Does the strategy make duration or credit bets?
RAFI fixed income strategies are not designed to make either credit or duration bets. However, RAFI corporate bond strategies will tend to have higher credit ratings than their market-weighted counterparts. By basing issuers’ weights on the fundamental factors, RAFI strategies are explicitly weighting issuers by variables that impact issuers’ ability to repay debt. If all else is equal, a firm with relatively high cash flow will be better equipped to repay a given level of debt than a firm with relatively low cash flow. In contrast, traditional bond indices weight issuers solely by the market value of each firm’s outstanding debt with no regard to underlying firm fundamentals.
RAFI fixed-income strategies are not designed to make either credit or duration bets. However, RAFI corporate bond strategies will tend to have higher credit ratings than their market-weighted counterparts. By basing issuers’ weights on the fundamental factors, RAFI strategies are explicitly weighting issuers by variables that impact issuers’ ability to repay debt. If all else is equal, a firm with relatively high cash flow will be better equipped to repay a given level of debt than a firm with relatively low cash flow. In contrast, traditional bond indices weight issuers solely by the market value of each firm’s outstanding debt with no regard to underlying firm fundamentals.
