This article originally appeared in the September 21, 2004 issue of the Financial Post and is reprinted with the express permission of The National Post Company, a CanWest Partnership.
A New Dimension
By Jade Hemeon
Financial Post
September 2004
Dimensional Fund Advisors, a powerful presence on the U.S. money management scene, is quietly gaining a foothold in Canada after opening its doors in Vancouver about a year ago.
Dimensional, which is based in Santa Monica, Calif., and also has offices in Sydney, Chicago and London, has a unique investment approach that is neither active nor totally passive. Its fund products are based on asset classes such as global fixed income, U.S. value stocks or Canadian equity, and while its portfolios resemble relevant market indices they do not strictly duplicate them the way index funds do.
Instead, Dimensional uses objective criteria to winnow out the stocks that don't belong in its definition of any particular asset class. For example, while the recognized U.S. small cap indices include Real Estate Investment Trusts, Dimensional's small cap funds exclude these companies. They also avoid newly hatched initial public offerings, which tend to sag after an initial price jump.
Dimensional's traders do business on exchanges around the world, and are particular about when and how they buy blocks of stock, skipping those with liquidity problems. Historically, Dimensional's average block purchase has been about 3% below the next day's closing price.1
Brad Steiman, regional director and head of the Canadian division, became acquainted with Dimensional while working for the U.S. division of Assante Corp. in Los Angeles. He was impressed with DFA's results in managing portfolios for Assante clients, and approached the company with the idea of adding Canada to the list of countries on its expansion list.
"People have learned some painful lessons in the stock markets over the past five years and many are ready to change to an investment strategy that is based on evidence, not on hype," says Steiman, who was visiting Toronto last week to talk to interested advisors.
Dimensional's approach is based on research covering a time span of more than 50 years. It is rooted in the concept that financial markets are efficient, and that investors' returns are determined primarily by asset allocation decisions. The firm maintains close ties with University of Chicago Business School and other research facilities, and is connected to a family of brainy board members and consultants that includes academics such as Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College, Nobel Laureates Myron Scholes and Robert Merton, and Roger Ibbotson, chairman of Ibbotson Associates Inc. and professor at Yale University.2 Now managing about $75 billion in assets worldwide, the firm had its beginnings at the University of Chicago, where its co-founders David Booth and Rex Sinquefield, were graduate students in the early 1970s.
Dimensional bases its investment strategy on the belief that active managers are unable to systematically beat the market in the long term, and on average they will underperform the market by the amount of fees that they charge. While some fund managers have been able to beat the market for a time, there is no way of predicting who those managers will be in the future.
Dimensional's goal is to structure globally diversified portfolios that beat the relevant benchmarks by a percentage point over the long-term, which translates to a 2% outperformance relative to the average fee-charging mutual fund, Mr. Steiman says. Because no two investors are alike, there is no single optimal asset allocation. Each investor works out his her own mix, based on risk tolerance, goals and circumstances.
While about 40 funds are available in the U.S, Dimensional is starting off with six in Canada. All funds are no-load with no compensation built in for advisors. They charge management fees of 25 to 50 basis points, depending on the fund.3 The minimum investment is $10,000, and clients must purchase the funds through Dimensional-approved, independent fee-based advisors. These advisors typically charge clients fees based on a percentage of assets under management.
One of the most unusual things about Dimensional is that financial advisors must qualify individually to sell its funds, and it does not make sales agreements with entire firms. So far, Dimensional has approved less than five advisors at each of three bank-owned brokerage giants to sell its funds. In total, 25 advisors have been approved in Canada, and another 25 are going through the process.
The process includes attendance at a two-day introductory conference in either Santa Monica or Toronto. The conference covers the academic research behind Dimensional's approach, the use of asset classes in portfolio construction, and client communication strategies to support the philosophy. Advisors attending the conference must pay their own way as a demonstration of their commitment. Once a year the firm holds an advanced conference at the University of Chicago, and invites advisors from around the globe.
"We definitely believe in the value of advice," says Steiman. "Good advisors keep clients disciplined."
1 Data courtesy of Donald B. Keim, the Wharton School, University of Pennsylvania.
2 Myron Scholes, Robert Merton, and Roger Ibbotson serve on the boards of directors of the US mutual funds that Dimensional advises.
3 Management fees for Class F shares are 25 to 50 basis points. For Class A shares, the management fees are 125 to 150 basis points. Certain investors eligible to invest in Class A shares may not be eligible to invest in Class F shares.