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Most CEOs are masters of saying nothing. David Booth is not most CEOs. "I hate complexity and a lot of changes,” the 70-year-old co-founder of Dimensional Fund Advisors says. “It undermines people’s trust in you. If people understand what you do, they’ll stick with you over the long haul, and if they do that, they’ll be okay.”

The pioneer of smart beta was more than okay one hot September evening in Austin, Texas, near the headquarters of the firm that has become his life’s work. He — along with the University of Chicago’s Gene Fama, who won the Nobel Prize for his contributions to efficient market theories and still teaches; Ken French, Fama’s longtime research partner and a finance professor at the Tuck School of Business at Dartmouth College; Booth’s designated successor and co-CEO, Eduardo Repetto; and a smattering of other executives — were sitting around a rustic table in the restaurant of the Hotel Granduca, a luxury hotel inspired by a 16th-century Italian villa. The conversation, food, and Italian red wine flowed freely.

The group was talking — arguing, really — about the differences between Dimensional’s funds and those pouring from its competitors in the ballooning catch-all category of factor and smart-beta investments. The table’s consensus: stark.

In 1981, Booth co-founded Dimensional with Rex Sinquefield to create real-world investments based on the academic theories about market efficiency that had been flowing out of his alma mater, the University of Chicago’s graduate school of business. Booth, who had been Fama’s research assistant, drafted his professor as a founding director.

From the beginning Dimensional’s goal was to improve passive investments at the edges, combining the best of objective models with human judgment. At its core the view is that investors should act as though prices are right. Dimensional has long had competitors in its push to sell factor-based investments — funds that take advantage of persistent market characteristics — but its success now has firms racing to create everything from simple low-volatility funds to portfolios based on multiple and interconnected factors, all starting with the same core research born at the University of Chicago. Foremost among that work is Fama and French’s seminal 1992 paper on the sources of stock returns. Dimensional’s rivals, however, don’t have Fama and French on staff.

After everyone at the restaurant table has ordered and the low-level chatter has meandered to such pressing topics as the number of Sicilian Famas in Boston (the professor’s hometown), Booth gets back to his favorite topic: Dimensional. “There’s one basic difference, and it may not sound like a big deal, but it’s a big deal”: The firm was founded on the idea that no one can predict securities prices.

French concurs. “Even if we don’t understand the world and whatever premium we were after turns out not to be there, our clients still have a good portfolio because we weren’t trying to do anything crazy. I don’t want to put words in David’s mouth —”

“— Please do, it sounds better when you say it —”

“— It’s not to say every price is right.”

“What do you mean?” injects Fama, ever alert to contentions that prices may be wrong. “There may be mistakes, but you won’t be able to tell what they are!”

“Well, there may be people out there who can tell,” French continues, “but if there are, they are the scarce resource and there is no reason for them to leave money on the table —”

“So much noise in the data. We’re only interested in stuff that is robust,” Fama says. “We want to see it in multiple time periods and markets — ”

“— and it makes sense,” adds French. “It’s not just a pattern.”

“‘Robust.’ I hate that word,” Booth says.

“It means fat,” laughs Fama.

“All this research testing out the models,” Booth responds, commenting on the competition. “As Gene says, models aren’t reality. If they explained everything, then you would need to call them reality. You wouldn’t have to call them models.”

The cross-talk continues. Yet one topic this group is less willing to banter over is the most complex issue of all for Dimensional Fund Advisors: Can the privately held firm survive its original team?

The succession problem is not unique to Dimensional, or to investment management in general. Companies worldwide are facing the retirement of their senior executives as baby boomers leave the workforce. But asset management has been hit uniquely hard by the problem, in part because its edge often lies in the collective experiences of talented people, not in factories or innovative patents.

