Case 5: Research Affiliates: International Portfolio Management

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Case 5: Research Affiliates
International Portfolio Management


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
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In that sense, we could admit that RA’s fundamental value proposition is quite similar to a TAF. Even if RA is also giving investment advices, as a traditional advisory would do, the company main activity is to sell its


index to other advisories, so it does not only give advice but is mostly creating and selling the tool to give this advice. This last idea leads us to the market segment analysis, which seems to be major difference between RA business model and a TAR. Indeed, an advisory firm’s customer would be any kind of investor or company who want to better manage its assets and would contact the firm to get some advice on the best positions to adopt. On the other hand RA’s customers are the ones that will be giving the advice, the ones that are going to use the RAFI to find better investment position and give advice to their own customers. Thus RA is actually an additional stage in the “supply chain”: investors contract advisory firms who buy RA’s licenses to give their advice. In the end RA has no contact with the investor, but only with the financial entities or companies that use its patents. TAR do mostly B2C, RA is more doing B2B activities. We can now understand that the firm’s value chain is very different from that of a TAR, as RA is mostly selling patents and licenses, and seems only to give advices as a secondary activity (through partners