During good times in the market or the economy, people tend not to watch their pennies. When returns and incomes are buoyant, these things don’t seem to matter so much. How times change.
This tendency in a benign climate to overlook costs is evident also in the money management industry, where managers often chase returns with little eye to the price of execution.
Think of this as the investment equivalent of “I want it all and I want it now.” The manager’s desire to add a particular stock to a portfolio can be such that they will overlook the explicit and hidden costs of doing so.
Now, these costs are material in the best of times. But they are even more so when markets are volatile. Smart managers will have systems in place to trade as efficiently as possible whatever the market backdrop.
Why is this important? Mutual fund companies pass on the costs associated with trading within the fund to the investor through the fund’s expenses – often referred to as the “expense ratio”. By paying attention to these costs, a manager leaves more money in the pot to return to the end investor.
Dimensional Fund Advisors has always placed a priority on efficient implementation. It is one of the key ways it adds value for investors and it’s an area where they are always seeking to make improvements.
For comparison, we need only look to one of the larger mutual fund companies – Fidelity. Morningstar.com ranks mutual funds and fund companies based on costs. Fidelity receives an “Average” rating when it comes to expenses. Compare that with Dimensional, who receives a “Very Low” rating. Low rating = low fees.
Generally, the difference between these scores translates to an extra 1% in fees annually. In other words, for every $100,000 invested you would lose an extra $1,000 each year to fees. That $1,000 is no chump change over time. After 10 years, the difference between an “Average” fund and a “Very Low” fund would be more than $17,000! (assuming a 7% return for the low cost fund)
Dimensional’s goal of keeping fees low is made easier by the nature of its process. Its focus is purely on efficiently capturing specific dimensions of risk identified by academic research. Because it doesn’t forecast, it can afford to focus on the price of execution rather than the timing. And, because it doesn’t try to match indexes, it is not forced into transacting to maintain its exposure to the index
. These numerous daily decisions, while perhaps not as headline-worthy as decisions based on timing the market, are every bit as important to end investors. At PartnersInWealth, we are proud to utilize Dimensional Funds. Their investment approach considers the investor, not just for returns, but also costs. They deliver the most value to our clients.