1 00:00:10,160 --> 00:00:14,080 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,200 --> 00:00:16,560 Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway. 3 00:00:16,760 --> 00:00:22,159 Speaker 1: Tracy, I have a big, big confession to me. Is 4 00:00:22,160 --> 00:00:25,320 Speaker 1: it going to actually like speak to everything that we do? Okay, 5 00:00:25,360 --> 00:00:26,080 Speaker 1: you're ready for it. 6 00:00:26,360 --> 00:00:28,000 Speaker 2: I'm bracing myself to it. 7 00:00:28,200 --> 00:00:32,559 Speaker 1: So I sort of ascribed to the general belief that 8 00:00:32,600 --> 00:00:38,400 Speaker 1: like markets are like fairly efficient, things are priced in indexing, 9 00:00:38,600 --> 00:00:41,559 Speaker 1: probably pretty good strategy, own the market portfolio, things like 10 00:00:41,560 --> 00:00:43,760 Speaker 1: that makes a lot of sense to me. A lot 11 00:00:43,800 --> 00:00:46,920 Speaker 1: of people seem to generally believe this is generally true 12 00:00:47,120 --> 00:00:47,440 Speaker 1: so far. 13 00:00:47,520 --> 00:00:49,760 Speaker 2: This is not a confession, okay. 14 00:00:49,520 --> 00:00:52,919 Speaker 1: But the confession is given that I don't really understand 15 00:00:52,920 --> 00:00:55,960 Speaker 1: why the investment industry exists and why do some why 16 00:00:55,960 --> 00:00:59,440 Speaker 1: do people trade at all? Why does anyone try to 17 00:00:59,480 --> 00:01:03,640 Speaker 1: beat the market? Why is active management a thing? We 18 00:01:03,760 --> 00:01:06,360 Speaker 1: all sort of accept these premises, and yet the investment 19 00:01:06,400 --> 00:01:07,920 Speaker 1: industry continues to exist. 20 00:01:08,040 --> 00:01:11,440 Speaker 2: Well, I applaud your honesty, show, especially given that you 21 00:01:11,480 --> 00:01:15,360 Speaker 2: work at a large financial organization dedicated to providing data 22 00:01:15,560 --> 00:01:18,760 Speaker 2: and services to the financial industry. But I don't think 23 00:01:18,840 --> 00:01:23,600 Speaker 2: it's actually an extremely unusual opinion. I think this has 24 00:01:23,640 --> 00:01:26,560 Speaker 2: come up at various times that if the best thing 25 00:01:26,600 --> 00:01:29,000 Speaker 2: for people to do is just index to the market 26 00:01:29,080 --> 00:01:31,880 Speaker 2: and find the fund or the vehicle that does that 27 00:01:32,000 --> 00:01:35,880 Speaker 2: at the lowest cost, then why do all these other 28 00:01:36,080 --> 00:01:39,039 Speaker 2: services and efays and things like that actually exist. 29 00:01:39,120 --> 00:01:41,479 Speaker 1: Yeah, what are we doing here? What are we doing here? Right? 30 00:01:41,720 --> 00:01:44,800 Speaker 1: Because we talk about all these different things, and you know, 31 00:01:45,000 --> 00:01:47,559 Speaker 1: sometimes on the show we talk about real economy things 32 00:01:47,680 --> 00:01:50,440 Speaker 1: and sometimes we talk about sort of strictly market things. 33 00:01:50,480 --> 00:01:52,960 Speaker 1: But why is anyone paying attention? Why does anyone talk 34 00:01:53,000 --> 00:01:54,880 Speaker 1: about this? Why is anyone trading on any of it? 35 00:01:55,120 --> 00:01:57,120 Speaker 2: Well, if I was going to hazard a guess, I 36 00:01:57,160 --> 00:02:01,080 Speaker 2: would say there is something innately human about the idea 37 00:02:01,200 --> 00:02:04,440 Speaker 2: that you can beat the system or outperform the market 38 00:02:04,560 --> 00:02:08,200 Speaker 2: in one way or another. Like it feels unsatisfying to 39 00:02:08,240 --> 00:02:11,239 Speaker 2: think that no one out there in the entire investment 40 00:02:11,280 --> 00:02:14,960 Speaker 2: world is able to outperform the market. And yet if 41 00:02:15,000 --> 00:02:17,760 Speaker 2: you listen to efficient market hypothesis and things like that, 42 00:02:17,760 --> 00:02:19,200 Speaker 2: that's exactly what it'll tell you. 43 00:02:19,360 --> 00:02:21,680 Speaker 1: Or maybe you can outperform the market, maybe you just 44 00:02:21,760 --> 00:02:24,560 Speaker 1: uperform someone else trying to match the market or something 45 00:02:24,600 --> 00:02:26,200 Speaker 1: like that. Maybe you could beat me or I could 46 00:02:26,240 --> 00:02:29,040 Speaker 1: beat you, but not necessarily the market. I don't know, 47 00:02:29,080 --> 00:02:31,080 Speaker 1: it just blows. It's always has bothered me. 48 00:02:31,240 --> 00:02:33,520 Speaker 2: I love that you've started this podcast on the most 49 00:02:33,600 --> 00:02:36,480 Speaker 2: existential note that you could possibly find. 50 00:02:36,720 --> 00:02:38,840 Speaker 1: Well, I think it's really fitting because today we are 51 00:02:38,840 --> 00:02:42,119 Speaker 1: going to be speaking We're at a company that's sort 52 00:02:42,120 --> 00:02:48,480 Speaker 1: of known for its deep, academic, data driven understanding of markets, 53 00:02:48,520 --> 00:02:52,280 Speaker 1: and it has this incredible lineage of people who have 54 00:02:52,320 --> 00:02:55,560 Speaker 1: been at the forefront of a lot of this research 55 00:02:55,639 --> 00:02:59,800 Speaker 1: about market efficiency and what is where pockets of inefficiency 56 00:03:00,160 --> 00:03:03,040 Speaker 1: might exist, and what is the best way to invest 57 00:03:03,120 --> 00:03:06,120 Speaker 1: given certain premises of efficiency and what that even means 58 00:03:06,280 --> 00:03:09,360 Speaker 1: market efficiency, And so I think that we can have 59 00:03:09,480 --> 00:03:13,240 Speaker 1: a conversation today that sort of gets at like some 60 00:03:13,360 --> 00:03:16,359 Speaker 1: of these existential questions about how markets operate. 61 00:03:16,520 --> 00:03:18,720 Speaker 2: I think that sounds great. I think we are also 62 00:03:18,760 --> 00:03:22,320 Speaker 2: going to be speaking to our second maybe rocket scientists, 63 00:03:22,360 --> 00:03:25,200 Speaker 2: to have oh on the podcast after Josh Younger. 64 00:03:25,480 --> 00:03:28,160 Speaker 1: I love when we talk to actual rocket scientists because 65 00:03:28,360 --> 00:03:30,840 Speaker 1: you know, obviously sometimes that is used as a cliche 66 00:03:30,880 --> 00:03:33,320 Speaker 1: for very smart person. But as you mentioned, Josh Younger, 67 00:03:33,639 --> 00:03:37,240 Speaker 1: former actual rocket scientist turned market econ guy, and yes 68 00:03:37,280 --> 00:03:38,240 Speaker 1: we have another one today. 69 00:03:38,240 --> 00:03:39,360 Speaker 3: All right, let's do it all right. 70 00:03:39,360 --> 00:03:41,920 Speaker 1: I'm very excited we are going to be speaking today 71 00:03:42,000 --> 00:03:46,240 Speaker 1: with Gerard O'Reilly. He is the co CEO and CIO 72 00:03:46,600 --> 00:03:49,600 Speaker 1: at Dimensional, been here since two thousand and four. We're 73 00:03:49,640 --> 00:03:54,800 Speaker 1: actually recording this at dimensionals headquarters in Austin, Texas right now. 74 00:03:55,000 --> 00:04:00,000 Speaker 1: One of the major providers of mutual funds and ETFs, 75 00:04:00,120 --> 00:04:02,240 Speaker 1: huge player in the industry. 76 00:04:01,920 --> 00:04:03,040 Speaker 2: The fastest growing, the. 77 00:04:03,160 --> 00:04:07,160 Speaker 1: Fastest growing ETF provider. As we're going to learn all 78 00:04:07,160 --> 00:04:10,240 Speaker 1: about this company's philosophy. Girard, thank you so much for 79 00:04:10,280 --> 00:04:10,840 Speaker 1: coming on. 80 00:04:10,720 --> 00:04:12,760 Speaker 3: Oud lots thanks for having me on the show. 81 00:04:12,880 --> 00:04:15,800 Speaker 1: So I mentioned that Dimensional sort of has this deep 82 00:04:16,320 --> 00:04:19,039 Speaker 1: academic lineage. What do you sort of give us the 83 00:04:19,440 --> 00:04:22,960 Speaker 1: quick history of the company and sort of like the 84 00:04:23,040 --> 00:04:25,520 Speaker 1: ideas and the people from which this emerged. 85 00:04:26,200 --> 00:04:29,039 Speaker 3: Yeah, So the company began in nineteen eighty one, so 86 00:04:29,080 --> 00:04:32,400 Speaker 3: we've been around for many decades now. And when you 87 00:04:32,880 --> 00:04:34,600 Speaker 3: kind of go back and trace the history of the 88 00:04:34,600 --> 00:04:37,200 Speaker 3: founders of the company, a lot of them had been 89 00:04:37,240 --> 00:04:39,680 Speaker 3: at the University of Chicago, so they had studied under 90 00:04:39,839 --> 00:04:43,320 Speaker 3: Gene Fama and others, and they had worked on the 91 00:04:43,320 --> 00:04:45,960 Speaker 3: first set of index funds in the early seventies. So 92 00:04:46,080 --> 00:04:50,320 Speaker 3: David Booth and Rex Singfield and in the early eighties, 93 00:04:50,520 --> 00:04:53,160 Speaker 3: David and Rex had identified a need in the marketplace, 94 00:04:53,440 --> 00:04:56,919 Speaker 3: which was it was no real way out there to 95 00:04:56,960 --> 00:05:01,679 Speaker 3: get systematic, broadly diversified exposure to small caps. They understood 96 00:05:01,680 --> 00:05:05,120 Speaker 3: the limitations of indexing, They understood that that probably wasn't 97 00:05:05,120 --> 00:05:07,640 Speaker 3: the best way to go, but they also understood some 98 00:05:07,680 --> 00:05:11,240 Speaker 3: of the benefits of indexing transparency, low cost, broad diversification. 99 00:05:11,800 --> 00:05:14,280 Speaker 3: So they started the company based on a need in 100 00:05:14,320 --> 00:05:17,320 Speaker 3: the market and a set of academic research that had 101 00:05:17,320 --> 00:05:20,400 Speaker 3: been coming out at that time kind of demonstrating that 102 00:05:20,440 --> 00:05:24,040 Speaker 3: small cap stocks had had higher returns than large cap stocks, 103 00:05:24,720 --> 00:05:27,440 Speaker 3: and from there the company began. It has its roots 104 00:05:27,440 --> 00:05:31,200 Speaker 3: in academia. When the company was first began, David and 105 00:05:31,240 --> 00:05:34,600 Speaker 3: Rex went up to the University of Chicago and Gene 106 00:05:34,600 --> 00:05:37,160 Speaker 3: Fama was there. He got on the board. He had 107 00:05:37,160 --> 00:05:40,479 Speaker 3: folks like mac McCown, a very long time industry expert 108 00:05:41,120 --> 00:05:43,240 Speaker 3: on the mutual fund board. You had Myron Shoals, you 109 00:05:43,279 --> 00:05:46,719 Speaker 3: had Martin Miller. Interesting thing about Dimensional is that we've 110 00:05:46,720 --> 00:05:50,960 Speaker 3: been associated closely with five Nobel Prize winners and all of. 111 00:05:50,920 --> 00:05:54,440 Speaker 2: The best credential I. 112 00:05:54,360 --> 00:05:57,800 Speaker 1: Think of like the Mount Rushmore of academic finance. It 113 00:05:57,839 --> 00:06:00,600 Speaker 1: sounds like they're all associated dimensional pretty much. 114 00:06:01,440 --> 00:06:04,599 Speaker 2: So I have a really basic and perhaps embarrassing question, 115 00:06:04,640 --> 00:06:06,479 Speaker 2: but I think it kind of gets to some of 116 00:06:06,480 --> 00:06:09,880 Speaker 2: our introductory remarks, and possibly I'm not the only one 117 00:06:09,880 --> 00:06:12,800 Speaker 2: who has this question. When I think about dimensional I 118 00:06:12,839 --> 00:06:17,599 Speaker 2: think about mostly indexing and really passive investing. But you 119 00:06:17,720 --> 00:06:20,680 Speaker 2: do have a bunch of actively managed etf So in 120 00:06:20,760 --> 00:06:22,800 Speaker 2: your mind, are you active or passive? 