“A Rigid Indexed Approach Leaves Money on the Table”

Marlena Lee, Dimensional's Global Head of Investment Solutions, chats share class ETF filings, and how the firm's flexible, systematic approach to active management gives investors an edge over indices. 

Full Transcript

Opening: Value Around the Edges

Nadig: You're not doing the "We like this stock, we're putting 25% of your money in it." It's a lot more around the edges where you really think you can add value.

Lee: It's all about implementation. So, we're active because we're not indexed, and we think that having a rigid indexed approach leaves money on the table.

Dimensional as First Movers on ETF Share Class Filings

Nadig: I'm here with Marlena Lee, the Global Head of Investment Solutions at Dimensional. I’ve got to tell you, on my list of things coming up, Dimensional is on there because of share classes. You guys were the first ones to file for share class relief to get share classes of your mutual funds out as ETFs. What should we be expecting and when should we expect it?

Lee: Oh, it's the money question, right? I hope soon. But you know, we've been hearing from a lot of our clients and just folks in the industry that this is the right thing to do – gets instant scale for ETF investors. You know, it’ll help with tax efficiency. There's a lot of things for people, investors to be excited about with this exemption.

Nadig: But you guys are already in the space. You came out with some fantastic actively managed funds that I think caught a lot of people by surprise. I think a lot of folks waited because they thought they were going to have to get gated in. I remember in the old days, the only way an advisor could even use a Dimensional product was by going to school. Talk to me a little bit about the approach and why it's now for everybody.

Lee: Well, yeah, anyone can buy our ETFs, of course, but we still want to lead with education. We think that it's really important for people to understand how their investment products are adding value, fits into their portfolio, and we want to do that. So anyone who wants to learn more about us, there's lots of ways to do that. So that's key to how we invest. But, of course, anyone can buy the ETFs, and we're really just trying to get everyone to have a better investment experience.

The Benefits of Active, Daily Rebalancing

Nadig: Part of that education, if I recall back in the day, was that your approach to active management is a little bit different. You're not doing the "We like this stock, we're putting 25% of your money in it." It's a lot more around the edges where you really think you can add value. Tell me a little more about that.

Lee: It's all about implementation. So, we're active because we're not indexed, and we think that having a rigid indexed approach leaves money on the table. So, instead, we think that flexibility adds value, and that's the way in which we're active, and also relying on all of the academic information about how to add value to returns. It's not about stock picking, it's about having a systematic, repeatable, transparent approach. And that's Dimensional.

Nadig: Now, one of the things I also associate with you all is trading expertise. Your trading desk, I remember a presentation I saw years ago. Somebody was talking about the amount of alpha generated just by trading differently than your competitors. Is that still a core advantage? Do you guys have a different approach to implementation when it gets down to pushing the buy and sell button?

Lee: Oh, no, that's the same as what you probably heard about decades ago. We still want to make sure that we're trading in a really flexible way, and that means rebalancing a little bit every day. And so we're not waiting for an index to tell us, "Hey, it's time for your quarterly rebalance." Instead, just doing it a little bit every day helps the portfolios stay on target. It helps reduce those trading costs, which if you have to trade in a certain amount on a certain day, and everyone else knows exactly where you're going to trade, we don't think that that leads to the best trading costs.

Nadig: Love it. Well, rational investing for everyone. I appreciate it. Thanks, Marlena.

Lee: Great to see you, Dave.