Dimensional Fund Advisors is a global investment manager and one of Endowus' key fund management partners.
In this session, Endowus' Chief Investment Officer & Chairman Samuel Rhee joins Dimensional Fund Advisors Joel Teasdel (Head of Wealth Management Asia ex Japan) and Dr. Wei Dai (Senior Researcher & VP) in an in-depth discussion of Dimensional’s investment philosophy and systematic approach - how they structure broadly diversified portfolios that emphasize the dimensions of higher expected returns in both equities and fixed income products, while addressing the tradeoffs that arise when executing portfolios.
2:00 Introduction to Endowus
5:09 Introduction to new Cash/SRS Portfolio
8:37 Introduction to Dimensional
11:00 Introduction to Dimensional Market Volatility and dangers of reacting to the market
36:46 Diversification and discipline
40:20 Dimensions of expected returns
48:28 Harvesting equity risk premiums and harvesting fixed income risk premiums
Q: What are your thoughts on Fama and French's recent paper which observed that size and value premiums seemed to have reduced in the last decade?
Dimensional: The last decade's worth of returns doesn't tell us anything statistically different. Ten years is a very short period of time from a statistical analytics perspective to try to infer anything from.
Think about it drawn from a bell-curve distribution: there is expected return and the expected value of that value premium, but there is a lot of uncertainty around that expected return. So for every month or year there is a realised premium drawn from that expected return distribution, when you look at different sample periods, the point estimate (sample average) will be different because there is a lot of noise in the distribution.
The conclusion of the paper is that in more recent periods, we've seen a smaller value premium on average, but that is not enough for us to reject the hypothesis that they might be coming from the same expected return distribution.
Q: What does "passive" investing mean?
Sam: Broadly speaking, passive investing means not being selective in the investment choices that we make. The ETFs that you may invest in can be trying to replicate an index that can have an extremely narrow investment mandate in terms of geography, sector. Buying an ETF doesn't equate to being passive in your investments.
Q: How does Dimensional ensure that portfolios minimise factor loadings to other unintended or undesirable factors such as Momentum?
Dimensional: We analyse and monitor many different factors, and we realised most do not produce consistent returns, so we focus on the 3 factors that specifically have consistently provided higher returns.
When considering our portfolios, the four dimensions (beta, size, value and profitability) are the most important because these are the long term drivers of expected returns and will influence our asset allocation. There are also other variables that tell us something about shorter-term expected return. For example, we see in the data that stocks that have outperformed their peers tend to outperform in the next few months.
There are also short term dimensions such as securities lending, and momentum that can give positive risk premiums. These short term dimensions can be priced in very quickly and also require increased transaction (and transaction costs) to capture the premiums.
We don't want to treat short-term variables as long-term variables. On a daily basis when we think about buying and selling stocks, we will consider both long and short-term considerations.
Q: How does Dimensional systematically manage your funds at such a low cost?
Dimensional: We aim to get the maximum return for our clients by focusing on the lowest cost. We have 22-26 traders around the world to get better execution prices.
Secondly, we try to squeeze down custodian prices.
We also do not spend money on activities that are not improving returns such as making macro calls or guessing which security is mispriced. We focus on delivering higher returns with our dimensions and the ability to execute it in a cost efficient manner.