One Life Financial Group & Dimensional funds
One Life Financial Group uses Dimensional funds within client portfolios. It is important to disclose the following:
- One Life does not receive any monetary compensation (commissions, referral fees, service fees, etc) for recommending or purchasing Dimensional funds on behalf of One Life clients.
- One Life does not have an obligation or commitment to use Dimensional funds within client portfolios.
- One Life receives academic research, client articles, videos, and educational resources. These resources are used to educate clients, team members of One Life, and to develop portfolios for clients.
- One Life will use investment solution outside of Dimensional funds when One Life feels there is a better solution for our clients.
WHY DOES ONE LIFE USE DIMENSIONAL FUNDS WITHIN CLIENT PORTFOLIOS?
- One Life values Dimensional’s commitment to using academic research to design and execute their investment solutions. One of the core values at One Life is to “Embrace the Evidence”. This core value helped us make the decision to pursue using Dimensional funds within the portfolios we manage for clients. Using academic research is one way to take the guesswork out of portfolio design and implementation. Video – The Power of the Markets
- Dimensional targets “dimensions” of higher expected returns. The resources below provide an overview of different dimensions of higher expected returns targeted by Dimensional’s equity (stock) investment solutions.
To learn more about the four equity dimensions of higher expected return, review the information and graphs below:
In the market dimension, stocks provided an equity premium by significantly outperforming bonds from the time period spanning from 1926 – 2017 (graph below).
In the size dimension, (large vs small company stocks), US Small Cap Stocks provided a premium over US Large Cap Stocks by more than 300% (graph above).
Relative price is the third dimension where Dimensional seeks stock premiums over time. The relative price premium in the US from 1928-2017 for large cap stocks was 2.29% and 3.34% for small cap stocks. Premiums were also found in large company stocks outside the US from 1970-2017 and across emerging markets from 1989-2017 (graph below).
Profitability is a fourth dimension where Dimensional seeks stock premiums over time. In the graph above, the profitability premium in US stocks was 4.11% from 1964-2017. Over the same time period, the profitability premium was 4.36% in large company stocks outside the US (1990-2017) and 5.35% in emerging markets (1996-2017).
While all nine dimensions produced premiums over long time horizons in the above graph, not all dimensions produced better results over a shorter 10-year time period. For example, the period from 2008-2017 saw two of the nine dimensions in the relative price dimension category underperform (graph below).
Information provided by Dimensional Fund Advisors LP.
All figures represent 10-year annualized compound returns (%) in US dollars. US size premium: Dimensional US Small Cap Index minus S&P 500 Index. US relative price premium: Fama/French US Value Research Index minus Fama/French US Growth Research Index. US profitability premium: Dimensional US High Profitability Index minus Dimensional US Low Profitability Index. Dev. ex US size premium: Dimensional Intl. Small Cap Index minus MSCI World ex USA Index (gross div.). Dev. ex US relative price premium: Fama/French International Value index minus Fama/French International Growth Index. Dev. ex US profitability premium: Dimensional International High Profitability Index minus Dimensional International Low Profitability Index. Emerging Markets size premium: Dimensional Emerging Markets Small Cap Index minus MSCI Emerging Markets Index (gross div.). Emerging Markets relative price premium: Fama/French Emerging Markets Value Index minus Fama/French Emerging Markets Growth Index. Emerging Markets profitability premium: Dimensional Emerging Markets High Profitability Index minus Dimensional Emerging Markets Low Profitability Index. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book. Dimensional indices use CRSP, Compustat and Bloomberg data. Fama/French indices provided by Ken French. S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2018, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See “Index Descriptions” for descriptions of Dimensional and Fama/French index data. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
We believe that it is critical for investors targeting dimensions of return to stay disciplined over time. Staying disciplined can help investors benefit from the dimensions of higher expected return should they continue to persist into the future.
- One Life favors using an investment approach with lower investment expenses and trading costs. Higher investment expenses and trading costs have proven to make outperformance difficult to achieve for too many fund managers. Armed with this knowledge, One Life seeks to minimize unnecessary investment expenses and trading costs.
As seen in the SPIVA U.S. Scorecard, 92.43% of all large-cap funds failed to beat the S&P 500 after their fees were deducted. The scorecard posts similar results for small-cap, mid-cap, and other types of categories.
The Mutual Fund Landscape video shows that higher fees and trading costs are two reasons many fund managers may be underperforming their benchmarks over longer periods of time.
- One Life appreciates the low costs of indexing but seeks to avoid common challenges with many index funds and ETFs (exchange traded funds). One option for minimizing investment expenses is to use a low-cost index fund or ETF that tracks an index. While One Life prefers using lower cost index funds over higher-cost traditional actively managed funds, index management can pose challenges that can negatively impact your investment experience including:
- Inflexible Trading – Think about what happens to the price of something when everyone is trying to buy it. If someone is trying to purchase the latest fad when demand is high (think beanie baby, tech stocks during the tech bubble, POGs, cabbage patch kids, collector cards, real estate during the real estate boom, or the new iphone during the next release), they will pay a higher price for what they want to buy. Conversely, those fad items sell at a much lower price when demand is low.
With index management, fund managers can have a goal to track an index such as the S&P 500. These managers attempt to track the index with as little error as possible. When the index changes or “reconstitutes”, the manager buys stocks and sells stocks in an attempt to track the index and avoid tracking error. The problem with this inflexible trading approach is that every other manager tracking the index is buying the same stocks on the same day. They are also trying to sell the same stocks other managers are dumping on the same day. This forced trading in a short period of time can result in an inflexible trading disadvantage. While index management might have lower fund expenses than actively managed funds, inflexible trading challenges can force index fund managers to buy high and sell low which is the opposite of what you want to do with your investment strategy.
Watch Dimensional’s trading advantage in this flexible trading video.
- Cap Weighting – Many index funds can run into challenges with cap-weighting. Cap-weighted investment solutions track a stock market index whose components are weighted according to the total market value of their outstanding shares. When a stock is a larger portion of the total market value (think tech stocks during the tech boom and real estate during the real estate boom), cap-weighting would force cap weighted index approach to purchase stocks that are trading high and sell stocks that are trading low. With investing, you want to do the opposite (buy low and sell high).
- One Life appreciates that Dimensional mutual funds are only available for purchase through a select group of financial advisors. Dimensional provides educational material to our advisors and clients in the form of training, online tools, and academic research. We believe that properly educating advisors, and their clients, can help investors stay the course and lower fund turnover. Lower fund turnover can reduce fund expenses and taxes for funds held in a taxable account such as a trust or other non-qualified account. As seen in the image below, Dimensional funds had a much different experience compared to the industry during and after the financial crisis of 2008-2009. They experience money going into their equity mutual funds in a time when the mutual fund industry had money going out of equities. Money leaving a fund can increase turnover and tax costs to investors.
Source – https://us.dimensional.com/
- One Life appreciates Dimensional’s track record. While past performance does not guarantee future results, we feel it is important to avoid using investment solutions that have a poor track record relative to benchmarks over longer periods (ideally 20 + years). Additionally, we consider strategies without a long-term track record, or that are not supported by long-term academic research, to be speculative in nature. When designing portfolios for our clients or researching investment options in external accounts (401k, 403b, 529 plans, etc), we look for solutions that target dimensions of higher expected returns that have persisted over long periods of time (ideally 20+ years). We value long term research over short term performance because market cycles can take 20 years or longer to complete. Contact our office or visit Dimensional for additional information about Dimensional and the performance of Dimensional’s investment solutions. Past performance does not guarantee future results.
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