121 00:06:23,680 --> 00:06:27,760 Speaker 3: We're non index, so passive is probably fine because passive 122 00:06:27,800 --> 00:06:31,000 Speaker 3: implies that you accept market prices, you trust market prices, 123 00:06:31,400 --> 00:06:34,520 Speaker 3: and you try to extract information from market prices. Index 124 00:06:34,720 --> 00:06:38,760 Speaker 3: two indexing you leave money on the table, and so 125 00:06:39,240 --> 00:06:41,520 Speaker 3: we're non index but we're not in the business of 126 00:06:41,520 --> 00:06:43,080 Speaker 3: trying to outguess market prices. 127 00:06:43,480 --> 00:06:46,320 Speaker 1: What does it mean? Okay, I guess, I guess to 128 00:06:46,400 --> 00:06:48,640 Speaker 1: your point, Maybe in my mind I've always sort of 129 00:06:48,640 --> 00:06:51,080 Speaker 1: elided the two or think that passive means index, so 130 00:06:51,160 --> 00:06:54,200 Speaker 1: that they're roughly synonyms. But clearly they're not. So why 131 00:06:54,200 --> 00:06:56,159 Speaker 1: do you talk a little bit further about what the 132 00:06:56,160 --> 00:06:56,719 Speaker 1: difference is? 133 00:06:57,440 --> 00:06:59,360 Speaker 3: So maybe it would be helpful also to talk a 134 00:06:59,400 --> 00:07:02,240 Speaker 3: little bit more or about markets. You made some comments 135 00:07:02,240 --> 00:07:05,560 Speaker 3: about market efficiency and so on. I think that it's 136 00:07:05,560 --> 00:07:09,279 Speaker 3: important to understand what a price actually represents the price 137 00:07:09,320 --> 00:07:11,960 Speaker 3: of a stock or the price of a bond, and 138 00:07:12,000 --> 00:07:15,000 Speaker 3: then you get a good idea of why not index, 139 00:07:15,640 --> 00:07:18,920 Speaker 3: but why be passive? And the example that we often 140 00:07:19,040 --> 00:07:21,960 Speaker 3: use is if you want to place a bet on 141 00:07:22,000 --> 00:07:26,560 Speaker 3: a sporting event, Typically you say, I think the favorite 142 00:07:26,600 --> 00:07:30,080 Speaker 3: will win by x twenty points, thirty points, forty points. 143 00:07:30,560 --> 00:07:33,280 Speaker 3: And so why bring this up as an example is 144 00:07:33,360 --> 00:07:36,720 Speaker 3: because that spread how much the favorite is expected to 145 00:07:36,760 --> 00:07:40,120 Speaker 3: win by is an example of using the wisdom of 146 00:07:40,160 --> 00:07:43,800 Speaker 3: the crowds to predict the future. The bookie tries to 147 00:07:43,880 --> 00:07:46,800 Speaker 3: keep the same number of people on one side of 148 00:07:46,800 --> 00:07:48,400 Speaker 3: the spread as the other side of the spread. If 149 00:07:48,440 --> 00:07:52,080 Speaker 3: more people say i'll take you know, the favorite will 150 00:07:52,120 --> 00:07:54,120 Speaker 3: win by more than the spread, the spread will change 151 00:07:54,800 --> 00:07:57,320 Speaker 3: and you can look at how well that does it 152 00:07:57,360 --> 00:08:00,320 Speaker 3: actually forecasting the outcome of the games. There was a 153 00:08:00,320 --> 00:08:03,400 Speaker 3: study in the mid two thousands that looked at, you know, 154 00:08:03,480 --> 00:08:07,200 Speaker 3: eight thousand MBA games and five thousand NFL games and 155 00:08:07,280 --> 00:08:09,640 Speaker 3: found that the favorite won by more than the spread 156 00:08:09,800 --> 00:08:12,760 Speaker 3: fifty percent of the time, exactly what you would explact. 157 00:08:13,240 --> 00:08:16,360 Speaker 3: So this notion of there's a wisdom of the crowds. 158 00:08:16,880 --> 00:08:19,760 Speaker 3: There's a marketplace by which they can express their opinion. 159 00:08:20,040 --> 00:08:23,559 Speaker 3: They express their opinion by putting real money on the table, 160 00:08:24,200 --> 00:08:26,680 Speaker 3: and that gives you a forecast about something that's going 161 00:08:26,720 --> 00:08:29,000 Speaker 3: to happen in the future. And so when you think 162 00:08:29,040 --> 00:08:32,200 Speaker 3: about markets, think about them in the same way that 163 00:08:32,360 --> 00:08:36,200 Speaker 3: prices are basically predictions or forecasts of the future, and 164 00:08:36,240 --> 00:08:40,679 Speaker 3: they're informed by the actions of people trading in the marketplace. 165 00:08:41,280 --> 00:08:43,520 Speaker 3: And the question then becomes is what informations in the 166 00:08:43,559 --> 00:08:46,800 Speaker 3: price of a bonder a stock. There's lots of academic, 167 00:08:47,240 --> 00:08:49,680 Speaker 3: you know, studies around that. When it comes to the spread, 168 00:08:49,720 --> 00:08:51,800 Speaker 3: it's okay, how much will the favorite in this sporting 169 00:08:51,800 --> 00:08:54,320 Speaker 3: event win by? When it comes to the price of 170 00:08:54,320 --> 00:08:58,560 Speaker 3: a bonder stock, the overwhelming academic evidence is that what's 171 00:08:58,600 --> 00:09:02,160 Speaker 3: mainly in there is the return that people require to 172 00:09:02,240 --> 00:09:05,480 Speaker 3: hold the investment. And I think that's a really important 173 00:09:05,559 --> 00:09:09,080 Speaker 3: point to make because it tells you that you don't 174 00:09:09,120 --> 00:09:11,720 Speaker 3: have to be out there out guessing market prices, but 175 00:09:11,880 --> 00:09:15,640 Speaker 3: you can use them to say which stocks or bonds 176 00:09:15,760 --> 00:09:18,720 Speaker 3: do people require a high return to hold, and which 177 00:09:18,720 --> 00:09:21,319 Speaker 3: stocksure bonds do people require a low return to hold, 178 00:09:22,080 --> 00:09:24,240 Speaker 3: and I think that's one of the keys and the 179 00:09:24,320 --> 00:09:27,679 Speaker 3: key insights that you kind of glean from this all 180 00:09:27,679 --> 00:09:30,640 Speaker 3: this academic literature, and that's what we do. We say, 181 00:09:30,720 --> 00:09:35,280 Speaker 3: how can we extract that information efficiently for investors. 182 00:09:35,720 --> 00:09:39,160 Speaker 2: So it's not that market prices are always necessarily correct, 183 00:09:39,240 --> 00:09:42,320 Speaker 2: but rather that you can kind of clean I guess 184 00:09:42,400 --> 00:09:46,200 Speaker 2: the risk assessment of investors based on those prices and 185 00:09:46,240 --> 00:09:47,280 Speaker 2: then adjust for that. 186 00:09:47,679 --> 00:09:50,840 Speaker 3: You can glean how much investors demand in returns to 187 00:09:50,920 --> 00:09:54,120 Speaker 3: hold a stock or a bonder, many differences in those 188 00:09:54,840 --> 00:09:57,200 Speaker 3: and the way I think about them always being right 189 00:09:57,360 --> 00:09:59,160 Speaker 3: or not always being right, I think about them being 190 00:09:59,280 --> 00:10:03,120 Speaker 3: fair and un biased. There's another set of academic studies 191 00:10:03,160 --> 00:10:06,079 Speaker 3: that look at the performance of managers and what they 192 00:10:06,160 --> 00:10:08,440 Speaker 3: find at the conclusion, the main conclusion you can draw 193 00:10:08,480 --> 00:10:12,200 Speaker 3: from those studies is that they're unbiased estimates of the future. 194 00:10:12,480 --> 00:10:14,800 Speaker 3: They may not be always spot on, but you don't 195 00:10:14,840 --> 00:10:16,080 Speaker 3: know when they're too high, and you don't know when 196 00:10:16,120 --> 00:10:18,920 Speaker 3: they're too low. And what you find is if you 197 00:10:19,040 --> 00:10:21,920 Speaker 3: use them effectively, you can manage risk better and you 198 00:10:21,960 --> 00:10:25,120 Speaker 3: can increase expected returns. So you know, at the start, 199 00:10:25,160 --> 00:10:29,560 Speaker 3: you said, why do people bother? Because let's take the 200 00:10:29,720 --> 00:10:33,240 Speaker 3: US over the past one hundred years, the nominal rate 201 00:10:33,240 --> 00:10:35,160 Speaker 3: of return on the US stock market has been about 202 00:10:35,160 --> 00:10:38,040 Speaker 3: ten percent over the past one hundred years. So that 203 00:10:38,160 --> 00:10:40,960 Speaker 3: means that if you invest your money doubles every seven years. 204 00:10:40,960 --> 00:10:44,280 Speaker 3: It's an explosive number. If you can take that ten 205 00:10:44,320 --> 00:10:46,080 Speaker 3: and turn it into an eleven or twelve, Your money 206 00:10:46,120 --> 00:10:49,520 Speaker 3: doubles every six so after a forty year horizon, you 207 00:10:49,559 --> 00:10:52,120 Speaker 3: have doubled the money. Now, a lot of people's investment 208 00:10:52,160 --> 00:10:55,079 Speaker 3: horizon in the humulation phase is thirty or forty years. 209 00:10:55,760 --> 00:10:58,920 Speaker 3: That's why people bother because the amount of consumption that 210 00:10:59,000 --> 00:11:01,520 Speaker 3: you can afford by doing a little better than the 211 00:11:01,559 --> 00:11:04,840 Speaker 3: market tends to be quite significant. 212 00:11:05,520 --> 00:11:09,240 Speaker 2: How would your framework of understanding the market apply to 213 00:11:09,440 --> 00:11:11,920 Speaker 2: a phenomenon like say, this might be a little unfair, 214 00:11:12,000 --> 00:11:15,800 Speaker 2: but you know an extreme example game stop for instance. 215 00:11:16,480 --> 00:11:19,720 Speaker 3: Yeah, So when you look at a situation like GameStop, 216 00:11:20,240 --> 00:11:23,480 Speaker 3: and you look at any market mechanisms around that time, 217 00:11:23,960 --> 00:11:27,040 Speaker 3: what was interesting is in order to keep what we 218 00:11:27,120 --> 00:11:29,600 Speaker 3: think as prices as unbiased estimates of the future, there 219 00:11:29,640 --> 00:11:32,120 Speaker 3: has to be some shorting going on, some long going on, 220 00:11:32,880 --> 00:11:35,240 Speaker 3: and when one of those market mechanisms becomes a little 221 00:11:35,280 --> 00:11:39,160 Speaker 3: bit more restricted. Well, then prices may deviate away from 222 00:11:39,200 --> 00:11:42,320 Speaker 3: what people consider a fundamental valuation of the firm, So 223 00:11:42,400 --> 00:11:46,760 Speaker 3: that market mechanism itself is important to keep running. And 224 00:11:46,800 --> 00:11:49,320 Speaker 3: as that market mechanism keeps running, then prices are just 225 00:11:49,360 --> 00:11:51,719 Speaker 3: from day to day. But you'll have people who think 226 00:11:51,720 --> 00:11:53,560 Speaker 3: they are too high, people who think they're too low, 227 00:11:54,080 --> 00:11:56,400 Speaker 3: and they will express their opinion on one side or 228 00:11:56,440 --> 00:11:58,439 Speaker 3: the other. When the people who think they're too high 229 00:11:58,520 --> 00:12:03,040 Speaker 3: can't express an opinion, what happens. That's where prices may deviate. 230 00:12:03,640 --> 00:12:05,520 Speaker 3: The thing I would mention about a company like a 231 00:12:05,559 --> 00:12:09,000 Speaker 3: game Stop is that when you have a systematic approach, 232 00:12:09,520 --> 00:12:12,679 Speaker 3: it allows you to handle situations like that very very efficiently. 