Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Series

Transcription

1 Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Series Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Liquid The Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Series weights a country s debt instruments according to fundamental measures of country size rather than amount of debt outstanding, providing an alternative approach to investable fixed income indices. Traditional bond indices allocate investment dollars according to the amount of a country s outstanding debt, which results in high weights to large debtors. In contrast, Research Affiliates has developed an innovative methodology, the Research Affiliates Fundamental Index (RAFI) approach, which determines component weightings based on fundamental factors of economic size which are correlated with a country s ability to service its debt. The result is an investable index that provides transparent, low-cost, diversified, broad-based exposure to the emerging world s sovereign debt markets. Because weights are determined by fundamental factors of economic size, the index potentially provides reduced risk exposures and the potential for long-run outperformance. An index weighted towards countries with high debt service capacity should have lower default risk than the one weighted by amount of debt outstanding. Additionally, the Citi RAFI approach has historically included higher weights in countries whose securities are of lower duration. Furthermore, a systematic rebalancing approach that contra-trades against market movements may add value. If market volatility is in part driven by mean-reverting price inefficiencies, then weighting by fundamentals will avoid a return drag that will impact a cap-weighted index due to systematically overweighting overpriced bonds and underweighting under-priced bonds. The RAFI approach also preserves the following advantages of passive investing: Transparency Liquidity Diversification Broad economic representation Limited transaction costs Holdings are weighted based on metrics that signify the size of a country in the world economy 1 : Population GDP Energy consumption 1 For further discussion of this approach, see the article by Arnott, Hsu, Li, and Shepherd (2010) in the Journal of Portfolio Management Index Methodology 01

2 Rescaled land area The RAFI metrics: are not based on market prices, amount of debt issued, or exchange rates are not affected by investor behavior reflect objective measures of relative size are correlated with debt service capacity of a country The Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Series is designed for investors and fund sponsors to measure exposure to 14 emerging government markets in local currencies through a thoughtful and transparent fundamentally weighted construction. The Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master includes all debt instruments that qualify for inclusion under the Citi Fixed Income Indices rules. Because this index includes more securities than can be comfortably replicated in an investable portfolio, the Citi RAFI Sovereign Emerging Markets Bond Local Currency Index Liquid implements a series of selection rules to reduce the number of bonds to a short list that provides the country and duration exposures of the Master Index in a fully replicable portfolio. This index guide describes the rules and processes to create and calculate these indices. Index Methodology 02

3 Methodology for Citi Fixed Income Indices All Citi Fixed Income Indices follow the general methodology outlined in this section. Index Profile With the growing importance of global indices to fund managers throughout the world, it is important to communicate the new index preliminary profile early enough for fund managers to respond to changes in their benchmarks within their respective time zones. The profile fixing enables Citi to disseminate index information ahead of the month-end date so that investors have time to prepare rebalancing transactions. Citi publishes a schedule of fixing dates on the Citi Fixed Income Indices website and in its monthly publications. These dates must be four (4) business days before the calendar end of the month in all of the following business regions: the United States, Japan, the United Kingdom, Germany, and Australia. For an issue to be eligible for inclusion in an index, all information on the issue must be publicly available on or before the fixing date, and the first settlement date of the issue must be on or before the end of the month. Although Treasury auctions may be announced prior to the fixing date, the results must be final by the fixing date in order to be considered for inclusion. At the same time, bonds that no longer meet the maturity (that is, an average life of less than one year from the last calendar day of the month), amount outstanding, or rating criteria are removed. Any buyback or reverse auction occurring on or before fixing may cause the bond to be removed from the index, as well. After the release of the preliminary profile and prior to the end of the month, Citi Fixed Income Indices will continue to track market activity and will remove any issues that are called, tendered, or defaulted. Citi Fixed Income Indices also may revise the preliminary profile for corrections. Maturity and Issue Size Citi Fixed Income Indices measure the total rate of return of bonds with remaining maturity of at least one year. In addition, each market has a minimum size criterion designed to include only those bonds that are reasonably available for institutional investors under normal market circumstances. The specific size criterion is outlined in Figure 5. Pricing Source Citi Fixed Income Indices rely primarily on Citi traders for bond prices. In selected markets, following local convention, prices from third-parties are used to ensure completeness. Timing and Pricing Prices for Citi Fixed Income Indices are generally bid-side prices. However, mid-prices are used for Japanese, Mexican and South African government bonds to conform to local convention. Figure 1 shows the local market closing times used for the pricing of Citi Fixed Income Indices. The closing time for the US domestic indices and Canadian Government Bond Index is that of the futures market. In the event of an early close of the cash or futures markets, Citi uses the futures market close as the market close for pricing. Index Methodology 03

