Sunniva Kolostyak: Welcome to Morningstar, where I’m today joined by Gerard O’Reilly, the co-CEO and co-CIO of Dimensional. Thank you very much for joining today.
I want to start by talking about Dimensional and the vision that you have. What areas are you currently most excited about?
Gerard O’Reilly: Yeah. Thank you for having me. It’s a pleasure to be here. You know, when you talk about vision for Dimensional, we’re a very client-centric, client-focused firm. And so we work with financial professionals all over the world, and understanding what needs they have is what drives what we prioritize.
How Dimensional Drives Technological Innovation in ETFs
O’Reilly: So some areas that are particularly exciting now: there’s a lot of innovation, I think, that can be done on the various different ways that you can deliver investment solutions to the end investor, whether that’s with improving the technology for mutual funds, whether it’s ETFs, whether it’s separately managed accounts, whether it’s model portfolio delivery. I think there’s a whole host of areas there that we can make our strategies easier to own for the end investor, which in turn turns them into longer term investors, which is I think is a good thing.
Other areas of excitement are just ongoing research, ongoing innovation. You always can get better at your craft. And we have a very strong research team that’s kind of investigating different areas of the equity and stock markets and the bond markets that are kind of driving new solutions for clients.
Dimensional’s Approach to Data-Driven Investing
Kolostyak: You are very research-driven fund house. I wonder, can you explain what that means? The word quantitative comes up a lot. What does that mean for investors?
O’Reilly: Yeah, quantitative, I think, at its heart, what it means is your inference or your insights are based on data. What data can you look at that can inform you something about what expectations you should have for the future. So it’s less about opinion. It’s less about a hunch. And it’s more what does the data tell you, you should expect. And so we have a very strong internal research team. We spend a lot of resources just like Morningstar does on the data quality and making sure we have all the right data to answer the questions.
But specifically, we’re doing research on trying to better identify the areas that investors require a higher return to hold. And how do you structure a portfolio, then, to capture those higher returns over the long haul for investors, So whether that’s value investing, quality or profitability investing, or how you enhance returns for fixed income portfolios. All of those areas of research are quantitative because they’re based on data and scientific, kind of inquiry.
How Research Shapes Dimensional’s Offering
Kolostyak: So can you talk a little bit about maybe how this research is informing what areas you are looking to find value at the moment?
O’Reilly: Yeah. So I’ll give you some examples. If you look at small-cap investing, and we were talking about that earlier on, and you say, are all small-caps created equal? Or should you have them all inside your portfolio? Well, what the historical data would say is that if you look at small-cap stocks that have very low profitability and very high relative prices, that those have had much lower performance on returns than the rest of small-cap stocks, which is intuitive because investors have paid high prices for low cash flows, means they’ve applied a low discount rate or low expected return, and they’ve had low returns. So that would be an example of, within small caps, how do you refine the asset category.
The same with things like asset growth or other types of information. So it’s things like that, whether it’s small-cap, value, profitability, or putting them all together in a core strategy, that I think can really make a difference for the long-term wealth accumulation of investors, that it’s important to take care of those details when you invest.
Dimensional’s European ETF Expansion
Kolostyak: So finally, I also want to talk about ETFs because you’ve got quite a few in the US. And there’s been some talk about launching this in Europe as well with UCITS. So what are your plans there?
O’Reilly: So yeah, in the US we launched our first suite of ETFs back in November of 2020. And now I think it’s around 41 and close to $180 billion in ETF assets. And they’re non-index. So what it is called in the US is active transparent. And there I think we serve the needs of the financial professionals because there’s tax questions, but there’s also operational efficiency questions for how they can implement the asset allocation on behalf of the families that they serve all over the US.
Over time, I think a similar trend may happen here in the UK and in Europe, where the technology and the infrastructure, where you can trade and support and put models in place for ETFs, may become more efficient over time. We want to be sure that if that is the path that these markets follow, that we have a good investment offering for people to be able to trade what’s effectively a mutual fund but traded on the exchange. And there are some operational challenges, but also efficiencies that can be gained by doing that.
So we’re looking at that now. We’re talking to clients. We’re talking to financial professionals. And we hope that we’ll be able to say more about that in the upcoming months.
Kolostyak: Well, Gerard, thank you very much for joining today. For Morningstar, I’m Sunniva Kolostyak.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
