Citi RAFI index to weight nations by economic factors, debt service

By Ashley Montgomery

Kansas City, Kan., Jan. 23 - Citigroup Inc. and Research Affiliates, LLC announced the launch of the Citi RAFI Bond index series, a new "sovereign bond index series based on measures of size," according to a news release.

"Mounting debt and deficits combined with aging demographics pose a 3-D hurricane to developed nations," Rob Arnott, Research Affiliates chairman and chief executive officer, said in the release. "Existing capitalization-weighted bond indices tend to overweight the largest debtors, without regard to whether they deliver a yield commensurate with the risk they are taking.

"It seems to us that weighting a bond index in proportion to underlying economic scale makes more sense than weighting in proportion to the outstanding debt. This new investable bond series will help investors find a more optimal way of investing in broadly diversified and transparent bond portfolios."

The index is the first to apply the Research Affiliates Fundamental Index methodology to sovereign debt, according to the release. Each county is weighted according to GDP, energy consumption, population and rescaled land area. The companies said this approach weights the countries according to their ability to service debt.

For comparison, the new index weighs the United States at 21.77% and Japan at 8.9% while the equivalent sovereign markets capitalization index puts Japan at 32.93% and the United States at 27.66%.

Citi is a financial services company based in New York.

Research Affiliates is a Newport Beach, Calif.-based investment and asset services company.

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