Advisor Success Series Stay the course – A conversation with dimensional fund advisors on risk-based factor investing
Sep 28, 2018
Lukas Smart, a Senior Portfolio Manager and Vice President at Dimensional Fund Advisors, shares valuable insights on risk-based factor investing. He stresses the significance of long-term investment strategies, especially during tumultuous periods influenced by rapid technological changes. The conversation delves into the challenges facing value and small-cap investments, highlighting the importance of combining valuation and profitability. Additionally, Lukas emphasizes the need for global diversification and the resilience of small-cap value investing, even amid shifting market dynamics.
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Value and Profitability as Return Drivers
- Value and profitability are distinct factors that drive expected returns. - Historic evidence supports their relevance despite current market disruptions.
Integrated Factor Approach
- Blindly combining value and profitability factors can dilute returns due to negative correlation. - Dimensional integrates factors to emphasize high-profitability value stocks, improving expected returns.
Profitability's Risk-Based Rationale
- Profitability has a solid risk-based rationale via the valuation equation. - Higher profitability firms have higher expected returns after controlling for valuation.