4 Figure 1. Local Market Times Used for Pricing North America Asia Pacific Canada 3:00 p.m. (New York) Australia 4:30 p.m. (Sydney) United States 3:00 p.m. (New York) New Zealand 4:30 p.m. (Wellington) China 4:30 p.m. (Shanghai) Europe China (Offshore) 6:00 p.m. (Hong Kong) EMU Bloc 4:15 p.m. (London) Indonesia 4:30 p.m. (Jakarta) Scandinavia 4:15 p.m. (London) Japan 3:00 p.m. (Tokyo) Czech Republic 5:00 p.m. (Prague) Malaysia 5:00 p.m. (Kuala Lumpur) Hungary 5:00 p.m. (Budapest) Philippines 4:00 p.m. (Makati City) Poland 5:00 p.m. (Warsaw) Singapore 4:30 p.m. (Singapore) Turkey 5:00 p.m. (Istanbul) South Korea 3:00 p.m. (Seoul) Switzerland 5:00 p.m. (Zurich) Sri Lanka 2:30 p.m. (Colombo) United Kingdom 4:15 p.m. (London) Taiwan 1:30 p.m. (Taipei) Thailand 4:30 p.m. (Bangkok) Middle East Israel 4:30 p.m. (Tel Aviv) Latin America Brazil 5:00 p.m. (New York) Africa Chile 1:30 p.m. (Santiago) South Africa 4:30 p.m. (Johannesburg) Colombia 2:00 p.m. (New York) Mexico Peru 2:00 p.m. (Mexico City) 2:30 p.m. (New York) Source: Citigroup Index LLC. Verification Reliable pricing of each security in the indices is necessary to ensure reliable index values and returns, thus third-party pricing sources and statistical techniques are used to identify pricing anomalies. Prices used in Citi Fixed Income Indices are provided as indications only. Inquiries challenging the accuracy of a price are reviewed by the Citi Fixed Income Indices team, which may adjust the price and update the pricing models for future valuations. Settlement For daily calculations, Citi assumes that indices settle on a same-day basis except on the last business day of the month, when settlement is the last calendar day. Monthly holding periods, therefore, are exactly one calendar month. For example, the January return period would run from the close on December 31 to the close on January 31, regardless of the last business day. However, the last business day in each local market is used for pricing. Maturity Sector In addition to the broad categories published, Citi provides subsector breakdowns for many indices. One such subdivision is based on the remaining maturity of the underlying securities. Citi defines maturity sector buckets by including all underlying issues with a remaining average life at least equal to the lower bound, but less than the upper bound of the particular category. For example, the one- to three-year sector of the US Index Methodology 04

5 Government Index includes all securities in the US Government Index with a remaining average life of at least one year, but less than three years. Citi fixes the set of bonds for the calculation month, even though the average life of some securities may decline through the lower bound during the calculation month. Index Quality An index quality is assigned to each index bond as of profile fixing. The quality is first mapped to the S&P rating. If a bond is not rated by S&P but it is rated by Moody s, Citi assigns the S&P equivalent of the Moody s rating to the index quality. If a bond is split-rated (an investment-grade rating by one rating agency and high-yield by other) Citi assigns the S&P equivalent of the investment-grade rating to the index quality. Index quality remains unchanged for the entire performance month. Exchange Rates Citi Fixed Income Indices use the WM/Reuters closing spot and forward rates. The WM Company takes several snapshots at regular intervals centered on the fixing time of 4:00pm London time and selects the median rate for each currency. All rates are mid-market quotations and appear on Reuters (see WMRSPOT01). Return Computation Total returns are computed on the assumption that each security is purchased at the beginning of the period and sold at the end of the period. (Bid-side valuations are used except for the Japanese, Mexican and South African markets where mid-prices are used.) An issue s total rate of return is the percentage change in its total value over the measurement period (see Figure 2). The components of total return are price change, pricing payments, coupon payments, accrued interest, and reinvestment income on intra-month cash flows. In the case of multi-currency or non-base indices, the total return also includes currency movement. The total returns are market-capitalization weighted using each individual security s beginning-of-period market value. Figure 2. Total Rate-of-Return Calculation Methodology Beginning-of-Period Value = (Beginning Price + Beginning Accrued) x Beginning Par Amount Outstanding End-of-Period Value = [(Ending Price + Ending Accrued) x (Beginning Par Amt. Outstanding - Principal Payments)] + Coupon Payments + Principal Payments + Reinvestment Income Total Rate of Return (%) = [(End-of-Period Value/Beginning-of-Period Value)-1] x 100 A note on precision: Returns are computed to at least six decimal places but reported to a maximum of four. In addition, owing to rounding errors inherent in computer floating-point arithmetic, the last digit in any reported value may sometimes be off by one from its true value. Source: Citigroup Index LLC. Index Methodology 05

