Endowus joins Dimensional Fund Advisors in an in-depth discussion about how Dimensional applies its investment philosophy to fixed income investing.

In this session, Joel Teasdel (Head of Wealth Management, Asia ex Japan) and Dr Wei Dai (Senior Researcher, Vice President) explains the aspects to consider when investing in fixed income, including what drives expected bond returns, how to pursue term and credit premiums globally, currency hedging, inflation risk and bond trading.

Endowus' Chief Investment Officer & Chairman Samuel Rhee also shares more about Endowus’ fixed income investment philosophy and the role of Dimensional funds in our fixed income allocation.

3:18 Introduction to Endowus

6:30 Limitation of Bond indexes and ETFs

10:05 Introduction to Dimensional

20:40 About Fixed Income Fund Management businesses - cost and underperformance

31:42 Dimensional's Research backed approach (Duration, credit quality & currency)

50:34 QnA

1:07:09 Benefits of flexibility in execution of investment strategy

1:14:47 QnA

Extracted QnA (paraphrased)

Q: Why does indexing work poorly for bonds and fixed income investments?

Dimensional: Similar to indexing, we have an investment mandate that we stick to. Within that investment universe we realise that there is an opportunity to improve the bond portfolio expected return by:

  1. balancing tradeoff between credit exposure and credit spread, and
  2. balancing tradeoff between bond duration and the shape of the yield curve.

We want to be able to improve returns in a systematic, diversified way. Bond Index Funds have to minimise their tracking error so they have to get certain exposure within a certain time frame, which may lead to poorer execution pricing.

Q: Are there any instances where Dimensional will be a forced seller during stress (e.g due to downgrades)?

Sam: Ratings agencies have a huge impact on whether a bond should be or not be in a bond index, due to ratings upgrades or downgrades. As Dimensional is not constrained by following or replicating an index, they retain the flexibility to buy and sell bonds that may not be favoured by indexing bond funds.

Dimensional: We have a credit monitoring system that attempts to pick up any changes in credit quality prior to any change. We also avoid getting exposure to bonds that are mispriced, such as negative yielding bonds.