233 00:12:13,400 --> 00:12:15,440 Speaker 3: So you accept the price for what it is. It 234 00:12:15,520 --> 00:12:17,920 Speaker 3: used to be a micro value stock. Two weeks later 235 00:12:17,960 --> 00:12:21,160 Speaker 3: it's a large growth company. Okay, if you're managing portfolio 236 00:12:21,200 --> 00:12:24,240 Speaker 3: is along those types of pact categories, you know what 237 00:12:24,320 --> 00:12:24,560 Speaker 3: to do. 238 00:12:41,080 --> 00:12:43,640 Speaker 1: Tell us a little bit more about the evolution of 239 00:12:43,720 --> 00:12:48,079 Speaker 1: product offerings at Dimensional and you mentioned that the original 240 00:12:48,559 --> 00:12:50,480 Speaker 1: a lot of the original research was sort of based 241 00:12:50,520 --> 00:12:53,960 Speaker 1: on this idea that they were potential outperformance in small 242 00:12:54,000 --> 00:12:57,080 Speaker 1: caps that were not easily exploited by the offerings that 243 00:12:57,120 --> 00:13:01,000 Speaker 1: were available. And I know you started in mutual funds. 244 00:13:01,280 --> 00:13:04,600 Speaker 1: The one thing I always heard about Dimensional mutual funds 245 00:13:04,679 --> 00:13:07,040 Speaker 1: is that there was sort of a screen to even 246 00:13:07,080 --> 00:13:09,360 Speaker 1: get access to them, and you wanted the advisors who 247 00:13:09,360 --> 00:13:11,560 Speaker 1: put some client money into Dimensional like that. 248 00:13:11,640 --> 00:13:14,520 Speaker 2: There's a great Michael Lewis article that I saw and 249 00:13:14,559 --> 00:13:16,640 Speaker 2: it kind of described the process and I guess the 250 00:13:16,720 --> 00:13:20,360 Speaker 2: late nineteen eighties of getting access to Dimensional and it's 251 00:13:20,400 --> 00:13:23,680 Speaker 2: almost like a revivalist meeting where you had to like 252 00:13:23,800 --> 00:13:26,560 Speaker 2: pledge your undying loyalty to efficient markets. 253 00:13:26,920 --> 00:13:28,400 Speaker 1: Yeah, lot of you talking about it. So what were 254 00:13:28,400 --> 00:13:30,760 Speaker 1: those initial product offerings and then we can get into 255 00:13:30,800 --> 00:13:32,480 Speaker 1: sort of how it evolved over time. 256 00:13:32,640 --> 00:13:35,360 Speaker 3: Yeah, So when the firm started in the eighties, the 257 00:13:35,400 --> 00:13:39,200 Speaker 3: initial product offerings were small cap strategies. Okay, began with 258 00:13:39,400 --> 00:13:43,360 Speaker 3: US small cap strategies, then moved to strategies outside the US, 259 00:13:43,440 --> 00:13:46,800 Speaker 3: the UK, Japan, Europe, and so on and so forth. 260 00:13:47,720 --> 00:13:51,040 Speaker 3: Then fixed income offerings came along, and the fixed income 261 00:13:51,040 --> 00:13:54,200 Speaker 3: offerings started out short term and evolved to be global 262 00:13:54,520 --> 00:13:57,800 Speaker 3: pretty early on by the kind of early nineties. And 263 00:13:57,840 --> 00:14:01,840 Speaker 3: there again, it's about using bond prices to understand differences 264 00:14:01,840 --> 00:14:06,600 Speaker 3: and expected returns across bonds, effectively thinking about the shape 265 00:14:06,600 --> 00:14:08,480 Speaker 3: of the yield curve. How much capital gain should I 266 00:14:08,480 --> 00:14:12,959 Speaker 3: expect versus yield? Right, that's at its heart. Then the 267 00:14:13,040 --> 00:14:17,000 Speaker 3: value research came along in the early nineties and the 268 00:14:17,040 --> 00:14:20,480 Speaker 3: firm really started to grow in two ways. One, the 269 00:14:20,480 --> 00:14:24,160 Speaker 3: product offering expanded, and what drives our product offering is 270 00:14:24,160 --> 00:14:28,400 Speaker 3: two things. One, we work very closely with financial professionals, 271 00:14:28,600 --> 00:14:32,440 Speaker 3: so we don't go straight to retail. We work generally 272 00:14:32,520 --> 00:14:35,960 Speaker 3: with financial professionals and we have deep relationships with them, 273 00:14:36,000 --> 00:14:38,760 Speaker 3: so we understand what problems they're trying to solve, and 274 00:14:38,800 --> 00:14:42,160 Speaker 3: that informs what strategies we bring to the market, and 275 00:14:42,200 --> 00:14:44,640 Speaker 3: you can see that in our track record. If you 276 00:14:44,680 --> 00:14:47,560 Speaker 3: look typically in the industry, the closure rate for funds 277 00:14:47,680 --> 00:14:50,680 Speaker 3: tends to be very high. For dimensional it's incredibly low 278 00:14:51,000 --> 00:14:53,480 Speaker 3: because we understand the need that we're trying to solve 279 00:14:53,520 --> 00:14:56,600 Speaker 3: before we launch a fund or an ETF and have 280 00:14:56,640 --> 00:14:58,760 Speaker 3: a pretty good idea of who has that need and 281 00:14:58,800 --> 00:15:00,000 Speaker 3: who else might have that need. 282 00:15:00,240 --> 00:15:02,840 Speaker 1: So you're sorry, you're not just like throwing. So it 283 00:15:02,880 --> 00:15:05,200 Speaker 1: does feel like a lot of ETFs. You get these 284 00:15:05,360 --> 00:15:07,600 Speaker 1: throwing things at the wall and we'll see if it sticks. 285 00:15:07,640 --> 00:15:09,160 Speaker 1: And that's not your personal launching the. 286 00:15:09,160 --> 00:15:11,800 Speaker 3: Product that that's not our approach at all. It's work 287 00:15:11,840 --> 00:15:16,480 Speaker 3: with clients who understand markets and it can express needs 288 00:15:16,480 --> 00:15:20,200 Speaker 3: their fiduciaries for end investors, and how can we build 289 00:15:20,280 --> 00:15:22,160 Speaker 3: products and solutions to meet their needs. 290 00:15:22,280 --> 00:15:25,400 Speaker 2: To Joe's point earlier, though, why not just cut out 291 00:15:25,440 --> 00:15:29,680 Speaker 2: the middleman completely and sell directly, because presumably you could 292 00:15:29,720 --> 00:15:33,160 Speaker 2: lower you're already pretty low fees even further. 293 00:15:33,960 --> 00:15:38,280 Speaker 3: We think that the combination of financial professional independent money 294 00:15:38,280 --> 00:15:42,480 Speaker 3: manager is a pretty good combination in terms of serving 295 00:15:42,560 --> 00:15:46,200 Speaker 3: the needs of families all across the country. Because you say, 296 00:15:46,200 --> 00:15:48,600 Speaker 3: why not just hold the market you mentioned that at 297 00:15:48,640 --> 00:15:52,160 Speaker 3: the beginning of the podcast and set it and forget it. 298 00:15:53,000 --> 00:15:56,120 Speaker 3: There's a lot of value that a financial professional can 299 00:15:56,160 --> 00:15:57,800 Speaker 3: bring to the table. And I'll get back a little 300 00:15:57,800 --> 00:15:59,440 Speaker 3: bit of the product offering in a moment. But this 301 00:15:59,520 --> 00:16:03,800 Speaker 3: is is interesting in itself because until you define your 302 00:16:03,840 --> 00:16:07,160 Speaker 3: goals with respect to your investment portfolio, you can't actually 303 00:16:07,160 --> 00:16:10,000 Speaker 3: manage risk. You have no way to manage risk until 304 00:16:10,040 --> 00:16:14,840 Speaker 3: you define your goals. Your goals define what assets actually 305 00:16:14,880 --> 00:16:19,080 Speaker 3: have low uncertainty relative to what you're trying to achieve 306 00:16:19,640 --> 00:16:23,359 Speaker 3: and that gives you a risk management asset. Financial professionals 307 00:16:23,440 --> 00:16:26,720 Speaker 3: typically will work with families who may not understand finance 308 00:16:26,800 --> 00:16:30,120 Speaker 3: all that well, and we'll do two things. One, help 309 00:16:30,160 --> 00:16:33,720 Speaker 3: them come with a financial plan and implement that financial 310 00:16:33,720 --> 00:16:37,000 Speaker 3: plan with the right investment vehicles. And then too, help 311 00:16:37,040 --> 00:16:39,760 Speaker 3: them stay disciplined and tune out the noise of all 312 00:16:40,000 --> 00:16:44,280 Speaker 3: what goes on around markets. And so that's why we've 313 00:16:44,560 --> 00:16:47,640 Speaker 3: gone down that path. And you mentioned that that started 314 00:16:47,640 --> 00:16:51,000 Speaker 3: in the early eighties. You're right, and that became another 315 00:16:51,160 --> 00:16:53,040 Speaker 3: kind of large part of our business through the nineties 316 00:16:53,040 --> 00:16:55,760 Speaker 3: and the two thousands. Just back to the kind of 317 00:16:55,800 --> 00:16:58,720 Speaker 3: how we decide on new strategies. The other area then 318 00:16:58,880 --> 00:17:02,280 Speaker 3: is new academic recas search our new research from our 319 00:17:02,280 --> 00:17:04,600 Speaker 3: internal team. We have about one hundred plus folks on 320 00:17:04,640 --> 00:17:08,200 Speaker 3: our internal research team, loss of PhDs and all types 321 00:17:08,240 --> 00:17:12,360 Speaker 3: of disciplines. And as we learn something new about markets 322 00:17:12,520 --> 00:17:15,920 Speaker 3: that can be implemented in a systematic way, we say, okay, great, 323 00:17:16,600 --> 00:17:19,680 Speaker 3: let's provide those benefits to all of our existing clients, 324 00:17:20,200 --> 00:17:22,600 Speaker 3: and it may lead to new strategies that we can 325 00:17:22,640 --> 00:17:24,840 Speaker 3: offer existing and new clients going forward. 326 00:17:25,200 --> 00:17:27,360 Speaker 1: So, as you point out, you know some of these 327 00:17:27,440 --> 00:17:30,080 Speaker 1: terms don't mean the same thing. Passive certainly does not 328 00:17:30,119 --> 00:17:35,000 Speaker 1: necessarily mean indexing. What is the difference between systematic and active? 329 00:17:36,400 --> 00:17:40,560 Speaker 3: For me, I'll use systematic or rules based approach. Okay, 330 00:17:40,760 --> 00:17:44,400 Speaker 3: we like rules based approaches when you can describe here 331 00:17:44,440 --> 00:17:46,199 Speaker 3: are the rules that are going to be used to 332 00:17:46,240 --> 00:17:49,600 Speaker 3: manage the portfolio, because then you can describe that to 333 00:17:49,640 --> 00:17:52,600 Speaker 3: a financial professional. You can give them the tools to 334 00:17:52,680 --> 00:17:56,760 Speaker 3: monitor what you've done, and they can see that you've 335 00:17:56,840 --> 00:17:59,200 Speaker 3: did what you said you would do, and that builds 336 00:17:59,280 --> 00:18:03,280 Speaker 3: trust over time. Trust builds a longer investment horizon over time, 337 00:18:03,760 --> 00:18:06,280 Speaker 3: and what we know about longer investment horizons is that 338 00:18:06,320 --> 00:18:09,360 Speaker 3: the probabilities of success go up with the length of investment, 339 00:18:09,400 --> 00:18:13,639 Speaker 3: probably realizing a positive value premium sized premium probability premium. 340 00:18:13,960 --> 00:18:18,199 Speaker 3: So rules or systematic are very very important because it 341 00:18:18,359 --> 00:18:21,880 Speaker 3: gives you a way to say that I can understand 342 00:18:22,040 --> 00:18:25,280 Speaker 3: what to expect from these strategies given different market environments. 343 00:18:25,600 --> 00:18:28,199 Speaker 3: Traditional active there are probably a set of rules, but 344 00:18:28,200 --> 00:18:31,239 Speaker 3: they're not as well articulated. It may be based on 345 00:18:31,280 --> 00:18:34,200 Speaker 3: a hunch or some analysis, and the analysis may vary 346 00:18:34,240 --> 00:18:37,159 Speaker 3: over time, and so the range of outcomes or the 347 00:18:37,200 --> 00:18:39,679 Speaker 3: dispersion of outcomes that you get from the strategy is 348 00:18:39,760 --> 00:18:43,960 Speaker 3: much greater, and you really can set as strong an expectation. 