We speak with Gerard O'Reilly, Co-CEO of Dimensional Fund Advisors, about the firm's history, approach to investing, and the future of fund management. Topics include active vs passive investing, market prices and outperformance, product offerings, intangible assets, ETF growth, and market structure.
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Quick takeaways
Dimensional Fund Advisors focuses on providing conflict-free investment propositions that compete on their merits and collaborate with financial professionals to serve clients' needs.
Dimensional's outperformance is attributed to their systematic approach based on valuation theory, efficient portfolio implementation, and taking advantage of potential alpha opportunities.
Investors should consider the total cost of ownership beyond the explicit expense ratio, including implementation costs and revenue generation through securities lending, to evaluate the true cost of investing.
Deep dives
The Rise of ETFs and the Challenge of Vertical Integration
The podcast episode explores the growth of ETFs and the impact of vertical integration on the industry. It discusses how companies like Vanguard and BlackRock dominate the market, while newer players like JP Morgan and Morgan Stanley also enter the space. The guest emphasizes the importance of a conflict-free investment approach, positioning it as a strength for Dimensional. He explains how Dimensional focuses on providing investment propositions that compete on their merits and collaborate with financial professionals to serve clients' needs.
The Evolution of Dimensional's Product Offerings
The episode delves into the history and product offerings of Dimensional. It discusses how the company started with small cap strategies and expanded into international strategies and fixed income offerings. It also highlights the importance of collaboration with financial professionals and clients in shaping their product lineup. The guest emphasizes the company's commitment to continuously learning and improving their strategies based on new research and client needs.
The Importance of Market Structure Awareness
The podcast explores how market structure awareness contributes to Dimensional's outperformance. It explains that Dimensional uses a systematic approach based on valuation theory to identify differences in expected returns across stocks and bonds. The guest also highlights the efficiency and discipline involved in implementing and managing portfolios, which helps generate value for investors. Moreover, he argues that indexing can leave money on the table, and Dimensional's approach takes advantage of potential alpha opportunities.
Total Cost of Ownership and the Limitations of Expense Ratios
The episode discusses the concept of total cost of ownership and challenges the notion that lower expense ratios automatically equate to lower costs. It emphasizes the importance of considering factors beyond the explicit expense ratio, such as implementation costs and revenue generation through securities lending. The guest highlights the need to dig deeper into the total cost of ownership and advises investors to look beyond the expense ratio to evaluate the true cost of investing.
The Future of Dimensional and the Impact of Exemptive Relief
The podcast covers the future trajectory of Dimensional and the potential impact of obtaining Exemptive Relief for ETF share classes of mutual funds. It explains that this relief would allow for seamless integration of retirement investors and brokerage account holders through ETFs, providing cost efficiencies and expanded access for investors. The guest highlights the potential game-changing nature of this development and expresses excitement about the possibilities it could offer for the mutual fund industry and end investors.
Dimensional Fund Advisors is one of the fastest growing providers of mutual funds and ETFs. It was founded in the early 1980s, built upon University of Chicago research on efficient markets, passive investing, and other ideas that have since become extremely widespread. After having built up a huge following among financial advisors for their mutual funds, the company has been racing up the list of ETF providers. On this episode, we speak with Dimensional's co-CEO and chief investment officer Gerard O'Reilly on the firm's history, its approach to investing, and where he sees the fund management industry going.