Lukas Smart will be speaking at our
Investing in Smart Beta Conference 
March 22 in Ft. Lauderdale
Enter discount code: smartbeta and attend for $49

Though smart beta products have swelled in popularity, they aren’t new.

In fact, Lukas Smart has been managing smart beta-style portfolios for more than eight years, and his firm, the Austin, Texas-based Dimensional Fund Advisors, has been offering strategies that mirror fundamental indexing for over 35 years.

“We already have a broad body of work,” Smart says. “Over the past few decades, Dimensional is one of the largest out-of-sample tests into whether or not dimension- or factor-based investing works, and clients have noticed the returns we have been able to achieve.”

Smart, a senior portfolio manager and vice president of Dimensional Fund Advisors, will speak at the upcoming Investing in Smart Beta conference March 22 in Fort Lauderdale, Fla.

Unlike many of the “smart beta” funds out there, Dimensional’s offerings have proven multiyear track records and experienced managers, like Smart.

“It’s an exciting time to be working at Dimensional,” Smart says. “We’re happy that the market is starting to embrace the concept of strategic beta, because it gives us more opportunities to tell our story.”

Smart employs Dimensional’s factor-based, research-driven approach in the funds he manages. The approach leads to a portfolio composition that resembles many smart beta indexes and products, but arrives at its destination differently. Unlike most smart beta managers, Smart does not use a fundamentaly-weighted index to make investment decisions.

“Incorporating multiple factors into our approach leads to better diversification,” Smart says. From Dimensional’s perspective, a stock can’t be adequately analyzed on the basis of returns or market capitalization alone.

He says markets are changing to favor DFA’s factor-based fund management style.

“We argue there are clearly some things related to differences in expected returns,” Smart says. “If you build a portfolio around those things, we feel you can expect to earn a premium over a market-cap-weighted benchmark.”

At DFA, Smart manages several U.S. large-cap equity funds and REIT portfolios as part of a team of investment professionals. Many of those portfolios consistently outperform their benchmarks. Those funds include the $6 billion DFA U.S. Large Company I fund, the $2.7 billion DFA U.S. Large Cap Value III portfolio and the $14.4 billion DFA U.S. Large Cap Value Portfolio.

The DFA Large Cap Value Portfolio’s top holdings include AT&T, Exxon Mobil, JPMorgan Chase, Comcast and Pfizer. While institutional shares of the fund are down more than 10 percent year over year, the fund boasts three-year annualized returns of 9.6 percent and five-year returns of 9.0 percent.

Smart also contributes his portfolio management expertise to a suite of six multi-factor ETFs launched last year by John Hancock and managed by DFA.

Smart has spent 15 years in the financial services industry. Before joining Dimensional in 2007, he did consulting work for Bank of America in Chicago, and was also a consultant and a portfolio manager for Ibbotson Associates.

Smart became involved in the financial services industry while an undergraduate at the University of San Diego.

“I went into my undergraduate years majoring in English of all things, but my faculty advisor was a professor in economics,” Smart says. “He showed me a lot of fascinating stuff, and I kind of fell down the rabbit hole.”

That relationship drove him into an MBA program at the University of Chicago’s Booth School of Business.

The Ibbotson connection brought him to Dimensional Fund Advisors -- Yale University professor Roger Ibbotson also sits on the firm’s board of directors.

“We don’t believe you can time the market, so the only reasonable course of action is to remain fully invested,” Smart says, and the key is selecting the right investments. That’s why Dimensional’s fund managers look at companies in the context of multiple dimensions.

Smart emphasizes profitability, company size and price within the context of the overall market in this multi-factor approach, which he describes as four dimensions.

“Three of them are price-driven: the market, size and relative price, while profitability is cash-flow driven,” Smart says, and all are used as a measure of potential returns.

The selection process limits style drift. In fact, Smart says the holdings of DFA’s funds tend to better represent the market factors they are trying to represent than their underlying indexes.

Though it was founded in 1981, Dimensional’s factor-based style hit its stride in the 1990s after Eugene Fama and Kenneth French published a landmark paper on their three-factor fundamental asset pricing model. Fama was awarded the Nobel prize in economics in 2013 for their work. Both economists now sit on DFA’s board of directors.

Dimensional’s asset pricing mode has since expanded to include profitability, defined as an adjusted operating profit priced to book, in its thinking.

“With size, style and profitability, the historical difference in returns is important, but the manager’s implementation is what delivers the benefits of these dimensions to investors,” Smart says, adding that keeping portfolio turnover to a minimum is also key to DFA’s strategies.

DFA can customize its portfolio methodology while keeping the costs of its funds well below industry averages. The company doesn’t bind Smart and other managers to an index or a set schedule for rebalancing their portfolios, but instead allows them freedom to implement and build their strategies as the firm’s research progresses.

“Implementation involves thinking about the benefits from buying or selling a holding and the costs of trading,” Smart says. “Our research on portfolio structure allows us to make those decisions in a consistent and transparent way.”