349 00:18:44,600 --> 00:18:46,960 Speaker 3: A rules based approach is the right approach in my view. 350 00:18:47,440 --> 00:18:49,480 Speaker 3: If you have the right innovation, you've got to do 351 00:18:49,520 --> 00:18:52,119 Speaker 3: the research and keep on pushing forward the boundaries. The 352 00:18:52,240 --> 00:18:55,240 Speaker 3: right pricing. You mentioned that you know we have very 353 00:18:55,240 --> 00:18:58,720 Speaker 3: well priced and then the right support, so you say, 354 00:18:58,960 --> 00:19:01,119 Speaker 3: you know, when we had a advisors and so on 355 00:19:01,160 --> 00:19:03,840 Speaker 3: come to conferences, what was that all about. It was 356 00:19:03,880 --> 00:19:07,760 Speaker 3: providing the right support because education is key. If you 357 00:19:07,960 --> 00:19:11,560 Speaker 3: understand what to expect and how bad it can be 358 00:19:11,560 --> 00:19:15,080 Speaker 3: before the bad times happen, you will be much better 359 00:19:15,080 --> 00:19:18,119 Speaker 3: prepared to handle those bad times when they almost certainly 360 00:19:18,119 --> 00:19:21,879 Speaker 3: will occur. So that support aspect is why we run conferences, 361 00:19:22,000 --> 00:19:26,199 Speaker 3: why we write white papers, why we provide materials to 362 00:19:26,320 --> 00:19:29,960 Speaker 3: financial professionals to help them understand the approach and communicate 363 00:19:30,000 --> 00:19:30,480 Speaker 3: the approach. 364 00:19:31,320 --> 00:19:33,560 Speaker 2: Just on this note, could you maybe describe for us 365 00:19:33,600 --> 00:19:37,000 Speaker 2: the process of coming up with a new product or 366 00:19:37,080 --> 00:19:40,960 Speaker 2: a new systemic investing strategy. What does it look like 367 00:19:41,040 --> 00:19:43,960 Speaker 2: from the initial research and maybe the pitching of the 368 00:19:44,040 --> 00:19:47,720 Speaker 2: idea to the approval process, And could you maybe provide 369 00:19:48,000 --> 00:19:52,000 Speaker 2: a favorite example where people were particularly creative, or one 370 00:19:52,040 --> 00:19:55,720 Speaker 2: that illustrates the way dimensional is thinking about markets. 371 00:19:56,440 --> 00:20:00,520 Speaker 3: Yeah, for sure. So let's take the exam sample of 372 00:20:00,640 --> 00:20:04,200 Speaker 3: profitability and it's going through its ten year anniversary. It's 373 00:20:04,280 --> 00:20:08,320 Speaker 3: been ten years since Professor Novi Marx published one of 374 00:20:08,320 --> 00:20:11,359 Speaker 3: the key papers on that particular topic, and so if 375 00:20:11,400 --> 00:20:13,840 Speaker 3: you go back to you know, twenty eleven, twenty twelve, 376 00:20:13,880 --> 00:20:18,520 Speaker 3: twenty thirteen, effectively there was new research coming out that 377 00:20:18,720 --> 00:20:22,960 Speaker 3: showed profitability, which kind of takes income statement variables and 378 00:20:23,000 --> 00:20:26,440 Speaker 3: scales them by balance sheet variables. It had the power 379 00:20:26,480 --> 00:20:29,960 Speaker 3: to predict future profitability. So it's an intrinsic firm characteristic. 380 00:20:30,080 --> 00:20:32,800 Speaker 3: Tall parents have tall kids, Well run firms tend to 381 00:20:32,800 --> 00:20:35,600 Speaker 3: remain well run firms for some period of time. And 382 00:20:35,680 --> 00:20:40,280 Speaker 3: if you pair that up with other price based metrics 383 00:20:40,359 --> 00:20:43,480 Speaker 3: like price to book, price to earnings, market cap, it 384 00:20:43,560 --> 00:20:47,800 Speaker 3: actually enhanced your description of differences and returns across stocks. 385 00:20:48,040 --> 00:20:50,560 Speaker 3: So we decided that we were going to incorporate that 386 00:20:50,760 --> 00:20:54,160 Speaker 3: in how we managed the portfolios, and so we went 387 00:20:54,200 --> 00:20:57,920 Speaker 3: through a large process of educating clients on here's the research, 388 00:20:58,480 --> 00:21:00,840 Speaker 3: here's how it will change the strategy that we manage 389 00:21:00,840 --> 00:21:04,800 Speaker 3: for you, and here's the benefits that we perceive for 390 00:21:04,960 --> 00:21:08,640 Speaker 3: you all from this piece of research. The research goes 391 00:21:08,680 --> 00:21:10,840 Speaker 3: through a very strong vetting process here internally, we have 392 00:21:11,320 --> 00:21:15,000 Speaker 3: an Investment Research Committee that has Nobel Prize winners on 393 00:21:15,040 --> 00:21:18,440 Speaker 3: a people like Gene Fama, people like Professor Martin ken 394 00:21:18,480 --> 00:21:21,879 Speaker 3: french Is on a professor Novi Marx that vets the 395 00:21:21,920 --> 00:21:25,440 Speaker 3: research very very thoroughly. And then we have a lot 396 00:21:25,440 --> 00:21:28,600 Speaker 3: of expertise in how to implement and so that goes 397 00:21:28,640 --> 00:21:31,399 Speaker 3: through the Investment committee, and the investment committee would review 398 00:21:31,520 --> 00:21:33,760 Speaker 3: all the ways that it would be implemented. So there's 399 00:21:33,760 --> 00:21:36,800 Speaker 3: a kind of a large emphasis on education and then 400 00:21:36,840 --> 00:21:40,840 Speaker 3: also implementation and doing it well. And then we bring 401 00:21:41,080 --> 00:21:43,760 Speaker 3: that to the marketplace with a series of new strategies 402 00:21:43,840 --> 00:21:47,160 Speaker 3: but also enhancements to all of our existing strategies. And 403 00:21:47,400 --> 00:21:49,760 Speaker 3: I think that's worked out very very well. But we 404 00:21:49,840 --> 00:21:53,040 Speaker 3: have these types of examples all the time that come 405 00:21:53,800 --> 00:21:57,240 Speaker 3: where clients either express needs or there's new academic research, 406 00:21:57,800 --> 00:21:59,720 Speaker 3: and that helps us, you know, improve what we do. 407 00:22:00,080 --> 00:22:02,680 Speaker 3: Always get better, that's our mantras. You can always get 408 00:22:02,720 --> 00:22:03,439 Speaker 3: better at what you do. 409 00:22:04,040 --> 00:22:08,840 Speaker 1: So I understand your point about support for financial advisors, 410 00:22:09,000 --> 00:22:14,640 Speaker 1: education for financial advisors, education about potential downsides, periods of downsides, 411 00:22:14,680 --> 00:22:17,760 Speaker 1: what to expect that maybe the premium exists over a 412 00:22:17,800 --> 00:22:19,880 Speaker 1: long time and then there could be bumps in the road. 413 00:22:20,160 --> 00:22:24,000 Speaker 1: I'm curious about a specific example like value, which is 414 00:22:24,640 --> 00:22:28,040 Speaker 1: cheap stocks depending on how you measure it. Supposedly there 415 00:22:28,080 --> 00:22:29,960 Speaker 1: was a lot of research that said they would do better. 416 00:22:30,359 --> 00:22:33,520 Speaker 1: My understanding is that over the last at least fifteen years, 417 00:22:34,320 --> 00:22:37,200 Speaker 1: that has not been an effective strategy, and some people 418 00:22:37,480 --> 00:22:40,480 Speaker 1: have certainly called into question like was that wrong? Will 419 00:22:40,480 --> 00:22:43,680 Speaker 1: it ever come back? Is that busted research? What has 420 00:22:43,800 --> 00:22:46,600 Speaker 1: happened with value? And sort of you know, with the 421 00:22:46,680 --> 00:22:49,200 Speaker 1: research that you've done it dimensional, how does that help 422 00:22:49,200 --> 00:22:51,040 Speaker 1: you understand that factor. 423 00:22:51,520 --> 00:22:53,760 Speaker 3: When you have a time period like that, it's always 424 00:22:53,800 --> 00:22:58,800 Speaker 3: important to be introspective, reevaluate your assumptions, re evaluate the data, 425 00:22:58,880 --> 00:23:02,720 Speaker 3: and also understand what really happened. So I think that 426 00:23:02,840 --> 00:23:05,280 Speaker 3: the idea that there hasn't been a value preom for 427 00:23:05,320 --> 00:23:07,639 Speaker 3: fifteen years, I disagree with that in the sense of 428 00:23:08,119 --> 00:23:11,520 Speaker 3: there's been many months, quarters, years where value stocks have 429 00:23:11,520 --> 00:23:14,400 Speaker 3: outperformed growth stocks. But what you had in the middle 430 00:23:14,440 --> 00:23:17,760 Speaker 3: of that period ending in June twenty twenty was the 431 00:23:17,800 --> 00:23:20,800 Speaker 3: worst three year period in the past one hundred years 432 00:23:20,840 --> 00:23:23,560 Speaker 3: for which we have data here in the US of 433 00:23:24,000 --> 00:23:27,240 Speaker 3: value stocks, in particular small value stocks versus large growth 434 00:23:28,200 --> 00:23:32,239 Speaker 3: And you say, well, was that unexpected or was that 435 00:23:32,359 --> 00:23:36,040 Speaker 3: a change in markets? If you look at the returns 436 00:23:36,040 --> 00:23:38,960 Speaker 3: of some of the large growth companies during that time 437 00:23:39,000 --> 00:23:41,440 Speaker 3: period and even over the ten years ending in June 438 00:23:41,480 --> 00:23:44,600 Speaker 3: twenty twenty, and you looked at the fangs or whichever 439 00:23:44,760 --> 00:23:48,159 Speaker 3: latest acronymy you want to use, they had annualized compound 440 00:23:48,200 --> 00:23:51,280 Speaker 3: return rates of thirty percent per year for about a decade. 441 00:23:51,680 --> 00:23:55,439 Speaker 3: That's unexpected. You can't tell me that people you know, 442 00:23:55,560 --> 00:23:58,639 Speaker 3: going back, you know, in twenty ten and so on, 443 00:23:58,680 --> 00:24:02,080 Speaker 3: we're going to say these want to return thirty percent 444 00:24:02,119 --> 00:24:04,919 Speaker 3: a year for the next decade. That's an unexpectedly good outcome. 445 00:24:04,920 --> 00:24:09,560 Speaker 3: And you can say why, Well, those firms did unexpectedly well. 446 00:24:09,840 --> 00:24:13,680 Speaker 3: They served their clients' needs better than anybody had anticipated, 447 00:24:13,760 --> 00:24:16,679 Speaker 3: grew their revenue better than anybody had anticipated, and became 448 00:24:17,480 --> 00:24:20,439 Speaker 3: dominant firms in the market, and that was an unexpected event. 449 00:24:21,560 --> 00:24:24,520 Speaker 3: You factor that in and you say, no, there's nothing 450 00:24:24,600 --> 00:24:27,520 Speaker 3: broken here. It's just that there's a lot of volatility 451 00:24:27,560 --> 00:24:31,720 Speaker 3: with these premiums, and this time period tells you that 452 00:24:31,800 --> 00:24:35,120 Speaker 3: you can have large unexpected events. But if you break 453 00:24:35,160 --> 00:24:37,000 Speaker 3: down a lot of those sub periods, you've had lots 454 00:24:37,040 --> 00:24:40,520 Speaker 3: of strong periods for value. So for example, after that 455 00:24:40,600 --> 00:24:43,359 Speaker 3: worst three year period on record June twenty twenty, we 456 00:24:43,400 --> 00:24:45,640 Speaker 3: went into one of the strongest two to three year 457 00:24:45,680 --> 00:24:50,000 Speaker 3: periods on record for value versus growth. And so it's 458 00:24:50,359 --> 00:24:53,000 Speaker 3: kind of tempting to try to summarize a fifteen year 459 00:24:53,040 --> 00:24:57,360 Speaker 3: period with one observation, but typically that's not as helpful. 