“Do we see a different spread in returns when you adjust for intangibles versus when you don’t? The answer is, historically, the spread is almost the same,” she says, citing preliminary internal research that looks at data going back to 1963.
It’s an academic point that has real-world consequences. A large chunk of Dimensional’s giant asset pool is in stock products guided by its factor models, which means even small tweaks to how it classifies shares can reverberate through markets. It also oversees fixed-income, real-estate and target-date funds.
It’s not just equities where Dimensional’s orthodox streak shines through. Rizova is skeptical of the factors quants are mining in the bond market now that systematic traders are turning to other asset classes.
The firm argues in a paper published last week that most popular fixed-income factors -- such as distance to default, bond momentum and corporate profitability -- aren’t worth the hype after taking into account a security’s forward rate. That supports Dimensional’s view that forward rates, or the expected return projected by the yield curve for similarly-rated bonds, are the best guide to future returns, with the issuer’s short-term equity performance also a key indicator.
But for all its staunch adherence to time-tested models, Dimensional also tweaks them occasionally, after extensive research.
The firm has discovered that recent profit growth can predict outperformance in U.S. stocks, even after controlling for current profitability. Dimensional is looking to add that insight to the model, after determining whether it applies across global markets, Rizova says.
It might look like the firm is playing a game of catch-up, but the deliberative stance is Dimensional’s brand. The money manager started using the investment factor -- part of the Fama-French model -- in its portfolios only last year, after first exploring it around 2012.
“A separate standalone factor is unlikely to come out, but it doesn’t mean we’re not doing additional work on long-term drivers of returns,” Rizova says, referring to the Fama-French framework. “You want to see it is a robust pattern before you incorporate it in your investment process -- at least, we do.”
This article was provided by Bloomberg News.