Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy, I have a big, big confession to me. Is
Speaker 1: it going to actually like speak to everything that we do? Okay,
Speaker 1: you're ready for it.
Speaker 2: I'm bracing myself to it.
Speaker 1: So I sort of ascribed to the general belief that
Speaker 1: like markets are like fairly efficient, things are priced in indexing,
Speaker 1: probably pretty good strategy, own the market portfolio, things like
Speaker 1: that makes a lot of sense to me. A lot
Speaker 1: of people seem to generally believe this is generally true
Speaker 1: so far.
Speaker 2: This is not a confession, okay.
Speaker 1: But the confession is given that I don't really understand
Speaker 1: why the investment industry exists and why do some why
Speaker 1: do people trade at all? Why does anyone try to
Speaker 1: beat the market? Why is active management a thing? We
Speaker 1: all sort of accept these premises, and yet the investment
Speaker 1: industry continues to exist.
Speaker 2: Well, I applaud your honesty, show, especially given that you
Speaker 2: work at a large financial organization dedicated to providing data
Speaker 2: and services to the financial industry. But I don't think
Speaker 2: it's actually an extremely unusual opinion. I think this has
Speaker 2: come up at various times that if the best thing
Speaker 2: for people to do is just index to the market
Speaker 2: and find the fund or the vehicle that does that
Speaker 2: at the lowest cost, then why do all these other
Speaker 2: services and efays and things like that actually exist.
Speaker 1: Yeah, what are we doing here? What are we doing here? Right?
Speaker 1: Because we talk about all these different things, and you know,
Speaker 1: sometimes on the show we talk about real economy things
Speaker 1: and sometimes we talk about sort of strictly market things.
Speaker 1: But why is anyone paying attention? Why does anyone talk
Speaker 1: about this? Why is anyone trading on any of it?
Speaker 2: Well, if I was going to hazard a guess, I
Speaker 2: would say there is something innately human about the idea
Speaker 2: that you can beat the system or outperform the market
Speaker 2: in one way or another. Like it feels unsatisfying to
Speaker 2: think that no one out there in the entire investment
Speaker 2: world is able to outperform the market. And yet if
Speaker 2: you listen to efficient market hypothesis and things like that,
Speaker 2: that's exactly what it'll tell you.
Speaker 1: Or maybe you can outperform the market, maybe you just
Speaker 1: uperform someone else trying to match the market or something
Speaker 1: like that. Maybe you could beat me or I could
Speaker 1: beat you, but not necessarily the market. I don't know,
Speaker 1: it just blows. It's always has bothered me.
Speaker 2: I love that you've started this podcast on the most
Speaker 2: existential note that you could possibly find.
Speaker 1: Well, I think it's really fitting because today we are
Speaker 1: going to be speaking We're at a company that's sort
Speaker 1: of known for its deep, academic, data driven understanding of markets,
Speaker 1: and it has this incredible lineage of people who have
Speaker 1: been at the forefront of a lot of this research
Speaker 1: about market efficiency and what is where pockets of inefficiency
Speaker 1: might exist, and what is the best way to invest
Speaker 1: given certain premises of efficiency and what that even means
Speaker 1: market efficiency, And so I think that we can have
Speaker 1: a conversation today that sort of gets at like some
Speaker 1: of these existential questions about how markets operate.
Speaker 2: I think that sounds great. I think we are also
Speaker 2: going to be speaking to our second maybe rocket scientists,
Speaker 2: to have oh on the podcast after Josh Younger.
Speaker 1: I love when we talk to actual rocket scientists because
Speaker 1: you know, obviously sometimes that is used as a cliche
Speaker 1: for very smart person. But as you mentioned, Josh Younger,
Speaker 1: former actual rocket scientist turned market econ guy, and yes
Speaker 1: we have another one today.
Speaker 3: All right, let's do it all right.
Speaker 1: I'm very excited we are going to be speaking today
Speaker 1: with Gerard O'Reilly. He is the co CEO and CIO
Speaker 1: at Dimensional, been here since two thousand and four. We're
Speaker 1: actually recording this at dimensionals headquarters in Austin, Texas right now.
Speaker 1: One of the major providers of mutual funds and ETFs,
Speaker 1: huge player in the industry.
Speaker 2: The fastest growing, the.
Speaker 1: Fastest growing ETF provider. As we're going to learn all
Speaker 1: about this company's philosophy. Girard, thank you so much for
Speaker 1: coming on.
Speaker 3: Oud lots thanks for having me on the show.
Speaker 1: So I mentioned that Dimensional sort of has this deep
Speaker 1: academic lineage. What do you sort of give us the
Speaker 1: quick history of the company and sort of like the
Speaker 1: ideas and the people from which this emerged.
Speaker 3: Yeah, So the company began in nineteen eighty one, so
Speaker 3: we've been around for many decades now. And when you
Speaker 3: kind of go back and trace the history of the
Speaker 3: founders of the company, a lot of them had been
Speaker 3: at the University of Chicago, so they had studied under
Speaker 3: Gene Fama and others, and they had worked on the
Speaker 3: first set of index funds in the early seventies. So
Speaker 3: David Booth and Rex Singfield and in the early eighties,
Speaker 3: David and Rex had identified a need in the marketplace,
Speaker 3: which was it was no real way out there to
Speaker 3: get systematic, broadly diversified exposure to small caps. They understood
Speaker 3: the limitations of indexing, They understood that that probably wasn't
Speaker 3: the best way to go, but they also understood some
Speaker 3: of the benefits of indexing transparency, low cost, broad diversification.
Speaker 3: So they started the company based on a need in
Speaker 3: the market and a set of academic research that had
Speaker 3: been coming out at that time kind of demonstrating that
Speaker 3: small cap stocks had had higher returns than large cap stocks,
Speaker 3: and from there the company began. It has its roots
Speaker 3: in academia. When the company was first began, David and
Speaker 3: Rex went up to the University of Chicago and Gene
Speaker 3: Fama was there. He got on the board. He had
Speaker 3: folks like mac McCown, a very long time industry expert
Speaker 3: on the mutual fund board. You had Myron Shoals, you
Speaker 3: had Martin Miller. Interesting thing about Dimensional is that we've
Speaker 3: been associated closely with five Nobel Prize winners and all of.
Speaker 2: The best credential I.
Speaker 1: Think of like the Mount Rushmore of academic finance. It
Speaker 1: sounds like they're all associated dimensional pretty much.
Speaker 2: So I have a really basic and perhaps embarrassing question,
Speaker 2: but I think it kind of gets to some of
Speaker 2: our introductory remarks, and possibly I'm not the only one
Speaker 2: who has this question. When I think about dimensional I
Speaker 2: think about mostly indexing and really passive investing. But you
Speaker 2: do have a bunch of actively managed etf So in
Speaker 2: your mind, are you active or passive?
