Research Affiliates has launched a new index suite combining its trademark Research Affiliates Fundamental Index (RAFI) methodology with metrics for environmental, social and corporate governance (ESG) screening.
Vitali Kalesnik, partner and head of equity research at Research Affiliates.
The traditional RAFI methodology weights companies based on fundamental measures of company size (as measured by accounting variables) rather than their market capitalization.
The accounting variables used include de-levered sales, cash flow, dividends, and book value.
The new strategy includes traditional ESG metrics, while also adding on ratings for financial discipline and gender diversity.
The financial discipline score uses metrics that are associated with generating sustainable long-term performance. For the diversity score, metrics are used to determine a firm’s commitment to gender diversity, with particular attention paid to women in management, in the C-suite, and on company boards.
A constituent’s weight in the new RAFI ESG indices is based on a composite score which factors in the traditional RAFI score, ESG score, financial discipline score, and diversity score.
“We wanted to deliver a transparent, broadly diversified, and customizable ESG strategy without sacrificing returns,” said Vitali Kalesnik, partner and head of equity research at Research Affiliates.
“Our research shows that we can achieve this objective by combining our Fundamental Index approach to investing with a broader set of ESG measures—specifically, by including measures of financial discipline and diversity. RAFI ESG addresses the needs of investors seeking to make an ESG impact while preserving the potential for added returns.”
The new index suite includes three indices: the RAFI ESG Developed Index, the RAFI ESG Europe Index, and the RAFI ESG US Index, providing exposure to global developed, European developed, and US companies respectively.
Similar to the firm’s existing index line-up, the new RAFI ESG strategies aim to generate excess returns versus the market-cap weighted benchmark through a systematic, contrarian rebalancing approach.
Research Affiliates plans to launch a stand-alone RAFI Diversity strategy at a later date in 2018.