Arnott sold the index franchise and kept the mandates

TMX Group closed its $490 million purchase of RAFI Indices on Aug. 18, and on the same day the money-management business left behind took a new name: Syzygy Asset Management, 28 employees and roughly $30 billion tied to strategies the team already runs, with Rob Arnott, who built the firm he has now renamed, still at the top.

Arnott founded Research Affiliates in Newport Beach in 2002 and made his reputation arguing that equity indexes should pick and weight companies by the underlying business, sales and cash flow rather than market capitalization. The RAFI Fundamental Index that came out of that argument became the franchise TMX bought; the client mandates that adopted it are what Arnott kept.

TMX agreed in June to pay $490 million for RAFI Indices, completed the acquisition on Aug. 18, and folded the index business into a group that already owns VettaFi, which supplies indexes and ETF data. The buyer is a platform selling index and data products, and what it bought is a licensing franchise with a record going back to 2002 and a name institutional allocators recognize. RAFI Indices' revenue and asset base do not appear in the coverage, which leaves the multiple TMX paid beyond arithmetic and the price standing as the buyer's own statement of what a licensing stream is worth.

What remains is a manager without an index to license, and Syzygy is the astronomical term for celestial bodies lining up, a nod to a founder who chases eclipses and traveled to Mallorca for August's total solar eclipse before speaking with Bloomberg News. The firm will keep managing money for clients including Pacific Investment Management Co., extending relationships built at Research Affiliates, with Jim Masturzo, Katy Sherrerd, and other longtime colleagues developing new stock and diversified strategies.

An endowment, foundation, or taxable family that holds a RAFI-based mandate now deals with two firms where it used to deal with one: the index sits inside TMX, the management sits at Syzygy, and any investment management agreement that names Research Affiliates as the manager is stale on its face. The coverage does not say how licensing or sub-advisory terms were re-papered after the close, nor whether the fee stack changed. Investment committees will want both answers, and the practical outcome is likely an amendment to existing documents rather than a search, because the people making the decisions did not move.

Size is one reason to expect the paper to be amended rather than replaced. Research Affiliates' registered assets stood at $27.8 billion across 33 accounts as of early September, against the roughly $30 billion in strategies the coverage cites for Syzygy, a difference that most likely reflects the gap between regulatory reporting and the broader count of strategies a team manages or licenses. The strategies, the portfolio managers, and the largest client relationship all carried over, which is the setup most consultants tolerate when a name changes and a process does not.

The growth plan runs through tax-aware long-short investing, a category Bloomberg has reported holds roughly $1 trillion across the broader universe of strategies designed to reduce or delay investors' tax bills. The mechanics are easy to state: buy some stocks, bet against others, and use the losses the book generates to offset a client's taxable gains elsewhere. Running them is harder, because harvested losses have to survive financing costs and the fee the client pays for them, and unlike a published index, a long-short book has to be sold household by household through intermediaries.

Arnott's own framing, in comments carried in the coverage, is that Syzygy's best new thinking will flow first into strategies its existing clients already own, alongside what he called "some high-octane active strategies, involving concentration and leverage." It is the public-markets version of the private-markets gateway argument, in which the pre-sold wrapper rather than the blind pool is the product; Syzygy is starting with the wrapper, strategies that have customers before they have track records.

The bet that relationships can outrun product ran through KKR's Japan wealth build, and it is the whole of the distribution argument here. It is also where a 28-person firm has the least room to be wrong: index licensing suits small teams, since a formula that works earns for years without a trading desk or a salesforce calling on taxable households, while tax-aware long-short does not. The scarce input in the business Syzygy is entering is distribution, a point Arnott concedes by implication when he says, "We're good at active management."

Arnott is 72, and the coverage does not address succession or how Syzygy's ownership is arranged after the sale, which means consultants re-papering mandates this fall will need an answer the coverage does not provide. The narrower thing to watch is the first existing institutional client that adopts one of the new tax-aware long-short strategies, which will show whether relationships inherited from an index business can carry a product the index never had to sell.