Speaker 3: We're non index, so passive is probably fine because passive
Speaker 3: implies that you accept market prices, you trust market prices,
Speaker 3: and you try to extract information from market prices. Index
Speaker 3: two indexing you leave money on the table, and so
Speaker 3: we're non index but we're not in the business of
Speaker 3: trying to outguess market prices.
Speaker 1: What does it mean? Okay, I guess, I guess to
Speaker 1: your point, Maybe in my mind I've always sort of
Speaker 1: elided the two or think that passive means index, so
Speaker 1: that they're roughly synonyms. But clearly they're not. So why
Speaker 1: do you talk a little bit further about what the
Speaker 1: difference is?
Speaker 3: So maybe it would be helpful also to talk a
Speaker 3: little bit more or about markets. You made some comments
Speaker 3: about market efficiency and so on. I think that it's
Speaker 3: important to understand what a price actually represents the price
Speaker 3: of a stock or the price of a bond, and
Speaker 3: then you get a good idea of why not index,
Speaker 3: but why be passive? And the example that we often
Speaker 3: use is if you want to place a bet on
Speaker 3: a sporting event, Typically you say, I think the favorite
Speaker 3: will win by x twenty points, thirty points, forty points.
Speaker 3: And so why bring this up as an example is
Speaker 3: because that spread how much the favorite is expected to
Speaker 3: win by is an example of using the wisdom of
Speaker 3: the crowds to predict the future. The bookie tries to
Speaker 3: keep the same number of people on one side of
Speaker 3: the spread as the other side of the spread. If
Speaker 3: more people say i'll take you know, the favorite will
Speaker 3: win by more than the spread, the spread will change
Speaker 3: and you can look at how well that does it
Speaker 3: actually forecasting the outcome of the games. There was a
Speaker 3: study in the mid two thousands that looked at, you know,
Speaker 3: eight thousand MBA games and five thousand NFL games and
Speaker 3: found that the favorite won by more than the spread
Speaker 3: fifty percent of the time, exactly what you would explact.
Speaker 3: So this notion of there's a wisdom of the crowds.
Speaker 3: There's a marketplace by which they can express their opinion.
Speaker 3: They express their opinion by putting real money on the table,
Speaker 3: and that gives you a forecast about something that's going
Speaker 3: to happen in the future. And so when you think
Speaker 3: about markets, think about them in the same way that
Speaker 3: prices are basically predictions or forecasts of the future, and
Speaker 3: they're informed by the actions of people trading in the marketplace.
Speaker 3: And the question then becomes is what informations in the
Speaker 3: price of a bonder a stock. There's lots of academic,
Speaker 3: you know, studies around that. When it comes to the spread,
Speaker 3: it's okay, how much will the favorite in this sporting
Speaker 3: event win by? When it comes to the price of
Speaker 3: a bonder stock, the overwhelming academic evidence is that what's
Speaker 3: mainly in there is the return that people require to
Speaker 3: hold the investment. And I think that's a really important
Speaker 3: point to make because it tells you that you don't
Speaker 3: have to be out there out guessing market prices, but
Speaker 3: you can use them to say which stocks or bonds
Speaker 3: do people require a high return to hold, and which
Speaker 3: stocksure bonds do people require a low return to hold,
Speaker 3: and I think that's one of the keys and the
Speaker 3: key insights that you kind of glean from this all
Speaker 3: this academic literature, and that's what we do. We say,
Speaker 3: how can we extract that information efficiently for investors.
Speaker 2: So it's not that market prices are always necessarily correct,
Speaker 2: but rather that you can kind of clean I guess
Speaker 2: the risk assessment of investors based on those prices and
Speaker 2: then adjust for that.
Speaker 3: You can glean how much investors demand in returns to
Speaker 3: hold a stock or a bonder, many differences in those
Speaker 3: and the way I think about them always being right
Speaker 3: or not always being right, I think about them being
Speaker 3: fair and un biased. There's another set of academic studies
Speaker 3: that look at the performance of managers and what they
Speaker 3: find at the conclusion, the main conclusion you can draw
Speaker 3: from those studies is that they're unbiased estimates of the future.
Speaker 3: They may not be always spot on, but you don't
Speaker 3: know when they're too high, and you don't know when
Speaker 3: they're too low. And what you find is if you
Speaker 3: use them effectively, you can manage risk better and you
Speaker 3: can increase expected returns. So you know, at the start,
Speaker 3: you said, why do people bother? Because let's take the
Speaker 3: US over the past one hundred years, the nominal rate
Speaker 3: of return on the US stock market has been about
Speaker 3: ten percent over the past one hundred years. So that
Speaker 3: means that if you invest your money doubles every seven years.
Speaker 3: It's an explosive number. If you can take that ten
Speaker 3: and turn it into an eleven or twelve, Your money
Speaker 3: doubles every six so after a forty year horizon, you
Speaker 3: have doubled the money. Now, a lot of people's investment
Speaker 3: horizon in the humulation phase is thirty or forty years.
Speaker 3: That's why people bother because the amount of consumption that
Speaker 3: you can afford by doing a little better than the
Speaker 3: market tends to be quite significant.
Speaker 2: How would your framework of understanding the market apply to
Speaker 2: a phenomenon like say, this might be a little unfair,
Speaker 2: but you know an extreme example game stop for instance.
Speaker 3: Yeah, So when you look at a situation like GameStop,
Speaker 3: and you look at any market mechanisms around that time,
Speaker 3: what was interesting is in order to keep what we
Speaker 3: think as prices as unbiased estimates of the future, there
Speaker 3: has to be some shorting going on, some long going on,
Speaker 3: and when one of those market mechanisms becomes a little
Speaker 3: bit more restricted. Well, then prices may deviate away from
Speaker 3: what people consider a fundamental valuation of the firm, So
Speaker 3: that market mechanism itself is important to keep running. And
Speaker 3: as that market mechanism keeps running, then prices are just
Speaker 3: from day to day. But you'll have people who think
Speaker 3: they are too high, people who think they're too low,
Speaker 3: and they will express their opinion on one side or
Speaker 3: the other. When the people who think they're too high
Speaker 3: can't express an opinion, what happens. That's where prices may deviate.
Speaker 3: The thing I would mention about a company like a
Speaker 3: game Stop is that when you have a systematic approach,
Speaker 3: it allows you to handle situations like that very very efficiently.
Speaker 3: So you accept the price for what it is. It
Speaker 3: used to be a micro value stock. Two weeks later
Speaker 3: it's a large growth company. Okay, if you're managing portfolio
Speaker 3: is along those types of pact categories, you know what
Speaker 3: to do.
