WEBVTT - Dimensional Co-CEO Gerard O'Reilly on the Future of Fund Management 0:00:10.160 --> 0:00:14.080 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.200 --> 0:00:16.560 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:16.760 --> 0:00:22.159 Tracy, I have a big, big confession to me. Is 0:00:22.160 --> 0:00:25.320 it going to actually like speak to everything that we do? Okay, 0:00:25.360 --> 0:00:26.080 you're ready for it. 0:00:26.360 --> 0:00:28.000 I'm bracing myself to it. 0:00:28.200 --> 0:00:32.559 So I sort of ascribed to the general belief that 0:00:32.600 --> 0:00:38.400 like markets are like fairly efficient, things are priced in indexing, 0:00:38.600 --> 0:00:41.559 probably pretty good strategy, own the market portfolio, things like 0:00:41.560 --> 0:00:43.760 that makes a lot of sense to me. A lot 0:00:43.800 --> 0:00:46.920 of people seem to generally believe this is generally true 0:00:47.120 --> 0:00:47.440 so far. 0:00:47.520 --> 0:00:49.760 This is not a confession, okay. 0:00:49.520 --> 0:00:52.919 But the confession is given that I don't really understand 0:00:52.920 --> 0:00:55.960 why the investment industry exists and why do some why 0:00:55.960 --> 0:00:59.440 do people trade at all? Why does anyone try to 0:00:59.480 --> 0:01:03.640 beat the market? Why is active management a thing? We 0:01:03.760 --> 0:01:06.360 all sort of accept these premises, and yet the investment 0:01:06.400 --> 0:01:07.920 industry continues to exist. 0:01:08.040 --> 0:01:11.440 Well, I applaud your honesty, show, especially given that you 0:01:11.480 --> 0:01:15.360 work at a large financial organization dedicated to providing data 0:01:15.560 --> 0:01:18.760 and services to the financial industry. But I don't think 0:01:18.840 --> 0:01:23.600 it's actually an extremely unusual opinion. I think this has 0:01:23.640 --> 0:01:26.560 come up at various times that if the best thing 0:01:26.600 --> 0:01:29.000 for people to do is just index to the market 0:01:29.080 --> 0:01:31.880 and find the fund or the vehicle that does that 0:01:32.000 --> 0:01:35.880 at the lowest cost, then why do all these other 0:01:36.080 --> 0:01:39.039 services and efays and things like that actually exist. 0:01:39.120 --> 0:01:41.479 Yeah, what are we doing here? What are we doing here? Right? 0:01:41.720 --> 0:01:44.800 Because we talk about all these different things, and you know, 0:01:45.000 --> 0:01:47.559 sometimes on the show we talk about real economy things 0:01:47.680 --> 0:01:50.440 and sometimes we talk about sort of strictly market things. 0:01:50.480 --> 0:01:52.960 But why is anyone paying attention? Why does anyone talk 0:01:53.000 --> 0:01:54.880 about this? Why is anyone trading on any of it? 0:01:55.120 --> 0:01:57.120 Well, if I was going to hazard a guess, I 0:01:57.160 --> 0:02:01.080 would say there is something innately human about the idea 0:02:01.200 --> 0:02:04.440 that you can beat the system or outperform the market 0:02:04.560 --> 0:02:08.200 in one way or another. Like it feels unsatisfying to 0:02:08.240 --> 0:02:11.239 think that no one out there in the entire investment 0:02:11.280 --> 0:02:14.960 world is able to outperform the market. And yet if 0:02:15.000 --> 0:02:17.760 you listen to efficient market hypothesis and things like that, 0:02:17.760 --> 0:02:19.200 that's exactly what it'll tell you. 0:02:19.360 --> 0:02:21.680 Or maybe you can outperform the market, maybe you just 0:02:21.760 --> 0:02:24.560 uperform someone else trying to match the market or something 0:02:24.600 --> 0:02:26.200 like that. Maybe you could beat me or I could 0:02:26.240 --> 0:02:29.040 beat you, but not necessarily the market. I don't know, 0:02:29.080 --> 0:02:31.080 it just blows. It's always has bothered me. 0:02:31.240 --> 0:02:33.520 I love that you've started this podcast on the most 0:02:33.600 --> 0:02:36.480 existential note that you could possibly find. 0:02:36.720 --> 0:02:38.840 Well, I think it's really fitting because today we are 0:02:38.840 --> 0:02:42.119 going to be speaking We're at a company that's sort 0:02:42.120 --> 0:02:48.480 of known for its deep, academic, data driven understanding of markets, 0:02:48.520 --> 0:02:52.280 and it has this incredible lineage of people who have 0:02:52.320 --> 0:02:55.560 been at the forefront of a lot of this research 0:02:55.639 --> 0:02:59.800 about market efficiency and what is where pockets of inefficiency 0:03:00.160 --> 0:03:03.040 might exist, and what is the best way to invest 0:03:03.120 --> 0:03:06.120 given certain premises of efficiency and what that even means 0:03:06.280 --> 0:03:09.360 market efficiency, And so I think that we can have 0:03:09.480 --> 0:03:13.240 a conversation today that sort of gets at like some 0:03:13.360 --> 0:03:16.359 of these existential questions about how markets operate. 0:03:16.520 --> 0:03:18.720 I think that sounds great. I think we are also 0:03:18.760 --> 0:03:22.320 going to be speaking to our second maybe rocket scientists, 0:03:22.360 --> 0:03:25.200 to have oh on the podcast after Josh Younger. 0:03:25.480 --> 0:03:28.160 I love when we talk to actual rocket scientists because 0:03:28.360 --> 0:03:30.840 you know, obviously sometimes that is used as a cliche 0:03:30.880 --> 0:03:33.320 for very smart person. But as you mentioned, Josh Younger, 0:03:33.639 --> 0:03:37.240 former actual rocket scientist turned market econ guy, and yes 0:03:37.280 --> 0:03:38.240 we have another one today. 0:03:38.240 --> 0:03:39.360 All right, let's do it all right. 0:03:39.360 --> 0:03:41.920 I'm very excited we are going to be speaking today 0:03:42.000 --> 0:03:46.240 with Gerard O'Reilly. He is the co CEO and CIO 0:03:46.600 --> 0:03:49.600 at Dimensional, been here since two thousand and four. We're 0:03:49.640 --> 0:03:54.800 actually recording this at dimensionals headquarters in Austin, Texas right now. 0:03:55.000 --> 0:04:00.000 One of the major providers of mutual funds and ETFs, 0:04:00.120 --> 0:04:02.240 huge player in the industry. 0:04:01.920 --> 0:04:03.040 The fastest growing, the. 0:04:03.160 --> 0:04:07.160 Fastest growing ETF provider. As we're going to learn all 0:04:07.160 --> 0:04:10.240 about this company's philosophy. Girard, thank you so much for 0:04:10.280 --> 0:04:10.840 coming on. 0:04:10.720 --> 0:04:12.760 Oud lots thanks for having me on the show. 0:04:12.880 --> 0:04:15.800 So I mentioned that Dimensional sort of has this deep 0:04:16.320 --> 0:04:19.039 academic lineage. What do you sort of give us the 0:04:19.440 --> 0:04:22.960 quick history of the company and sort of like the 0:04:23.040 --> 0:04:25.520 ideas and the people from which this emerged. 0:04:26.200 --> 0:04:29.039 Yeah, So the company began in nineteen eighty one, so 0:04:29.080 --> 0:04:32.400 we've been around for many decades now. And when you 0:04:32.880 --> 0:04:34.600 kind of go back and trace the history of the 0:04:34.600 --> 0:04:37.200 founders of the company, a lot of them had been 0:04:37.240 --> 0:04:39.680 at the University of Chicago, so they had studied under 0:04:39.839 --> 0:04:43.320 Gene Fama and others, and they had worked on the 0:04:43.320 --> 0:04:45.960 first set of index funds in the early seventies. So 0:04:46.080 --> 0:04:50.320 David Booth and Rex Singfield and in the early eighties, 0:04:50.520 --> 0:04:53.160 David and Rex had identified a need in the marketplace, 0:04:53.440 --> 0:04:56.919 which was it was no real way out there to 0:04:56.960 --> 0:05:01.679 get systematic, broadly diversified exposure to small caps. They understood 0:05:01.680 --> 0:05:05.120 the limitations of indexing, They understood that that probably wasn't 0:05:05.120 --> 0:05:07.640 the best way to go, but they also understood some 0:05:07.680 --> 0:05:11.240 of the benefits of indexing transparency, low cost, broad diversification. 0:05:11.800 --> 0:05:14.280 So they started the company based on a need in 0:05:14.320 --> 0:05:17.320 the market and a set of academic research that had 0:05:17.320 --> 0:05:20.400 been coming out at that time kind of demonstrating that 0:05:20.440 --> 0:05:24.040 small cap stocks had had higher returns than large cap stocks, 0:05:24.720 --> 0:05:27.440 and from there the company began. It has its roots 0:05:27.440 --> 0:05:31.200 in academia. When the company was first began, David and 0:05:31.240 --> 0:05:34.600 Rex went up to the University of Chicago and Gene 0:05:34.600 --> 0:05:37.160 Fama was there. He got on the board. He had 0:05:37.160 --> 0:05:40.479 folks like mac McCown, a very long time industry expert 0:05:41.120 --> 0:05:43.240 on the mutual fund board. You had Myron Shoals, you 0:05:43.279 --> 0:05:46.719 had Martin Miller. Interesting thing about Dimensional is that we've 0:05:46.720 --> 0:05:50.960 been associated closely with five Nobel Prize winners and all of. 0:05:50.920 --> 0:05:54.440 The best credential I. 0:05:54.360 --> 0:05:57.800 Think of like the Mount Rushmore of academic finance. It 0:05:57.839 --> 0:06:00.600 sounds like they're all associated dimensional pretty much. 0:06:01.440 --> 0:06:04.599 So I have a really basic and perhaps embarrassing question, 0:06:04.640 --> 0:06:06.479 but I think it kind of gets to some of 0:06:06.480 --> 0:06:09.880 our introductory remarks, and possibly I'm not the only one 0:06:09.880 --> 0:06:12.800 who has this question. When I think about dimensional I 0:06:12.839 --> 0:06:17.599 think about mostly indexing and really passive investing. But you 0:06:17.720 --> 0:06:20.680 do have a bunch of actively managed etf So in 0:06:20.760 --> 0:06:22.800 your mind, are you active or passive? 