- Why Dimensional
Dimensional has assembled a repertoire of equity strategies to help clients build broadly diversified portfolios across a range of asset classes in the US market. These strategies, which include small and large cap, value, growth, tax managed, and applied core equity approaches, are engineered to offer precisely defined exposure to the underlying sources of risk.
Asset allocation is traditionally achieved in two ways: by owning a core portfolio that replicates the characteristics of the total equity market, or by building a portfolio from component asset classes. Our core strategies adopt the total market approach by targeting return premiums across the multiple asset classes of the US equity market.
Portfolio structure forms the basis of Dimensional strategies and provides the framework to implement insights from financial science and practical experience. The engineered approach to applied core equity is a natural evolution of our experience in building multifactor strategies, newly modified for greater efficiency. Because the core equity architecture is seamlessly integrated across the full range of securities, the turnover and transaction costs normally associated with maintaining multiple components are strongly reduced.
Dimensional's applied core strategies seek to buy the total US market in proportions that provide higher exposure to the risk premiums associated with size and value identified by Fama and French. The total market is defined as the aggregate capitalization of the NYSE, AMEX, and NASDAQ Global Market System companies.
The total market is weighted by market capitalization (price times shares outstanding), causing large cap growth companies to dominate. The applied core equity strategies alter the weighting of stocks by considering both a company's market cap and its price-to-book ratio. As a result, exposure to the small and value shares that research shows offer higher expected return is increased. To balance out the greater small and value exposure and still include every stock in the market, the weight of large cap and growth stocks is reduced.
Each of the US core strategies applies a different degree of exposure to small cap and value factors. The US Core Equity 1 Portfolio provides a moderate exposure to small cap and value. The US Core Equity 2 Portfolio provides a stronger exposure. The US Social Core Equity 2 Portfolio offers an exposure similar to the US Core Equity 2 Portfolio while excluding certain companies based on criteria established and applied by an independent, third-party social screening vendor. The US Vector Equity Portfolio is the most aggressive in terms of small cap and value exposures and is intended to augment those exposures.
Owning a core portfolio reduces reliance on asset class strategies and provides targeted factor exposure that can result in lower overall operating expenses and rebalancing costs. A smoother and broader exposure also reduces trading costs and capital gains caused by style drift or the reconstitution of indices.
Starting with the US Micro Cap Portfolio, Dimensional has been developing dedicated asset class strategies for the last three decades. Whether used as "satellite" complements to a core portfolio or as building blocks in a component-based asset allocation, these US and non-US strategies offer broadly diversified exposure to the returns of specific individual asset classes.
Dimensional has been a pioneer in small stock research since 1981. Research documents that, over the long term, small companies provide higher expected returns than larger companies. Dimensional's objective is to deliver a small cap performance premium and provide worldwide diversification.
Dimensional defines small companies as those whose market capitalization comprises the smallest 10% of the total market universe or that are smaller than the 1,000th largest company in the universe, whichever results in a higher market capitalization break. The US Micro Cap Portfolio buys securities of US companies whose size falls within the smallest 4% of the total market universe. The US Micro Cap Portfolio's hold range extends through the bottom 5% of companies or below the 1,500th largest company in the universe, whichever is higher. The US Small Cap Portfolio buys securities of US companies whose size falls within the smallest 8% of the total market universe. The US Small Cap Portfolio's hold range extends through the bottom 10% of companies or below the 1,000th largest company in the universe, whichever is higher. A "buffer" range allows small cap strategies to hold securities that grow out of the buy range, in order to minimize transaction costs and keep portfolio turnover low.
Additional screening criteria are employed to eliminate securities that do not display the common qualities of the asset class or that lack sufficient liquidity for cost-effective trading, such as OTC stocks with fewer than four market makers and those not included on the Nasdaq Global Market System. We are aggressive in keeping cash levels low to ensure consistent and full asset class exposure.
Dimensional's value strategies are based on the Fama/French research and are designed to capture the return premiums associated with high book-to-market (BtM) ratios. Our value portfolios are constructed by first ranking the total market universe by market cap and identifying those companies that fall within the defined size range. This universe is then ranked by BtM ratio.
The US Small Cap Value Portfolio generally buys companies whose market cap falls within the smallest 8% of the total market universe, with a hold or buffer range up to the bottom 10% of the universe or below the 1,000th largest company in the universe, whichever results in a higher market capitalization break. The US Targeted Value Portfolio invests in companies whose size range includes companies smaller than the 500th largest company in the total market universe. The US Large Cap Value Portfolio invests in companies that have a market cap in the largest 90% of the total market universe or are larger than the 1,000th largest company in the universe, whichever results in a higher market capitalization break. A hold or buffer range for sales is also maintained for book-to-market percentiles. Issues that migrate outside the hold ranges are eligible for sale, with any proceeds reinvested in the portfolio.
Dimensional's tax-efficient mutual funds target market segments that have higher expected returns but are otherwise costly or unsuitable for taxable investors. The tax-managed strategies deliver the same strong, consistent exposure to their asset classes that Dimensional is known for, but with a special emphasis on capturing after-tax returns.
Dimensional's strategies open new opportunities for taxable investors. Asset classes that were previously suited to non-taxable investors now make sense for everyone. The Fama/French research found a way to offset gains and minimize dividends without sacrificing strong diversified exposure to specific asset classes or across asset classes as in the case of the Tax-Managed US Equity Portfolio. As a result, the full benefits of engineered approaches like Dimensional's value strategies are no longer reserved for non-taxable corporate plans. Strategies also include small cap, small cap value, and marketwide value.
Dimensional's Enhanced US Large Company Portfolio combines S&P 500® Index stock futures contracts with a short-term fixed income vehicle. The investment goal is an annual return in excess of that of the S&P 500®.
The strategy relies on Dimensional's ability to deliver a fixed income return that exceeds the short-term interest rate implied in futures contract pricing. This short-term benchmark rate can be approximated by a number of measures including T-bills, LIBOR, or even money fund averages. For over a decade, Dimensional has managed short-term fixed income strategies that attempt to exceed these benchmarks. By coupling this strategy with futures contracts, Dimensional's short-term fixed income expertise can be transformed into a strategy seeking to provide excess return on the S&P 500.
The principal risks of investing in these portfolios may include any of the following: market risk, small company risk, tax management strategy risk, foreign securities and currencies risk, risk of concentrating in the real estate industry, and real estate investment risk. These risks are fully described in the prospectus in the section entitled "Principal Risks."