Speaker 1: Tell us a little bit more about the evolution of
Speaker 1: product offerings at Dimensional and you mentioned that the original
Speaker 1: a lot of the original research was sort of based
Speaker 1: on this idea that they were potential outperformance in small
Speaker 1: caps that were not easily exploited by the offerings that
Speaker 1: were available. And I know you started in mutual funds.
Speaker 1: The one thing I always heard about Dimensional mutual funds
Speaker 1: is that there was sort of a screen to even
Speaker 1: get access to them, and you wanted the advisors who
Speaker 1: put some client money into Dimensional like that.
Speaker 2: There's a great Michael Lewis article that I saw and
Speaker 2: it kind of described the process and I guess the
Speaker 2: late nineteen eighties of getting access to Dimensional and it's
Speaker 2: almost like a revivalist meeting where you had to like
Speaker 2: pledge your undying loyalty to efficient markets.
Speaker 1: Yeah, lot of you talking about it. So what were
Speaker 1: those initial product offerings and then we can get into
Speaker 1: sort of how it evolved over time.
Speaker 3: Yeah, So when the firm started in the eighties, the
Speaker 3: initial product offerings were small cap strategies. Okay, began with
Speaker 3: US small cap strategies, then moved to strategies outside the US,
Speaker 3: the UK, Japan, Europe, and so on and so forth.
Speaker 3: Then fixed income offerings came along, and the fixed income
Speaker 3: offerings started out short term and evolved to be global
Speaker 3: pretty early on by the kind of early nineties. And
Speaker 3: there again, it's about using bond prices to understand differences
Speaker 3: and expected returns across bonds, effectively thinking about the shape
Speaker 3: of the yield curve. How much capital gain should I
Speaker 3: expect versus yield? Right, that's at its heart. Then the
Speaker 3: value research came along in the early nineties and the
Speaker 3: firm really started to grow in two ways. One, the
Speaker 3: product offering expanded, and what drives our product offering is
Speaker 3: two things. One, we work very closely with financial professionals,
Speaker 3: so we don't go straight to retail. We work generally
Speaker 3: with financial professionals and we have deep relationships with them,
Speaker 3: so we understand what problems they're trying to solve, and
Speaker 3: that informs what strategies we bring to the market, and
Speaker 3: you can see that in our track record. If you
Speaker 3: look typically in the industry, the closure rate for funds
Speaker 3: tends to be very high. For dimensional it's incredibly low
Speaker 3: because we understand the need that we're trying to solve
Speaker 3: before we launch a fund or an ETF and have
Speaker 3: a pretty good idea of who has that need and
Speaker 3: who else might have that need.
Speaker 1: So you're sorry, you're not just like throwing. So it
Speaker 1: does feel like a lot of ETFs. You get these
Speaker 1: throwing things at the wall and we'll see if it sticks.
Speaker 1: And that's not your personal launching the.
Speaker 3: Product that that's not our approach at all. It's work
Speaker 3: with clients who understand markets and it can express needs
Speaker 3: their fiduciaries for end investors, and how can we build
Speaker 3: products and solutions to meet their needs.
Speaker 2: To Joe's point earlier, though, why not just cut out
Speaker 2: the middleman completely and sell directly, because presumably you could
Speaker 2: lower you're already pretty low fees even further.
Speaker 3: We think that the combination of financial professional independent money
Speaker 3: manager is a pretty good combination in terms of serving
Speaker 3: the needs of families all across the country. Because you say,
Speaker 3: why not just hold the market you mentioned that at
Speaker 3: the beginning of the podcast and set it and forget it.
Speaker 3: There's a lot of value that a financial professional can
Speaker 3: bring to the table. And I'll get back a little
Speaker 3: bit of the product offering in a moment. But this
Speaker 3: is is interesting in itself because until you define your
Speaker 3: goals with respect to your investment portfolio, you can't actually
Speaker 3: manage risk. You have no way to manage risk until
Speaker 3: you define your goals. Your goals define what assets actually
Speaker 3: have low uncertainty relative to what you're trying to achieve
Speaker 3: and that gives you a risk management asset. Financial professionals
Speaker 3: typically will work with families who may not understand finance
Speaker 3: all that well, and we'll do two things. One, help
Speaker 3: them come with a financial plan and implement that financial
Speaker 3: plan with the right investment vehicles. And then too, help
Speaker 3: them stay disciplined and tune out the noise of all
Speaker 3: what goes on around markets. And so that's why we've
Speaker 3: gone down that path. And you mentioned that that started
Speaker 3: in the early eighties. You're right, and that became another
Speaker 3: kind of large part of our business through the nineties
Speaker 3: and the two thousands. Just back to the kind of
Speaker 3: how we decide on new strategies. The other area then
Speaker 3: is new academic recas search our new research from our
Speaker 3: internal team. We have about one hundred plus folks on
Speaker 3: our internal research team, loss of PhDs and all types
Speaker 3: of disciplines. And as we learn something new about markets
Speaker 3: that can be implemented in a systematic way, we say, okay, great,
Speaker 3: let's provide those benefits to all of our existing clients,
Speaker 3: and it may lead to new strategies that we can
Speaker 3: offer existing and new clients going forward.
Speaker 1: So, as you point out, you know some of these
Speaker 1: terms don't mean the same thing. Passive certainly does not
Speaker 1: necessarily mean indexing. What is the difference between systematic and active?
Speaker 3: For me, I'll use systematic or rules based approach. Okay,
Speaker 3: we like rules based approaches when you can describe here
Speaker 3: are the rules that are going to be used to
Speaker 3: manage the portfolio, because then you can describe that to
Speaker 3: a financial professional. You can give them the tools to
Speaker 3: monitor what you've done, and they can see that you've
Speaker 3: did what you said you would do, and that builds
Speaker 3: trust over time. Trust builds a longer investment horizon over time,
Speaker 3: and what we know about longer investment horizons is that
Speaker 3: the probabilities of success go up with the length of investment,
Speaker 3: probably realizing a positive value premium sized premium probability premium.
Speaker 3: So rules or systematic are very very important because it
Speaker 3: gives you a way to say that I can understand
Speaker 3: what to expect from these strategies given different market environments.
Speaker 3: Traditional active there are probably a set of rules, but
Speaker 3: they're not as well articulated. It may be based on
Speaker 3: a hunch or some analysis, and the analysis may vary
Speaker 3: over time, and so the range of outcomes or the
Speaker 3: dispersion of outcomes that you get from the strategy is
Speaker 3: much greater, and you really can set as strong an expectation.
Speaker 3: A rules based approach is the right approach in my view.