460 00:24:57,520 --> 00:25:00,760 Speaker 3: The one comment I would make the learning for that 461 00:25:00,800 --> 00:25:03,680 Speaker 3: period is that sector weights matter a lot, and the 462 00:25:03,760 --> 00:25:08,439 Speaker 3: value strategy, and in particular, you know, value strategies when 463 00:25:08,480 --> 00:25:11,640 Speaker 3: you just look at them, generally tended to be underway technology. 464 00:25:12,200 --> 00:25:14,440 Speaker 3: We use a lot of sector caps and sector constraints, 465 00:25:14,640 --> 00:25:17,600 Speaker 3: and they were actually quite helpful for our relative performance 466 00:25:17,680 --> 00:25:21,000 Speaker 3: during that period and subsequent periods. And I think that 467 00:25:21,119 --> 00:25:23,560 Speaker 3: was one thing that was probably additive that that data 468 00:25:23,600 --> 00:25:25,399 Speaker 3: gave you in terms of understanding of how better to 469 00:25:25,440 --> 00:25:27,200 Speaker 3: build value strategies from that period. 470 00:25:27,600 --> 00:25:30,919 Speaker 2: What about the definition of value itself, because over the 471 00:25:30,960 --> 00:25:33,400 Speaker 2: past couple of years there's been this discourse that may 472 00:25:33,400 --> 00:25:36,760 Speaker 2: bee traditional measures of value such as price to book, 473 00:25:36,760 --> 00:25:40,760 Speaker 2: which doesn't take into account in tangible asset values. Maybe 474 00:25:40,760 --> 00:25:43,239 Speaker 2: that's not the right way to do it. How are 475 00:25:43,240 --> 00:25:45,719 Speaker 2: you thinking about actually measuring value? 476 00:25:46,160 --> 00:25:48,960 Speaker 3: So a couple of kind of quick reactions there. One, 477 00:25:49,480 --> 00:25:51,719 Speaker 3: there are a lot of intangible assets that are in 478 00:25:51,760 --> 00:25:56,040 Speaker 3: book value. So let's take some examples. If Company A 479 00:25:56,040 --> 00:25:59,720 Speaker 3: acquires Company B, then there may be line items books 480 00:25:59,720 --> 00:26:02,840 Speaker 3: through them merger and acquisition process that are called externally 481 00:26:02,920 --> 00:26:06,879 Speaker 3: acquired in tangibles. And so as companies go through this 482 00:26:07,040 --> 00:26:08,920 Speaker 3: M and A process, you get a lot of intangible 483 00:26:08,960 --> 00:26:11,240 Speaker 3: assets on a company's balance sheet. In fact, if you 484 00:26:11,240 --> 00:26:13,359 Speaker 3: look at S and P five hundred companies, I think 485 00:26:13,400 --> 00:26:15,399 Speaker 3: it's something like twenty five percent of the value of 486 00:26:15,400 --> 00:26:19,080 Speaker 3: the assets are intangible assets externally acquired. And so that's 487 00:26:19,320 --> 00:26:23,240 Speaker 3: grown since about the year two thousand because the accounting 488 00:26:23,560 --> 00:26:27,439 Speaker 3: mechanisms for how you treated M and A activity changed 489 00:26:27,480 --> 00:26:29,359 Speaker 3: in the year two thousand in the US. So you 490 00:26:29,400 --> 00:26:32,399 Speaker 3: see a lot of intangible assets on companies balance sheets. 491 00:26:32,640 --> 00:26:37,040 Speaker 3: Perfect example is when Disney acquired what's the company I'm 492 00:26:37,080 --> 00:26:42,679 Speaker 3: thinking of for Star Wars, oh, Lucasfilms. Lucasfilms, that was 493 00:26:42,760 --> 00:26:45,119 Speaker 3: about two billion in intangible assets and two billion in 494 00:26:45,119 --> 00:26:49,399 Speaker 3: goodwill appeared on Disney's balance sheet. What doesn't typically appear 495 00:26:49,440 --> 00:26:53,720 Speaker 3: on the balance sheet is internally developed intangible assets, and 496 00:26:53,720 --> 00:26:57,200 Speaker 3: there's very good reasons that they don't. They're usually expensed, 497 00:26:57,320 --> 00:27:00,439 Speaker 3: not capitalized, and so they flow through the incomest not 498 00:27:00,480 --> 00:27:04,040 Speaker 3: the balance sheet. And the reason behind that is that 499 00:27:04,119 --> 00:27:07,440 Speaker 3: as you do research and development, or you do things 500 00:27:07,440 --> 00:27:12,119 Speaker 3: that develop brand and future intangible assets, the level of 501 00:27:12,200 --> 00:27:15,920 Speaker 3: uncertainty around what the value of those will be when 502 00:27:15,960 --> 00:27:19,160 Speaker 3: you're incurring the expense to build them is massively high. 503 00:27:19,160 --> 00:27:22,200 Speaker 3: And we've done lots of work on this. So in short, 504 00:27:22,240 --> 00:27:24,520 Speaker 3: there's kind of a mix. There's a good chunk of 505 00:27:24,520 --> 00:27:29,080 Speaker 3: intangibles on balance sheets and some that's internally developed intangibles 506 00:27:29,080 --> 00:27:32,240 Speaker 3: that typically are not And when you look over time, 507 00:27:32,280 --> 00:27:34,120 Speaker 3: in fact, I think that the way that the data 508 00:27:34,160 --> 00:27:37,240 Speaker 3: is presented can be misleading because if you look actually 509 00:27:37,320 --> 00:27:40,720 Speaker 3: at the percent of balance sheets that are intangibles, it 510 00:27:40,720 --> 00:27:43,879 Speaker 3: actually hasn't changed that much over time. It's just that 511 00:27:43,920 --> 00:27:47,320 Speaker 3: when you compare to things like property and equipment are 512 00:27:47,480 --> 00:27:49,480 Speaker 3: subsets of what's on the balance sheet, that you get 513 00:27:49,480 --> 00:27:52,399 Speaker 3: the big changes. We've done a lot of work on 514 00:27:52,440 --> 00:27:56,360 Speaker 3: this adjusted book values for intangibles with and without, and 515 00:27:56,640 --> 00:28:02,359 Speaker 3: what really boils down to is that the estimates for 516 00:28:02,359 --> 00:28:05,560 Speaker 3: eternally developed intangibles are too noisy to be useful, so 517 00:28:05,600 --> 00:28:09,080 Speaker 3: we don't use those. But when you combine it with profitability, 518 00:28:09,119 --> 00:28:12,280 Speaker 3: asset growth things like that, it actually doesn't matter, and 519 00:28:12,640 --> 00:28:15,080 Speaker 3: you have to use multiple variables for it not to matter. 520 00:28:15,760 --> 00:28:18,960 Speaker 3: But it's actually not that relevant for computing value programs. 521 00:28:35,800 --> 00:28:39,320 Speaker 1: So I realized there's multiple ways we could take this conversation, 522 00:28:39,520 --> 00:28:42,000 Speaker 1: and we could talk about different factors for a long time, 523 00:28:42,160 --> 00:28:44,080 Speaker 1: but I also want to talk about the sort of 524 00:28:44,360 --> 00:28:50,200 Speaker 1: industry and the nature of products. You started offering mutual funds, 525 00:28:50,640 --> 00:28:53,360 Speaker 1: and as Tracy mentioned, there is this sort of whole 526 00:28:53,400 --> 00:28:57,160 Speaker 1: process about getting access to them and education and screening, etc. 527 00:28:57,840 --> 00:29:00,800 Speaker 1: Now you're really big. You're one of the fastest ETF 528 00:29:01,000 --> 00:29:03,400 Speaker 1: When did you get into ETFs? 529 00:29:03,600 --> 00:29:05,720 Speaker 3: Our three year anniversary is this November? 530 00:29:05,960 --> 00:29:07,920 Speaker 1: Very so, given like ETFs have been a while, and 531 00:29:08,320 --> 00:29:09,240 Speaker 1: it was late. 532 00:29:09,200 --> 00:29:12,440 Speaker 2: As soon as the actively managed ETFs were approved pretty. 533 00:29:12,200 --> 00:29:15,840 Speaker 3: Much right, Yeah, in about October twenty nineteen. There's what's 534 00:29:15,880 --> 00:29:19,040 Speaker 3: called Rule sixty eleven, the ETF rule, And then about 535 00:29:19,080 --> 00:29:22,600 Speaker 3: one year later we had ETFs in the marketplace. 536 00:29:22,160 --> 00:29:25,800 Speaker 1: And you're one of the fastest growing ETF companies. Can 537 00:29:25,800 --> 00:29:27,840 Speaker 1: you just give it a little bit overview, like how 538 00:29:27,880 --> 00:29:30,240 Speaker 1: big is that? How much of the ETF money is 539 00:29:30,320 --> 00:29:33,120 Speaker 1: just sort of the same investor has switched from a 540 00:29:33,160 --> 00:29:37,000 Speaker 1: dimensional mutual fund to a dimensional ETF, Like how big 541 00:29:37,040 --> 00:29:39,120 Speaker 1: is that? And what is the relative weight of like 542 00:29:39,240 --> 00:29:42,160 Speaker 1: the legacy or the mutual funds versus the ETF today? 543 00:29:42,320 --> 00:29:43,160 Speaker 1: What are we talking about? 544 00:29:43,560 --> 00:29:47,760 Speaker 3: Yeah, the the ETF business for us, I'll take a 545 00:29:47,800 --> 00:29:50,640 Speaker 3: step back, sure was why did we do it to 546 00:29:50,680 --> 00:29:53,320 Speaker 3: begin with? One was the rule change that allowed us 547 00:29:53,360 --> 00:29:54,920 Speaker 3: to do what we do in mutual funds and an 548 00:29:54,920 --> 00:29:57,400 Speaker 3: ETF wrapper, which was important to us because we don't 549 00:29:57,440 --> 00:30:00,920 Speaker 3: sacrifice the investment principles and the investment proper position. We 550 00:30:00,960 --> 00:30:03,720 Speaker 3: want to be able to deliver equally good investment propositions 551 00:30:03,760 --> 00:30:07,720 Speaker 3: regardless of the rapper. And two is that the financial professionals, 552 00:30:08,080 --> 00:30:11,000 Speaker 3: whether those are advisors or institutions that we were working with, 553 00:30:11,080 --> 00:30:14,280 Speaker 3: we're using ETFs more and more frequently and we're asking 554 00:30:14,320 --> 00:30:17,760 Speaker 3: for dimension to have an ETF lineup. So we said, okay, 555 00:30:18,280 --> 00:30:20,520 Speaker 3: now that we have this new rule, we can do 556 00:30:20,680 --> 00:30:23,600 Speaker 3: what we did in mutual funds. So we launched the 557 00:30:23,600 --> 00:30:26,480 Speaker 3: ETFs with that in mind, and we'll have you know, 558 00:30:27,720 --> 00:30:29,840 Speaker 3: close to forty by the end of the year in 559 00:30:29,920 --> 00:30:34,200 Speaker 3: terms of ETFs, and all launched with input from our 560 00:30:34,240 --> 00:30:37,000 Speaker 3: clients on which are most important to you and for 561 00:30:37,160 --> 00:30:40,960 Speaker 3: your businesses. There's no doubt that the industry has seen 562 00:30:41,120 --> 00:30:44,480 Speaker 3: flows from mutual funds to ETFs. I think that's a 563 00:30:44,520 --> 00:30:47,320 Speaker 3: trend that we've seen in the industry, and we have 564 00:30:47,520 --> 00:30:51,880 Speaker 3: some advisors that have changed kind of transition from our 565 00:30:51,960 --> 00:30:56,440 Speaker 3: mutual funds to our ETFs. What's been interesting about the ETFs, though, 566 00:30:56,680 --> 00:30:59,960 Speaker 3: is that allows us to access i would say, new 567 00:31:00,000 --> 00:31:05,520 Speaker 3: new channels, new advisors, new wealth platforms that we traditionally 568 00:31:05,520 --> 00:31:07,920 Speaker 3: haven't played in. And so if you look at the 569 00:31:08,200 --> 00:31:12,360 Speaker 3: kind of large broker dealers, the wirehouses, if you look 570 00:31:12,360 --> 00:31:14,720 Speaker 3: at some of the bank trusts, all of those types 571 00:31:14,760 --> 00:31:18,320 Speaker 3: of platforms and organizations, we traditionally haven't played there with 572 00:31:18,440 --> 00:31:21,960 Speaker 3: mutual funds, but ETFs are lend themselves much more so 573 00:31:21,960 --> 00:31:25,280 Speaker 3: there's been kind of many new clients actually have come 574 00:31:25,320 --> 00:31:27,360 Speaker 3: on board over the past number of years, and that's 575 00:31:27,400 --> 00:31:29,960 Speaker 3: also helped the ETF growth. 