Founded by now-wealthy men, asset management is a relatively new industry whose growth accelerated in the 1980s as individuals were forced to save for their own retirement and as institutions became more sophisticated investors. As the industry matured, many privately held money managers diversified beyond their core product, went public, or were bought by large banks, insurance companies, or consolidators like Affiliated Managers Group that promised to help with messy issues like succession. Private equity firms such as KKR & Co. and Carlyle Group have been a case in point, struggling to move beyond the famous faces of their founders (in branding, if not in returns). Mergers and acquisitions, which have been notoriously difficult to pull off, have also gone in the other direction, with companies spinning off their money managers, particularly after the financial crisis.

At first glance, Dimensional and its $445 billion in assets under management are well poised to manage the succession issue. The firm embraces a passive approach based on economic science. Its transparent investment process doesn’t rely on star managers. It does business under a structure favored by institutional investors, which often prefer private firms that aren’t subject to the vagaries of public markets and whose key executives have ownership stakes. Publicly owned companies, on the other hand, need to maximize their returns for stock owners by gathering assets and launching products, and that often conflicts with maximizing the return for investors in their funds.

Another advantage for Dimensional: Fama and French. Both are directors and work closely with research, investment, and client service teams; they also sit on the investment policy committee. That the two are so actively involved in the firm may be surprising given their central place in financial history. Yet there they are — and with them, at least in spirit, is the University of Chicago’s famed business school.

In 1960, Chicago started developing the first database for historical securities prices and returns information, allowing researchers to analyze the performance of the markets and kicking off the modern era of finance. Four years later Fama — a Chicago student now known to many as the “father of finance” — published his famous Ph.D. dissertation concluding that stock price movements are unpredictable (Fama used his own data for the dissertation). That set the stage for the Efficient Market Hypothesis and the advent of index funds that sought to match rather than beat the market. (Institutional Investor published a less technical version of the dissertation in 1968.)

Booth, who was pursuing a master’s degree at the University of Kansas, read Fama’s work. He decided to apply to Chicago and graduated with an MBA in 1971. Although Fama thought he should work toward a Ph.D., Booth was more interested in applying the theory in the real world. “Clearly, leaving Chicago helped me and the university. Everyone won with that one,” Booth joked during a predinner interview that day in September. He wasn’t wrong: Chicago’s business school is now branded the Booth School of Business, renamed after Booth made a $300 million contribution in 2008.

Upon Booth’s rejection of the Ph.D. track, Fama called Mac McQuown, a former student who was working to develop the first index fund at Wells Fargo & Co., to recommend his onetime research assistant. McQuown hired Booth to work at Wells Fargo’s think tank, which also employed as consultants Fischer Black and Myron Scholes, who would publish the Black–Scholes options pricing model a few years later.

After the Wells Fargo group split up, Booth and Sinquefield formed Dimensional. By then Jack Bogle’s Vanguard Group and others were enjoying success with large-cap index funds, so the new firm decided to focus on small-cap stocks. At the time, there were no small-cap indexes — and no empirical research existed showing that small-cap stocks outperformed large caps.

Yet Booth and his partners had an intuition that higher-risk companies would return more than less-risky large caps and offer diversification. (Rolf Banz, a Ph.D. student of Scholes’ at Chicago, would publish the results of his doctoral research on small-cap outperformance shortly before Dimensional’s launch.)

The challenge was to cost-effectively buy and sell thinly traded small-cap stocks so that the outperformance wasn’t eaten up by expenses. With few institutions, or even mutual funds, owning small caps because of the headache involved, Dimensional had the field to itself if it could make it work. The trick, which is still at the heart of Dimensional despite an expanded product lineup, is almost embarrassingly simple: Trade as little as possible and hold out until stocks can be had at good prices. And Dimensional went beyond just keeping transaction costs down, buying blocks of illiquid stocks to earn a discount. Though the firm didn’t do fundamental analysis of the stocks it bought, it avoided companies that were about to make big announcements or had reported insider sales. The idea was to add a premium to a market portfolio by incorporating human judgment.

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