Speaker 3: If you have the right innovation, you've got to do
Speaker 3: the research and keep on pushing forward the boundaries. The
Speaker 3: right pricing. You mentioned that you know we have very
Speaker 3: well priced and then the right support, so you say,
Speaker 3: you know, when we had a advisors and so on
Speaker 3: come to conferences, what was that all about. It was
Speaker 3: providing the right support because education is key. If you
Speaker 3: understand what to expect and how bad it can be
Speaker 3: before the bad times happen, you will be much better
Speaker 3: prepared to handle those bad times when they almost certainly
Speaker 3: will occur. So that support aspect is why we run conferences,
Speaker 3: why we write white papers, why we provide materials to
Speaker 3: financial professionals to help them understand the approach and communicate
Speaker 3: the approach.
Speaker 2: Just on this note, could you maybe describe for us
Speaker 2: the process of coming up with a new product or
Speaker 2: a new systemic investing strategy. What does it look like
Speaker 2: from the initial research and maybe the pitching of the
Speaker 2: idea to the approval process, And could you maybe provide
Speaker 2: a favorite example where people were particularly creative, or one
Speaker 2: that illustrates the way dimensional is thinking about markets.
Speaker 3: Yeah, for sure. So let's take the exam sample of
Speaker 3: profitability and it's going through its ten year anniversary. It's
Speaker 3: been ten years since Professor Novi Marx published one of
Speaker 3: the key papers on that particular topic, and so if
Speaker 3: you go back to you know, twenty eleven, twenty twelve,
Speaker 3: twenty thirteen, effectively there was new research coming out that
Speaker 3: showed profitability, which kind of takes income statement variables and
Speaker 3: scales them by balance sheet variables. It had the power
Speaker 3: to predict future profitability. So it's an intrinsic firm characteristic.
Speaker 3: Tall parents have tall kids, Well run firms tend to
Speaker 3: remain well run firms for some period of time. And
Speaker 3: if you pair that up with other price based metrics
Speaker 3: like price to book, price to earnings, market cap, it
Speaker 3: actually enhanced your description of differences and returns across stocks.
Speaker 3: So we decided that we were going to incorporate that
Speaker 3: in how we managed the portfolios, and so we went
Speaker 3: through a large process of educating clients on here's the research,
Speaker 3: here's how it will change the strategy that we manage
Speaker 3: for you, and here's the benefits that we perceive for
Speaker 3: you all from this piece of research. The research goes
Speaker 3: through a very strong vetting process here internally, we have
Speaker 3: an Investment Research Committee that has Nobel Prize winners on
Speaker 3: a people like Gene Fama, people like Professor Martin ken
Speaker 3: french Is on a professor Novi Marx that vets the
Speaker 3: research very very thoroughly. And then we have a lot
Speaker 3: of expertise in how to implement and so that goes
Speaker 3: through the Investment committee, and the investment committee would review
Speaker 3: all the ways that it would be implemented. So there's
Speaker 3: a kind of a large emphasis on education and then
Speaker 3: also implementation and doing it well. And then we bring
Speaker 3: that to the marketplace with a series of new strategies
Speaker 3: but also enhancements to all of our existing strategies. And
Speaker 3: I think that's worked out very very well. But we
Speaker 3: have these types of examples all the time that come
Speaker 3: where clients either express needs or there's new academic research,
Speaker 3: and that helps us, you know, improve what we do.
Speaker 3: Always get better, that's our mantras. You can always get
Speaker 3: better at what you do.
Speaker 1: So I understand your point about support for financial advisors,
Speaker 1: education for financial advisors, education about potential downsides, periods of downsides,
Speaker 1: what to expect that maybe the premium exists over a
Speaker 1: long time and then there could be bumps in the road.
Speaker 1: I'm curious about a specific example like value, which is
Speaker 1: cheap stocks depending on how you measure it. Supposedly there
Speaker 1: was a lot of research that said they would do better.
Speaker 1: My understanding is that over the last at least fifteen years,
Speaker 1: that has not been an effective strategy, and some people
Speaker 1: have certainly called into question like was that wrong? Will
Speaker 1: it ever come back? Is that busted research? What has
Speaker 1: happened with value? And sort of you know, with the
Speaker 1: research that you've done it dimensional, how does that help
Speaker 1: you understand that factor.
Speaker 3: When you have a time period like that, it's always
Speaker 3: important to be introspective, reevaluate your assumptions, re evaluate the data,
Speaker 3: and also understand what really happened. So I think that
Speaker 3: the idea that there hasn't been a value preom for
Speaker 3: fifteen years, I disagree with that in the sense of
Speaker 3: there's been many months, quarters, years where value stocks have
Speaker 3: outperformed growth stocks. But what you had in the middle
Speaker 3: of that period ending in June twenty twenty was the
Speaker 3: worst three year period in the past one hundred years
Speaker 3: for which we have data here in the US of
Speaker 3: value stocks, in particular small value stocks versus large growth
Speaker 3: And you say, well, was that unexpected or was that
Speaker 3: a change in markets? If you look at the returns
Speaker 3: of some of the large growth companies during that time
Speaker 3: period and even over the ten years ending in June
Speaker 3: twenty twenty, and you looked at the fangs or whichever
Speaker 3: latest acronymy you want to use, they had annualized compound
Speaker 3: return rates of thirty percent per year for about a decade.
Speaker 3: That's unexpected. You can't tell me that people you know,
Speaker 3: going back, you know, in twenty ten and so on,
Speaker 3: we're going to say these want to return thirty percent
Speaker 3: a year for the next decade. That's an unexpectedly good outcome.
Speaker 3: And you can say why, Well, those firms did unexpectedly well.
Speaker 3: They served their clients' needs better than anybody had anticipated,
Speaker 3: grew their revenue better than anybody had anticipated, and became
Speaker 3: dominant firms in the market, and that was an unexpected event.
Speaker 3: You factor that in and you say, no, there's nothing
Speaker 3: broken here. It's just that there's a lot of volatility
Speaker 3: with these premiums, and this time period tells you that
Speaker 3: you can have large unexpected events. But if you break
Speaker 3: down a lot of those sub periods, you've had lots
Speaker 3: of strong periods for value. So for example, after that
Speaker 3: worst three year period on record June twenty twenty, we
Speaker 3: went into one of the strongest two to three year
Speaker 3: periods on record for value versus growth. And so it's
Speaker 3: kind of tempting to try to summarize a fifteen year
Speaker 3: period with one observation, but typically that's not as helpful.
Speaker 3: The one comment I would make the learning for that
Speaker 3: period is that sector weights matter a lot, and the
Speaker 3: value strategy, and in particular, you know, value strategies when
Speaker 3: you just look at them, generally tended to be underway technology.
