Webcasts

Trading at Dimensional: Seeking Stable Outcomes in Unstable Times

Featuring Dave Plecha, Global Head of Fixed Income | Jake DeKinder, Head of Client Communications

May 26, 2021

Topic

Fixed Income Investing Investment Principles

In the first of a four-part series on real-world fixed income investing, Dave Plecha, Global Head of Fixed Income at Dimensional, discusses the importance of having an investment process that can weather any type of market. He explains why high volatility in the 2020 bond market created pressures on bond index funds, which have less flexibility in what securities they hold and when. He also discusses how balancing stability and flexibility enabled Dimensional to deliver value during that period.

“We could execute our strategies in periods of normal market volatility and in periods of high volatility. That’s how I view robustness.”

You know, Dave, certainly here at Dimensional, we're big advocates of indexing, we know the whole history of David while working in the mid 1970's on the creation of one of the first index funds. But we also know that, you know, with an indexing approach sometimes it can be a little bit ridged. And if we look back at the first part of 2020, you see that really coming into play with some of the indexes in the bond market. We did, for sure, you know, we talk about, you know, robust processes, we use that term a lot, I hear that term a lot of robust process and I think well, how, if someone asked me to explain "What do you mean by robust?" You know ,I started out years and years ago as a engineer, and I'll tell you the way an engineer would think about that word in a process. He would say, "Well, a process has inputs and then something happens, the machine makes something, and then there's something that comes out." And if there are just minor variations in inputs, and there's always gonna be variations in inputs, maybe it's the stuff that you get from your supplier or maybe even the temperature of the building. If minor changes to inputs cause significant changes to the outputs, well, that's not a robust process, a robust process can deal with small variations input and give a good stable outcome. So how would that relate to the investment process? Well, I would sort of say, well, variations in inputs, think about that as market volatility. So if you develop some process that works perfectly fine in normal volatility market environments, and then we go through a period of high volatility, your whole process falls apart, well, then I would say that's not a robust process. So we had some examples of things that you would think would be a robust process. Sound very robust, like, let's say bond indexing, for example. So, you know, that seems pretty simple, even people who've been doing it for a long time, but let's go back to March of 2020 earlier this year, where we had a very, very volatile time in the market, lots of activity, bid-ask spreads widened out tremendously, credit spreads widened out tremendously as well, index providers, they knew what was gonna happen. When they got to the normal process of that index provider reconstituting their benchmark, which they do every month end and there are certain names that drop out, very simple things often, you know, if the bond gets below a year, it drops out of the index and new bonds come in. If anything gets credit, downgraded below the index range, it gets dropped out. Index providers knew that just a normal reconstitution was gonna put so much pressure on their process, they would not be able to manage their process the way they normally did. And they literally went and appealed to index providers to not do their normal reconstitution, to delay it by a month to let them sort of get their arms around what they were doing. And the index providers actually complied, they went along with it. So, I mean, there's an example of a process that was obviously not robust, even something as simple. Now again, you know, even the more obvious ones that were not robust is, "Oh, I'm gonna pick the winners or I'm gonna try to time the market." You know, many of those that disastrous results in the month of March. If you look at our strategies, look, we were in the exact same market, the same volatility, the same bid-ask spread widening, we were in the exact same market conditions, but our strategies held up quite well through March and April and beyond, because we built a robust processes that could perform well, and we could execute our strategies in periods of normal market market volatility and in periods of high volatility. So I think in the end, that's how I view robustness, and I think sometimes you have to get put to the test to back up what you're saying. We've always said our processes are robust and sometimes you have to be dragged through the fire a little bit, and we prove that we were.

More From This Series

Part 1: Trading at Dimensional—Seeking Stable Outcomes in Unstable Times

Part 2: On Fixed Income—The Research Never Stops

Part 3: On Fixed Income—Talking and Listening to Our Clients

Part 4: On Fixed Income— Fighting for What Is Right

Disclosures

The information in this document is provided in good faith without any warranty and is intended for the recipient’s background information only. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized copying, reproducing, duplicating, or transmitting of this document are strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited.

UNITED STATES: Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.

CANADA: These materials have been prepared by Dimensional Fund Advisors Canada ULC. They are provided for educational purposes only, should not be construed as investment advice or an offer of any security for sale and do not represent a recommendation of any particular security, strategy or investment product. Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Unless otherwise noted, any indicated total rates of return reflect the historical annual compounded total returns, including changes in share or unit value and reinvestment of all dividends or other distributions, and do not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

This material is not intended for Quebec residents.

AUSTRALIA: This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that has been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

NEW ZEALAND: This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. This material does not give any recommendation or opinion to acquire any financial product or any financial advice product, and is not financial advice to you or any other person. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and for the Dimensional Wholesale Trusts the target market determination (TMD) that has been made for each financial product or financial advice product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.

WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED OR DIMENSIONAL FUND ADVISORS LTD.
Neither Dimensional Ireland Limited (Dimensional Ireland) nor Dimensional Fund Advisors Ltd. (Dimensional UK), as applicable (each an “Issuing Entity,” as the context requires), give financial advice. You are responsible for deciding whether an investment is suitable for your personal circumstances, and we recommend that a financial adviser helps you with that decision.

NOTICE TO INVESTORS IN SWITZERLAND: This is an advertising document.

WHERE ISSUED BY DIMENSIONAL IRELAND LIMITED
Issued by Dimensional Ireland Limited (Dimensional Ireland), with registered office 25 North Wall Quay, Dublin 1, D01 H104, Ireland. Dimensional Ireland is regulated by the Central Bank of Ireland (Registration No. C185067). Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional Ireland to be reliable, and Dimensional Ireland has reasonable grounds to believe that all factual information herein is true as at the date of this document.

Dimensional Ireland issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional Ireland will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.

WHERE ISSUED BY DIMENSIONAL FUND ADVISORS LTD.
Issued by Dimensional Fund Advisors Ltd. (Dimensional UK), 20 Triton Street, Regent’s Place, London, NW1 3BF. Dimensional UK is authorised and regulated by the Financial Conduct Authority (FCA). Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional UK to be reliable, and Dimensional UK has reasonable grounds to believe that all factual information herein is true as at the date of this document.

Dimensional UK issues information and materials in English and may also issue information and materials in certain other languages. The recipient’s continued acceptance of information and materials from Dimensional UK will constitute the recipient’s consent to be provided with such information and materials, where relevant, in more than one language.

RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

JAPAN: Provided for institutional investors only. This document is deemed to be issued by Dimensional Japan Ltd., which is regulated by the Financial Services Agency of Japan and is registered as a Financial Instruments Firm conducting Investment Management Business and Investment Advisory and Agency Business. This material is solely for informational purposes only and shall not constitute an offer to sell or the solicitation to buy securities or enter into investment advisory contracts. The material in this article and any content contained herein may not be reproduced, copied, modified, transferred, disclosed, or used in any way not expressly permitted by Dimensional Japan Ltd. in writing. All expressions of opinion are subject to change without notice.

Dimensional Japan Ltd.
Director of Kanto Local Finance Bureau (FIBO) No. 2683
Membership: Investment Management Association of Japan

FOR PROFESSIONAL INVESTORS IN HONG KONG.
This material is deemed to be issued by Dimensional Hong Kong Limited (CE No. BJE760) (“Dimensional Hong Kong”), which is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.

This material should only be provided to “professional investors” (as defined in the Securities and Futures Ordinance [Chapter 571 of the Laws of Hong Kong] and its subsidiary legislation) and is not for use with the public. This material is not directed to any person in any jurisdiction where (by reason of that person’s nationality, residence, or otherwise) the publication or availability of this material are prohibited or which would subject Dimensional Hong Kong (including its affiliates) or any of Dimensional Hong Kong’s products or services to any registration, licensing, or other such legal requirements within such jurisdiction or country. When provided to prospective investors, this material forms part of, and must be provided together with, applicable fund offering materials. This material must not be provided to prospective investors on a standalone basis. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice.

Unauthorized copying, reproducing, duplicating, or transmitting of this material are prohibited. This material and the distribution of this material are not intended to constitute and do not constitute an offer or an invitation to offer to the Hong Kong public to acquire, dispose of, subscribe for, or underwrite any securities, structured products, or related financial products or instruments nor investment advice thereto. Any opinions and views expressed herein are subject to change. Neither Dimensional Hong Kong nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors. Financial advisors in Hong Kong shall not actively market the services of Dimensional Hong Kong or its affiliates to the Hong Kong public.

SINGAPORE
This material is deemed to be issued by Dimensional Fund Advisors Pte. Ltd., which is regulated by the Monetary Authority of Singapore and holds a capital markets services license for fund management.

This advertisement has not been reviewed by the Monetary Authority of Singapore. This information should not be considered investment advice or an offer of any security for sale. All information is given in good faith without any warranty and is not intended to provide professional, investment, or any other type of advice or recommendation and does not take into account the particular investment objectives, financial situation, or needs of individual recipients. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Dimensional Fund Advisors Pte. Ltd. does not accept any responsibility and cannot be held liable for any person’s use of or reliance on the information and opinions contained herein. Neither Dimensional Fund Advisors Pte. Ltd. nor its affiliates shall be responsible or held responsible for any content prepared by financial advisors.