We use Dimensional Fund Advisors to execute the proper implementation for our clients’ portfolios. Properly implementing portfolio management is one of our investment management principles. Here are some highlights that will give you a better understanding of why we partner with them.
Commitment to Financial Science
Dimensional’s roots began at the University of Chicago and was founded to implement the research into real money management. The original board featured three University of Chicago professors (Eugene Fama, Mac McQuown, and Myron Scholes) who would all, years later, receive Nobel Prizes for their work.
The close connection to academia continues today as Dimensional is constantly looking at the latest research, always searching for ways to bring quality ideas to their portfolios.
However, the way they implement the research has not changed all that much due to their stringent criteria for evaluating new academic research. To qualify, the research must be sensible, persistent through time, pervasive across markets, and cost-effective to capture in diversified strategies.
Dimensional and others have shown that the vast majority of “active” managers do not consistently outperform their benchmarks over time and that those who have would be extremely difficult to identify in advance with any confidence.
The flip side of this coin is passive, or index, investing. Dimensional believes that while easily accessible index investments have been a positive development for investors, that they are too mechanical. Simply put, Dimensional takes the passive approach and adds a little bit of judgment (based upon theoretical and empirical research) in order to add value.
Low Cost – Low Turnover
Dimensional understands that keeping costs low means better returns. They are able to do this by being smart with what they spend money on — you won’t see any advertisements and they even have advisors pay their own travel and lodging when going to their conferences.
A hidden cost of being invested is the trading costs within the portfolio. Active managers will make decisions about the stocks they hold and may want to immediately buy or sell when a decision is made. This leads to buying at a higher price or selling at a lower price in order to get the trade executed.
Dimensional, not being a truly active or passive investor, call themselves “flexible shoppers” when it comes to trading. They are able to take advantage of those needing to execute their trades quickly in order to get better prices for their investors. Internally, they keep track of all of these data points each day and find that their trading approach provides real value for their investors.
The Bottom Line
We believe in Dimensional’s approach to investing and their values align with ours. As co-CEO Eduardo Repetto said, “The money we manage is not our money — it’s our clients’ past and their future.” A company that understands this is the kind of company we like to partner with.
Dimensional Funds is a separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal. No strategy assures success or protects against loss.