Speaker 3: We use a lot of sector caps and sector constraints,
Speaker 3: and they were actually quite helpful for our relative performance
Speaker 3: during that period and subsequent periods. And I think that
Speaker 3: was one thing that was probably additive that that data
Speaker 3: gave you in terms of understanding of how better to
Speaker 3: build value strategies from that period.
Speaker 2: What about the definition of value itself, because over the
Speaker 2: past couple of years there's been this discourse that may
Speaker 2: bee traditional measures of value such as price to book,
Speaker 2: which doesn't take into account in tangible asset values. Maybe
Speaker 2: that's not the right way to do it. How are
Speaker 2: you thinking about actually measuring value?
Speaker 3: So a couple of kind of quick reactions there. One,
Speaker 3: there are a lot of intangible assets that are in
Speaker 3: book value. So let's take some examples. If Company A
Speaker 3: acquires Company B, then there may be line items books
Speaker 3: through them merger and acquisition process that are called externally
Speaker 3: acquired in tangibles. And so as companies go through this
Speaker 3: M and A process, you get a lot of intangible
Speaker 3: assets on a company's balance sheet. In fact, if you
Speaker 3: look at S and P five hundred companies, I think
Speaker 3: it's something like twenty five percent of the value of
Speaker 3: the assets are intangible assets externally acquired. And so that's
Speaker 3: grown since about the year two thousand because the accounting
Speaker 3: mechanisms for how you treated M and A activity changed
Speaker 3: in the year two thousand in the US. So you
Speaker 3: see a lot of intangible assets on companies balance sheets.
Speaker 3: Perfect example is when Disney acquired what's the company I'm
Speaker 3: thinking of for Star Wars, oh, Lucasfilms. Lucasfilms, that was
Speaker 3: about two billion in intangible assets and two billion in
Speaker 3: goodwill appeared on Disney's balance sheet. What doesn't typically appear
Speaker 3: on the balance sheet is internally developed intangible assets, and
Speaker 3: there's very good reasons that they don't. They're usually expensed,
Speaker 3: not capitalized, and so they flow through the incomest not
Speaker 3: the balance sheet. And the reason behind that is that
Speaker 3: as you do research and development, or you do things
Speaker 3: that develop brand and future intangible assets, the level of
Speaker 3: uncertainty around what the value of those will be when
Speaker 3: you're incurring the expense to build them is massively high.
Speaker 3: And we've done lots of work on this. So in short,
Speaker 3: there's kind of a mix. There's a good chunk of
Speaker 3: intangibles on balance sheets and some that's internally developed intangibles
Speaker 3: that typically are not And when you look over time,
Speaker 3: in fact, I think that the way that the data
Speaker 3: is presented can be misleading because if you look actually
Speaker 3: at the percent of balance sheets that are intangibles, it
Speaker 3: actually hasn't changed that much over time. It's just that
Speaker 3: when you compare to things like property and equipment are
Speaker 3: subsets of what's on the balance sheet, that you get
Speaker 3: the big changes. We've done a lot of work on
Speaker 3: this adjusted book values for intangibles with and without, and
Speaker 3: what really boils down to is that the estimates for
Speaker 3: eternally developed intangibles are too noisy to be useful, so
Speaker 3: we don't use those. But when you combine it with profitability,
Speaker 3: asset growth things like that, it actually doesn't matter, and
Speaker 3: you have to use multiple variables for it not to matter.
Speaker 3: But it's actually not that relevant for computing value programs.
Speaker 1: So I realized there's multiple ways we could take this conversation,
Speaker 1: and we could talk about different factors for a long time,
Speaker 1: but I also want to talk about the sort of
Speaker 1: industry and the nature of products. You started offering mutual funds,
Speaker 1: and as Tracy mentioned, there is this sort of whole
Speaker 1: process about getting access to them and education and screening, etc.
Speaker 1: Now you're really big. You're one of the fastest ETF
Speaker 1: When did you get into ETFs?
Speaker 3: Our three year anniversary is this November?
Speaker 1: Very so, given like ETFs have been a while, and
Speaker 1: it was late.
Speaker 2: As soon as the actively managed ETFs were approved pretty.
Speaker 3: Much right, Yeah, in about October twenty nineteen. There's what's
Speaker 3: called Rule sixty eleven, the ETF rule, And then about
Speaker 3: one year later we had ETFs in the marketplace.
Speaker 1: And you're one of the fastest growing ETF companies. Can
Speaker 1: you just give it a little bit overview, like how
Speaker 1: big is that? How much of the ETF money is
Speaker 1: just sort of the same investor has switched from a
Speaker 1: dimensional mutual fund to a dimensional ETF, Like how big
Speaker 1: is that? And what is the relative weight of like
Speaker 1: the legacy or the mutual funds versus the ETF today?
Speaker 1: What are we talking about?
Speaker 3: Yeah, the the ETF business for us, I'll take a
Speaker 3: step back, sure was why did we do it to
Speaker 3: begin with? One was the rule change that allowed us
Speaker 3: to do what we do in mutual funds and an
Speaker 3: ETF wrapper, which was important to us because we don't
Speaker 3: sacrifice the investment principles and the investment proper position. We
Speaker 3: want to be able to deliver equally good investment propositions
Speaker 3: regardless of the rapper. And two is that the financial professionals,
Speaker 3: whether those are advisors or institutions that we were working with,
Speaker 3: we're using ETFs more and more frequently and we're asking
Speaker 3: for dimension to have an ETF lineup. So we said, okay,
Speaker 3: now that we have this new rule, we can do
Speaker 3: what we did in mutual funds. So we launched the
Speaker 3: ETFs with that in mind, and we'll have you know,
Speaker 3: close to forty by the end of the year in
Speaker 3: terms of ETFs, and all launched with input from our
Speaker 3: clients on which are most important to you and for
Speaker 3: your businesses. There's no doubt that the industry has seen
Speaker 3: flows from mutual funds to ETFs. I think that's a
Speaker 3: trend that we've seen in the industry, and we have
Speaker 3: some advisors that have changed kind of transition from our
Speaker 3: mutual funds to our ETFs. What's been interesting about the ETFs, though,
Speaker 3: is that allows us to access i would say, new
Speaker 3: new channels, new advisors, new wealth platforms that we traditionally
Speaker 3: haven't played in. And so if you look at the
Speaker 3: kind of large broker dealers, the wirehouses, if you look
Speaker 3: at some of the bank trusts, all of those types
Speaker 3: of platforms and organizations, we traditionally haven't played there with
Speaker 3: mutual funds, but ETFs are lend themselves much more so
Speaker 3: there's been kind of many new clients actually have come
Speaker 3: on board over the past number of years, and that's
Speaker 3: also helped the ETF growth.
