Dimensional Fund Advisors have released their Matrix Book for 2020. You may download a digital copy here.
If you are client or associate of Strategic Wealth Management and would like a hard copy, please email us with your request.
Dimensional At A Glance
For those unfamiliar with Dimensional Fund Advisors and their approach to investing, the company has produced a the following snapshot of their beliefs, processes and philosophy.
A belief in the power of markets
Each day, the global financial markets process millions of trades between buyers and sellers.
These trades embed vast amounts of news, expectations and information into prices.
Dimensional regards a security’s price as the best estimate of actual value--and bases its investment approach on market prices.
A different investment approach
Index fund managers aim to match index returns, accepting portfolio management and trading constraints that can increase costs.
Traditional managers and quants may rely on predictions or backtested simulations to find mispriced securities or time markets.
Dimensional believes investors can have a successful investment experience without having to outguess the market. The firm trusts market prices and applies a scientific, transparent, and processdriven investment approach to pursue higher expected returns.
Focusing on the drivers of returns
Dimensional believes security prices contain reliable information about expected returns.
The firm draws insights from research and prices to emphasise market areas—or dimensions—that drive returns.
Equity dimensions with higher expected returns are small, value and high profitability companies. Fixed income dimensions are term, credit and currency.
Dimensional targets these dimensions in low-cost, broadly diversified strategies.4
Applying financial science to investing
Dimensional has forged deep working relationships with top academics in finance.
Nobel laureate Eugene Fama, fellow researcher Kenneth French and other leading academics are directors and consultants to the firm.
A scientific perspective guides the firm’s culture, philosophy and investment approach.
“The research is out there for anybody to access. What distinguishes Dimensional is the way we implement the ideas.”
Value-added implementation
Expert implementation sets Dimensional apart. The firm applies financial science in real-world portfolios through a process that integrates:
RESEARCH - Gain a better understanding of expected returns by evaluating and testing empirical research
PORTFOLIO DESIGN - Increase expected returns while allowing for robust risk and cost management
PORTFOLIO MANAGEMENT - Use current market information to balance tradeoffs between competing premiums and costs
TRADING - Reduce trading costs by employing a flexible approach to participate in available market liquidity
1. Assets under management as of 30 September 2020, in Australian dollars (billions).
2. In Australian dollars. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days.
3. Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is measured as operating income before depreciation and amortisation minus interest expense scaled by book.
4. Diversification neither assures a profit nor guarantees against loss in a declining market.
News From The NZ Finance Industry
The Financial Markets Authority (FMA) has released a number of materials in the past month. We have chosen to share some of these, along with some brief comments regarding our thoughts. We hope you find something of interest below.
KiwiSaver fees and value for money
The FMA has opened consultation on guidance for KiwiSaver fees. Part of this guidance will focus on each provider's obligation to not charge unreasonable fees. This follows logically from the ongoing obligation for providers to act in the best interest of their clients.
When the KiwiSaver Act was introduced in 2006, the long-term expectation was for fees to fall as economies of scale reduced costs for providers. Clearly this hasn't happened to the extent the FMA would like.
Currently, according to the Sorted KiwiSaver Fund finder, fees for a balanced fund range from 0.36% with Juno and 0.45% with Simplicity, all the way to 1.82% p.a. for AMP's Global Multi-Asset Fund (leaving out the Amanah fund, created to be Shari'ah compliant).
Higher fees mean lower returns for investors, so it is important these fees are commensurate with the services provided. A recent FMA report suggests this has not been the case in NZ, with the amount of active management in a KiwiSaver fund having little relationship to fees charged.
We look forward to reading the final guidance notes, which will outline cases in which fees are considered unreasonable. Long-term, we hope this leads to better KiwiSaver outcomes for New Zealand investors.
Investing Q&A with Mary Holm and Gillian Boyes
For world investor week, one of our favourite journalists Mary Holm answered questions from investors alongside Gillian Boyes from the FMA. The full Q&A session was uploaded to YouTube for all to enjoy. For your convenience, we have listed the questions asked in order below.
1:00 - Thoughts on current state of investing
2:00 - Retiree considers land-banking
4:20 - Who holds your money in an index fund?
6:00 - Pay mortgage or invest?
9:35 - Holding on to Bonus Bonds
10:50 - How can retirees make the money last?
12:05 - How to buy shares for grandchildren
13:20 - Thoughts on ethical investing
15:50 - Tips for new investors
19:10 - Alternatives to shares and managed funds
20:50 - Uni student with $30k to invest
22:30 - Invest maturing term deposits in KiwiSaver?
23:40 - Older investor wanting higher returns
24:55 - Difference between managed funds and PIEs
26:00 - Investing funds needed for a house purchase
28:00 - Minimum investment needed for investing?
29:05 - Thoughts on a home bias in shares
31:45 - How advisers fit into investor's lives
33:35 - Where to invest an inheritance?
34:40 - Savings for kid's educations
37:20 - Investing habits for men and women
40:10 - How to judge a provider's "reputation"?
42:45 - High fee managed fund vs term deposits?
44:45 - Comparing the performance of funds
45:55 - Graduate paying back student loan
48:00 - Concerns regarding property prices
50:35 - How to know whether a product is regulated?
52:25 - Property vs KiwiSaver
53:55 - 8% KiwiSaver contributions or 3%?
57:00 - Cannot afford a financial adviser
2020 KiwiSaver Report
Each year, the FMA publishes a report on the state of KiwiSaver, using data from providers. The 2020 KiwiSaver Annual Report was released last month.
The total funds under management in KiwiSaver has increased by $62B(!) for the year, an increase on last year's $57B. This is despite negative investment returns over this period. We have also seen an increase in withdrawals, both for retirement and first home purchases.
Unsurprisingly, the number of "fund switches" has also increased by 54%. For most KiwiSaver members, this year has been the first in which their balance has significantly dropped. Unfortunately, many of these investors were switching from aggressive funds to conservative during the challenging first quarter, locking in losses while missing out on subsequent gains.
KiwiSaver began in 2006, a year before the Global Financial Crisis. While the GFC brought an extended period of uncertainty and investment losses, the value of KiwiSaver funds today is many times more than in 2007. No wonder many investors were unsettled enough to switch out of highly volatile aggressive funds.
For those that stayed the course, their KiwiSaver balances are likely back to where they were at the start of the year.