Dimensional Fund Advisors, the $529 billion asset manager famed for its factor investing, has never offered an exchange-traded fund in its 39-year history. Now, it’s launching two and has plans for several more as investors withdraw billions of dollars from its mutual funds.
At the request of investors and allocators, and after more than a year of serious contemplation, Austin-based Dimensional said this summer it would launch three ETFs. This week, it revealed plans to list the first two on Wednesday: the Dimensional US Core Equity Market ETF (NYSE Arca: DFAU) and the Dimensional International Core Equity Market ETF (NYSE Arca: DFAI). The third fund, the Dimensional Emerging Core Equity Market ETF, will launch in December.
The asset manager also said this week it would create six new actively managed ETFs intended to replace six mutual funds collectively managing about $20 billion in assets. Dimensional plans to convert the six tax-managed mutual funds into new ETFs in 2021, a novel process in asset management, Dave Butler, a director and the co-CEO of Dimensional Fund Advisors, told RIA Intel. Butler was only aware of one other asset manager undergoing that process.
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Swapping the mutual fund shares for the ETFs is expected to be a tax-free event that will also deliver higher after-tax returns going forward. Dimensional also plans to lower the management fees of the six strategies by an average of 27% compared to current levels on an asset-weighted basis.
The timing of it all had nothing to do with the Covid-19 pandemic, the passing of a contentious presidential election, or Dimensional itself, according to Butler. “There were no outside or external pushes to when we launched this. We were looking to move forward as quickly as we could through the regulatory process. And our interest was getting the vehicles out to the clients as soon as we could,” he said.
At Dimensional, or more colloquially “DFA” to financial advisors and others, clients are centric to every decision. The “feedback loop” between the asset manager and financial professionals allocating money on another’s behalf has driven changes and Dimensional throughout its history and it continues to today, according Butler. That’s why the asset manager is launching ETFs and an enhanced separately managed account platform next year, and “doubling down” on the services it offers RIAs and other clients, such as virtual conferences and proprietary research.
“All of this ties into the overall view that we have, which is we want to provide the flexibility and meet clients' demands and client needs to capture the Dimensional approach in various different wrappers that we think are going to be helpful to the businesses, and then help, obviously, to their clients that they're servicing.”
But the arrival of Dimensional’s ETFs might be coming just in time to combat a new trend.
Just prior to the pandemic, the stream of money flowing to Dimensional relative to the money leaving had weakened. After a decade almost entirely of inflows, assets began trickling out at the end of 2019. Then, the sudden spread of Covid-19 in the U.S. led to the fastest-ever bear market in March. Like other asset managers, Dimensional had outflows — investors yanked an estimated $7.9 billion from the fund family that month, according to Morningstar. But unlike for other asset managers, that money has not returned.
Beginning in April, Dimensional’s U.S. funds have experienced net outflows every month of at least $3 billion. Between November of 2019 and October of 2020, Dimensional's total estimated net flows in the U.S. were negative 37.2 billion to $403 billion, which contributed to a 10.36% fall in Dimensional’s U.S. assets under management during that period, Daniel Sotiroff, a manager research analyst at Morningstar, told RIA Intel.
“You definitely see the trend start to occur,” Sotiroff said about the recent U.S. outflows. Dimensional’s total assets under management increased from $506 billion in June, to $527 billion as of Sept. 30.
No specific U.S. fund is responsible for a disproportionate amount of assets leaving. The monthly outflows are spread across dozens of Dimensional’s more than 100 different funds, according to Morningstar estimates.
RIA Intel spoke to Butler about Dimensional’s ETFs before reviewing Moringstar’s latest fund flow data for the asset manager. Dimensional declined to comment on the recent outflows, including questions about whether launching ETFs would taper outflows or reverse the recent trend.
Other asset managers have fared better over the past year, in terms of net new assets in the U.S. Both Vanguard and BlackRock, two behemoths each managing trillions of dollars, continue to attract more money this year. Although, a comparison between Dimensional and those two firms has limited utility, primarily because they don’t offer the same strategies.
American Century Investments’ Avantis Investors, a group that splintered out of DFA and led by Eduardo Repetto, the former co-CEO and co-chief investment officer of Dimensional, is a slightly better comparison, according to Sotiroff. Avantis offers similar strategies to Dimensional and from November 2019 to October 2020, the company’s net U.S. asset flows were $1.5 billion, according to Morningstar.
There is a clear demand for Dimensional’s investment management and other value-added services; it’s not a ship off course, according to Sotiroff. Competition is getting stiffer and the asset manager is making the changes it needs to. In addition to launching ETFs, Dimensional has also lowered fees on some mutual funds in recent years.
“Finally” is a word financial advisors and others often use to describe Dimensional launching ETFs but Butler doesn’t feel his company is behind others.
“One thing I would say about Dimensional is we are always innovative, and we're always proactive, and I think we've proven that through the years. And I think there's an appreciation of the fact that Dimensional only does things that are going to be value-add, and are going to be a value-add to the client,” Butler said.
“I think that's an important point, you want to be forward-looking, but in the Dimensional fashion. We always want to make sure that we are truly adding value, and we're truly going through a robust process to get to a solution that we think's going to make sense for the client.”
Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.