Speaker 2: This was going to be my next question. Actually, we've
Speaker 2: said fastest growing a number of times now, and I
Speaker 2: think your assets under management are now above five hundred
Speaker 2: billion something like that. What proportion of inflows are new
Speaker 2: clients versus people migrating from mutual funds into ETFs.
Speaker 3: It's a tricky question to answer because of the data constraints,
Speaker 3: but I'd say, you know, in terms of new flows
Speaker 3: into ETFs versus maybe transitions, what educated guess is maybe
Speaker 3: fifty to fifty something in around there thereabout. So we
Speaker 3: have about one hundred billion now in ETF assets. Globally,
Speaker 3: we kind of bounce around six twenty five to six
Speaker 3: fifty billion in terms of total firm assets on what
Speaker 3: we manage on behalf of clients. And our mutual fund
Speaker 3: business is still very very large street of four hundred
Speaker 3: billion of US mutual funds. Our US mutual funds are
Speaker 3: still very important to us. We continue to innovate and
Speaker 3: push forward there. ETF is important. Kind of when Dave
Speaker 3: and I first got on the role, Davis is the
Speaker 3: other co CEO. One of the things that we kind
Speaker 3: of agreed on is that let's make it convenient as
Speaker 3: we can for financial professionals, whether they're institutions or advisors
Speaker 3: to access this investment approach, and that's why the ETFs,
Speaker 3: that's why the enhancements to mutual funds, that's why lowering
Speaker 3: our account minimum with SMAs. It's all about, you know,
Speaker 3: convenience of use for the professionals to serve their clients.
Speaker 2: So I know you said earlier that you consider yourselves
Speaker 2: more passive, but not in that sers and I kind
Speaker 2: of want to get your take on the overall rise
Speaker 2: of I guess extreme passive the indexation in the industry.
Speaker 2: And I know there's been a lot of hand ringing
Speaker 2: over this idea that if you're just benchmark to an
Speaker 2: index and you're trying to hug that index as closely
Speaker 2: as possible, you're actually still making an active investment decision.
Speaker 2: It's just you're kind of outsourcing that active management to
Speaker 2: the benchmark index provider, so MSCI or SMP or whoever.
Speaker 2: What do you think about that argument?
Speaker 3: Well, this goes back to Joe's opening remarks, which I
Speaker 3: kind of take as evidence that the academic evidence has
Speaker 3: won in the sense that academics for a long time
Speaker 3: have slitted the performance of active managers and say, you know,
Speaker 3: there's no real evidence here that people can now guess
Speaker 3: the market, and people who outperform by stockpicking and market
Speaker 3: timing are doing so by look versus skill. How you
Speaker 3: can't disentangle it too, And so there's been a large
Speaker 3: flow of money into indexes. I think the people of
Speaker 3: indexed on index because there's a lot that you can
Speaker 3: do to actually get your fair share of the returns
Speaker 3: that the market is willing to offer, and in my view,
Speaker 3: indexing leave some of that money on the table. So
Speaker 3: let's take some examples. Tesla was added to the S
Speaker 3: and P five hundred in December of twenty twenty. We
Speaker 3: all remember that event. It was one of the biggest
Speaker 3: new entrants to the S and P five hundred on history.
Speaker 3: And if you look at the price pressure that index
Speaker 3: managers exerted on Tesla's stock on the day that it
Speaker 3: was added to the S and P five hundred, on
Speaker 3: that day, the price was driven up, and then after
Speaker 3: that price pressure came down, the price came down. You
Speaker 3: say how much did that cost the index? It actually
Speaker 3: costs the index between five and ten basis points in
Speaker 3: one month, and you can come up with reasonable ways
Speaker 3: to make that estimate. In one month to add one
Speaker 3: stock to the index. So here's the most liquid stocks
Speaker 3: in the entire world. And to accommodate a rebalancing event,
Speaker 3: people spend two to three times what's a typical expense
Speaker 3: ratio on an SMP five hundred index fund on adding
Speaker 3: the stock, but it's never reported. People don't notice it
Speaker 3: unless they do the research to actually find out, and
Speaker 3: there's an example of leaving money on the table by
Speaker 3: having too rigid an approach. In my view, there's no
Speaker 3: reason that you need to hold a perfectly market cap
Speaker 3: weighted portfolio of stocks, and indexes typically aren't perfectly market
Speaker 3: cap weight in a aney event that it's much better
Speaker 3: if you have some flexibility to deviate for market cap
Speaker 3: weights to pursue higher returns, but also flexibility on how
Speaker 3: to turn the portfolio over and keep yourself focused day
Speaker 3: in day out. You don't need to wait for one
Speaker 3: or two events each year to rebalance. So indexing is
Speaker 3: definitely an active decision with respect to how they're put together,
Speaker 3: how they decide to rebalance, and those active decisions have
Speaker 3: cost investors' money.
Speaker 2: Suggestion earlier was the dimensional doesn't try to outguess the market,
Speaker 2: but you do try to outperform. Is this market structure
Speaker 2: awareness a key plank of that outperformance? I know you
Speaker 2: talked about systematic strategies and having a rules based approach,
Speaker 2: but is it also just understanding some of these market
Speaker 2: dynamics and recognizing alpha opportunities. For instance, when there is
Speaker 2: an index rebalancing event.
Speaker 3: Spot on, there's two major sources. One is, does anybody
Speaker 3: think that all stocks of the same expected return are
Speaker 3: all bonds of the same expected return? No, there's differences
Speaker 3: in expected returns. And you can use a systematic framework
Speaker 3: that's based on valuation theory to identify those. Two is
Speaker 3: be efficient, don't do stupid things when you know they're stupid.
Speaker 3: Always good advice, always good advice. And that is about
Speaker 3: how do you understand how markets operate, how to trade?
Speaker 3: How do you add value while you hold stock? In
Speaker 3: terms of the corporate actions that you elect. Some corporate actions,
Speaker 3: just as an example, an index will choose a way
Speaker 3: to have deal with the corporate action a stock is
Speaker 3: spinning something off or doing a tender or something like that,
Speaker 3: and the index providers may not always choose them the
Speaker 3: value maximizing way to deal with the corporate action. Index
Speaker 3: managers often follow the index provider. We say, well, why
Speaker 3: would you do that? There's another election on this corporate
Speaker 3: action that actually improves value. Pick that one, right, There's
Speaker 3: things like that that add value. So there's a combination
Speaker 3: of the research to identify the systematic drivers of returns
Speaker 3: and then how do you implement. Implementation is key and
Speaker 3: those are two big drivers of how we outperform indices.
Speaker 3: And by the way, just a quick stat if you
Speaker 3: look at our US mutual funds, eighty percent of them
Speaker 3: over the past twenty years that have been live for
Speaker 3: the twenty years have outperformed their benchmark indices, which is
Speaker 3: an incredibly unusual stat for our industry.
