Case 5: Research Affiliates
International Portfolio Management

31.03.2014

Executive Summary
Tower Watson, an investment consultant company, has for main objective toward its pension clients to increase their return as high as possible while keeping as low as possible the risk taken by their investments. We are asked to analyze the pertinence for TW to recommend to its clients the Research Affiliate Financial Index (RAFI) strategy over traditional indexing and over a more actively managed strategy. The RAFI is presented to Tower Watson as a new efficient B2B tool to invest, to help investment advisory firms to better establish their strategy. Indeed this index is based on fundamental criteria instead of market capitalization criteria (and thus it has an economic-centric view instead of a market-centric view). It has been proved through studies that portfolio weights decided by fundamentals are more reliable than by price. This interesting strategy, halfway between active and passive, has shown some significant higher returns over the past years, a fact that many pension funds have already noticed since the trend today for these funds is to invest more and more in passively traded funds. Even if such strategies seem to increase the investment exposure to market fluctuation they can still be considered as “smart-beta” strategies. In the end we will have understood that TW should follow that investment tendency and purchase RAFI’s license to offer a better performing investment strategy to its pension clients, keeping in mind that one should not invest all its AUM on a passive strategy but should rather diversify its portfolio between active and passive investment strategies.

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Case Study Questions
1. What is the role of pension fund consultants such as Towers Watson (TW) towards their clients? What criteria should TW use to assess the suitability of