In view of the recent volatility in the stock and bond markets, I think it’s important to consider why we’ve aligned with Dimensional Fund Advisors as our primary provider of highly-diversified asset class mutual funds and exchange-traded funds (ETFs). A review of the performance difference between asset classes—growth stocks versus value stocks and large stocks versus small stocks—year-to-date is important. But even more important is the performance difference between traditional index funds and Dimensional’s asset class funds. I’ll review these numbers in next month’s Asset Class, but I encourage you to talk with your Equius advisor at any time if you have questions or concerns about the performance of your investment portfolio. For now, I’d like to present a perspective from another advisor who utilizes Dimensional to manage his clients’ portfolios. First, an intro.
When I look back on my career, I never fail to consider with much respect and appreciation the people who in various ways showed me the right course to take. I’ve written in the past about Dimensional and folks like Dan Wheeler, Sam Adams (who started his own mutual fund company and is now on our board), Jay Totten, Ryan Cooper, and others who have been consummate professionals in my pursuit of the truth. Armed with the best research, data, wisdom, and integrity, they have helped me and our team at Equius provide you with the best investment advice we can. For the sake of respecting our independence, however, I’ve been careful to not be too effusive with my praise of these folks (and the amazing academics who have provided the fuel to drive this asset class investing strategy). But they truly are unique in our industry and should be recognized as such.
A great friend of mine and the firm and former Equius advisor, Eric Nelson, recently wrote a piece for an industry magazine that really sums up my (our) feelings on this subject. With his permission, I share it below. I hope you find it enlightening.
by Eric Nelson, Servo Wealth Management
When I started using Dimensional 20 years ago, they had already compiled a 20-year track record of success and had carved out a unique place in the investment management industry. I was relatively unproven then, but right away I could offer an investment approach with decades of historical support and partner with a firm that had a massive amount of experience and credibility implementing the research. It wasn’t just DFA’s raw returns versus benchmarks that impressed me—they are quite impressive and something I can’t believe more people aren’t discussing—it’s that DFA delivers the return premiums they say they’re going to deliver, consistently, year in and year out. They do not deviate when things “aren’t working.” They don’t shut down or merge poorly performing funds because a premium is out of favor. What I am saying is, you can trust Dimensional. All my personal money is with them. This isn’t just a business strategy. I ask my clients to trust me, and I trust Dimensional.
In wealth management, remember, we’re managing people’s lifetime savings. This is all the money they’ve worked for or inherited from family and may ever have. You don’t want to screw this up. This isn’t just about “managing some mutual funds and ETFs.” This is one of the most important things in people’s lives. And so it just makes obvious sense to use a firm that has a 40-year track record of taking the important research from academic theory—which is the only sensible way to think about investing—and translating that into strategies that apply the theories in the real world and offer willing clients a great investment experience.
But Dimensional’s strategies today have evolved over time. They’ve been updated as our/their under-standing of markets and academic research has advanced. Dimensional’s small cap value fund today doesn’t look exactly like the fund I started buying in 2001, for example. They invented the Core Equity fund, which is basically a new approach to asset allocation. That’s important to me. I want to make sure the portfolios I manage, while not constantly changing, are keeping up with the latest techniques to earn higher investment returns and manage risk more prudently.
But Dimensional doesn’t just hop on every new idea. I don’t want them to live on the cutting edge, throwing a bunch of stuff against the wall in hopes that something will stick. I don’t want to be anyone’s lab rat. I want to know they have a high degree of confidence that how they’re managing money—from pursuing premiums to the type of fund vehicle they’re managing (like ETFs)—is going to work the way we want it to. With Dimensional, I know what they offer has been seriously and thoughtfully researched and stress-tested so by the time it’s available to me, it’s appropriate to consider for my clients.
Another aspect Dimensional brings to the table for me is their communication. I receive great education and support from them—from their webinars to their website to the research they publish to the partner-ship I have with their regional directors. I’ve talked to dozens of people at Dimensional, and they are all top-notch— really smart, really compassionate. You get the sense they really care about us as advisors and they’re not here just trying to sell their funds. I’ve spent hundreds, maybe thousands, of hours reading their research, talking to them, and using their returns programs for my own research. What they provide advisors is really incredible, and I’m not sure how many advisors out there are really aware of what a great resource the company is.
So what about Vanguard, Avantis, RAFI, and the myriad quant ETF managers? I just don’t see them as being in the same category as Dimensional. I view Dimensional as the industry leader and real expert in the field of multi-asset class or multi-factor investing. If it’s not broke, why fix it?
Some of us know using multiple fund families in order to look “objective” is often simply an investment advisory firm’s marketing strategy. Clients should not pay for this fluff with inferior returns. They want the best advice we can offer. Frankly, I’ve looked really closely at all these other options, probably as much as or more than anyone else, and I can’t see the benefit of using them. But I do see serious drawbacks. Some of their strategies are based on what I perceive to be inferior research or “simply being different just to not be Dimensional” based on unrealistic backtests, in some cases.
With Vanguard, let’s be honest. We know what they are—a great firm, but a basic index manager. If you want a low-fee S&P 500 stock fund or the Barclays Aggregate bond fund, they’re great. You’re buying John Bogle’s legacy. Their DNA is low costs. They’re not expertly delivering the core multi-factor returns. Their’s is an entirely different approach. And low costs—especially expense ratios— are a much smaller piece of the puzzle than the Valley Forge marketing team would have you believe.
Vanguard’s basic size/style index funds are obviously inferior, and I can’t even trust that some of their factor funds will be around in five years, to be honest. Taking that chance is not what I consider putting my clients’ best interests first.
As for Avantis, I was big fans of those guys when they were at Dimensional and I wish them the best, but they can’t replicate DFA’s deep bench of research and expertise or their 40 years of real-world experience in managing portfolios or the connections with academics like Fama, French, or Novy-Marx. I see no compelling advantage to using them over Dimensional when they aren’t doing anything better that I can see and in many cases have drawbacks in terms of diversification levels, weighting schemes, and an affiliation with an old-school active manager (American Century).
In my early years, the choice to use Dimensional was easy because it was either use them or try to cobble together some Vanguard index funds with obvious drawbacks. As more and more firms have entered the multi-factor space, I have to say that my trust in and conviction about Dimensional have not eroded. In fact, they’ve strengthened.
Dimensional has always made it look easy, and in the early years it was like “who else am I going to use?” Now, seeing all these other firms and their spin on the multi-factor/Dimensional model, I see all the ways Dimensional could have tripped up if they’d gone in the wrong direction or compromised their principles.
But they haven’t. That’s even more impressive in my opinion: all the ways they could have crumbled under their early success but have continued to improve. In some ways I feel they’re like a turbo-charged version of the firm I started using for clients and my own investments two decades ago.
And I don’t see this changing. I used to worry about what happens after David Booth (one of the founders and current executive chairman) and academics like Eugene Fama and Ken French retire. But current co CEO, Gerard O’Reilly is certainly no slouch in the research department—just listen to the podcasts with this guy…wow.
Marlena Lee, PhD, Global Head of Investment Solutions, and Savina Rizova, Global Head of Research, are also very impressive “next-gen” leaders at Dimensional. Rizova was recently named as one of Barron’s 100 Most Influential Women in US Finance.
I’m also a big fan of Robert Novy-Marx, not just because he’s from Rochester and I’m a Hobart guy, but also because he’s a great next-generation academic whom I trust to keep the Fama/French flame alive. It’s not easy to develop a factor that finds its way into the Fama/French model as Robert did.
With Dimensional, I’m confident the best is yet to come, and I want to be there along with my clients when it does.
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Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.
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