Is Healthcare Two Decades In The Past?

March 5, 2020 Phil Ison

Recently I stumbled across an article which I found fascinating. The article discusses the need for "implementation science" in the field of health-care. From the article:

“It has been widely reported that evidence-based practices (EBPs) take on average 17 years to be incorporated into routine general practice in health care. Even this dismal estimate presents an unrealistically rosy projection, as only about half of EBPs ever reach widespread clinical usage.”

The people paying for research to be completed are rightfully concerned seeing how little the research affects public health practices. Implementation science is used to bridge this gap between research and practice, focusing on how best to implement new evidence into systematic changes in practices.

The lack of follow-through is understandable. The Auckland DHB alone employs more than 11,000 people. We can't expect them to overhaul their standards and procedures every time a paper is published. It may actually be detrimental to have healthcare professionals burdened by constant changes, leading to poorer outcomes for patients.

Two shortcomings in how research is conducted drive the lack of implementation. How the research can realistically be integrated by healthcare professionals is typically not considered before it is undertaken. Additionally, once the work is published, little consideration is given by researchers regarding how the findings can lead to better results for patients.

The need for implementation science shows how research is only the first step in a longer process. How the evidence is used has large ramifications for the end result.

Implementing Ideas in Financial Science

Dimensional Fund Advisors describe themselves as Evidence-Based Investors, focusing on academically proven sources for higher returns. Many prominent figures from the financial world are employed by the fund manager, including several Nobel laureates.

DFA places as much importance on implementation as the underlying evidence. While we tend to focus on the small, value and profitability premiums when describing investment returns, other drivers of returns have been proven.

Momentum is an effect which describes the tendency for a share price to continue rising or falling following for a few months. In other words, if the share price of company X rose over the past month, it is more likely to continue rising for the following 3 months. This has been studied and proven by financial academics.

How can we use this information to benefit investors? The first thing that comes to mind is to buy shares that have gone up recently and sell them after a few months. Momentum funds do exist, attempting to benefit via this strategy.

The trouble is, because momentum comes and goes in such a short period of time, it requires a lot of trading to capture. Not only are there costs when buying and selling shares, the lack of flexibility leads to implicit costs. You may be making large orders at inopportune times and affecting the market price with large trades.

Dimensional carried out extensive research before implementing their own approach to momentum. They implement the research at the trading level. Being well diversified and focusing on long-term drivers of return, they remain flexible when buying and selling.

If there are two comparable companies with similar characteristics, yet one's price has recently trended upwards, they will favour this company when entering their orders. Likewise, they may delay purchasing a company's shares if the price has recently fallen, if statistically the price will most likely continue to fall for the following few months.

Better Results for Clients

Through careful implementation, Dimensional is able to leverage the available research to benefit clients. Without the focus on implementation, underlying premiums are often lost to trading costs.

While much of medical science is left on the operating table, implementation science is improving the way research translates to better results for patients. In the same way, Dimensional strives to efficiently implement financial research in order to provide better outcomes for investors.

Reduction In Fund Management Fees

February 21, 2020 Phil Ison

We are happy to advise that Dimensional has announced a reduction in fund management fees for several of their funds. These fees are paid from the fund's assets and are reflected by the fund price. Effectively this means the performance of the funds will be enhanced by the fee reduction moving forward.

Dimensional released the statement below with regards to the reduction in fund management fees.

Dimensional is pleased to announce a reduction in management fees for 14 of the Dimensional Wholesale Trusts, effective 2 March 2020. The reduction in management fees applies to more than half of the assets invested in the Dimensional Wholesale Trusts.

Australian CEO Glenn Crane said, “We evaluate the management fees for our trusts on a regular basis and when appropriate, we make adjustments.”

The fee reductions apply across many of Dimensional’s most widely held Trusts, including the Core Equity, World Allocation, Sustainability and Large Company Trusts.

As a systematic active manager, Dimensional is among the most competitively priced managers in the Australian market and even prior to these latest changes was ranked by third party researchers as in the bottom quartile for fees across most fund categories it offers.

“We expect to do better than benchmarks and peers, after fees, so we fight for every basis point,” noted Gerard O’Reilly, Global Co-CEO and CIO of Dimensional. “We continue to gain insights from research and innovate across all aspects of our process.”

The following table lists the funds with fee reductions.

The reduction in fees for the Australian Core Equity and Global Core Equity trusts will benefit all clients. Together these two trusts make up 70% of the shares in our model portfolios. Clients with more aggressive portfolios will therefore benefit the most.

It is also worth noting the relatively large reduction in fees for the sustainability trusts. For those who have opted for these trusts, the fees have become comparable to the core trusts. For the model portfolios, substituting the sustainable alternatives raises the total management fees by about 0.02% p.a. whereas previously the difference was 0.04%.

A balanced portfolio, with 60% invested in shares, has fund management fees of 0.38% p.a. Substituting in the sustainable fund options raises this to 0.40% p.a.

While this drop in fees came as a pleasant suprise, we are always looking at ways to improve outcomes for clients and reducing the costs to doing so.

