. While RAFI bonds did not underperform during any of the periods, outperformance was far more pronounced during bear markets and periods of falling interest rates. Outperformance during these periods of market distress is most likely attributable to the quality bias of the RAFI strategies in relation to their cap-weighted counterparts.