6 Return Computation Base Currency Returns, Unhedged We calculate returns in a base currency in the following way: Figure 3. Total Rate-of-Return Calculation Methodology (Unhedged) Total Rate of Return (%) = ((1+ (Local Currency Return/100)) x (End-of-Month Spot Rate/Beginning-of-Month Spot Rate)-1) x 100 Source: Citigroup Index LLC. This equation holds true only if the spot rates are quoted as base currency per unit of foreign currency. Return Computation Base Currency Returns, Currency-Hedged Citi computes monthly currency-hedged return by using a rolling one-month forward exchange contract as a hedging instrument. The face value of the contract is equal to the estimated end-of-month full market value. To calculate this value, Citi assumes that the bond s yield is unchanged from the beginning of the month. Citi then accounts for any known cash flows, such as coupon or principal payments, and adds expected accrued interest for the period. This strategy leaves the intra-month changes in bond prices from yield movements unhedged. Any principal movement resulting from yield change is then settled at the end-of-month spot exchange rates. The calculation formula from the point of view of a US investor is shown in Figure 4. Figure 4. Currency-Hedged Monthly Return Calculation Methodology Beginning-of-Period Value [(Beginning Price + Beginning Accrued) x (Beginning Par Outstanding)] x [Beginning-of-Period Spot Exchange Rate (US Dollar/Local Currency)] End-of-Period Value [(End-of-Period Local Currency Value, Assuming Unchanged Yield + Known Intra-month Cash Flows and Interest Expected to Accrue) x Beginning-of-Period One-Month Forward Exchange Rate (US Dollar/Local Currency)] + Total Rate of Return (%) [Change in Market Value of Principal Amount Due to Yield Change x (End-of-Period Spot Exchange Rate (US Dollar/Local Currency)] [(End-of-Period Value/Beginning-of-Period Value) 1]*100 Source: Citigroup Index LLC. Index Methodology 06

7 Figure 5. Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master Design Criteria and Calculation Assumptions Weighting RAFI defined annually effective from Sept 30 th of each year Minimum Size Outstanding Brazil: BRL5 billion (excludes LTN) Chile: CLP100 billion Colombia: COP2 trillion Czech Republic: CZK15 billion (excludes zero-coupon bonds) Hungary: HUF200 billion Indonesia: IDR7.5 trillion (excludes recapitalization and retail bonds) Malaysia: RM4 billion (excludes Government Investment Issue) Composition Minimum Quality Mexico: MXN10 billion Peru: PEN2 billion Philippines: PHP45 billion (excludes retail and zero-coupon bonds) Poland: PLN5 billion South Africa: ZAR10 billion (excludes zero-coupon bonds) Turkey. TRL2billion Thailand: THB25 billion (excludes saving bonds) Sovereign debt denominated in the domestic currency C by either S&P or Moody s Redemption Features Reinvestment of Cash Flow Pricing Bullet, sinking fund, putable, extendable, or callable At daily average of local currency one-month Eurodeposit rate. Individual Citi trader pricing except Mexico (provided by Proveedor Integral de Precios S.A. de C.V). All pricing generally taken as of the local market close, see Pricing in the Methodology section. Calculation Frequency Settlement Date Daily Monthly: Last calendar day Daily: Same day except for last business day of the month, when settlement is last calendar day Base Date September 30, 2010 Source: Citigroup Index LLC. Index Methodology 07