Speaker 1: Real quickly, on the sort of like product distribution side ETFs,
Speaker 1: obviously I imagine Tracy or I could log into a
Speaker 1: brokerage and buy a dimensional ETF. But still focus from
Speaker 1: the sort of corporate strategy perspective is to distribute them
Speaker 1: or sell them through advisors.
Speaker 3: That's correct, and I hope that you guys do that.
Speaker 3: We would love to have you as clients, but that
Speaker 3: is the approach. We know how to work with financial professionals,
Speaker 3: whether they're institutions or advisors. We know how to give
Speaker 3: them the tools to monitor what we do, and then
Speaker 3: we think that the advice they give to their and
Speaker 3: constituencies is typically the right way to go. So that's
Speaker 3: the approach where we don't market directly to the retailed public.
Speaker 2: Can you talk to us a little bit more about
Speaker 2: cost because this has also been a big conversation in
Speaker 2: the fund industry, the idea of a race to the bottom,
Speaker 2: the idea that, especially in passive or indexing, the only
Speaker 2: thing that really matters is your cost ratio, and so
Speaker 2: you want to get that as low as possible. Is
Speaker 2: there a limit to how low that can go? And
Speaker 2: do you yourself feel pressure to get it as low
Speaker 2: as possible?
Speaker 3: Right?
Speaker 1: Just to sort of add out to that, like I'm
Speaker 1: thinking in the Tesla example, someone has to be paying
Speaker 1: attention to that or that is someone that you know
Speaker 1: that takes some level of human work to be thinking
Speaker 1: about these dynamics at which I imagine isn't free. So yeah, i'
Speaker 1: what is the limit.
Speaker 3: Of Yeah, there's two things that go on there. One
Speaker 3: is the explicit expense ratio, and there has been a
Speaker 3: strong focus on expense ratios, and we've reacted similarly as
Speaker 3: we've gained efficiencies with our systems and scale, we've reduced
Speaker 3: our fees over time. Our weighted average fees come down
Speaker 3: by about thirty percent in the past, you know, four
Speaker 3: or five years. So that's one aspect, But the expense
Speaker 3: ratio is not the only part for total cost of ownership.
Speaker 3: There's also things around implementation that are very very important
Speaker 3: with respect to the total cost of ownership. So we
Speaker 3: spend a lot of time on education, which is why
Speaker 3: we have those conferences and so on, and work with
Speaker 3: them professionals on what are some of the aspects that
Speaker 3: maybe aren't as obvious but go into the total cost
Speaker 3: of ownership. Let's take an example of securities lending, and
Speaker 3: if you look at securities lending revenue, it can vary
Speaker 3: across asset category, but I'll take the extreme when emerging
Speaker 3: market's small, emerging markets small. Over the past few years,
Speaker 3: typically those strategies have gained forty basis points in securities
Speaker 3: lending revenue each year. Depending on how you do that,
Speaker 3: that can be a material percentage of the expense ratio
Speaker 3: given back to the investors through a process that you
Speaker 3: can have going on inside the fund. So I think
Speaker 3: that they're the total cost of ownership is key, and
Speaker 3: you have to dig far deeper than the expense ratio
Speaker 3: to actually get there. When you look at the total
Speaker 3: cost of ownership of indices, it's actually much higher than
Speaker 3: the expense ratio because of the way that they're implemented
Speaker 3: and often the lack of focus on the asset category.
Speaker 1: What's next for you? I mean, in sort of the
Speaker 1: big picture TRENDSFER we sort of trace the sort of
Speaker 1: lineage of the company and the introduction of various ETFs,
Speaker 1: what aspects whether it's sort of industry market structure of
Speaker 1: things like where do you see the future or where
Speaker 1: are you investing for growth.
Speaker 3: One of the big areas that we've been working on
Speaker 3: recently is our application for exemptive relief for ETF share
Speaker 3: classes of mutual funds. And we think that if that
Speaker 3: becomes a high enough priority for the SEC and more
Speaker 3: folks in the industry are able to get that exemptive relief,
Speaker 3: we think that could be a big thing for the inserty.
Speaker 1: Just why is this important? What is this and why
Speaker 1: is this important?
Speaker 3: Well? This means is that let's say you have an
Speaker 3: existing mutual fund, OK, you could offer an ETF access point.
Speaker 3: So let's say an existing mutual fund is purchased by
Speaker 3: retirement investors through four oh one K accounts. Now you
Speaker 3: can offer an ETF access point. All of a sudden,
Speaker 3: you can commingle the retirement savers plus people who maybe
Speaker 3: have brokerage accounts that are in taxable accounts. That commingle
Speaker 3: provides economies of scale immediately to both sets of investors.
Speaker 3: The SEC has to provide fund managers what's called exemptive relief,
Speaker 3: so permission to do this. But I think that if
Speaker 3: more of those types of structures appear in this country,
Speaker 3: I think that will be a game changer for the
Speaker 3: mutual fund industry and also for the end investor, because
Speaker 3: folks who want to make a move from mutual fund
Speaker 3: to an ETF could now do so without trading if
Speaker 3: this were put in place more broadly in a very
Speaker 3: particular way. So I think that's a big one to
Speaker 3: keep an eye on, and we're definitely excited and energized
Speaker 3: by that possibility because we think it can be good
Speaker 3: for the end investor.
Speaker 2: You know, we spoke a little bit about your assets
Speaker 2: under management more than six hundred billion now, but not
Speaker 2: the biggest by far. You know, Vanguard black Rock are
Speaker 2: still the sort of I guess giant whales in the market.
Speaker 2: How does their growth or their size affect what you do?
Speaker 2: And I guess how closely do you keep an eye
Speaker 2: on what your competitors are doing in order to either
Speaker 2: identify market opportunities or perhaps alpha generation opportunities.
Speaker 3: So we definitely try to understand who's doing smart things
Speaker 3: with respect to investing, because, as I mentioned before, you
Speaker 3: can always improve on yourself and what you do. So
Speaker 3: if somebody comes out with a smart way to solve
Speaker 3: a problem, we're interested in learning. Learning that I think
Speaker 3: that in terms of how we decide where to go
Speaker 3: next and what strategies to launch. Typically, there we're not
Speaker 3: looking at our competitors. We're looking at our clients, and
Speaker 3: our clients give us far more precise, informed, useful information
Speaker 3: on what can be helpful for them and therefore what
Speaker 3: can lead to more sustainable business opportunities for us. So
Speaker 3: in that sense, we're maybe a little bit different than
Speaker 3: others in the industry in that, you know, we kind
Speaker 3: of march to the beat of our own tune in
Speaker 3: some respects because we have these strong relationships with academics
Speaker 3: and clients. They help us forge a path that we
Speaker 3: think is the right one, which may be different than others.