0:06:23.680 --> 0:06:27.760 We're non index, so passive is probably fine because passive 0:06:27.800 --> 0:06:31.000 implies that you accept market prices, you trust market prices, 0:06:31.400 --> 0:06:34.520 and you try to extract information from market prices. Index 0:06:34.720 --> 0:06:38.760 two indexing you leave money on the table, and so 0:06:39.240 --> 0:06:41.520 we're non index but we're not in the business of 0:06:41.520 --> 0:06:43.080 trying to outguess market prices. 0:06:43.480 --> 0:06:46.320 What does it mean? Okay, I guess, I guess to 0:06:46.400 --> 0:06:48.640 your point, Maybe in my mind I've always sort of 0:06:48.640 --> 0:06:51.080 elided the two or think that passive means index, so 0:06:51.160 --> 0:06:54.200 that they're roughly synonyms. But clearly they're not. So why 0:06:54.200 --> 0:06:56.159 do you talk a little bit further about what the 0:06:56.160 --> 0:06:56.719 difference is? 0:06:57.440 --> 0:06:59.360 So maybe it would be helpful also to talk a 0:06:59.400 --> 0:07:02.240 little bit more or about markets. You made some comments 0:07:02.240 --> 0:07:05.560 about market efficiency and so on. I think that it's 0:07:05.560 --> 0:07:09.279 important to understand what a price actually represents the price 0:07:09.320 --> 0:07:11.960 of a stock or the price of a bond, and 0:07:12.000 --> 0:07:15.000 then you get a good idea of why not index, 0:07:15.640 --> 0:07:18.920 but why be passive? And the example that we often 0:07:19.040 --> 0:07:21.960 use is if you want to place a bet on 0:07:22.000 --> 0:07:26.560 a sporting event, Typically you say, I think the favorite 0:07:26.600 --> 0:07:30.080 will win by x twenty points, thirty points, forty points. 0:07:30.560 --> 0:07:33.280 And so why bring this up as an example is 0:07:33.360 --> 0:07:36.720 because that spread how much the favorite is expected to 0:07:36.760 --> 0:07:40.120 win by is an example of using the wisdom of 0:07:40.160 --> 0:07:43.800 the crowds to predict the future. The bookie tries to 0:07:43.880 --> 0:07:46.800 keep the same number of people on one side of 0:07:46.800 --> 0:07:48.400 the spread as the other side of the spread. If 0:07:48.440 --> 0:07:52.080 more people say i'll take you know, the favorite will 0:07:52.120 --> 0:07:54.120 win by more than the spread, the spread will change 0:07:54.800 --> 0:07:57.320 and you can look at how well that does it 0:07:57.360 --> 0:08:00.320 actually forecasting the outcome of the games. There was a 0:08:00.320 --> 0:08:03.400 study in the mid two thousands that looked at, you know, 0:08:03.480 --> 0:08:07.200 eight thousand MBA games and five thousand NFL games and 0:08:07.280 --> 0:08:09.640 found that the favorite won by more than the spread 0:08:09.800 --> 0:08:12.760 fifty percent of the time, exactly what you would explact. 0:08:13.240 --> 0:08:16.360 So this notion of there's a wisdom of the crowds. 0:08:16.880 --> 0:08:19.760 There's a marketplace by which they can express their opinion. 0:08:20.040 --> 0:08:23.559 They express their opinion by putting real money on the table, 0:08:24.200 --> 0:08:26.680 and that gives you a forecast about something that's going 0:08:26.720 --> 0:08:29.000 to happen in the future. And so when you think 0:08:29.040 --> 0:08:32.200 about markets, think about them in the same way that 0:08:32.360 --> 0:08:36.200 prices are basically predictions or forecasts of the future, and 0:08:36.240 --> 0:08:40.679 they're informed by the actions of people trading in the marketplace. 0:08:41.280 --> 0:08:43.520 And the question then becomes is what informations in the 0:08:43.559 --> 0:08:46.800 price of a bonder a stock. There's lots of academic, 0:08:47.240 --> 0:08:49.680 you know, studies around that. When it comes to the spread, 0:08:49.720 --> 0:08:51.800 it's okay, how much will the favorite in this sporting 0:08:51.800 --> 0:08:54.320 event win by? When it comes to the price of 0:08:54.320 --> 0:08:58.560 a bonder stock, the overwhelming academic evidence is that what's 0:08:58.600 --> 0:09:02.160 mainly in there is the return that people require to 0:09:02.240 --> 0:09:05.480 hold the investment. And I think that's a really important 0:09:05.559 --> 0:09:09.080 point to make because it tells you that you don't 0:09:09.120 --> 0:09:11.720 have to be out there out guessing market prices, but 0:09:11.880 --> 0:09:15.640 you can use them to say which stocks or bonds 0:09:15.760 --> 0:09:18.720 do people require a high return to hold, and which 0:09:18.720 --> 0:09:21.319 stocksure bonds do people require a low return to hold, 0:09:22.080 --> 0:09:24.240 and I think that's one of the keys and the 0:09:24.320 --> 0:09:27.679 key insights that you kind of glean from this all 0:09:27.679 --> 0:09:30.640 this academic literature, and that's what we do. We say, 0:09:30.720 --> 0:09:35.280 how can we extract that information efficiently for investors. 0:09:35.720 --> 0:09:39.160 So it's not that market prices are always necessarily correct, 0:09:39.240 --> 0:09:42.320 but rather that you can kind of clean I guess 0:09:42.400 --> 0:09:46.200 the risk assessment of investors based on those prices and 0:09:46.240 --> 0:09:47.280 then adjust for that. 0:09:47.679 --> 0:09:50.840 You can glean how much investors demand in returns to 0:09:50.920 --> 0:09:54.120 hold a stock or a bonder, many differences in those 0:09:54.840 --> 0:09:57.200 and the way I think about them always being right 0:09:57.360 --> 0:09:59.160 or not always being right, I think about them being 0:09:59.280 --> 0:10:03.120 fair and un biased. There's another set of academic studies 0:10:03.160 --> 0:10:06.079 that look at the performance of managers and what they 0:10:06.160 --> 0:10:08.440 find at the conclusion, the main conclusion you can draw 0:10:08.480 --> 0:10:12.200 from those studies is that they're unbiased estimates of the future. 0:10:12.480 --> 0:10:14.800 They may not be always spot on, but you don't 0:10:14.840 --> 0:10:16.080 know when they're too high, and you don't know when 0:10:16.120 --> 0:10:18.920 they're too low. And what you find is if you 0:10:19.040 --> 0:10:21.920 use them effectively, you can manage risk better and you 0:10:21.960 --> 0:10:25.120 can increase expected returns. So you know, at the start, 0:10:25.160 --> 0:10:29.560 you said, why do people bother? Because let's take the 0:10:29.720 --> 0:10:33.240 US over the past one hundred years, the nominal rate 0:10:33.240 --> 0:10:35.160 of return on the US stock market has been about 0:10:35.160 --> 0:10:38.040 ten percent over the past one hundred years. So that 0:10:38.160 --> 0:10:40.960 means that if you invest your money doubles every seven years. 0:10:40.960 --> 0:10:44.280 It's an explosive number. If you can take that ten 0:10:44.320 --> 0:10:46.080 and turn it into an eleven or twelve, Your money 0:10:46.120 --> 0:10:49.520 doubles every six so after a forty year horizon, you 0:10:49.559 --> 0:10:52.120 have doubled the money. Now, a lot of people's investment 0:10:52.160 --> 0:10:55.079 horizon in the humulation phase is thirty or forty years. 0:10:55.760 --> 0:10:58.920 That's why people bother because the amount of consumption that 0:10:59.000 --> 0:11:01.520 you can afford by doing a little better than the 0:11:01.559 --> 0:11:04.840 market tends to be quite significant. 0:11:05.520 --> 0:11:09.240 How would your framework of understanding the market apply to 0:11:09.440 --> 0:11:11.920 a phenomenon like say, this might be a little unfair, 0:11:12.000 --> 0:11:15.800 but you know an extreme example game stop for instance. 0:11:16.480 --> 0:11:19.720 Yeah, So when you look at a situation like GameStop, 0:11:20.240 --> 0:11:23.480 and you look at any market mechanisms around that time, 0:11:23.960 --> 0:11:27.040 what was interesting is in order to keep what we 0:11:27.120 --> 0:11:29.600 think as prices as unbiased estimates of the future, there 0:11:29.640 --> 0:11:32.120 has to be some shorting going on, some long going on, 0:11:32.880 --> 0:11:35.240 and when one of those market mechanisms becomes a little 0:11:35.280 --> 0:11:39.160 bit more restricted. Well, then prices may deviate away from 0:11:39.200 --> 0:11:42.320 what people consider a fundamental valuation of the firm, So 0:11:42.400 --> 0:11:46.760 that market mechanism itself is important to keep running. And 0:11:46.800 --> 0:11:49.320 as that market mechanism keeps running, then prices are just 0:11:49.360 --> 0:11:51.719 from day to day. But you'll have people who think 0:11:51.720 --> 0:11:53.560 they are too high, people who think they're too low, 0:11:54.080 --> 0:11:56.400 and they will express their opinion on one side or 0:11:56.440 --> 0:11:58.439 the other. When the people who think they're too high 0:11:58.520 --> 0:12:03.040 can't express an opinion, what happens. That's where prices may deviate. 0:12:03.640 --> 0:12:05.520 The thing I would mention about a company like a 0:12:05.559 --> 0:12:09.000 game Stop is that when you have a systematic approach, 0:12:09.520 --> 0:12:12.679 it allows you to handle situations like that very very efficiently. 