Philosophy / 

Decades of financial research have identified dimensions of higher expected returns in the global capital markets. Portfolios can be structured around these dimensions, which are sensible, backed by data, and cost-effective to capture in diversified portfolios. Dimensional designs and manages strategies to pursue these dimensions for investors around the world.

Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions. First, stocks have higher expected returns than bonds. Among stocks, expected return differences are largely driven by company size, relative price, and profitability. Academic research and results from practicing investors show that small companies have higher expected returns than large companies, low relative price “value” companies have higher expected returns than high relative price “growth” companies, and companies with high profitability have higher expected returns than companies with low profitability.

In fixed income, expected returns are driven by the dimensions of term and credit. Longer-term bonds are more sensitive than shorter-term bonds to unexpected changes in interest rates. Bonds with lower credit quality have a greater risk of default than bonds with higher credit quality.

      Dimensions Point to Systematic Differences in Expected Returns

Relative price as measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios.
Profitability is a measure of current profitability, based on information from individual companies’ income statements.

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The unpredictability of changes in interest rates has a simple implication that is the basis of Dimensional's bond strategies. Specifically, current prices of discount bonds are good estimates of the prices of bonds with the same maturities one period from now.