Dimensional’s portfolios are based on rigorous academic research on markets and the sources of higher expected return. We design strategies to offer consistent, fully diversified exposure to the return sources we believe to be robust and reliable. Our flexible, innovative design offers potential to creatively enhance returns.
In Dimensional’s view, the road to investment success lies in identifying the risks that bear compensation, choosing how much of these risks to take, and then striving to minimize the risks and costs imposed by traditional approaches. Research-based portfolio engineering makes this possible.
Dimensional seeks to design broadly diversified equity strategies that offer focused exposure to the sources of expected returns in the market. Unlike index funds that follow commercial benchmarks, Dimensional defines equity asset classes based on a security’s market capitalization and price-to-book ratio and actively applies our own eligibility rules. To gain the purest representation possible, we seek to exclude securities that do not exhibit the general characteristics of the defined asset class. We also seek to eliminate securities that lack sufficient liquidity for cost-effective trading.
Engineering equity portfolios around broadly defined return sources generates opportunities for Dimensional traders to add value. Rather than replicate an index in mechanical fashion, we permit deviations from market cap weightings and allow for the integration of stocks among asset classes. This flexibility also allows us to reduce transaction costs caused by counterproductive trading. For example, for asset classes defined by size, a slightly higher hold or “buffer” range allows Dimensional to hold securities that a commercial index may be forced to sell, which reduces turnover and can increase returns.
The design of a fixed income portfolio follows three integral inputs: term, credit quality, and appropriate diversification. The bounds of these inputs are determined by an individual’s investment goals, risk tolerances, and tax circumstances. Dimensional’s fixed income portfolios seek to provide efficient exposure to defined term and credit quality ranges, thereby allowing our clients to tailor a fixed income solution to meet their investment needs. The fixed income portfolios seek to add value and control risk through yield curve and credit spread-aware designs that take advantage of a diverse universe of bonds.
As with the equity portfolios, the fixed income portfolios are flexibly managed, which enables Dimensional to implement cost-efficient trading strategies. On any given day, there may be multiple individual bonds that are eligible for purchase by a fixed income portfolio, giving the portfolio manager and the trader many options from which to choose. This allows Dimensional’s fixed income traders to add value through the implementation of cost-efficient trading strategies.