0:12:13.400 --> 0:12:15.440 So you accept the price for what it is. It 0:12:15.520 --> 0:12:17.920 used to be a micro value stock. Two weeks later 0:12:17.960 --> 0:12:21.160 it's a large growth company. Okay, if you're managing portfolio 0:12:21.200 --> 0:12:24.240 is along those types of pact categories, you know what 0:12:24.320 --> 0:12:24.560 to do. 0:12:41.080 --> 0:12:43.640 Tell us a little bit more about the evolution of 0:12:43.720 --> 0:12:48.079 product offerings at Dimensional and you mentioned that the original 0:12:48.559 --> 0:12:50.480 a lot of the original research was sort of based 0:12:50.520 --> 0:12:53.960 on this idea that they were potential outperformance in small 0:12:54.000 --> 0:12:57.080 caps that were not easily exploited by the offerings that 0:12:57.120 --> 0:13:01.000 were available. And I know you started in mutual funds. 0:13:01.280 --> 0:13:04.600 The one thing I always heard about Dimensional mutual funds 0:13:04.679 --> 0:13:07.040 is that there was sort of a screen to even 0:13:07.080 --> 0:13:09.360 get access to them, and you wanted the advisors who 0:13:09.360 --> 0:13:11.560 put some client money into Dimensional like that. 0:13:11.640 --> 0:13:14.520 There's a great Michael Lewis article that I saw and 0:13:14.559 --> 0:13:16.640 it kind of described the process and I guess the 0:13:16.720 --> 0:13:20.360 late nineteen eighties of getting access to Dimensional and it's 0:13:20.400 --> 0:13:23.680 almost like a revivalist meeting where you had to like 0:13:23.800 --> 0:13:26.560 pledge your undying loyalty to efficient markets. 0:13:26.920 --> 0:13:28.400 Yeah, lot of you talking about it. So what were 0:13:28.400 --> 0:13:30.760 those initial product offerings and then we can get into 0:13:30.800 --> 0:13:32.480 sort of how it evolved over time. 0:13:32.640 --> 0:13:35.360 Yeah, So when the firm started in the eighties, the 0:13:35.400 --> 0:13:39.200 initial product offerings were small cap strategies. Okay, began with 0:13:39.400 --> 0:13:43.360 US small cap strategies, then moved to strategies outside the US, 0:13:43.440 --> 0:13:46.800 the UK, Japan, Europe, and so on and so forth. 0:13:47.720 --> 0:13:51.040 Then fixed income offerings came along, and the fixed income 0:13:51.040 --> 0:13:54.200 offerings started out short term and evolved to be global 0:13:54.520 --> 0:13:57.800 pretty early on by the kind of early nineties. And 0:13:57.840 --> 0:14:01.840 there again, it's about using bond prices to understand differences 0:14:01.840 --> 0:14:06.600 and expected returns across bonds, effectively thinking about the shape 0:14:06.600 --> 0:14:08.480 of the yield curve. How much capital gain should I 0:14:08.480 --> 0:14:12.959 expect versus yield? Right, that's at its heart. Then the 0:14:13.040 --> 0:14:17.000 value research came along in the early nineties and the 0:14:17.040 --> 0:14:20.480 firm really started to grow in two ways. One, the 0:14:20.480 --> 0:14:24.160 product offering expanded, and what drives our product offering is 0:14:24.160 --> 0:14:28.400 two things. One, we work very closely with financial professionals, 0:14:28.600 --> 0:14:32.440 so we don't go straight to retail. We work generally 0:14:32.520 --> 0:14:35.960 with financial professionals and we have deep relationships with them, 0:14:36.000 --> 0:14:38.760 so we understand what problems they're trying to solve, and 0:14:38.800 --> 0:14:42.160 that informs what strategies we bring to the market, and 0:14:42.200 --> 0:14:44.640 you can see that in our track record. If you 0:14:44.680 --> 0:14:47.560 look typically in the industry, the closure rate for funds 0:14:47.680 --> 0:14:50.680 tends to be very high. For dimensional it's incredibly low 0:14:51.000 --> 0:14:53.480 because we understand the need that we're trying to solve 0:14:53.520 --> 0:14:56.600 before we launch a fund or an ETF and have 0:14:56.640 --> 0:14:58.760 a pretty good idea of who has that need and 0:14:58.800 --> 0:15:00.000 who else might have that need. 0:15:00.240 --> 0:15:02.840 So you're sorry, you're not just like throwing. So it 0:15:02.880 --> 0:15:05.200 does feel like a lot of ETFs. You get these 0:15:05.360 --> 0:15:07.600 throwing things at the wall and we'll see if it sticks. 0:15:07.640 --> 0:15:09.160 And that's not your personal launching the. 0:15:09.160 --> 0:15:11.800 Product that that's not our approach at all. It's work 0:15:11.840 --> 0:15:16.480 with clients who understand markets and it can express needs 0:15:16.480 --> 0:15:20.200 their fiduciaries for end investors, and how can we build 0:15:20.280 --> 0:15:22.160 products and solutions to meet their needs. 0:15:22.280 --> 0:15:25.400 To Joe's point earlier, though, why not just cut out 0:15:25.440 --> 0:15:29.680 the middleman completely and sell directly, because presumably you could 0:15:29.720 --> 0:15:33.160 lower you're already pretty low fees even further. 0:15:33.960 --> 0:15:38.280 We think that the combination of financial professional independent money 0:15:38.280 --> 0:15:42.480 manager is a pretty good combination in terms of serving 0:15:42.560 --> 0:15:46.200 the needs of families all across the country. Because you say, 0:15:46.200 --> 0:15:48.600 why not just hold the market you mentioned that at 0:15:48.640 --> 0:15:52.160 the beginning of the podcast and set it and forget it. 0:15:53.000 --> 0:15:56.120 There's a lot of value that a financial professional can 0:15:56.160 --> 0:15:57.800 bring to the table. And I'll get back a little 0:15:57.800 --> 0:15:59.440 bit of the product offering in a moment. But this 0:15:59.520 --> 0:16:03.800 is is interesting in itself because until you define your 0:16:03.840 --> 0:16:07.160 goals with respect to your investment portfolio, you can't actually 0:16:07.160 --> 0:16:10.000 manage risk. You have no way to manage risk until 0:16:10.040 --> 0:16:14.840 you define your goals. Your goals define what assets actually 0:16:14.880 --> 0:16:19.080 have low uncertainty relative to what you're trying to achieve 0:16:19.640 --> 0:16:23.359 and that gives you a risk management asset. Financial professionals 0:16:23.440 --> 0:16:26.720 typically will work with families who may not understand finance 0:16:26.800 --> 0:16:30.120 all that well, and we'll do two things. One, help 0:16:30.160 --> 0:16:33.720 them come with a financial plan and implement that financial 0:16:33.720 --> 0:16:37.000 plan with the right investment vehicles. And then too, help 0:16:37.040 --> 0:16:39.760 them stay disciplined and tune out the noise of all 0:16:40.000 --> 0:16:44.280 what goes on around markets. And so that's why we've 0:16:44.560 --> 0:16:47.640 gone down that path. And you mentioned that that started 0:16:47.640 --> 0:16:51.000 in the early eighties. You're right, and that became another 0:16:51.160 --> 0:16:53.040 kind of large part of our business through the nineties 0:16:53.040 --> 0:16:55.760 and the two thousands. Just back to the kind of 0:16:55.800 --> 0:16:58.720 how we decide on new strategies. The other area then 0:16:58.880 --> 0:17:02.280 is new academic recas search our new research from our 0:17:02.280 --> 0:17:04.600 internal team. We have about one hundred plus folks on 0:17:04.640 --> 0:17:08.200 our internal research team, loss of PhDs and all types 0:17:08.240 --> 0:17:12.360 of disciplines. And as we learn something new about markets 0:17:12.520 --> 0:17:15.920 that can be implemented in a systematic way, we say, okay, great, 0:17:16.600 --> 0:17:19.680 let's provide those benefits to all of our existing clients, 0:17:20.200 --> 0:17:22.600 and it may lead to new strategies that we can 0:17:22.640 --> 0:17:24.840 offer existing and new clients going forward. 0:17:25.200 --> 0:17:27.360 So, as you point out, you know some of these 0:17:27.440 --> 0:17:30.080 terms don't mean the same thing. Passive certainly does not 0:17:30.119 --> 0:17:35.000 necessarily mean indexing. What is the difference between systematic and active? 0:17:36.400 --> 0:17:40.560 For me, I'll use systematic or rules based approach. Okay, 0:17:40.760 --> 0:17:44.400 we like rules based approaches when you can describe here 0:17:44.440 --> 0:17:46.199 are the rules that are going to be used to 0:17:46.240 --> 0:17:49.600 manage the portfolio, because then you can describe that to 0:17:49.640 --> 0:17:52.600 a financial professional. You can give them the tools to 0:17:52.680 --> 0:17:56.760 monitor what you've done, and they can see that you've 0:17:56.840 --> 0:17:59.200 did what you said you would do, and that builds 0:17:59.280 --> 0:18:03.280 trust over time. Trust builds a longer investment horizon over time, 0:18:03.760 --> 0:18:06.280 and what we know about longer investment horizons is that 0:18:06.320 --> 0:18:09.360 the probabilities of success go up with the length of investment, 0:18:09.400 --> 0:18:13.639 probably realizing a positive value premium sized premium probability premium. 0:18:13.960 --> 0:18:18.199 So rules or systematic are very very important because it 0:18:18.359 --> 0:18:21.880 gives you a way to say that I can understand 0:18:22.040 --> 0:18:25.280 what to expect from these strategies given different market environments. 0:18:25.600 --> 0:18:28.199 Traditional active there are probably a set of rules, but 0:18:28.200 --> 0:18:31.239 they're not as well articulated. It may be based on 0:18:31.280 --> 0:18:34.200 a hunch or some analysis, and the analysis may vary 0:18:34.240 --> 0:18:37.159 over time, and so the range of outcomes or the 0:18:37.200 --> 0:18:39.679 dispersion of outcomes that you get from the strategy is 0:18:39.760 --> 0:18:43.960 much greater, and you really can set as strong an expectation. 