576 00:31:30,640 --> 00:31:33,040 Speaker 2: This was going to be my next question. Actually, we've 577 00:31:33,040 --> 00:31:35,840 Speaker 2: said fastest growing a number of times now, and I 578 00:31:35,840 --> 00:31:38,400 Speaker 2: think your assets under management are now above five hundred 579 00:31:38,440 --> 00:31:42,280 Speaker 2: billion something like that. What proportion of inflows are new 580 00:31:42,320 --> 00:31:46,320 Speaker 2: clients versus people migrating from mutual funds into ETFs. 581 00:31:46,560 --> 00:31:51,040 Speaker 3: It's a tricky question to answer because of the data constraints, 582 00:31:51,560 --> 00:31:54,640 Speaker 3: but I'd say, you know, in terms of new flows 583 00:31:54,640 --> 00:31:58,320 Speaker 3: into ETFs versus maybe transitions, what educated guess is maybe 584 00:31:58,400 --> 00:32:01,040 Speaker 3: fifty to fifty something in around there thereabout. So we 585 00:32:01,080 --> 00:32:04,400 Speaker 3: have about one hundred billion now in ETF assets. Globally, 586 00:32:05,160 --> 00:32:07,480 Speaker 3: we kind of bounce around six twenty five to six 587 00:32:07,560 --> 00:32:11,239 Speaker 3: fifty billion in terms of total firm assets on what 588 00:32:11,280 --> 00:32:14,160 Speaker 3: we manage on behalf of clients. And our mutual fund 589 00:32:14,480 --> 00:32:16,800 Speaker 3: business is still very very large street of four hundred 590 00:32:16,800 --> 00:32:19,920 Speaker 3: billion of US mutual funds. Our US mutual funds are 591 00:32:19,920 --> 00:32:22,520 Speaker 3: still very important to us. We continue to innovate and 592 00:32:22,560 --> 00:32:26,560 Speaker 3: push forward there. ETF is important. Kind of when Dave 593 00:32:26,600 --> 00:32:28,480 Speaker 3: and I first got on the role, Davis is the 594 00:32:28,520 --> 00:32:31,880 Speaker 3: other co CEO. One of the things that we kind 595 00:32:31,920 --> 00:32:35,000 Speaker 3: of agreed on is that let's make it convenient as 596 00:32:35,000 --> 00:32:40,280 Speaker 3: we can for financial professionals, whether they're institutions or advisors 597 00:32:40,680 --> 00:32:44,880 Speaker 3: to access this investment approach, and that's why the ETFs, 598 00:32:44,920 --> 00:32:47,720 Speaker 3: that's why the enhancements to mutual funds, that's why lowering 599 00:32:47,720 --> 00:32:50,920 Speaker 3: our account minimum with SMAs. It's all about, you know, 600 00:32:51,000 --> 00:32:54,520 Speaker 3: convenience of use for the professionals to serve their clients. 601 00:32:55,080 --> 00:32:57,720 Speaker 2: So I know you said earlier that you consider yourselves 602 00:32:57,840 --> 00:33:01,560 Speaker 2: more passive, but not in that sers and I kind 603 00:33:01,560 --> 00:33:05,040 Speaker 2: of want to get your take on the overall rise 604 00:33:05,400 --> 00:33:09,320 Speaker 2: of I guess extreme passive the indexation in the industry. 605 00:33:09,400 --> 00:33:11,120 Speaker 2: And I know there's been a lot of hand ringing 606 00:33:11,480 --> 00:33:14,920 Speaker 2: over this idea that if you're just benchmark to an 607 00:33:15,000 --> 00:33:17,360 Speaker 2: index and you're trying to hug that index as closely 608 00:33:17,400 --> 00:33:21,520 Speaker 2: as possible, you're actually still making an active investment decision. 609 00:33:21,560 --> 00:33:24,640 Speaker 2: It's just you're kind of outsourcing that active management to 610 00:33:24,680 --> 00:33:28,360 Speaker 2: the benchmark index provider, so MSCI or SMP or whoever. 611 00:33:28,920 --> 00:33:30,240 Speaker 2: What do you think about that argument? 612 00:33:31,040 --> 00:33:34,720 Speaker 3: Well, this goes back to Joe's opening remarks, which I 613 00:33:34,920 --> 00:33:37,719 Speaker 3: kind of take as evidence that the academic evidence has 614 00:33:37,760 --> 00:33:40,640 Speaker 3: won in the sense that academics for a long time 615 00:33:40,640 --> 00:33:43,760 Speaker 3: have slitted the performance of active managers and say, you know, 616 00:33:43,840 --> 00:33:46,040 Speaker 3: there's no real evidence here that people can now guess 617 00:33:46,120 --> 00:33:49,880 Speaker 3: the market, and people who outperform by stockpicking and market 618 00:33:49,880 --> 00:33:53,120 Speaker 3: timing are doing so by look versus skill. How you 619 00:33:53,120 --> 00:33:56,240 Speaker 3: can't disentangle it too, And so there's been a large 620 00:33:56,280 --> 00:33:59,840 Speaker 3: flow of money into indexes. I think the people of 621 00:34:00,280 --> 00:34:03,880 Speaker 3: indexed on index because there's a lot that you can 622 00:34:03,960 --> 00:34:06,280 Speaker 3: do to actually get your fair share of the returns 623 00:34:06,280 --> 00:34:08,440 Speaker 3: that the market is willing to offer, and in my view, 624 00:34:08,480 --> 00:34:10,279 Speaker 3: indexing leave some of that money on the table. So 625 00:34:10,360 --> 00:34:13,680 Speaker 3: let's take some examples. Tesla was added to the S 626 00:34:13,719 --> 00:34:16,200 Speaker 3: and P five hundred in December of twenty twenty. We 627 00:34:16,280 --> 00:34:18,400 Speaker 3: all remember that event. It was one of the biggest 628 00:34:18,840 --> 00:34:21,480 Speaker 3: new entrants to the S and P five hundred on history. 629 00:34:22,520 --> 00:34:26,800 Speaker 3: And if you look at the price pressure that index 630 00:34:26,880 --> 00:34:30,319 Speaker 3: managers exerted on Tesla's stock on the day that it 631 00:34:30,360 --> 00:34:33,000 Speaker 3: was added to the S and P five hundred, on 632 00:34:33,120 --> 00:34:36,239 Speaker 3: that day, the price was driven up, and then after 633 00:34:36,280 --> 00:34:39,680 Speaker 3: that price pressure came down, the price came down. You 634 00:34:39,719 --> 00:34:42,480 Speaker 3: say how much did that cost the index? It actually 635 00:34:42,520 --> 00:34:45,640 Speaker 3: costs the index between five and ten basis points in 636 00:34:45,719 --> 00:34:48,680 Speaker 3: one month, and you can come up with reasonable ways 637 00:34:48,719 --> 00:34:51,000 Speaker 3: to make that estimate. In one month to add one 638 00:34:51,040 --> 00:34:54,360 Speaker 3: stock to the index. So here's the most liquid stocks 639 00:34:54,360 --> 00:34:57,960 Speaker 3: in the entire world. And to accommodate a rebalancing event, 640 00:34:58,560 --> 00:35:02,080 Speaker 3: people spend two to three times what's a typical expense 641 00:35:02,160 --> 00:35:05,160 Speaker 3: ratio on an SMP five hundred index fund on adding 642 00:35:05,160 --> 00:35:08,759 Speaker 3: the stock, but it's never reported. People don't notice it 643 00:35:08,840 --> 00:35:11,600 Speaker 3: unless they do the research to actually find out, and 644 00:35:11,640 --> 00:35:14,680 Speaker 3: there's an example of leaving money on the table by 645 00:35:14,880 --> 00:35:19,520 Speaker 3: having too rigid an approach. In my view, there's no 646 00:35:19,719 --> 00:35:23,759 Speaker 3: reason that you need to hold a perfectly market cap 647 00:35:23,840 --> 00:35:27,759 Speaker 3: weighted portfolio of stocks, and indexes typically aren't perfectly market 648 00:35:27,800 --> 00:35:31,720 Speaker 3: cap weight in a aney event that it's much better 649 00:35:31,960 --> 00:35:36,080 Speaker 3: if you have some flexibility to deviate for market cap 650 00:35:36,080 --> 00:35:39,960 Speaker 3: weights to pursue higher returns, but also flexibility on how 651 00:35:40,000 --> 00:35:43,960 Speaker 3: to turn the portfolio over and keep yourself focused day 652 00:35:43,960 --> 00:35:45,600 Speaker 3: in day out. You don't need to wait for one 653 00:35:45,719 --> 00:35:50,080 Speaker 3: or two events each year to rebalance. So indexing is 654 00:35:50,120 --> 00:35:54,880 Speaker 3: definitely an active decision with respect to how they're put together, 655 00:35:55,200 --> 00:35:57,960 Speaker 3: how they decide to rebalance, and those active decisions have 656 00:35:58,000 --> 00:35:59,040 Speaker 3: cost investors' money. 657 00:36:00,040 --> 00:36:03,760 Speaker 2: Suggestion earlier was the dimensional doesn't try to outguess the market, 658 00:36:03,800 --> 00:36:08,360 Speaker 2: but you do try to outperform. Is this market structure 659 00:36:08,640 --> 00:36:12,560 Speaker 2: awareness a key plank of that outperformance? I know you 660 00:36:12,600 --> 00:36:16,280 Speaker 2: talked about systematic strategies and having a rules based approach, 661 00:36:16,320 --> 00:36:19,560 Speaker 2: but is it also just understanding some of these market 662 00:36:19,600 --> 00:36:23,799 Speaker 2: dynamics and recognizing alpha opportunities. For instance, when there is 663 00:36:23,840 --> 00:36:25,560 Speaker 2: an index rebalancing event. 664 00:36:25,719 --> 00:36:30,800 Speaker 3: Spot on, there's two major sources. One is, does anybody 665 00:36:30,840 --> 00:36:32,880 Speaker 3: think that all stocks of the same expected return are 666 00:36:32,920 --> 00:36:36,440 Speaker 3: all bonds of the same expected return? No, there's differences 667 00:36:36,440 --> 00:36:39,200 Speaker 3: in expected returns. And you can use a systematic framework 668 00:36:39,239 --> 00:36:44,520 Speaker 3: that's based on valuation theory to identify those. Two is 669 00:36:45,000 --> 00:36:48,520 Speaker 3: be efficient, don't do stupid things when you know they're stupid. 670 00:36:48,640 --> 00:36:52,680 Speaker 3: Always good advice, always good advice. And that is about 671 00:36:53,000 --> 00:36:57,640 Speaker 3: how do you understand how markets operate, how to trade? 672 00:36:58,360 --> 00:37:00,600 Speaker 3: How do you add value while you hold stock? In 673 00:37:00,680 --> 00:37:04,000 Speaker 3: terms of the corporate actions that you elect. Some corporate actions, 674 00:37:04,239 --> 00:37:07,440 Speaker 3: just as an example, an index will choose a way 675 00:37:07,680 --> 00:37:10,920 Speaker 3: to have deal with the corporate action a stock is 676 00:37:10,960 --> 00:37:13,439 Speaker 3: spinning something off or doing a tender or something like that, 677 00:37:14,040 --> 00:37:16,759 Speaker 3: and the index providers may not always choose them the 678 00:37:17,200 --> 00:37:20,960 Speaker 3: value maximizing way to deal with the corporate action. Index 679 00:37:22,160 --> 00:37:25,440 Speaker 3: managers often follow the index provider. We say, well, why 680 00:37:25,440 --> 00:37:28,320 Speaker 3: would you do that? There's another election on this corporate 681 00:37:28,320 --> 00:37:31,640 Speaker 3: action that actually improves value. Pick that one, right, There's 682 00:37:31,800 --> 00:37:34,320 Speaker 3: things like that that add value. So there's a combination 683 00:37:34,440 --> 00:37:38,000 Speaker 3: of the research to identify the systematic drivers of returns 684 00:37:38,360 --> 00:37:41,520 Speaker 3: and then how do you implement. Implementation is key and 685 00:37:41,560 --> 00:37:44,240 Speaker 3: those are two big drivers of how we outperform indices. 