4th March 2013
Letter of the week
Although we advocate passive investment strategies, we do not use index trackers currently. Up to 2008 we included Legal And General's UK all share tracker and Norwich Union's world tracker in client portfolios; these were replaced at that time with a global approach utilising Dimensional's “core equity” and "targeted value" (small and value) strategies. Testing at the time indicated that the combination of global and core equity would improve expected returns and reduce risk.
Although we are very rarely asked whether Dimensional's funds beat their benchmarks, this is something we monitor on a regular basis; great care is needed as the approach Dimensional take involves neither traditional active management nor index tracking. As is often the case the USA has a great deal more to go at in this area than the UK; there are a much larger number of indices and the case for small and value tilts in portfolios is much better known there than in Europe. In the case of Dimensional, there is also a much longer data series in the USA than in the UK.
So, for those who are interested (and we accept that may not be a large number!) we are attaching three documents to this blog; the first comes from CBS News in the US and is written by Larry Swedroe, who is director of research at Buckingham Asset Management in the US and a well respected commentator. His article asks the question, "Does DFA hit its benchmarks?" and concludes unequivocally that both domestically and internationally it clearly does. It is important to point out that Dimensional's approach and construction of funds is similar wherever in the world their funds are situated. The conclusions of this article then should give a great deal of comfort to investors in their funds in the UK.
The second document is from Dimensional themselves and is entitled "Since Inception Performance." It analyses the performance of their funds available in the UK from inception to the end of October 2012, i.e. before the current very strong run in markets. The second page of the document demonstrates that where they are not beating their benchmark they are running close, except in a couple of areas which include 2 funds that we use. Given the relatively short life of these funds and the reasons that Dimensional give under the paragraphs, "Fund Specific Factors", we remain comfortable with the use of these funds.
The third document, entitled, "Benchmarks 1212" is a cause for even greater encouragement. Of the five Dimensional funds we incorporate in client portfolios, three of them, Global Core Equity, Emerging Markets Core Equity and Global Short Dated Bonds beat their benchmarks comfortably and consistently. The other two, Global Targeted Value and Emerging Markets Targeted Value are showing much improved performance over the 12 months ending December 2012 and beginning to beat their benchmarks comfortably. This is a trend we expect to continue.
Whilst benchmarking is never an exact science, it is one indicator amongst many that can provide some useful information; given Dimensional's pure research led approach and their record of beating benchmarks in other countries with a longer track record, there is every reason for believing they will continue to beat their benchmarks in the UK.
Index Wealth Management Performance
The anlaysis is provided for information purposes only and does not constitute advice to invest. Advice should be obtained from a financial adviser before the decision to invest is taken. You should include the past performance is not a guide to future performance warning.
Noel Farrelly
Index Wealth Management
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