0:18:44.600 --> 0:18:46.960 A rules based approach is the right approach in my view. 0:18:47.440 --> 0:18:49.480 If you have the right innovation, you've got to do 0:18:49.520 --> 0:18:52.119 the research and keep on pushing forward the boundaries. The 0:18:52.240 --> 0:18:55.240 right pricing. You mentioned that you know we have very 0:18:55.240 --> 0:18:58.720 well priced and then the right support, so you say, 0:18:58.960 --> 0:19:01.119 you know, when we had a advisors and so on 0:19:01.160 --> 0:19:03.840 come to conferences, what was that all about. It was 0:19:03.880 --> 0:19:07.760 providing the right support because education is key. If you 0:19:07.960 --> 0:19:11.560 understand what to expect and how bad it can be 0:19:11.560 --> 0:19:15.080 before the bad times happen, you will be much better 0:19:15.080 --> 0:19:18.119 prepared to handle those bad times when they almost certainly 0:19:18.119 --> 0:19:21.879 will occur. So that support aspect is why we run conferences, 0:19:22.000 --> 0:19:26.199 why we write white papers, why we provide materials to 0:19:26.320 --> 0:19:29.960 financial professionals to help them understand the approach and communicate 0:19:30.000 --> 0:19:30.480 the approach. 0:19:31.320 --> 0:19:33.560 Just on this note, could you maybe describe for us 0:19:33.600 --> 0:19:37.000 the process of coming up with a new product or 0:19:37.080 --> 0:19:40.960 a new systemic investing strategy. What does it look like 0:19:41.040 --> 0:19:43.960 from the initial research and maybe the pitching of the 0:19:44.040 --> 0:19:47.720 idea to the approval process, And could you maybe provide 0:19:48.000 --> 0:19:52.000 a favorite example where people were particularly creative, or one 0:19:52.040 --> 0:19:55.720 that illustrates the way dimensional is thinking about markets. 0:19:56.440 --> 0:20:00.520 Yeah, for sure. So let's take the exam sample of 0:20:00.640 --> 0:20:04.200 profitability and it's going through its ten year anniversary. It's 0:20:04.280 --> 0:20:08.320 been ten years since Professor Novi Marx published one of 0:20:08.320 --> 0:20:11.359 the key papers on that particular topic, and so if 0:20:11.400 --> 0:20:13.840 you go back to you know, twenty eleven, twenty twelve, 0:20:13.880 --> 0:20:18.520 twenty thirteen, effectively there was new research coming out that 0:20:18.720 --> 0:20:22.960 showed profitability, which kind of takes income statement variables and 0:20:23.000 --> 0:20:26.440 scales them by balance sheet variables. It had the power 0:20:26.480 --> 0:20:29.960 to predict future profitability. So it's an intrinsic firm characteristic. 0:20:30.080 --> 0:20:32.800 Tall parents have tall kids, Well run firms tend to 0:20:32.800 --> 0:20:35.600 remain well run firms for some period of time. And 0:20:35.680 --> 0:20:40.280 if you pair that up with other price based metrics 0:20:40.359 --> 0:20:43.480 like price to book, price to earnings, market cap, it 0:20:43.560 --> 0:20:47.800 actually enhanced your description of differences and returns across stocks. 0:20:48.040 --> 0:20:50.560 So we decided that we were going to incorporate that 0:20:50.760 --> 0:20:54.160 in how we managed the portfolios, and so we went 0:20:54.200 --> 0:20:57.920 through a large process of educating clients on here's the research, 0:20:58.480 --> 0:21:00.840 here's how it will change the strategy that we manage 0:21:00.840 --> 0:21:04.800 for you, and here's the benefits that we perceive for 0:21:04.960 --> 0:21:08.640 you all from this piece of research. The research goes 0:21:08.680 --> 0:21:10.840 through a very strong vetting process here internally, we have 0:21:11.320 --> 0:21:15.000 an Investment Research Committee that has Nobel Prize winners on 0:21:15.040 --> 0:21:18.440 a people like Gene Fama, people like Professor Martin ken 0:21:18.480 --> 0:21:21.879 french Is on a professor Novi Marx that vets the 0:21:21.920 --> 0:21:25.440 research very very thoroughly. And then we have a lot 0:21:25.440 --> 0:21:28.600 of expertise in how to implement and so that goes 0:21:28.640 --> 0:21:31.399 through the Investment committee, and the investment committee would review 0:21:31.520 --> 0:21:33.760 all the ways that it would be implemented. So there's 0:21:33.760 --> 0:21:36.800 a kind of a large emphasis on education and then 0:21:36.840 --> 0:21:40.840 also implementation and doing it well. And then we bring 0:21:41.080 --> 0:21:43.760 that to the marketplace with a series of new strategies 0:21:43.840 --> 0:21:47.160 but also enhancements to all of our existing strategies. And 0:21:47.400 --> 0:21:49.760 I think that's worked out very very well. But we 0:21:49.840 --> 0:21:53.040 have these types of examples all the time that come 0:21:53.800 --> 0:21:57.240 where clients either express needs or there's new academic research, 0:21:57.800 --> 0:21:59.720 and that helps us, you know, improve what we do. 0:22:00.080 --> 0:22:02.680 Always get better, that's our mantras. You can always get 0:22:02.720 --> 0:22:03.439 better at what you do. 0:22:04.040 --> 0:22:08.840 So I understand your point about support for financial advisors, 0:22:09.000 --> 0:22:14.640 education for financial advisors, education about potential downsides, periods of downsides, 0:22:14.680 --> 0:22:17.760 what to expect that maybe the premium exists over a 0:22:17.800 --> 0:22:19.880 long time and then there could be bumps in the road. 0:22:20.160 --> 0:22:24.000 I'm curious about a specific example like value, which is 0:22:24.640 --> 0:22:28.040 cheap stocks depending on how you measure it. Supposedly there 0:22:28.080 --> 0:22:29.960 was a lot of research that said they would do better. 0:22:30.359 --> 0:22:33.520 My understanding is that over the last at least fifteen years, 0:22:34.320 --> 0:22:37.200 that has not been an effective strategy, and some people 0:22:37.480 --> 0:22:40.480 have certainly called into question like was that wrong? Will 0:22:40.480 --> 0:22:43.680 it ever come back? Is that busted research? What has 0:22:43.800 --> 0:22:46.600 happened with value? And sort of you know, with the 0:22:46.680 --> 0:22:49.200 research that you've done it dimensional, how does that help 0:22:49.200 --> 0:22:51.040 you understand that factor. 0:22:51.520 --> 0:22:53.760 When you have a time period like that, it's always 0:22:53.800 --> 0:22:58.800 important to be introspective, reevaluate your assumptions, re evaluate the data, 0:22:58.880 --> 0:23:02.720 and also understand what really happened. So I think that 0:23:02.840 --> 0:23:05.280 the idea that there hasn't been a value preom for 0:23:05.320 --> 0:23:07.639 fifteen years, I disagree with that in the sense of 0:23:08.119 --> 0:23:11.520 there's been many months, quarters, years where value stocks have 0:23:11.520 --> 0:23:14.400 outperformed growth stocks. But what you had in the middle 0:23:14.440 --> 0:23:17.760 of that period ending in June twenty twenty was the 0:23:17.800 --> 0:23:20.800 worst three year period in the past one hundred years 0:23:20.840 --> 0:23:23.560 for which we have data here in the US of 0:23:24.000 --> 0:23:27.240 value stocks, in particular small value stocks versus large growth 0:23:28.200 --> 0:23:32.239 And you say, well, was that unexpected or was that 0:23:32.359 --> 0:23:36.040 a change in markets? If you look at the returns 0:23:36.040 --> 0:23:38.960 of some of the large growth companies during that time 0:23:39.000 --> 0:23:41.440 period and even over the ten years ending in June 0:23:41.480 --> 0:23:44.600 twenty twenty, and you looked at the fangs or whichever 0:23:44.760 --> 0:23:48.159 latest acronymy you want to use, they had annualized compound 0:23:48.200 --> 0:23:51.280 return rates of thirty percent per year for about a decade. 0:23:51.680 --> 0:23:55.439 That's unexpected. You can't tell me that people you know, 0:23:55.560 --> 0:23:58.639 going back, you know, in twenty ten and so on, 0:23:58.680 --> 0:24:02.080 we're going to say these want to return thirty percent 0:24:02.119 --> 0:24:04.919 a year for the next decade. That's an unexpectedly good outcome. 0:24:04.920 --> 0:24:09.560 And you can say why, Well, those firms did unexpectedly well. 0:24:09.840 --> 0:24:13.680 They served their clients' needs better than anybody had anticipated, 0:24:13.760 --> 0:24:16.679 grew their revenue better than anybody had anticipated, and became 0:24:17.480 --> 0:24:20.439 dominant firms in the market, and that was an unexpected event. 0:24:21.560 --> 0:24:24.520 You factor that in and you say, no, there's nothing 0:24:24.600 --> 0:24:27.520 broken here. It's just that there's a lot of volatility 0:24:27.560 --> 0:24:31.720 with these premiums, and this time period tells you that 0:24:31.800 --> 0:24:35.120 you can have large unexpected events. But if you break 0:24:35.160 --> 0:24:37.000 down a lot of those sub periods, you've had lots 0:24:37.040 --> 0:24:40.520 of strong periods for value. So for example, after that 0:24:40.600 --> 0:24:43.359 worst three year period on record June twenty twenty, we 0:24:43.400 --> 0:24:45.640 went into one of the strongest two to three year 0:24:45.680 --> 0:24:50.000 periods on record for value versus growth. And so it's 0:24:50.359 --> 0:24:53.000 kind of tempting to try to summarize a fifteen year 0:24:53.040 --> 0:24:57.360 period with one observation, but typically that's not as helpful. 