RAFI Fundamental Index equity strategies select and weight securities by their fundamental measures of sizeSome indexes and weights are here:
When I looked inside RAFI US 1000 index, I found most of System12 stocks in top two dozens.
(Note: most resent weighting for corresponding etf PRF from PowerShares are here
Size matter... in everything... I know... and also from personal experience... I got size... I know...
But really, what matters as size, as far as companies go? Sales matter (otherwise there is no E in P/E), dividends matter (otherwise nobody gets paid to wait), book (otherwise its just an air)..., if we are talking about true market leaders, corporations that really control this shit and make themselves laws to suit. These names are the biggest and the best, around us everywhere all the time in everything, laying off the vig 24/7 worldwide!
Here in order of index weight, as of 12/31/2013
from largest XOM at 2.87% to BRK at 0.61%, in total a bit over 30%
The idea is this:
What if I take 1 standard System12 position size, and divide it between Mega Dozen (MD) components in a way of 'Fundamental Bonus'. Only top 12 of RAFI stocks are considered. 5 of them were in MD in January, 2014 - XOM, GE, CVX, WFC, MSFT, then CVX was removed in February, then JPM was added in March. Increase in position size of these in MD Control equally by 20% each shows almost same result, with no material improvement. Testing 3 months period is meaningless for S12, but I am not going to back test. I want to observe this in real time, and especially now, when nothing else works.
It may be possible to skew selection process towards higher ranking in RAFI, by allocating 50% of total bonus to top 2 stocks. The rest will have to share remaining half, also in unequal parts, with lowest being 10% of total bonus. But this may be premature, as I don't have enough data. Also I want to wait for Arnott's own re-balancing, and see how recent earnings affect index weightings. They publish updates with lag of at-least 2 months, so I will not know for a while.
In real world I don't trade MD Control (its just an index...he-he), so here is a true back-test.
Using actual account records, starting 1/28/2014, apply Arnott Overlay (AO):
Apply 20% bonus to S12 position, that is in MD and also one of top 12 in RAFI allocation. (This percentage will change in time, depending on amount of matching stocks of his first dozen and mine.)
No re-balancing of existing positions. System goes into LP much sooner.
Slightly positive results achieved.
NOTE: this is an extremely short time period for definite conclusion
I tried several different ways to split this bonus, and also tried to include SD stocks. All tests have a slightly better tilt, than actual account records. This leads me to believe, that Mr. Arnott's method has merit, statically robust and will add a bit of 'Smart Beta' to System 12 portfolio.
Who said fundamentals don't matter?
There is an additional use of AO, as a qualifier.
I had this problem in back-testing, when there are several candidates from SD for non-fully-loaded System12. All looked equally good on a chart, and I basically went on a coin flip. Now I can use RAFI as a ranking tool, giving preference to entry into higher weighted one. Anything that eliminates my own discretion is good for S12BCM.
Every single AO component already is an existing position of S12BCM
I am not going to adjust my positions here, because costs will effectively eliminate any gains.
Going forward, AO will be updated at every roll-over, and also as soon as current RAFI allocation is published.
MD Control will not be changed, and will continue to be calculated based on original methodology. Its my index, the least I can do is to preserve its integrity. No scam here. Really
As of 4/13/2014, Arnott Overlay (AO) are:
XOM, GE, WFC, MSFT, JPM for 20% each
Research Affiliates Chairman and CEO Robert Arnott explains why fundamentals can make a big difference on Wealthtrack with Consuelo Mack