686 00:37:44,280 --> 00:37:47,200 Speaker 3: And by the way, just a quick stat if you 687 00:37:47,239 --> 00:37:50,080 Speaker 3: look at our US mutual funds, eighty percent of them 688 00:37:50,120 --> 00:37:52,040 Speaker 3: over the past twenty years that have been live for 689 00:37:52,080 --> 00:37:55,319 Speaker 3: the twenty years have outperformed their benchmark indices, which is 690 00:37:55,360 --> 00:37:59,040 Speaker 3: an incredibly unusual stat for our industry. 691 00:38:00,120 --> 00:38:04,160 Speaker 1: Real quickly, on the sort of like product distribution side ETFs, 692 00:38:04,239 --> 00:38:07,000 Speaker 1: obviously I imagine Tracy or I could log into a 693 00:38:07,000 --> 00:38:10,680 Speaker 1: brokerage and buy a dimensional ETF. But still focus from 694 00:38:10,680 --> 00:38:14,200 Speaker 1: the sort of corporate strategy perspective is to distribute them 695 00:38:14,320 --> 00:38:16,120 Speaker 1: or sell them through advisors. 696 00:38:16,360 --> 00:38:19,480 Speaker 3: That's correct, and I hope that you guys do that. 697 00:38:19,560 --> 00:38:21,920 Speaker 3: We would love to have you as clients, but that 698 00:38:22,400 --> 00:38:26,680 Speaker 3: is the approach. We know how to work with financial professionals, 699 00:38:26,680 --> 00:38:30,239 Speaker 3: whether they're institutions or advisors. We know how to give 700 00:38:30,280 --> 00:38:33,600 Speaker 3: them the tools to monitor what we do, and then 701 00:38:33,640 --> 00:38:35,600 Speaker 3: we think that the advice they give to their and 702 00:38:35,800 --> 00:38:38,680 Speaker 3: constituencies is typically the right way to go. So that's 703 00:38:38,719 --> 00:38:42,000 Speaker 3: the approach where we don't market directly to the retailed public. 704 00:38:42,719 --> 00:38:44,800 Speaker 2: Can you talk to us a little bit more about 705 00:38:44,920 --> 00:38:48,279 Speaker 2: cost because this has also been a big conversation in 706 00:38:48,320 --> 00:38:50,880 Speaker 2: the fund industry, the idea of a race to the bottom, 707 00:38:51,160 --> 00:38:55,439 Speaker 2: the idea that, especially in passive or indexing, the only 708 00:38:55,480 --> 00:38:57,680 Speaker 2: thing that really matters is your cost ratio, and so 709 00:38:57,719 --> 00:39:00,360 Speaker 2: you want to get that as low as possible. Is 710 00:39:00,360 --> 00:39:03,399 Speaker 2: there a limit to how low that can go? And 711 00:39:03,520 --> 00:39:06,400 Speaker 2: do you yourself feel pressure to get it as low 712 00:39:06,440 --> 00:39:06,960 Speaker 2: as possible? 713 00:39:07,000 --> 00:39:07,120 Speaker 3: Right? 714 00:39:07,480 --> 00:39:08,879 Speaker 1: Just to sort of add out to that, like I'm 715 00:39:08,880 --> 00:39:11,640 Speaker 1: thinking in the Tesla example, someone has to be paying 716 00:39:11,680 --> 00:39:13,520 Speaker 1: attention to that or that is someone that you know 717 00:39:13,640 --> 00:39:16,560 Speaker 1: that takes some level of human work to be thinking 718 00:39:16,600 --> 00:39:20,120 Speaker 1: about these dynamics at which I imagine isn't free. So yeah, i' 719 00:39:20,320 --> 00:39:21,440 Speaker 1: what is the limit. 720 00:39:21,160 --> 00:39:24,680 Speaker 3: Of Yeah, there's two things that go on there. One 721 00:39:24,760 --> 00:39:27,400 Speaker 3: is the explicit expense ratio, and there has been a 722 00:39:27,440 --> 00:39:31,680 Speaker 3: strong focus on expense ratios, and we've reacted similarly as 723 00:39:31,719 --> 00:39:35,480 Speaker 3: we've gained efficiencies with our systems and scale, we've reduced 724 00:39:35,880 --> 00:39:38,319 Speaker 3: our fees over time. Our weighted average fees come down 725 00:39:38,320 --> 00:39:40,480 Speaker 3: by about thirty percent in the past, you know, four 726 00:39:40,560 --> 00:39:44,200 Speaker 3: or five years. So that's one aspect, But the expense 727 00:39:44,320 --> 00:39:48,120 Speaker 3: ratio is not the only part for total cost of ownership. 728 00:39:48,560 --> 00:39:52,719 Speaker 3: There's also things around implementation that are very very important 729 00:39:52,760 --> 00:39:55,319 Speaker 3: with respect to the total cost of ownership. So we 730 00:39:55,400 --> 00:39:57,919 Speaker 3: spend a lot of time on education, which is why 731 00:39:57,960 --> 00:39:59,799 Speaker 3: we have those conferences and so on, and work with 732 00:39:59,840 --> 00:40:02,640 Speaker 3: them professionals on what are some of the aspects that 733 00:40:02,719 --> 00:40:06,240 Speaker 3: maybe aren't as obvious but go into the total cost 734 00:40:06,320 --> 00:40:10,520 Speaker 3: of ownership. Let's take an example of securities lending, and 735 00:40:10,960 --> 00:40:14,320 Speaker 3: if you look at securities lending revenue, it can vary 736 00:40:14,360 --> 00:40:17,200 Speaker 3: across asset category, but I'll take the extreme when emerging 737 00:40:17,239 --> 00:40:20,719 Speaker 3: market's small, emerging markets small. Over the past few years, 738 00:40:20,719 --> 00:40:26,080 Speaker 3: typically those strategies have gained forty basis points in securities 739 00:40:26,160 --> 00:40:28,840 Speaker 3: lending revenue each year. Depending on how you do that, 740 00:40:28,840 --> 00:40:32,480 Speaker 3: that can be a material percentage of the expense ratio 741 00:40:33,120 --> 00:40:36,960 Speaker 3: given back to the investors through a process that you 742 00:40:37,040 --> 00:40:39,279 Speaker 3: can have going on inside the fund. So I think 743 00:40:39,280 --> 00:40:42,200 Speaker 3: that they're the total cost of ownership is key, and 744 00:40:42,239 --> 00:40:44,520 Speaker 3: you have to dig far deeper than the expense ratio 745 00:40:44,520 --> 00:40:46,600 Speaker 3: to actually get there. When you look at the total 746 00:40:46,640 --> 00:40:49,480 Speaker 3: cost of ownership of indices, it's actually much higher than 747 00:40:49,520 --> 00:40:52,400 Speaker 3: the expense ratio because of the way that they're implemented 748 00:40:52,800 --> 00:40:55,080 Speaker 3: and often the lack of focus on the asset category. 749 00:40:56,360 --> 00:40:58,279 Speaker 1: What's next for you? I mean, in sort of the 750 00:40:58,480 --> 00:41:01,239 Speaker 1: big picture TRENDSFER we sort of trace the sort of 751 00:41:01,280 --> 00:41:06,359 Speaker 1: lineage of the company and the introduction of various ETFs, 752 00:41:06,680 --> 00:41:10,400 Speaker 1: what aspects whether it's sort of industry market structure of 753 00:41:10,440 --> 00:41:13,359 Speaker 1: things like where do you see the future or where 754 00:41:13,400 --> 00:41:14,560 Speaker 1: are you investing for growth. 755 00:41:15,000 --> 00:41:17,200 Speaker 3: One of the big areas that we've been working on 756 00:41:17,280 --> 00:41:21,879 Speaker 3: recently is our application for exemptive relief for ETF share 757 00:41:21,880 --> 00:41:25,879 Speaker 3: classes of mutual funds. And we think that if that 758 00:41:25,960 --> 00:41:29,319 Speaker 3: becomes a high enough priority for the SEC and more 759 00:41:29,360 --> 00:41:32,520 Speaker 3: folks in the industry are able to get that exemptive relief, 760 00:41:33,120 --> 00:41:34,880 Speaker 3: we think that could be a big thing for the inserty. 761 00:41:34,880 --> 00:41:36,640 Speaker 1: Just why is this important? What is this and why 762 00:41:36,680 --> 00:41:37,320 Speaker 1: is this important? 763 00:41:37,400 --> 00:41:39,719 Speaker 3: Well? This means is that let's say you have an 764 00:41:39,719 --> 00:41:43,560 Speaker 3: existing mutual fund, OK, you could offer an ETF access point. 765 00:41:43,800 --> 00:41:46,480 Speaker 3: So let's say an existing mutual fund is purchased by 766 00:41:46,719 --> 00:41:50,000 Speaker 3: retirement investors through four oh one K accounts. Now you 767 00:41:50,000 --> 00:41:52,400 Speaker 3: can offer an ETF access point. All of a sudden, 768 00:41:52,440 --> 00:41:56,000 Speaker 3: you can commingle the retirement savers plus people who maybe 769 00:41:56,040 --> 00:41:59,960 Speaker 3: have brokerage accounts that are in taxable accounts. That commingle 770 00:42:00,600 --> 00:42:04,400 Speaker 3: provides economies of scale immediately to both sets of investors. 771 00:42:05,440 --> 00:42:10,120 Speaker 3: The SEC has to provide fund managers what's called exemptive relief, 772 00:42:10,160 --> 00:42:13,120 Speaker 3: so permission to do this. But I think that if 773 00:42:13,239 --> 00:42:16,280 Speaker 3: more of those types of structures appear in this country, 774 00:42:16,400 --> 00:42:17,960 Speaker 3: I think that will be a game changer for the 775 00:42:18,000 --> 00:42:21,880 Speaker 3: mutual fund industry and also for the end investor, because 776 00:42:22,080 --> 00:42:24,359 Speaker 3: folks who want to make a move from mutual fund 777 00:42:24,360 --> 00:42:27,359 Speaker 3: to an ETF could now do so without trading if 778 00:42:27,400 --> 00:42:30,160 Speaker 3: this were put in place more broadly in a very 779 00:42:30,239 --> 00:42:32,560 Speaker 3: particular way. So I think that's a big one to 780 00:42:32,600 --> 00:42:36,640 Speaker 3: keep an eye on, and we're definitely excited and energized 781 00:42:36,640 --> 00:42:38,520 Speaker 3: by that possibility because we think it can be good 782 00:42:38,520 --> 00:42:39,360 Speaker 3: for the end investor. 783 00:42:39,640 --> 00:42:41,680 Speaker 2: You know, we spoke a little bit about your assets 784 00:42:41,760 --> 00:42:46,000 Speaker 2: under management more than six hundred billion now, but not 785 00:42:46,320 --> 00:42:50,440 Speaker 2: the biggest by far. You know, Vanguard black Rock are 786 00:42:50,480 --> 00:42:53,640 Speaker 2: still the sort of I guess giant whales in the market. 787 00:42:54,080 --> 00:42:58,879 Speaker 2: How does their growth or their size affect what you do? 788 00:42:59,120 --> 00:43:01,520 Speaker 2: And I guess how closely do you keep an eye 789 00:43:01,560 --> 00:43:04,799 Speaker 2: on what your competitors are doing in order to either 790 00:43:04,960 --> 00:43:09,480 Speaker 2: identify market opportunities or perhaps alpha generation opportunities. 791 00:43:10,320 --> 00:43:14,319 Speaker 3: So we definitely try to understand who's doing smart things 792 00:43:14,320 --> 00:43:17,440 Speaker 3: with respect to investing, because, as I mentioned before, you 793 00:43:17,440 --> 00:43:20,759 Speaker 3: can always improve on yourself and what you do. So 794 00:43:20,800 --> 00:43:22,799 Speaker 3: if somebody comes out with a smart way to solve 795 00:43:22,840 --> 00:43:27,000 Speaker 3: a problem, we're interested in learning. Learning that I think 796 00:43:27,000 --> 00:43:29,600 Speaker 3: that in terms of how we decide where to go 797 00:43:29,680 --> 00:43:32,560 Speaker 3: next and what strategies to launch. Typically, there we're not 798 00:43:32,600 --> 00:43:35,520 Speaker 3: looking at our competitors. We're looking at our clients, and 799 00:43:35,719 --> 00:43:41,440 Speaker 3: our clients give us far more precise, informed, useful information 800 00:43:41,800 --> 00:43:45,640 Speaker 3: on what can be helpful for them and therefore what 801 00:43:45,680 --> 00:43:49,680 Speaker 3: can lead to more sustainable business opportunities for us. So 802 00:43:49,760 --> 00:43:51,880 Speaker 3: in that sense, we're maybe a little bit different than 803 00:43:51,920 --> 00:43:55,919 Speaker 3: others in the industry in that, you know, we kind 804 00:43:55,920 --> 00:43:57,839 Speaker 3: of march to the beat of our own tune in 805 00:43:57,880 --> 00:44:01,719 Speaker 3: some respects because we have these strong relationships with academics 806 00:44:01,840 --> 00:44:04,600 Speaker 3: and clients. They help us forge a path that we 807 00:44:04,640 --> 00:44:06,920 Speaker 3: think is the right one, which may be different than others. 