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Loring Ward advisors learned that a 'breakthrough' dimension related to profitability will be mixed into all funds by year's end
June 6, 2013 — 6:53 AM UTC by Brooke Southall
Brooke’s Note: Dimensional Fund Advisors is a company that continues to experience stunning success — but not because it does anything exciting per se. DFA is a boring company, basically selling index funds with a layer of intelligence baked in. But it sells a tremendous amount of those funds and its steady nature is part of its charm and why it is so trusted. That dare-to-be-dull bearing of the Austin, Texas-based company with about $300 billion of managed assets helps explain why the company sent no less than its co-CEO to California to explain that, in effect, a couple lines of code are being changed in a tome of algorithms. Eduardo Repetto employed a combination of humor, numbers and deft use of an Argentinian accent to get his point across that 'profitability’ as a DFA additive to portfolios is a good thing and a 'big deal’.
Dimensional Fund Advisors LP is making profitability a separate and distinct attribute that it seeks out in a company before it buys its stock.
The company, which has about 450 employees at its Austin, Texas, headquarters and about 100 in Santa Monica, Calif., already has introduced the sparky little additive to some of its separately managed accounts. But the “breakthrough” advancement will be added across the board to all of its fund products, which have $300 billion of combined assets, according to a one-hour speech its co-chief executive, Eduardo Repetto, delivered yesterday at Loring Ward national conference in Monterey, Calif. Personal financial advisors globally account for $164 billion of DFA’s assets. See: Loring Ward tells a focus group to let loose on advisors — and it does.
All that is holding back the change at this stage is that such a change is not easy to explain and so the company is determined to do so carefully. Not only do advisors need to understand exactly how profitability comes into play but they need to be able to grasp what’s happening well enough to explain it to clients, he added.
DFA is measuring profitability not in terms of profits per se but profits divided by book value, as a good indication of a company’s potential for strong future profits.
Asked to characterize how big a deal it is— on a scale of watershed event, big deal or tweak — that DFA is messing with a formula that many advisors speak of with the same reverence as aficionados of Coca-Cola Classic (keep out that corn syrup!), Repetto paused, and then chose his words carefully.
“From a theoretical point of view, it’s a big deal,” he said. “But the marginal contribution is smaller and smaller and smaller — not like when value [as an approach to investing] came.”
When Alex Potts, CEO of Loring Ward, which has about $8.8 billion of TAMP assets came on stage after the speech, he stated that the change should certainly not be viewed as a watershed event by any means.
When I ran into Chip Roame, managing principal of Tiburon Strategic Advisors LLC, in the hallway after the speech, he said he believed that the change could be viewed as, hydrology aside, a watershed. He said he viewed it in the same way as DFA’s introduction of momentum investing a number of years ago as part of its formula — a watershed event of sorts for a company religious about passive investing.
20 years in the making
Repetto mentioned that DFA did not have growth portfolios before because we could not find a significant source of value added, but with profitability applied to growth stocks he found that source of value added so his firm could launched growth portfolios” See: Dimensional Fund Advisors still has low RIA acceptance rate and stunning growth.
Repetto added that there could be times when profitability hurts the portfoilio. One example he gave was the 2000-era technology bubble when companies with no profits were being accorded astronomical valuations.
To demonstrate just how grudgingly his company made the addition of the profitability screen, Repetto said his company had been waiting to get and crunch what it considered a critical mass of data. “Twenty years ago there was 20 years less data,” he said.
Still, Repetto made clear that the idea has been kicking around DFA for quite a while, pointing out that his company put out an article that was “going in that direction” in 2006.
One thing that is certainly pointing in the right direction for DFA is its asset growth. It had $213 billion of AUM as of Dec. 31, 2011, $262 billion as of Dec. 31, 2012, and $283 billion as of March 31. See: Eduardo Repetto tips Dimensional Fund Advisors’ hand on long-term succession — which likely involves an IPO.
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Top Executive: Alex Potts
Tiburon Strategic Advisors
Top Executive: Charles Roame
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