U.S. & Canadian equities - frequently asked questions
Why does Dimensional use a ratio of book value to market value to construct portfolios for the value strategies? Book value appears to be increasingly unimportant in assessing stocks as investors attach greater significance to off-balance sheet assets such as technological expertise or brand recognition.
The goal is to distinguish between companies with high and low investor expectations; using market price relative to some fundamental economic measure effectively captures these differences. There is no magic associated with book value; research shows that screening on other fundamental measures such as cash flow, earnings, or dividends produces similar results. Book value appears to do the best job in explaining differences in average returns over time between growth and value stocks, but the current reliance on book value does not preclude future refinements in screening techniques.
Dimensional's small company strategies employ a “patient buyer” trading strategy to purchase blocks of thinly-traded stocks at a discount. What happens if Dimensional gets a large redemption? Won’t it face the same transaction cost problem trying to sell these stocks?
It would be difficult to manage our small cap portfolios cost-effectively if they were subject to large and unexpected redemptions. Unlike conventional mutual funds accessible by the general public, Dimensional strategies have been developed exclusively for a limited number of professional investors such as corporate pension plans, state governments and registered investment advisors. We work closely with clients to identify significant cash inflows or outflows in advance in order to minimize overall portfolio transaction costs. Although it has never occurred, the Portfolios are permitted to make redemption payments by a distribution of portfolio securities in lieu of cash.
What is a reasonable expectation for portfolio turnover in the various strategies?
A portfolio such as U.S. Large Company will have relatively low turnover since companies in the S&P 500 index which it attempts to track are replaced infrequently. Turnover is generally higher for strategies focusing on the small capitalization or value dimensions of the equity market. In order to maintain the desired small cap or value characteristics, stocks are sold as they move out of a pre-determined buy/hold range.