Dimensional's Review Of The 2010s

February 6, 2020 Phil Ison

Imagine it is early January 2010 and you are reading a review of the financial markets. Investors have been on a roller coaster over the past three years, living through the stress of the global financial crisis and market downturn of 2008–2009, then experiencing the recovery that began in March 2009 and is still going strong.

Investors who rode out the market’s slide are beginning to be rewarded. But the rebound is 10 months old, and markets have a long way to go to reach their previous highs. Opinions are mixed about what might unfold in the coming year. A December 2009 headline in the Wall Street Journal underscored the uncertainty: “Bull Market Shows Signs of Aging.”1 The publication pointed out that, although stocks have rallied and indices are on the rise, worries are mounting in some quarters that the market is running out of steam.

From the vantage point of early 2010, you may be wondering whether to stick with your investment plan or move into cash and wait for more evidence that the markets have recovered. Now, fast forward to today and consider what the global equity markets delivered to investors who stayed the course.

On a total return basis, global stocks more than doubled in value from 2010–2019, as Exhibit 1 shows. The MSCI All Country World IMI Index, which includes large and small cap stocks in developed and emerging markets, had a 10-year annualised return of 8.91%. From a growth-of-wealth standpoint, $10,000 invested in the stocks in the index at the beginning of 2010 would have grown to $23,473 by year‑end 2019.

EXHIBIT 1
Growth of Wealth
MSCI All Country World IMI Index, January 2010-December 2019

Past performance is no guarantee of future results.

Despite positive annual market returns during most of the decade, investors had to process ever-present uncertainty arising from a host of events, including an unprecedented US credit rating downgrade, sovereign debt problems in Europe, negative interest rates, flattening yield curves, the Brexit vote, the 2016 US presidential election, recessions in Europe and Japan, slowing growth in China, trade wars, and geopolitical turmoil in the Middle East, to name a few.

The decade also brought technological advances in electronic commerce and cloud computing, the global embrace of the smartphone and social media, increased automation and enhanced artificial intelligence, and new products like electric cars and early iterations of self‑driving ones.

Looking back, you could conclude that the decade had its share of uncertainty—just like the decades before. But overall, the US equity market experienced moderate volatility compared with previous decades. Exhibit 2 displays this by looking at returns and standard deviation, where a higher standard deviation reflects wider market swings during that decade.

EXHIBIT 2
Volatility in Perspective
S&P 500 Index annualised returns grouped by decade (1930-2019)

Benefits of Diversification

Investors who committed to global diversification and to areas of the market associated with higher returns—small cap stocks and value stocks (i.e., stocks trading at low relative prices)—were challenged over the past decade. As shown in Exhibit 3, during the 2000s, investors were generally rewarded for holding emerging markets stocks and developed ex US stocks. During the 2010s, the US market outperformed developed ex US and emerging markets.

EXHIBIT 3
The Past Two Decades-2000s vs. 2010s
Annualised Returns (%)

The performance of value stocks vs. growth stocks (i.e., stocks trading at high relative prices), and small vs. large cap stocks, also varied between decades. Small cap and value stocks outperformed large cap and growth stocks in the 2000s, while the 2010s produced mixed outcomes. Small caps underperformed large caps in the US and emerging markets but outperformed in the developed ex US market. Value underperformed growth in all three market regions. Despite underperforming large cap and growth in the US, small cap and value delivered 11.83% and 11.71%, respectively, for the decade.

Exhibit 4 shows the cumulative investment experience over both decades, with small cap and value stocks outperforming large cap and growth stocks, respectively, across the US, developed ex US, and emerging markets. The annualised 20-year returns illustrate how diversification can help investors ride out the extremes to pursue a positive longer-term outcome.

EXHIBIT 4
The Longer View
2000-2019: Annualised Returns (%)

Over the past decade, global fixed income also posted returns that may have surprised some investors. In 2010, investors looking at historically low interest rates may have expected rising rates as financial markets and economies recovered from the crisis. But over the decade, short-term rates increased while long-term rates decreased. Realised term premiums were positive, as long-term bonds generally outperformed shorter-term bonds. Realised credit premiums were also positive, as lower-quality bonds generally outperformed higher‑quality bonds.2

Enduring Principles

That brings us to now—January 2020. Stocks and bonds in the US, and in many other developed markets and emerging markets, logged strong returns last year. The US bull market is 10 years old, and current headlines can give investors other reasons to worry about the future—for example, a pushback on globalisation, the effects of climate change, the limits of monetary policy, the fate of Brexit, and the vagaries of the 2020 US presidential race. And those are merely the known unknowns. Looking ahead, who can say what the next 10 years will bring? The only certainty is the decade will have its own set of surprises.

Here’s what we can learn from the past decade (and the ones that came before it): Despite all the change and uncertainty, the fundamentals of successful investing endured. Diversify across markets and asset groups to manage risks and pursue higher expected returns. Stay disciplined and maintain a long-term perspective. Take the daily news with a grain of salt and avoid reactive investment decisions based on fear or anxiety. Don’t try to predict future performance or time the markets. Instead, develop a sensible investment plan based on a strong philosophy—and stick with it.

Investors who follow these principles can have a better financial journey in any decade.

FOOTNOTES

1 “Bull Market Shows Signs of Aging,” The Wall Street Journal, December 7, 2009.
2 Bloomberg Barclays Indices.