0:24:57.520 --> 0:25:00.760 The one comment I would make the learning for that 0:25:00.800 --> 0:25:03.680 period is that sector weights matter a lot, and the 0:25:03.760 --> 0:25:08.439 value strategy, and in particular, you know, value strategies when 0:25:08.480 --> 0:25:11.640 you just look at them, generally tended to be underway technology. 0:25:12.200 --> 0:25:14.440 We use a lot of sector caps and sector constraints, 0:25:14.640 --> 0:25:17.600 and they were actually quite helpful for our relative performance 0:25:17.680 --> 0:25:21.000 during that period and subsequent periods. And I think that 0:25:21.119 --> 0:25:23.560 was one thing that was probably additive that that data 0:25:23.600 --> 0:25:25.399 gave you in terms of understanding of how better to 0:25:25.440 --> 0:25:27.200 build value strategies from that period. 0:25:27.600 --> 0:25:30.919 What about the definition of value itself, because over the 0:25:30.960 --> 0:25:33.400 past couple of years there's been this discourse that may 0:25:33.400 --> 0:25:36.760 bee traditional measures of value such as price to book, 0:25:36.760 --> 0:25:40.760 which doesn't take into account in tangible asset values. Maybe 0:25:40.760 --> 0:25:43.239 that's not the right way to do it. How are 0:25:43.240 --> 0:25:45.719 you thinking about actually measuring value? 0:25:46.160 --> 0:25:48.960 So a couple of kind of quick reactions there. One, 0:25:49.480 --> 0:25:51.719 there are a lot of intangible assets that are in 0:25:51.760 --> 0:25:56.040 book value. So let's take some examples. If Company A 0:25:56.040 --> 0:25:59.720 acquires Company B, then there may be line items books 0:25:59.720 --> 0:26:02.840 through them merger and acquisition process that are called externally 0:26:02.920 --> 0:26:06.879 acquired in tangibles. And so as companies go through this 0:26:07.040 --> 0:26:08.920 M and A process, you get a lot of intangible 0:26:08.960 --> 0:26:11.240 assets on a company's balance sheet. In fact, if you 0:26:11.240 --> 0:26:13.359 look at S and P five hundred companies, I think 0:26:13.400 --> 0:26:15.399 it's something like twenty five percent of the value of 0:26:15.400 --> 0:26:19.080 the assets are intangible assets externally acquired. And so that's 0:26:19.320 --> 0:26:23.240 grown since about the year two thousand because the accounting 0:26:23.560 --> 0:26:27.439 mechanisms for how you treated M and A activity changed 0:26:27.480 --> 0:26:29.359 in the year two thousand in the US. So you 0:26:29.400 --> 0:26:32.399 see a lot of intangible assets on companies balance sheets. 0:26:32.640 --> 0:26:37.040 Perfect example is when Disney acquired what's the company I'm 0:26:37.080 --> 0:26:42.679 thinking of for Star Wars, oh, Lucasfilms. Lucasfilms, that was 0:26:42.760 --> 0:26:45.119 about two billion in intangible assets and two billion in 0:26:45.119 --> 0:26:49.399 goodwill appeared on Disney's balance sheet. What doesn't typically appear 0:26:49.440 --> 0:26:53.720 on the balance sheet is internally developed intangible assets, and 0:26:53.720 --> 0:26:57.200 there's very good reasons that they don't. They're usually expensed, 0:26:57.320 --> 0:27:00.439 not capitalized, and so they flow through the incomest not 0:27:00.480 --> 0:27:04.040 the balance sheet. And the reason behind that is that 0:27:04.119 --> 0:27:07.440 as you do research and development, or you do things 0:27:07.440 --> 0:27:12.119 that develop brand and future intangible assets, the level of 0:27:12.200 --> 0:27:15.920 uncertainty around what the value of those will be when 0:27:15.960 --> 0:27:19.160 you're incurring the expense to build them is massively high. 0:27:19.160 --> 0:27:22.200 And we've done lots of work on this. So in short, 0:27:22.240 --> 0:27:24.520 there's kind of a mix. There's a good chunk of 0:27:24.520 --> 0:27:29.080 intangibles on balance sheets and some that's internally developed intangibles 0:27:29.080 --> 0:27:32.240 that typically are not And when you look over time, 0:27:32.280 --> 0:27:34.120 in fact, I think that the way that the data 0:27:34.160 --> 0:27:37.240 is presented can be misleading because if you look actually 0:27:37.320 --> 0:27:40.720 at the percent of balance sheets that are intangibles, it 0:27:40.720 --> 0:27:43.879 actually hasn't changed that much over time. It's just that 0:27:43.920 --> 0:27:47.320 when you compare to things like property and equipment are 0:27:47.480 --> 0:27:49.480 subsets of what's on the balance sheet, that you get 0:27:49.480 --> 0:27:52.399 the big changes. We've done a lot of work on 0:27:52.440 --> 0:27:56.360 this adjusted book values for intangibles with and without, and 0:27:56.640 --> 0:28:02.359 what really boils down to is that the estimates for 0:28:02.359 --> 0:28:05.560 eternally developed intangibles are too noisy to be useful, so 0:28:05.600 --> 0:28:09.080 we don't use those. But when you combine it with profitability, 0:28:09.119 --> 0:28:12.280 asset growth things like that, it actually doesn't matter, and 0:28:12.640 --> 0:28:15.080 you have to use multiple variables for it not to matter. 0:28:15.760 --> 0:28:18.960 But it's actually not that relevant for computing value programs. 0:28:35.800 --> 0:28:39.320 So I realized there's multiple ways we could take this conversation, 0:28:39.520 --> 0:28:42.000 and we could talk about different factors for a long time, 0:28:42.160 --> 0:28:44.080 but I also want to talk about the sort of 0:28:44.360 --> 0:28:50.200 industry and the nature of products. You started offering mutual funds, 0:28:50.640 --> 0:28:53.360 and as Tracy mentioned, there is this sort of whole 0:28:53.400 --> 0:28:57.160 process about getting access to them and education and screening, etc. 0:28:57.840 --> 0:29:00.800 Now you're really big. You're one of the fastest ETF 0:29:01.000 --> 0:29:03.400 When did you get into ETFs? 0:29:03.600 --> 0:29:05.720 Our three year anniversary is this November? 0:29:05.960 --> 0:29:07.920 Very so, given like ETFs have been a while, and 0:29:08.320 --> 0:29:09.240 it was late. 0:29:09.200 --> 0:29:12.440 As soon as the actively managed ETFs were approved pretty. 0:29:12.200 --> 0:29:15.840 Much right, Yeah, in about October twenty nineteen. There's what's 0:29:15.880 --> 0:29:19.040 called Rule sixty eleven, the ETF rule, And then about 0:29:19.080 --> 0:29:22.600 one year later we had ETFs in the marketplace. 0:29:22.160 --> 0:29:25.800 And you're one of the fastest growing ETF companies. Can 0:29:25.800 --> 0:29:27.840 you just give it a little bit overview, like how 0:29:27.880 --> 0:29:30.240 big is that? How much of the ETF money is 0:29:30.320 --> 0:29:33.120 just sort of the same investor has switched from a 0:29:33.160 --> 0:29:37.000 dimensional mutual fund to a dimensional ETF, Like how big 0:29:37.040 --> 0:29:39.120 is that? And what is the relative weight of like 0:29:39.240 --> 0:29:42.160 the legacy or the mutual funds versus the ETF today? 0:29:42.320 --> 0:29:43.160 What are we talking about? 0:29:43.560 --> 0:29:47.760 Yeah, the the ETF business for us, I'll take a 0:29:47.800 --> 0:29:50.640 step back, sure was why did we do it to 0:29:50.680 --> 0:29:53.320 begin with? One was the rule change that allowed us 0:29:53.360 --> 0:29:54.920 to do what we do in mutual funds and an 0:29:54.920 --> 0:29:57.400 ETF wrapper, which was important to us because we don't 0:29:57.440 --> 0:30:00.920 sacrifice the investment principles and the investment proper position. We 0:30:00.960 --> 0:30:03.720 want to be able to deliver equally good investment propositions 0:30:03.760 --> 0:30:07.720 regardless of the rapper. And two is that the financial professionals, 0:30:08.080 --> 0:30:11.000 whether those are advisors or institutions that we were working with, 0:30:11.080 --> 0:30:14.280 we're using ETFs more and more frequently and we're asking 0:30:14.320 --> 0:30:17.760 for dimension to have an ETF lineup. So we said, okay, 0:30:18.280 --> 0:30:20.520 now that we have this new rule, we can do 0:30:20.680 --> 0:30:23.600 what we did in mutual funds. So we launched the 0:30:23.600 --> 0:30:26.480 ETFs with that in mind, and we'll have you know, 0:30:27.720 --> 0:30:29.840 close to forty by the end of the year in 0:30:29.920 --> 0:30:34.200 terms of ETFs, and all launched with input from our 0:30:34.240 --> 0:30:37.000 clients on which are most important to you and for 0:30:37.160 --> 0:30:40.960 your businesses. There's no doubt that the industry has seen 0:30:41.120 --> 0:30:44.480 flows from mutual funds to ETFs. I think that's a 0:30:44.520 --> 0:30:47.320 trend that we've seen in the industry, and we have 0:30:47.520 --> 0:30:51.880 some advisors that have changed kind of transition from our 0:30:51.960 --> 0:30:56.440 mutual funds to our ETFs. What's been interesting about the ETFs, though, 0:30:56.680 --> 0:30:59.960 is that allows us to access i would say, new 0:31:00.000 --> 0:31:05.520 new channels, new advisors, new wealth platforms that we traditionally 0:31:05.520 --> 0:31:07.920 haven't played in. And so if you look at the 0:31:08.200 --> 0:31:12.360 kind of large broker dealers, the wirehouses, if you look 0:31:12.360 --> 0:31:14.720 at some of the bank trusts, all of those types 0:31:14.760 --> 0:31:18.320 of platforms and organizations, we traditionally haven't played there with 0:31:18.440 --> 0:31:21.960 mutual funds, but ETFs are lend themselves much more so 0:31:21.960 --> 0:31:25.280 there's been kind of many new clients actually have come 0:31:25.320 --> 0:31:27.360 on board over the past number of years, and that's 0:31:27.400 --> 0:31:29.960 also helped the ETF growth. 