8 Figure 6. Composition of the Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Market Securities Included Securities Excluded Brazil Fixed-rate bonds LTN and index-linked bonds Chile Fixed-rate bonds Index-linked bonds Colombia Fixed-rate bonds Index-linked bonds Czech Republic Fixed-rate bonds Zero-coupon bonds Hungary Fixed-rate bonds Indonesia Fixed-rate bonds Recapitalization and retail bonds Malaysia Fixed-rate noncallable and callable bonds Government Investment Issues (GII) Mexico Fixed-rate bonds Bonds issued prior to January 1, 2003 Peru Fixed-rate bonds Index-linked bonds Philippines Fixed-rate bonds Retail and zero-coupon bonds Poland Fixed-rate noncallable bonds (including zerocoupon bonds) Treasury convertible bonds, floating-rate bonds South Africa Fixed-rate bonds Zero-coupon and index-linked bonds Thailand Fixed-rate bonds Saving bonds Turkey Fixed-rate bonds Source: Citigroup Index LLC. Index Methodology 08

9 Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master Methodology Eligibility and Selection Criteria The Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master comprises a subset of the government markets that are tracked by Citi. To be included in the Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master, countries must have at least an investment grade domestic sovereign debt rating by either Standard & Poor s or Moody s. A country will be removed from the index because of a rating downgrade according to the methodology for Citi Fixed Income Indices. Eligible countries as of September 30, 2011 Brazil, Chile, Colombia, Czech Republic, Hungary, Indonesia, Malaysia, Mexico, Peru, Poland, Philippines, South Africa, Thailand, Turkey. The eligibility of the countries is verified annually in August based on the data available by July 31 (Country Selection Cut-Off Date). Changes become effective on September 30. The list of eligible countries is published on August 31. The bond specific eligibility rules for each country that will be followed are outlined in Figures 5 & 6. Weighting Methodology The weights for each country will be determined once per year based on the RAFI methodology. Weights are based on country fundamentals rather than the amount of debt outstanding. Weights for each country will be determined on August 31 and become effective on September 30. The Master index will rebalance to these weights once per year on September 30. The eligible constituents for each country will be defined on a monthly basis as indicated in the General Methodology section. The aggregate country weight, determined by the RAFI methodology, will be applied to all bonds that qualify for inclusion from that country. Each country is weighted by a combination of that country s GDP, population, land area, and energy use. Research Affiliates gathers data for GDP (converted to a common currency using purchasing power parity), population, and land area (scaled by taking the square root of each value) from the World Bank, and data for energy consumption from the British Petroleum Statistical Use of World Energy Report. Research Affiliates use five-year lagged average values for each of these metrics as the input for the country weights and then construct four series of weights, one for each metric. The country weight in each of these is simply the proportion of that country s GDP (or population, land area, energy use) to the aggregate GDP (population, land area, energy use) across all countries in the index. The composite RAFI weight for each country is determined by taking the equally weighted average of each country s weights across the four metrics. As a final step, a rescaling of the composite RAFI weights is implemented, to provide additional diversification in the index. The resulting scores are then rescaled so that the aggregate weights sum to 100%. This process shift weights away from larger, concentrated positions and into smaller positions. The resulting weights from this process are then applied to the index. Index Methodology 09