808 00:44:07,680 --> 00:44:10,760 Speaker 1: Just to get back to the competition real quickly, Tracy 809 00:44:10,880 --> 00:44:14,960 Speaker 1: mentioned Blackrock and Vanguard, but also we've seen more and 810 00:44:15,040 --> 00:44:18,640 Speaker 1: more ETF offerings from the likes of JP Morgan and 811 00:44:19,080 --> 00:44:22,439 Speaker 1: more recently Morgan Stanley that have a lot of sort 812 00:44:22,480 --> 00:44:27,520 Speaker 1: of natural internal distribution capabilities, and both have wealth management 813 00:44:27,640 --> 00:44:30,319 Speaker 1: arms and so have advisors for whom they can have 814 00:44:30,360 --> 00:44:34,319 Speaker 1: a seamless brand. How challenging of that from a competition 815 00:44:34,680 --> 00:44:38,440 Speaker 1: perspective is that, because obviously Dimensional does not have its 816 00:44:38,480 --> 00:44:43,040 Speaker 1: own advisors or Dimensional Wealth Management. When companies that have 817 00:44:43,120 --> 00:44:46,560 Speaker 1: this sort of end and sort of vertically integrated wealth 818 00:44:46,600 --> 00:44:49,600 Speaker 1: solution their own people on the ground, their own local offices, 819 00:44:49,680 --> 00:44:53,120 Speaker 1: their own ETFs, their own fund, how much of a 820 00:44:53,200 --> 00:44:55,280 Speaker 1: challenges that from a sort of competitive standpoint. 821 00:44:55,960 --> 00:44:58,440 Speaker 3: We positioned it as a strength in a strength in 822 00:44:58,480 --> 00:45:02,160 Speaker 3: the sense that with us in the loop in terms 823 00:45:02,200 --> 00:45:05,799 Speaker 3: of as conflict free advice as you can possibly get, 824 00:45:06,560 --> 00:45:10,040 Speaker 3: because we compete on the merits of our investment proposition only, 825 00:45:10,360 --> 00:45:13,920 Speaker 3: and so that's how we compete, and so we have 826 00:45:14,000 --> 00:45:18,880 Speaker 3: to convince independent you know organizations that are providing financial 827 00:45:18,920 --> 00:45:23,560 Speaker 3: advice that the vehicles that we manage and deliver can 828 00:45:23,600 --> 00:45:25,759 Speaker 3: put their clients in the very best position. So we 829 00:45:25,880 --> 00:45:28,120 Speaker 3: put it out there as a strength. It means that 830 00:45:28,200 --> 00:45:30,520 Speaker 3: we can have to continue to innovate, we have to 831 00:45:30,520 --> 00:45:33,840 Speaker 3: continue to be introspective, and that when you work with 832 00:45:33,960 --> 00:45:37,719 Speaker 3: dimensional in our view, you're going to get always the 833 00:45:37,800 --> 00:45:40,600 Speaker 3: leading edge of what academics have to say about investing 834 00:45:40,600 --> 00:45:43,280 Speaker 3: in the right way to do it. And so that's 835 00:45:43,480 --> 00:45:46,359 Speaker 3: how we've kind of positioned it. So it's a source 836 00:45:46,360 --> 00:45:49,960 Speaker 3: of strength for us and something that keeps us on track, 837 00:45:50,080 --> 00:45:53,239 Speaker 3: keeps us disciplined, and keeps us improving. And you know 838 00:45:53,320 --> 00:45:56,640 Speaker 3: that appeals to a lot of different financial professionals out 839 00:45:56,640 --> 00:45:57,520 Speaker 3: there in the marketplace. 840 00:45:58,200 --> 00:46:01,040 Speaker 2: So one last question we mentioned in the intro but 841 00:46:01,080 --> 00:46:04,200 Speaker 2: then we kind of glossed over it. But you did study, 842 00:46:04,360 --> 00:46:07,760 Speaker 2: I believe, physics and you could have been a rocket scientist, 843 00:46:07,840 --> 00:46:11,360 Speaker 2: but went into finance instead. You happy with that decision. 844 00:46:11,400 --> 00:46:14,640 Speaker 3: Yeah, very happy. I started out in theoretical physics actually 845 00:46:14,719 --> 00:46:17,759 Speaker 3: in my undergrad Then I did a master's in high 846 00:46:17,760 --> 00:46:20,880 Speaker 3: performance computing, and then I did a PhD at Caltech 847 00:46:20,960 --> 00:46:25,680 Speaker 3: in aeronautical engineering. And so I really enjoyed it. It 848 00:46:25,920 --> 00:46:28,759 Speaker 3: was great lessons learned in terms of how to be 849 00:46:28,800 --> 00:46:31,680 Speaker 3: detail oriented but also see the big picture. I always 850 00:46:31,719 --> 00:46:32,960 Speaker 3: think that if you're going to be a master it's 851 00:46:33,000 --> 00:46:35,040 Speaker 3: something you have to be able to see the forest, 852 00:46:35,080 --> 00:46:36,719 Speaker 3: the trees, and the leaves all at the same time, 853 00:46:37,160 --> 00:46:41,160 Speaker 3: and that's when true mastery actually happens. But applying those 854 00:46:41,280 --> 00:46:44,279 Speaker 3: to the world of finance has been wonderful. Have been 855 00:46:44,480 --> 00:46:47,480 Speaker 3: to Mention now almost twenty years and I've learned a 856 00:46:47,480 --> 00:46:49,800 Speaker 3: lot of new things here and served a lot of 857 00:46:49,800 --> 00:46:53,879 Speaker 3: people here and hopefully improved people's lives. So I think 858 00:46:53,920 --> 00:46:56,000 Speaker 3: it's been a wonderful journey and I wouldn't change it 859 00:46:56,040 --> 00:46:56,440 Speaker 3: for anything. 860 00:46:57,280 --> 00:47:00,200 Speaker 1: Gerard O'Reilly, thank you so much for coming out Odd 861 00:47:00,239 --> 00:47:02,120 Speaker 1: Lives this it's a fascinating conversation. 862 00:47:02,400 --> 00:47:11,160 Speaker 3: Thank you for having me and enjoyed it. 863 00:47:16,560 --> 00:47:19,920 Speaker 1: Tracy, I really enjoyed that conversation. It is funny, like 864 00:47:20,400 --> 00:47:23,200 Speaker 1: I guess maybe laziness is the right word using some 865 00:47:23,239 --> 00:47:29,080 Speaker 1: of these terms sort of enterchang, oh, indexing, Yeah, passive, systematic, active, 866 00:47:29,160 --> 00:47:31,400 Speaker 1: like sort of certain things that I just sort of 867 00:47:31,400 --> 00:47:33,839 Speaker 1: maybe use one of the other and that actually it's 868 00:47:33,920 --> 00:47:36,279 Speaker 1: useful to think about the distinctions between these terms. 869 00:47:36,280 --> 00:47:40,439 Speaker 2: Oh absolutely, I will say labels have their usefulness as well. Yeah, 870 00:47:40,680 --> 00:47:44,640 Speaker 2: as sort of like quick catch alls. But the nuance 871 00:47:44,920 --> 00:47:48,279 Speaker 2: that Girard used in describing their own strategy, so the 872 00:47:48,280 --> 00:47:51,400 Speaker 2: idea of being passive but not indexed. Also the idea 873 00:47:51,440 --> 00:47:54,160 Speaker 2: that you know, you can be an indexer, but there 874 00:47:54,200 --> 00:47:59,040 Speaker 2: are different flavors and skills within indexing itself, so you 875 00:47:59,080 --> 00:48:01,840 Speaker 2: can be a bad indexer and leave a lot of 876 00:48:01,840 --> 00:48:04,120 Speaker 2: money on the table when you don't have to, right. 877 00:48:04,400 --> 00:48:09,279 Speaker 1: The Tesla example was fascinating. Also the idea that to 878 00:48:09,480 --> 00:48:13,319 Speaker 1: your question, cost is not everything, or the cost that 879 00:48:13,360 --> 00:48:15,880 Speaker 1: you see on the page is like this is our 880 00:48:15,920 --> 00:48:18,319 Speaker 1: expense ratio, or this is the fee for being in. 881 00:48:18,360 --> 00:48:21,359 Speaker 1: This is not necessarily the all in cost because maybe 882 00:48:21,360 --> 00:48:23,799 Speaker 1: they're not doing a good job of getting revenue for 883 00:48:23,840 --> 00:48:26,799 Speaker 1: you for securities lending, and that if you build in 884 00:48:26,840 --> 00:48:29,520 Speaker 1: that capacity and you find ways to do that efficiently, 885 00:48:30,280 --> 00:48:32,600 Speaker 1: that's really you know, yeah, that makes a difference. 886 00:48:32,680 --> 00:48:35,480 Speaker 2: Well, also, getting back to the starting point of you know, 887 00:48:35,520 --> 00:48:38,160 Speaker 2: why does the finance industry exist at all? I thought 888 00:48:38,239 --> 00:48:41,279 Speaker 2: Jared's point that it's not necessarily about trying to have 889 00:48:41,320 --> 00:48:44,320 Speaker 2: a bunch of smart people beating the market, because according 890 00:48:44,360 --> 00:48:49,319 Speaker 2: to the efficient market hypothesis, that is impossible. But more 891 00:48:49,400 --> 00:48:54,000 Speaker 2: about having financial professionals who are able to interpret clients' 892 00:48:54,000 --> 00:48:57,399 Speaker 2: needs and figure out what kind of risk profile they 893 00:48:57,440 --> 00:49:00,600 Speaker 2: need and then look at those risk adjustice returns in 894 00:49:00,680 --> 00:49:02,120 Speaker 2: the market and figure out what's best. 895 00:49:02,200 --> 00:49:04,879 Speaker 1: And then that makes sense of the education. And these 896 00:49:04,920 --> 00:49:08,000 Speaker 1: are all of those sort of the building, like those 897 00:49:08,040 --> 00:49:11,160 Speaker 1: deep relationships with the advisors and why that's a particularly 898 00:49:11,680 --> 00:49:13,759 Speaker 1: necessary aspect of the industry. 899 00:49:13,400 --> 00:49:14,000 Speaker 3: And the company. 900 00:49:14,440 --> 00:49:16,800 Speaker 2: But we're in Austin, and I think it's time for barbecue. 901 00:49:16,880 --> 00:49:17,640 Speaker 1: Let's go get barbaga. 902 00:49:17,680 --> 00:49:18,279 Speaker 2: Shall we leave it there? 903 00:49:18,360 --> 00:49:18,960 Speaker 1: Let's leave it there? 904 00:49:19,040 --> 00:49:19,439 Speaker 3: All right? 905 00:49:19,480 --> 00:49:22,520 Speaker 2: This has been another episode of the Odlots podcast. I'm 906 00:49:22,560 --> 00:49:25,200 Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway. 907 00:49:25,440 --> 00:49:28,040 Speaker 1: I'm Joe Wisenthal. You can follow me at the Stalwart. 908 00:49:28,120 --> 00:49:31,759 Speaker 1: Follow our producers Carmen Rodriguez at Carmen armand dash Ol 909 00:49:31,760 --> 00:49:35,680 Speaker 1: Bennett at Dashbot. And thanks to Moses Onam for his assistance. 910 00:49:36,239 --> 00:49:39,560 Speaker 1: Follow all of the Bloomberg podcasts under the handle at Podcasts, 911 00:49:39,560 --> 00:49:42,120 Speaker 1: and for more Oddlots content, go to Bloomberg dot com 912 00:49:42,160 --> 00:49:45,520 Speaker 1: slash odd Lots, where we have transcripts, a blog, and 913 00:49:45,560 --> 00:49:48,720 Speaker 1: a newsletter. And check out our discord discord dot gg 914 00:49:48,800 --> 00:49:50,960 Speaker 1: slash odd lots where you can chat twenty four to 915 00:49:50,960 --> 00:49:52,120 Speaker 1: seven with fellow listeners. 916 00:49:52,360 --> 00:49:55,120 Speaker 2: And if you enjoy odlots, if you like it when 917 00:49:55,120 --> 00:49:58,800 Speaker 2: we question the entire existence and validity of the financial industry, 918 00:49:59,040 --> 00:50:02,000 Speaker 2: then please leave us a positive review on your favorite 919 00:50:02,040 --> 00:50:04,000 Speaker 2: podcast platform. Thanks for listening.