0:31:30.640 --> 0:31:33.040 This was going to be my next question. Actually, we've 0:31:33.040 --> 0:31:35.840 said fastest growing a number of times now, and I 0:31:35.840 --> 0:31:38.400 think your assets under management are now above five hundred 0:31:38.440 --> 0:31:42.280 billion something like that. What proportion of inflows are new 0:31:42.320 --> 0:31:46.320 clients versus people migrating from mutual funds into ETFs. 0:31:46.560 --> 0:31:51.040 It's a tricky question to answer because of the data constraints, 0:31:51.560 --> 0:31:54.640 but I'd say, you know, in terms of new flows 0:31:54.640 --> 0:31:58.320 into ETFs versus maybe transitions, what educated guess is maybe 0:31:58.400 --> 0:32:01.040 fifty to fifty something in around there thereabout. So we 0:32:01.080 --> 0:32:04.400 have about one hundred billion now in ETF assets. Globally, 0:32:05.160 --> 0:32:07.480 we kind of bounce around six twenty five to six 0:32:07.560 --> 0:32:11.239 fifty billion in terms of total firm assets on what 0:32:11.280 --> 0:32:14.160 we manage on behalf of clients. And our mutual fund 0:32:14.480 --> 0:32:16.800 business is still very very large street of four hundred 0:32:16.800 --> 0:32:19.920 billion of US mutual funds. Our US mutual funds are 0:32:19.920 --> 0:32:22.520 still very important to us. We continue to innovate and 0:32:22.560 --> 0:32:26.560 push forward there. ETF is important. Kind of when Dave 0:32:26.600 --> 0:32:28.480 and I first got on the role, Davis is the 0:32:28.520 --> 0:32:31.880 other co CEO. One of the things that we kind 0:32:31.920 --> 0:32:35.000 of agreed on is that let's make it convenient as 0:32:35.000 --> 0:32:40.280 we can for financial professionals, whether they're institutions or advisors 0:32:40.680 --> 0:32:44.880 to access this investment approach, and that's why the ETFs, 0:32:44.920 --> 0:32:47.720 that's why the enhancements to mutual funds, that's why lowering 0:32:47.720 --> 0:32:50.920 our account minimum with SMAs. It's all about, you know, 0:32:51.000 --> 0:32:54.520 convenience of use for the professionals to serve their clients. 0:32:55.080 --> 0:32:57.720 So I know you said earlier that you consider yourselves 0:32:57.840 --> 0:33:01.560 more passive, but not in that sers and I kind 0:33:01.560 --> 0:33:05.040 of want to get your take on the overall rise 0:33:05.400 --> 0:33:09.320 of I guess extreme passive the indexation in the industry. 0:33:09.400 --> 0:33:11.120 And I know there's been a lot of hand ringing 0:33:11.480 --> 0:33:14.920 over this idea that if you're just benchmark to an 0:33:15.000 --> 0:33:17.360 index and you're trying to hug that index as closely 0:33:17.400 --> 0:33:21.520 as possible, you're actually still making an active investment decision. 0:33:21.560 --> 0:33:24.640 It's just you're kind of outsourcing that active management to 0:33:24.680 --> 0:33:28.360 the benchmark index provider, so MSCI or SMP or whoever. 0:33:28.920 --> 0:33:30.240 What do you think about that argument? 0:33:31.040 --> 0:33:34.720 Well, this goes back to Joe's opening remarks, which I 0:33:34.920 --> 0:33:37.719 kind of take as evidence that the academic evidence has 0:33:37.760 --> 0:33:40.640 won in the sense that academics for a long time 0:33:40.640 --> 0:33:43.760 have slitted the performance of active managers and say, you know, 0:33:43.840 --> 0:33:46.040 there's no real evidence here that people can now guess 0:33:46.120 --> 0:33:49.880 the market, and people who outperform by stockpicking and market 0:33:49.880 --> 0:33:53.120 timing are doing so by look versus skill. How you 0:33:53.120 --> 0:33:56.240 can't disentangle it too, And so there's been a large 0:33:56.280 --> 0:33:59.840 flow of money into indexes. I think the people of 0:34:00.280 --> 0:34:03.880 indexed on index because there's a lot that you can 0:34:03.960 --> 0:34:06.280 do to actually get your fair share of the returns 0:34:06.280 --> 0:34:08.440 that the market is willing to offer, and in my view, 0:34:08.480 --> 0:34:10.279 indexing leave some of that money on the table. So 0:34:10.360 --> 0:34:13.680 let's take some examples. Tesla was added to the S 0:34:13.719 --> 0:34:16.200 and P five hundred in December of twenty twenty. We 0:34:16.280 --> 0:34:18.400 all remember that event. It was one of the biggest 0:34:18.840 --> 0:34:21.480 new entrants to the S and P five hundred on history. 0:34:22.520 --> 0:34:26.800 And if you look at the price pressure that index 0:34:26.880 --> 0:34:30.319 managers exerted on Tesla's stock on the day that it 0:34:30.360 --> 0:34:33.000 was added to the S and P five hundred, on 0:34:33.120 --> 0:34:36.239 that day, the price was driven up, and then after 0:34:36.280 --> 0:34:39.680 that price pressure came down, the price came down. You 0:34:39.719 --> 0:34:42.480 say how much did that cost the index? It actually 0:34:42.520 --> 0:34:45.640 costs the index between five and ten basis points in 0:34:45.719 --> 0:34:48.680 one month, and you can come up with reasonable ways 0:34:48.719 --> 0:34:51.000 to make that estimate. In one month to add one 0:34:51.040 --> 0:34:54.360 stock to the index. So here's the most liquid stocks 0:34:54.360 --> 0:34:57.960 in the entire world. And to accommodate a rebalancing event, 0:34:58.560 --> 0:35:02.080 people spend two to three times what's a typical expense 0:35:02.160 --> 0:35:05.160 ratio on an SMP five hundred index fund on adding 0:35:05.160 --> 0:35:08.759 the stock, but it's never reported. People don't notice it 0:35:08.840 --> 0:35:11.600 unless they do the research to actually find out, and 0:35:11.640 --> 0:35:14.680 there's an example of leaving money on the table by 0:35:14.880 --> 0:35:19.520 having too rigid an approach. In my view, there's no 0:35:19.719 --> 0:35:23.759 reason that you need to hold a perfectly market cap 0:35:23.840 --> 0:35:27.759 weighted portfolio of stocks, and indexes typically aren't perfectly market 0:35:27.800 --> 0:35:31.720 cap weight in a aney event that it's much better 0:35:31.960 --> 0:35:36.080 if you have some flexibility to deviate for market cap 0:35:36.080 --> 0:35:39.960 weights to pursue higher returns, but also flexibility on how 0:35:40.000 --> 0:35:43.960 to turn the portfolio over and keep yourself focused day 0:35:43.960 --> 0:35:45.600 in day out. You don't need to wait for one 0:35:45.719 --> 0:35:50.080 or two events each year to rebalance. So indexing is 0:35:50.120 --> 0:35:54.880 definitely an active decision with respect to how they're put together, 0:35:55.200 --> 0:35:57.960 how they decide to rebalance, and those active decisions have 0:35:58.000 --> 0:35:59.040 cost investors' money. 0:36:00.040 --> 0:36:03.760 Suggestion earlier was the dimensional doesn't try to outguess the market, 0:36:03.800 --> 0:36:08.360 but you do try to outperform. Is this market structure 0:36:08.640 --> 0:36:12.560 awareness a key plank of that outperformance? I know you 0:36:12.600 --> 0:36:16.280 talked about systematic strategies and having a rules based approach, 0:36:16.320 --> 0:36:19.560 but is it also just understanding some of these market 0:36:19.600 --> 0:36:23.799 dynamics and recognizing alpha opportunities. For instance, when there is 0:36:23.840 --> 0:36:25.560 an index rebalancing event. 0:36:25.719 --> 0:36:30.800 Spot on, there's two major sources. One is, does anybody 0:36:30.840 --> 0:36:32.880 think that all stocks of the same expected return are 0:36:32.920 --> 0:36:36.440 all bonds of the same expected return? No, there's differences 0:36:36.440 --> 0:36:39.200 in expected returns. And you can use a systematic framework 0:36:39.239 --> 0:36:44.520 that's based on valuation theory to identify those. Two is 0:36:45.000 --> 0:36:48.520 be efficient, don't do stupid things when you know they're stupid. 0:36:48.640 --> 0:36:52.680 Always good advice, always good advice. And that is about 0:36:53.000 --> 0:36:57.640 how do you understand how markets operate, how to trade? 0:36:58.360 --> 0:37:00.600 How do you add value while you hold stock? In 0:37:00.680 --> 0:37:04.000 terms of the corporate actions that you elect. Some corporate actions, 0:37:04.239 --> 0:37:07.440 just as an example, an index will choose a way 0:37:07.680 --> 0:37:10.920 to have deal with the corporate action a stock is 0:37:10.960 --> 0:37:13.439 spinning something off or doing a tender or something like that, 0:37:14.040 --> 0:37:16.759 and the index providers may not always choose them the 0:37:17.200 --> 0:37:20.960 value maximizing way to deal with the corporate action. Index 0:37:22.160 --> 0:37:25.440 managers often follow the index provider. We say, well, why 0:37:25.440 --> 0:37:28.320 would you do that? There's another election on this corporate 0:37:28.320 --> 0:37:31.640 action that actually improves value. Pick that one, right, There's 0:37:31.800 --> 0:37:34.320 things like that that add value. So there's a combination 0:37:34.440 --> 0:37:38.000 of the research to identify the systematic drivers of returns 0:37:38.360 --> 0:37:41.520 and then how do you implement. Implementation is key and 0:37:41.560 --> 0:37:44.240 those are two big drivers of how we outperform indices. 