10 Monthly Reconstitution Several events can trigger a monthly reconstitution of a country s bonds: coupon flows, new issuance of eligible bonds, bonds aging out of the index, and other events that eliminate certain bonds, like a drop in the amount outstanding below the index threshold caused by corporate actions, etc. At the end of every month, a country s market value is determined as for any index, multiplying the par amounts by the full prices of the bonds, and adding in any coupons received or proceeds from a call, etc. Note that the relative performance of the various countries will likely result in a realignment of country weights away from the annually specified RAFI weights. Unless this is an annual reconstitution, the new weights are left untouched. Within a country, however, a reconstitution may be required if any of the triggering events occurred. 1. Determine the dollar amount to be invested in a given country the month end value for a country becomes the beginning value for that country in the following month. 2. Determine the list of eligible bonds from each country assemble the new list of bonds for the country if bonds have been added or deleted. The index holds no cash at the beginning of the month, so cash must be eliminated as well, leaving only eligible bonds that need to be weighted properly. 3. Determine the par amount of each bond in a given country assemble all of the eligible bonds into a market capitalization-weighted portfolio to determine each bond s weight within the country. Apply these weights against the total index dollar amount for that country (the month-end value determined in step 1). This determines the required market value of each bond for the country. Divide the market value for each bond by its full price divided by 100 (so that a bond priced at uses a divisor of 1.015). The result is the par amount of the bond in the index. Repeat for every bond in the country (and then repeat for all countries). Here is how some of the trigger events will shape the following month s index: if bonds have aged out of the index, they will be eliminated from consideration. Cash must also be removed. Each of these actions will lower the portfolio value below the month-end value, and, in the absence of any new bonds, all of the remaining bonds must be scaled up in size (as described earlier in this paragraph) so that the total market value of the new portfolio for the country equals the month-end market value determined from the former composition. a. If cash is the only trigger of reconstitution, the scaling up of the remaining bonds is the equivalent of investing the cash into the remaining bonds in proportion to their month-end market values. b. If bonds leaving the index are the only reason for reconstitution, the scaling up of the remaining bonds is the equivalent of selling the departing bonds at their month-end values and investing the proceeds proportionally into the remaining bonds. c. If new issuance is the sole reason for reconstitution, the former bonds must be scaled down in proportion to their market values in sufficient size to purchase the newly issued bonds in a size that properly represents the relative size of the new bonds compared to the others. If a given month-end does NOT require a reconstitution, the par amounts of the existing bonds remain unchanged and roll into the following month. On the business day after the fixing day, the index constituents will be published, and all bonds in the next month s index will be scaled, both notional and market value, to reflect the weight of the country taking into account the return over the month to the fixing date. On the first business day of the next month, the new index constituents will be published with the notional and market values rescaled to reflect the previous month s return. The index constituents remain Index Methodology 10

11 the same for the calendar month, and all interim returns are calculated based on its composition. Reconstitution on a monthly basis, together with the large number of bonds in the indices, provides a reasonable compromise between stability and comprehensiveness. Index Methodology 11

12 Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Liquid Methodology The Liquid index is a subset of bonds in the Master index chosen to match the overall performance of the Citi RAFI Sovereign Emerging Markets Local Currency Bond Index Master. General Methodology With regards to pricing, settlement, exchange rates and returns calculations, the Liquid index will follow the methodology previously outlined in the Master index construction rules. Eligibility and Selection Criteria An issue is eligible (both to enter and to remain in the index) if it satisfies the following criteria: Its country of issuance is listed in the Appendix as Emerging It is a constituent of one of the Citi Government Bond Indices Its maturity exceeds 1 year and 11 months at the annual reconstitution Weighting Methodology On an annual basis, the sum of the market values of the issues in each country, divided by the sum of the market values in all countries is set to match the RAFI percentage weights defined on September 30 of each year. Index Profile Annual Reconstitution Issue Selection Criteria The Liquid index differs from the Master index in that it is reconstituted annually. On September 30, new bonds are selected for all countries in the given universe. The Index Committee 2 will meet annually before the annual reconstitution to review the bond selection; at its discretion, in case of unusual circumstances, the Index Committee may select specific bonds for a certain country. Due to the evolving nature of the emerging countries capital markets, the bond selection is necessarily specific to the country s issuance pattern. The selection rules will be revisited nearer the annual reconstitution to assess the changing issuance patterns and market structure. Group A This section applies to the countries marked Group A in the Appendix. For each country, three bonds are selected (from among the eligible bonds): Indonesia Newest bond in 1-7yr maturity bucket Newest 10yr bond in the 7-10 yr bucket 2 The Index Committee comprises individuals from Citi and Research Affiliates responsible for reviewing the Citi RAFI Bond Index Series Index Methodology 12

13 Mexico Newest 20yr bond Newest 5yr in 1-5yr maturity bucket Newest 5yr bond Newest 20yr bond The weight of the middle bond is set to equal the weight of middle maturity bucket in the Master index and the remaining market weight is split equally between the short and long bond. Then the weight is shifted between the 10-year and the longest bond in such a way that the duration of the country in the Liquid index equals the duration of the country in the Master index. Group B This section applies to all countries marked Group B in the Appendix. In these countries, two bond issues selected are (from among the eligible bonds): For Czech, Thailand, Brazil, Chile Latest 5yr Latest 10yr For Hungary, Poland Latest 3yr coupon bond Latest 10yr For Turkey 3yr coupon bond issued a year ago (closest to 2yr maturity) Latest 5yr bond South Africa Latest issue in 3-7yr maturity bucket Latest issue in 20-25yr maturity bucket Malaysia Newest bond in 1-3yr maturity bucket Latest 10yr Philippines Latest bond in 1-10yr maturity bucket Latest 20yr Colombia Shortest bond in 2-5yr maturity bucket Longest bond in 5-10yr maturity bucket Peru Latest 15yr bond Latest bond in 20-25yr maturity bucket These bonds are assigned weights such that the duration of the country in the liquid index equals the duration of the country in the master index. Index Methodology 13