Speaker 1: Just to get back to the competition real quickly, Tracy
Speaker 1: mentioned Blackrock and Vanguard, but also we've seen more and
Speaker 1: more ETF offerings from the likes of JP Morgan and
Speaker 1: more recently Morgan Stanley that have a lot of sort
Speaker 1: of natural internal distribution capabilities, and both have wealth management
Speaker 1: arms and so have advisors for whom they can have
Speaker 1: a seamless brand. How challenging of that from a competition
Speaker 1: perspective is that, because obviously Dimensional does not have its
Speaker 1: own advisors or Dimensional Wealth Management. When companies that have
Speaker 1: this sort of end and sort of vertically integrated wealth
Speaker 1: solution their own people on the ground, their own local offices,
Speaker 1: their own ETFs, their own fund, how much of a
Speaker 1: challenges that from a sort of competitive standpoint.
Speaker 3: We positioned it as a strength in a strength in
Speaker 3: the sense that with us in the loop in terms
Speaker 3: of as conflict free advice as you can possibly get,
Speaker 3: because we compete on the merits of our investment proposition only,
Speaker 3: and so that's how we compete, and so we have
Speaker 3: to convince independent you know organizations that are providing financial
Speaker 3: advice that the vehicles that we manage and deliver can
Speaker 3: put their clients in the very best position. So we
Speaker 3: put it out there as a strength. It means that
Speaker 3: we can have to continue to innovate, we have to
Speaker 3: continue to be introspective, and that when you work with
Speaker 3: dimensional in our view, you're going to get always the
Speaker 3: leading edge of what academics have to say about investing
Speaker 3: in the right way to do it. And so that's
Speaker 3: how we've kind of positioned it. So it's a source
Speaker 3: of strength for us and something that keeps us on track,
Speaker 3: keeps us disciplined, and keeps us improving. And you know
Speaker 3: that appeals to a lot of different financial professionals out
Speaker 3: there in the marketplace.
Speaker 2: So one last question we mentioned in the intro but
Speaker 2: then we kind of glossed over it. But you did study,
Speaker 2: I believe, physics and you could have been a rocket scientist,
Speaker 2: but went into finance instead. You happy with that decision.
Speaker 3: Yeah, very happy. I started out in theoretical physics actually
Speaker 3: in my undergrad Then I did a master's in high
Speaker 3: performance computing, and then I did a PhD at Caltech
Speaker 3: in aeronautical engineering. And so I really enjoyed it. It
Speaker 3: was great lessons learned in terms of how to be
Speaker 3: detail oriented but also see the big picture. I always
Speaker 3: think that if you're going to be a master it's
Speaker 3: something you have to be able to see the forest,
Speaker 3: the trees, and the leaves all at the same time,
Speaker 3: and that's when true mastery actually happens. But applying those
Speaker 3: to the world of finance has been wonderful. Have been
Speaker 3: to Mention now almost twenty years and I've learned a
Speaker 3: lot of new things here and served a lot of
Speaker 3: people here and hopefully improved people's lives. So I think
Speaker 3: it's been a wonderful journey and I wouldn't change it
Speaker 3: for anything.
Speaker 1: Gerard O'Reilly, thank you so much for coming out Odd
Speaker 1: Lives this it's a fascinating conversation.
Speaker 3: Thank you for having me and enjoyed it.
Speaker 1: Tracy, I really enjoyed that conversation. It is funny, like
Speaker 1: I guess maybe laziness is the right word using some
Speaker 1: of these terms sort of enterchang, oh, indexing, Yeah, passive, systematic, active,
Speaker 1: like sort of certain things that I just sort of
Speaker 1: maybe use one of the other and that actually it's
Speaker 1: useful to think about the distinctions between these terms.
Speaker 2: Oh absolutely, I will say labels have their usefulness as well. Yeah,
Speaker 2: as sort of like quick catch alls. But the nuance
Speaker 2: that Girard used in describing their own strategy, so the
Speaker 2: idea of being passive but not indexed. Also the idea
Speaker 2: that you know, you can be an indexer, but there
Speaker 2: are different flavors and skills within indexing itself, so you
Speaker 2: can be a bad indexer and leave a lot of
Speaker 2: money on the table when you don't have to, right.
Speaker 1: The Tesla example was fascinating. Also the idea that to
Speaker 1: your question, cost is not everything, or the cost that
Speaker 1: you see on the page is like this is our
Speaker 1: expense ratio, or this is the fee for being in.
Speaker 1: This is not necessarily the all in cost because maybe
Speaker 1: they're not doing a good job of getting revenue for
Speaker 1: you for securities lending, and that if you build in
Speaker 1: that capacity and you find ways to do that efficiently,
Speaker 1: that's really you know, yeah, that makes a difference.
Speaker 2: Well, also, getting back to the starting point of you know,
Speaker 2: why does the finance industry exist at all? I thought
Speaker 2: Jared's point that it's not necessarily about trying to have
Speaker 2: a bunch of smart people beating the market, because according
Speaker 2: to the efficient market hypothesis, that is impossible. But more
Speaker 2: about having financial professionals who are able to interpret clients'
Speaker 2: needs and figure out what kind of risk profile they
Speaker 2: need and then look at those risk adjustice returns in
Speaker 2: the market and figure out what's best.
Speaker 1: And then that makes sense of the education. And these
Speaker 1: are all of those sort of the building, like those
Speaker 1: deep relationships with the advisors and why that's a particularly
Speaker 1: necessary aspect of the industry.
Speaker 3: And the company.
Speaker 2: But we're in Austin, and I think it's time for barbecue.
Speaker 1: Let's go get barbaga.
Speaker 2: Shall we leave it there?
Speaker 1: Let's leave it there?
Speaker 3: All right?
Speaker 2: This has been another episode of the Odlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 1: Follow our producers Carmen Rodriguez at Carmen armand dash Ol
Speaker 1: Bennett at Dashbot. And thanks to Moses Onam for his assistance.
Speaker 1: Follow all of the Bloomberg podcasts under the handle at Podcasts,
Speaker 1: and for more Oddlots content, go to Bloomberg dot com
Speaker 1: slash odd Lots, where we have transcripts, a blog, and
Speaker 1: a newsletter. And check out our discord discord dot gg
Speaker 1: slash odd lots where you can chat twenty four to
Speaker 1: seven with fellow listeners.
Speaker 2: And if you enjoy odlots, if you like it when
Speaker 2: we question the entire existence and validity of the financial industry,
Speaker 2: then please leave us a positive review on your favorite
Speaker 2: podcast platform. Thanks for listening.