0:37:44.280 --> 0:37:47.200 And by the way, just a quick stat if you 0:37:47.239 --> 0:37:50.080 look at our US mutual funds, eighty percent of them 0:37:50.120 --> 0:37:52.040 over the past twenty years that have been live for 0:37:52.080 --> 0:37:55.319 the twenty years have outperformed their benchmark indices, which is 0:37:55.360 --> 0:37:59.040 an incredibly unusual stat for our industry. 0:38:00.120 --> 0:38:04.160 Real quickly, on the sort of like product distribution side ETFs, 0:38:04.239 --> 0:38:07.000 obviously I imagine Tracy or I could log into a 0:38:07.000 --> 0:38:10.680 brokerage and buy a dimensional ETF. But still focus from 0:38:10.680 --> 0:38:14.200 the sort of corporate strategy perspective is to distribute them 0:38:14.320 --> 0:38:16.120 or sell them through advisors. 0:38:16.360 --> 0:38:19.480 That's correct, and I hope that you guys do that. 0:38:19.560 --> 0:38:21.920 We would love to have you as clients, but that 0:38:22.400 --> 0:38:26.680 is the approach. We know how to work with financial professionals, 0:38:26.680 --> 0:38:30.239 whether they're institutions or advisors. We know how to give 0:38:30.280 --> 0:38:33.600 them the tools to monitor what we do, and then 0:38:33.640 --> 0:38:35.600 we think that the advice they give to their and 0:38:35.800 --> 0:38:38.680 constituencies is typically the right way to go. So that's 0:38:38.719 --> 0:38:42.000 the approach where we don't market directly to the retailed public. 0:38:42.719 --> 0:38:44.800 Can you talk to us a little bit more about 0:38:44.920 --> 0:38:48.279 cost because this has also been a big conversation in 0:38:48.320 --> 0:38:50.880 the fund industry, the idea of a race to the bottom, 0:38:51.160 --> 0:38:55.439 the idea that, especially in passive or indexing, the only 0:38:55.480 --> 0:38:57.680 thing that really matters is your cost ratio, and so 0:38:57.719 --> 0:39:00.360 you want to get that as low as possible. Is 0:39:00.360 --> 0:39:03.399 there a limit to how low that can go? And 0:39:03.520 --> 0:39:06.400 do you yourself feel pressure to get it as low 0:39:06.440 --> 0:39:06.960 as possible? 0:39:07.000 --> 0:39:07.120 Right? 0:39:07.480 --> 0:39:08.879 Just to sort of add out to that, like I'm 0:39:08.880 --> 0:39:11.640 thinking in the Tesla example, someone has to be paying 0:39:11.680 --> 0:39:13.520 attention to that or that is someone that you know 0:39:13.640 --> 0:39:16.560 that takes some level of human work to be thinking 0:39:16.600 --> 0:39:20.120 about these dynamics at which I imagine isn't free. So yeah, i' 0:39:20.320 --> 0:39:21.440 what is the limit. 0:39:21.160 --> 0:39:24.680 Of Yeah, there's two things that go on there. One 0:39:24.760 --> 0:39:27.400 is the explicit expense ratio, and there has been a 0:39:27.440 --> 0:39:31.680 strong focus on expense ratios, and we've reacted similarly as 0:39:31.719 --> 0:39:35.480 we've gained efficiencies with our systems and scale, we've reduced 0:39:35.880 --> 0:39:38.319 our fees over time. Our weighted average fees come down 0:39:38.320 --> 0:39:40.480 by about thirty percent in the past, you know, four 0:39:40.560 --> 0:39:44.200 or five years. So that's one aspect, But the expense 0:39:44.320 --> 0:39:48.120 ratio is not the only part for total cost of ownership. 0:39:48.560 --> 0:39:52.719 There's also things around implementation that are very very important 0:39:52.760 --> 0:39:55.319 with respect to the total cost of ownership. So we 0:39:55.400 --> 0:39:57.919 spend a lot of time on education, which is why 0:39:57.960 --> 0:39:59.799 we have those conferences and so on, and work with 0:39:59.840 --> 0:40:02.640 them professionals on what are some of the aspects that 0:40:02.719 --> 0:40:06.240 maybe aren't as obvious but go into the total cost 0:40:06.320 --> 0:40:10.520 of ownership. Let's take an example of securities lending, and 0:40:10.960 --> 0:40:14.320 if you look at securities lending revenue, it can vary 0:40:14.360 --> 0:40:17.200 across asset category, but I'll take the extreme when emerging 0:40:17.239 --> 0:40:20.719 market's small, emerging markets small. Over the past few years, 0:40:20.719 --> 0:40:26.080 typically those strategies have gained forty basis points in securities 0:40:26.160 --> 0:40:28.840 lending revenue each year. Depending on how you do that, 0:40:28.840 --> 0:40:32.480 that can be a material percentage of the expense ratio 0:40:33.120 --> 0:40:36.960 given back to the investors through a process that you 0:40:37.040 --> 0:40:39.279 can have going on inside the fund. So I think 0:40:39.280 --> 0:40:42.200 that they're the total cost of ownership is key, and 0:40:42.239 --> 0:40:44.520 you have to dig far deeper than the expense ratio 0:40:44.520 --> 0:40:46.600 to actually get there. When you look at the total 0:40:46.640 --> 0:40:49.480 cost of ownership of indices, it's actually much higher than 0:40:49.520 --> 0:40:52.400 the expense ratio because of the way that they're implemented 0:40:52.800 --> 0:40:55.080 and often the lack of focus on the asset category. 0:40:56.360 --> 0:40:58.279 What's next for you? I mean, in sort of the 0:40:58.480 --> 0:41:01.239 big picture TRENDSFER we sort of trace the sort of 0:41:01.280 --> 0:41:06.359 lineage of the company and the introduction of various ETFs, 0:41:06.680 --> 0:41:10.400 what aspects whether it's sort of industry market structure of 0:41:10.440 --> 0:41:13.359 things like where do you see the future or where 0:41:13.400 --> 0:41:14.560 are you investing for growth. 0:41:15.000 --> 0:41:17.200 One of the big areas that we've been working on 0:41:17.280 --> 0:41:21.879 recently is our application for exemptive relief for ETF share 0:41:21.880 --> 0:41:25.879 classes of mutual funds. And we think that if that 0:41:25.960 --> 0:41:29.319 becomes a high enough priority for the SEC and more 0:41:29.360 --> 0:41:32.520 folks in the industry are able to get that exemptive relief, 0:41:33.120 --> 0:41:34.880 we think that could be a big thing for the inserty. 0:41:34.880 --> 0:41:36.640 Just why is this important? What is this and why 0:41:36.680 --> 0:41:37.320 is this important? 0:41:37.400 --> 0:41:39.719 Well? This means is that let's say you have an 0:41:39.719 --> 0:41:43.560 existing mutual fund, OK, you could offer an ETF access point. 0:41:43.800 --> 0:41:46.480 So let's say an existing mutual fund is purchased by 0:41:46.719 --> 0:41:50.000 retirement investors through four oh one K accounts. Now you 0:41:50.000 --> 0:41:52.400 can offer an ETF access point. All of a sudden, 0:41:52.440 --> 0:41:56.000 you can commingle the retirement savers plus people who maybe 0:41:56.040 --> 0:41:59.960 have brokerage accounts that are in taxable accounts. That commingle 0:42:00.600 --> 0:42:04.400 provides economies of scale immediately to both sets of investors. 0:42:05.440 --> 0:42:10.120 The SEC has to provide fund managers what's called exemptive relief, 0:42:10.160 --> 0:42:13.120 so permission to do this. But I think that if 0:42:13.239 --> 0:42:16.280 more of those types of structures appear in this country, 0:42:16.400 --> 0:42:17.960 I think that will be a game changer for the 0:42:18.000 --> 0:42:21.880 mutual fund industry and also for the end investor, because 0:42:22.080 --> 0:42:24.359 folks who want to make a move from mutual fund 0:42:24.360 --> 0:42:27.359 to an ETF could now do so without trading if 0:42:27.400 --> 0:42:30.160 this were put in place more broadly in a very 0:42:30.239 --> 0:42:32.560 particular way. So I think that's a big one to 0:42:32.600 --> 0:42:36.640 keep an eye on, and we're definitely excited and energized 0:42:36.640 --> 0:42:38.520 by that possibility because we think it can be good 0:42:38.520 --> 0:42:39.360 for the end investor. 0:42:39.640 --> 0:42:41.680 You know, we spoke a little bit about your assets 0:42:41.760 --> 0:42:46.000 under management more than six hundred billion now, but not 0:42:46.320 --> 0:42:50.440 the biggest by far. You know, Vanguard black Rock are 0:42:50.480 --> 0:42:53.640 still the sort of I guess giant whales in the market. 0:42:54.080 --> 0:42:58.879 How does their growth or their size affect what you do? 0:42:59.120 --> 0:43:01.520 And I guess how closely do you keep an eye 0:43:01.560 --> 0:43:04.799 on what your competitors are doing in order to either 0:43:04.960 --> 0:43:09.480 identify market opportunities or perhaps alpha generation opportunities. 0:43:10.320 --> 0:43:14.319 So we definitely try to understand who's doing smart things 0:43:14.320 --> 0:43:17.440 with respect to investing, because, as I mentioned before, you 0:43:17.440 --> 0:43:20.759 can always improve on yourself and what you do. So 0:43:20.800 --> 0:43:22.799 if somebody comes out with a smart way to solve 0:43:22.840 --> 0:43:27.000 a problem, we're interested in learning. Learning that I think 0:43:27.000 --> 0:43:29.600 that in terms of how we decide where to go 0:43:29.680 --> 0:43:32.560 next and what strategies to launch. Typically, there we're not 0:43:32.600 --> 0:43:35.520 looking at our competitors. We're looking at our clients, and 0:43:35.719 --> 0:43:41.440 our clients give us far more precise, informed, useful information 0:43:41.800 --> 0:43:45.640 on what can be helpful for them and therefore what 0:43:45.680 --> 0:43:49.680 can lead to more sustainable business opportunities for us. So 0:43:49.760 --> 0:43:51.880 in that sense, we're maybe a little bit different than 0:43:51.920 --> 0:43:55.919 others in the industry in that, you know, we kind 0:43:55.920 --> 0:43:57.839 of march to the beat of our own tune in 0:43:57.880 --> 0:44:01.719 some respects because we have these strong relationships with academics 0:44:01.840 --> 0:44:04.600 and clients. They help us forge a path that we 0:44:04.640 --> 0:44:06.920 think is the right one, which may be different than others. 