14 Monthly Rebalance At the end of each month, if the duration of the country in the Liquid index differs from the duration of the country in the Master index by more than 0.25, the appropriate weight is shifted between the shortest bond and the longest bond in the country in such a way as to make the duration of the country in the Liquid index equal the duration of the country in the Master index. If this would result in a negative weight assigned to one of the bonds, such bond is assigned a weight of zero, instead. Cash is invested in the bonds in proportion to their month-end values. Index Methodology 14

15 Appendix Emerging Markets as of September 30, 2011: Group A Indonesia, Mexico Group B Brazil, Czech Republic, Chile, Colombia, Hungary, Malaysia, Peru, Philippines, Poland, South Africa,, Thailand, Turkey Index Methodology 15

16 Important Information Citi, the leading global financial services company, has approximately 200 million accounts and does business in more than 160 countries and jurisdictions. Citi, the leading global financial services company, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management. Research Affiliates, a global leader in innovative investing and asset allocation strategies, operates worldwide from its base in Newport Beach, California. Dedicated to solving complex investment issues, the firm creates innovative strategies that respond to the current needs of the market. Leveraging its strong research focus, Research Affiliates distributes products in partnership with some of the world s leading financial institutions. These affiliations take the form of direct asset management, sub-advisory services, and licensing agreements. Citigroup Index LLC, a subsidiary of Citigroup Inc., and Research Affiliates, LLC have agreed to jointly create and distribute investable fixed income indices (the Citi RAFI Bond Index Series ) based on Research Affiliates patented Fundamental Index methodology. All intellectual property, including trademarks, contributed by Research Affiliates, LLC and Citigroup Index LLC shall remain solely vested with the respective contributor. All information is provided for information purposes only. Neither Citigroup Index LLC nor Research Affiliates, LLC accept any liability for any errors or any loss arising from the use of information in this publication. Citigroup Index LLC and Research Affiliates, LLC make no representation as to the accuracy, adequacy, completeness or availability of any data and information contained herein and are not responsible for any errors or omissions or for the results obtained from the use of such data and information. BOTH CITIGROUP INDEX LLC AND RESEARCH AFFILIATES, LLC GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall Citigroup Index LLC nor Research Affiliates, LLC be liable for any direct, indirect, special or consequential damages in connection with any use of the data and information contained herein. Citi and Citi and Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates and are used and registered throughout the world. The trade names Fundamental Index, RAFI, the RAFI logo, and the Research Affiliates corporate name and logo are the exclusive intellectual property of Research Affiliates, LLC and are registered trademarks in the United States and other countries. Any use of these trade names and logos without the prior written permission of Research Affiliates, LLC is expressly prohibited and Research Affiliates, LLC reserves the right to take any and all necessary action to preserve all of its rights, title and interest in and to these marks. Fundamental Index, the non-capitalization method for creating and weighting of an index of securities, is patented and patent-pending proprietary intellectual property of Research Affiliates, LLC (US Patent No. 7,620,577; 7,747,502; 7,792,719; 7,778,905; and 8,005,740; Patent Pending Publ. Nos. US A1, US A1, US , US , WO 2005/076812, WO 2007/ A2, WO 2008/118372, EPN , and HK ). 2012, Citigroup Index LLC. All rights reserved. Duplication or dissemination prohibited without prior written permission. 2012, Research Affiliates, LLC. All rights reserved. Duplication and dissemination prohibited without prior written permission. Citi Research Affiliates The Americas Jayni Kosoff, David Craft fi.index@citi.com Asia Pacific Zhanying Li, Daniel Cao fi.index@citi.com EMEA Kalpash Solanki Christopher J Jenkins fi.index@citi.com Japan Ryuichi Urino, Andre Kasmara, fi.index.tk@citi.com Michael Larsen larsen@rallc.com Index Methodology 16