The Imitation Game

When I was a teenager dreaming of becoming a successful rock musician, the thing I wanted most in this world was a Fender Stratocaster guitar. Celebrating its 70th anniversary this year, the Strat is arguably music’s most iconic instrument. In the hands of legends such as Jimi Hendrix, Eric Clapton or David Gilmour of Pink Floyd, it is the instrument that has defined the sound of rock music for generations. In fact, so recognisable is Leo Fender’s creation that if you want a guitar emoji for your WhatsApp messages, you’ll get a Strat.

Unfortunately, for this budding musician, the Stratocaster displayed in the window of the local music store was light-years beyond my budget. What I could afford, after months of freezing early-morning paper rounds, was a Strat copy. It looked just like the real thing, for a fraction of the price. And, thrashing away with my band at the local village halls we performed at, who could tell the difference?

I did love my trusty fake Strat, and perhaps I should have been satisfied that it worked well enough. But then I got the chance to play the real thing and it changed everything. The quality of the finish—that was a difference you could see. The attention to detail on the guitar neck and fretboard—that was a difference you could feel. And the quality of the pickups? Wow, that was a difference you could hear.

But it wasn’t just the attention to detail in the individual components that made the guitar such a pleasure to play. What set it apart was how everything was designed and engineered to work harmoniously together. Am I claiming it made me a better guitarist? Well, yes actually. I got to experience what it was like to work with the guitar rather than fight against it to produce the sound I wanted.

Successful innovators know that one of the ways they can measure their success is by the number of imitators they spawn. That’s as true in investment management as it is in guitar manufacture. Dimensional has a long history of innovation and over 40 years’ experience in applying the leading ideas in capital markets research to real-world investment solutions. And, just like Fender, its innovations are frequently emulated.

Indeed, when I was an adviser, I tried to do this myself, building portfolios of index funds to target the same sources of higher expected return as Dimensional but at supposedly lower cost—or so I thought. On the surface, these ersatz solutions might have appeared to be a close match to the Dimensional methodology. However, as I came to discover, it’s the nuances, the attention to the unseen details, and the refusal to compromise on quality that differentiate the original from the imitation.

Avoiding arbitrary index reconstitution dates, style drift in between rebalances, and inefficient trading—these are differences that you can observe in higher returns. But, ultimately, it’s the way the strategies are designed and engineered to integrate multiple reliable premiums, so that they work together harmoniously, that makes tangible differences. And that, ultimately, is the point. The aggregated effect of these marginal gains can compound over time and have a meaningful impact on people’s lives whether they are investing for retirement, supporting their children’s education or saving for a special event.

Like the discerning musician who can distinguish the Stratocaster’s unique tonal qualities from a slew of imitations, sophisticated investors can recognise the increasingly refined distinctions that Dimensional makes in its approach to managing other people’s money so that they can enjoy a successful investment experience. As we’ve found, in financial markets just like in music, the real magic lies in the details.