0:44:07.680 --> 0:44:10.760 Just to get back to the competition real quickly, Tracy 0:44:10.880 --> 0:44:14.960 mentioned Blackrock and Vanguard, but also we've seen more and 0:44:15.040 --> 0:44:18.640 more ETF offerings from the likes of JP Morgan and 0:44:19.080 --> 0:44:22.439 more recently Morgan Stanley that have a lot of sort 0:44:22.480 --> 0:44:27.520 of natural internal distribution capabilities, and both have wealth management 0:44:27.640 --> 0:44:30.319 arms and so have advisors for whom they can have 0:44:30.360 --> 0:44:34.319 a seamless brand. How challenging of that from a competition 0:44:34.680 --> 0:44:38.440 perspective is that, because obviously Dimensional does not have its 0:44:38.480 --> 0:44:43.040 own advisors or Dimensional Wealth Management. When companies that have 0:44:43.120 --> 0:44:46.560 this sort of end and sort of vertically integrated wealth 0:44:46.600 --> 0:44:49.600 solution their own people on the ground, their own local offices, 0:44:49.680 --> 0:44:53.120 their own ETFs, their own fund, how much of a 0:44:53.200 --> 0:44:55.280 challenges that from a sort of competitive standpoint. 0:44:55.960 --> 0:44:58.440 We positioned it as a strength in a strength in 0:44:58.480 --> 0:45:02.160 the sense that with us in the loop in terms 0:45:02.200 --> 0:45:05.799 of as conflict free advice as you can possibly get, 0:45:06.560 --> 0:45:10.040 because we compete on the merits of our investment proposition only, 0:45:10.360 --> 0:45:13.920 and so that's how we compete, and so we have 0:45:14.000 --> 0:45:18.880 to convince independent you know organizations that are providing financial 0:45:18.920 --> 0:45:23.560 advice that the vehicles that we manage and deliver can 0:45:23.600 --> 0:45:25.759 put their clients in the very best position. So we 0:45:25.880 --> 0:45:28.120 put it out there as a strength. It means that 0:45:28.200 --> 0:45:30.520 we can have to continue to innovate, we have to 0:45:30.520 --> 0:45:33.840 continue to be introspective, and that when you work with 0:45:33.960 --> 0:45:37.719 dimensional in our view, you're going to get always the 0:45:37.800 --> 0:45:40.600 leading edge of what academics have to say about investing 0:45:40.600 --> 0:45:43.280 in the right way to do it. And so that's 0:45:43.480 --> 0:45:46.359 how we've kind of positioned it. So it's a source 0:45:46.360 --> 0:45:49.960 of strength for us and something that keeps us on track, 0:45:50.080 --> 0:45:53.239 keeps us disciplined, and keeps us improving. And you know 0:45:53.320 --> 0:45:56.640 that appeals to a lot of different financial professionals out 0:45:56.640 --> 0:45:57.520 there in the marketplace. 0:45:58.200 --> 0:46:01.040 So one last question we mentioned in the intro but 0:46:01.080 --> 0:46:04.200 then we kind of glossed over it. But you did study, 0:46:04.360 --> 0:46:07.760 I believe, physics and you could have been a rocket scientist, 0:46:07.840 --> 0:46:11.360 but went into finance instead. You happy with that decision. 0:46:11.400 --> 0:46:14.640 Yeah, very happy. I started out in theoretical physics actually 0:46:14.719 --> 0:46:17.759 in my undergrad Then I did a master's in high 0:46:17.760 --> 0:46:20.880 performance computing, and then I did a PhD at Caltech 0:46:20.960 --> 0:46:25.680 in aeronautical engineering. And so I really enjoyed it. It 0:46:25.920 --> 0:46:28.759 was great lessons learned in terms of how to be 0:46:28.800 --> 0:46:31.680 detail oriented but also see the big picture. I always 0:46:31.719 --> 0:46:32.960 think that if you're going to be a master it's 0:46:33.000 --> 0:46:35.040 something you have to be able to see the forest, 0:46:35.080 --> 0:46:36.719 the trees, and the leaves all at the same time, 0:46:37.160 --> 0:46:41.160 and that's when true mastery actually happens. But applying those 0:46:41.280 --> 0:46:44.279 to the world of finance has been wonderful. Have been 0:46:44.480 --> 0:46:47.480 to Mention now almost twenty years and I've learned a 0:46:47.480 --> 0:46:49.800 lot of new things here and served a lot of 0:46:49.800 --> 0:46:53.879 people here and hopefully improved people's lives. So I think 0:46:53.920 --> 0:46:56.000 it's been a wonderful journey and I wouldn't change it 0:46:56.040 --> 0:46:56.440 for anything. 0:46:57.280 --> 0:47:00.200 Gerard O'Reilly, thank you so much for coming out Odd 0:47:00.239 --> 0:47:02.120 Lives this it's a fascinating conversation. 0:47:02.400 --> 0:47:11.160 Thank you for having me and enjoyed it. 0:47:16.560 --> 0:47:19.920 Tracy, I really enjoyed that conversation. It is funny, like 0:47:20.400 --> 0:47:23.200 I guess maybe laziness is the right word using some 0:47:23.239 --> 0:47:29.080 of these terms sort of enterchang, oh, indexing, Yeah, passive, systematic, active, 0:47:29.160 --> 0:47:31.400 like sort of certain things that I just sort of 0:47:31.400 --> 0:47:33.839 maybe use one of the other and that actually it's 0:47:33.920 --> 0:47:36.279 useful to think about the distinctions between these terms. 0:47:36.280 --> 0:47:40.439 Oh absolutely, I will say labels have their usefulness as well. Yeah, 0:47:40.680 --> 0:47:44.640 as sort of like quick catch alls. But the nuance 0:47:44.920 --> 0:47:48.279 that Girard used in describing their own strategy, so the 0:47:48.280 --> 0:47:51.400 idea of being passive but not indexed. Also the idea 0:47:51.440 --> 0:47:54.160 that you know, you can be an indexer, but there 0:47:54.200 --> 0:47:59.040 are different flavors and skills within indexing itself, so you 0:47:59.080 --> 0:48:01.840 can be a bad indexer and leave a lot of 0:48:01.840 --> 0:48:04.120 money on the table when you don't have to, right. 0:48:04.400 --> 0:48:09.279 The Tesla example was fascinating. Also the idea that to 0:48:09.480 --> 0:48:13.319 your question, cost is not everything, or the cost that 0:48:13.360 --> 0:48:15.880 you see on the page is like this is our 0:48:15.920 --> 0:48:18.319 expense ratio, or this is the fee for being in. 0:48:18.360 --> 0:48:21.359 This is not necessarily the all in cost because maybe 0:48:21.360 --> 0:48:23.799 they're not doing a good job of getting revenue for 0:48:23.840 --> 0:48:26.799 you for securities lending, and that if you build in 0:48:26.840 --> 0:48:29.520 that capacity and you find ways to do that efficiently, 0:48:30.280 --> 0:48:32.600 that's really you know, yeah, that makes a difference. 0:48:32.680 --> 0:48:35.480 Well, also, getting back to the starting point of you know, 0:48:35.520 --> 0:48:38.160 why does the finance industry exist at all? I thought 0:48:38.239 --> 0:48:41.279 Jared's point that it's not necessarily about trying to have 0:48:41.320 --> 0:48:44.320 a bunch of smart people beating the market, because according 0:48:44.360 --> 0:48:49.319 to the efficient market hypothesis, that is impossible. But more 0:48:49.400 --> 0:48:54.000 about having financial professionals who are able to interpret clients' 0:48:54.000 --> 0:48:57.399 needs and figure out what kind of risk profile they 0:48:57.440 --> 0:49:00.600 need and then look at those risk adjustice returns in 0:49:00.680 --> 0:49:02.120 the market and figure out what's best. 0:49:02.200 --> 0:49:04.879 And then that makes sense of the education. And these 0:49:04.920 --> 0:49:08.000 are all of those sort of the building, like those 0:49:08.040 --> 0:49:11.160 deep relationships with the advisors and why that's a particularly 0:49:11.680 --> 0:49:13.759 necessary aspect of the industry. 0:49:13.400 --> 0:49:14.000 And the company. 0:49:14.440 --> 0:49:16.800 But we're in Austin, and I think it's time for barbecue. 0:49:16.880 --> 0:49:17.640 Let's go get barbaga. 0:49:17.680 --> 0:49:18.279 Shall we leave it there? 0:49:18.360 --> 0:49:18.960 Let's leave it there? 0:49:19.040 --> 0:49:19.439 All right? 0:49:19.480 --> 0:49:22.520 This has been another episode of the Odlots podcast. I'm 0:49:22.560 --> 0:49:25.200 Tracy Alloway. You can follow me at Tracy Alloway. 0:49:25.440 --> 0:49:28.040 I'm Joe Wisenthal. You can follow me at the Stalwart. 0:49:28.120 --> 0:49:31.759 Follow our producers Carmen Rodriguez at Carmen armand dash Ol 0:49:31.760 --> 0:49:35.680 Bennett at Dashbot. And thanks to Moses Onam for his assistance. 0:49:36.239 --> 0:49:39.560 Follow all of the Bloomberg podcasts under the handle at Podcasts, 0:49:39.560 --> 0:49:42.120 and for more Oddlots content, go to Bloomberg dot com 0:49:42.160 --> 0:49:45.520 slash odd Lots, where we have transcripts, a blog, and 0:49:45.560 --> 0:49:48.720 a newsletter. And check out our discord discord dot gg 0:49:48.800 --> 0:49:50.960 slash odd lots where you can chat twenty four to 0:49:50.960 --> 0:49:52.120 seven with fellow listeners. 0:49:52.360 --> 0:49:55.120 And if you enjoy odlots, if you like it when 0:49:55.120 --> 0:49:58.800 we question the entire existence and validity of the financial industry, 0:49:59.040 --> 0:50:02.000 then please leave us a positive review on your favorite 0:50:02.040 --> 0:50:04.000 podcast platform. Thanks for listening.