Why Dimensional Fund Advisors is the best-kept secret
The quant heavyweight manages more than US$700 billion under management. Still, the brand, Dimensional Fund Advisors, has been little known to many people.
There are two ways that Dimensional is different from traditional active and passive investing shops: Investment approach and distribution strategy.
Dimensional’s evidence-based investing approach is based on academic research and is backed by empirical evidence, and is transparent and well-diversified.
“We take the guesswork out of it. It is rules-based, systematic investing. We are active as in trying to harvest the premiums, but we stay away from making subjective forecasts, such as what the market will do, or to tell people to go in and out of markets,” says Joel Kim, CEO, Asia ex-Japan, at Dimensional Fund Advisors.
“We've pioneered that way of investing–it is probably better known as factor investing by now. It is basically using a reliable return driver, structuring portfolios around them, and then harvesting gains that you associate with that,” says Kim.
“Getting close to what you tell clients is a good way to invest in a long-term asset allocation, focus on low cost, and remain disciplined in your investment approach. And that usually gets you to like the best outcomes for clients.”
It's both active and passive
Dimensional’s approach is one that Kim described as “being able to capture the premiums but offer more than an index.”
“Indexes were made for active managers to be benchmarked against. It was never meant as an investment vehicle in itself,” said Kim. Here’s a catch, for two reasons.
One is the reconstitution effect.
He took Tesla in 2020 as an example as the electric vehicle maker started the year at US$30 per share. Its market cap qualified for being included in the S&P 500 Index, but not the earnings mark.
Before being considered to be included in the S&P 500 Index, a company needs to have four quarters of positive profits. Around November that year, Tesla met those criteria and the stock surged way above, standing at US$130.
Kim continued: “By the time that Tesla was included, the index manager would have had to buy it at US$230 to minimise tracking error… With the reconstitution effect, this is a really good example to show the upside of having some flexibility and not just blindly tracking an index.”
The other one is rebalancing.
“Again, we know that around the reconstitution day by an index provider, the index manager will buy or sell stocks approaching the close of that day to complete the rebalancing process. And it's a little bit like Valentine's Day,” Kim explains.
Share prices might surge matching the regular cadence of the rebalancing exercise of many passive managers to return to the initial, desired weight of each securities, according to the selected benchmark index. He likened it to buying flowers on Valentine’s Day, when bouquets are typically marked up on the very day compared to a day before or after.
“Echoing what we said, there's a lot of stuff that we have in common with index managers that is a low-cost, transparent, diversified approach. But we've got a pretty good proposition to add something above that–something an index manager typically cannot do,” Kim said.
No trailer commission, no advertising
Regarding distribution strategy, Dimensional is very different as well.
“We don't pay commissions, we don't advertise, and we don't really have any kind of robust retail marketing presence because we don't have any inclination to do so,” says Joel Teasdel, Head Wealth Management Group, Asia ex-Japan at Dimensional Fund Advisors.
“What we try to do is look for partners who are sophisticated investment management professionals, who are looking for the best solutions for their clients to give them long-term exposure to asset classes with the hope of getting the return of that asset class or better. We've been at that for 40-plus years and researching it for even longer than that.”
We never had to close a fund has partially to do with the rigour and the research process. The signals we use, we never had to turn one off. Never.
– Joel Teasdel, Dimensional Fund Advisors
He says the natural client base is sovereign wealth funds, large institutions, and fee-based wealth managers. Endowus is a fee-based digital wealth management platform that pioneers the conflict-free and truly independent investment distribution model in Hong Kong.
“One of the great things that Endowus is bringing to Hong Kong in a very scalable way is an independent voice that helps clients understand what their goals are and construct solutions that are designed to get them where they're trying to go, not whether the market's up or down, but harvest the return of the asset classes you're invested in,” Teasdel said in the fireside chat discussion.
The inaugural Endowus Investment Summit, held on 17 April at Asia Society Hong Kong Center, hosted close to 500 clients, investors, and industry professionals. Enjoying the digest? Watch the full recap video of the discussion:
For the first time, Dimensional is here for Hong Kong investors
Dimensional funds have traditionally only been accessible to institutional investors in Hong Kong, or through a select number of financial advisors for ultra-high-net-worth clients.
Reflecting on the journey, Kim says the biggest mistake in the last two decades, was marketing-related. “We have a really good story to tell to people and to give them an idea of how there's an alternative way of investing, other than just taking indexes or thinking you have to be active. And we work hard at it.
“But, I think we can do a much better job of being vociferous with a lot more people that there's an alternative that can work well for you. In retrospect, I would say that's the biggest mistake.”
For the first time in Hong Kong, funds managed by Dimensional will be a part of individual Endowus client portfolios. Available from May 2024, the new Endowus Flagship Portfolios will become a one-stop solution for clients seeking diversified and optimised risk-adjusted returns.
According to an investor’s risk profile, this is achieved through different compositions of equity and fixed income, with building blocks of mutual funds, managed by Dimensional Fund Advisors and other leading global fund managers.
The new Flagship Portfolios are discretionary portfolios and are managed by the Endowus Investment Office, a twelve-person regional team with strong institutional backgrounds. The team focuses on the curation of best-in-class building block funds, optimised portfolio construction, and ongoing performance monitoring.
Apart from the Flagship portfolios, the Endowus Investment Office continues to leverage its extensive experience across public and private market investing, family offices, and wealth management, to perform all the heavy lifting needed, freeing clients from the need to monitor the markets constantly.
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