Dimensional Global Core Equity and Global Targeted Value UCITS ETFs are now Live! – Investment Moats

My colleague happen to accidentally found out that Dimensional have listed their UCITS ETF a week ago.

That means that you can buy them through a broker that allows you to trade on the London Stock Exchange (LSE) such as Interactive Brokers.

There will be the fans of Dimensional Fund Advisers that is looking forward but perhaps there will also be those who say what is the big deal. I used to write a 16,000 word article introducing Dimensional Fund Advisers to my readers. I wrote that in April 2019 so parts of it is pretty outdated but one thing is for certain in that their systematic strategy is still consistent.

Dimensional listed two ETFs:

1. Dimensional Global Core Equity UCITS ETF (Acc)
2. Dimensional Global Targeted Value UCITS ETF (Acc)

They are both domiciled in Ireland which means that they attract zero percent estate tax for non-resident investors of Ireland. This will reduce your worry if the investor passed away prematurely and the executor of the estate have to contend with the tax issues.

Since they are ETFs domiciled in Ireland, the dividend withholding tax off the underlying US shares (e.g. Apple) to the fund is 15% due to the dual taxation treaty, and that they are ETFs. If this is a unit trust domiciled in Ireland, the same dividend withholding tax would still be 30%.

With this, it means that those who share a similar investment philosophy to Dimensional and understand their philosophy can invest directly without having to pay access fee to platforms such as Endowus and Providend, if you don’t find that the adviser provide any value-add during your experience with them.

I will provide some details of the two fund below but likely I don’t want to dive too deep into it because I thought I would have shared enough over the years.

Do bear in mind, while I have a working relationship at work with Dimensional, I did not communicate with them anything regarding the ETFs. So these are my own personal views. There might be some miscommunication so it is always good to check with them if you felt that there are some discrepancy.

But likely, I will try my best to explain in my own way about the ETF funds.

Dimensional Global Core Equity UCITS ETF

The first fund is the Dimensional Global Core Equity UCITS ETF. This should run the same strategy as the Dimensional Global Core equity fund, which is already available to Singapore advisers to recommend to their clients.

Here are some details about the ETF fund:

It is available in two currencies USD and GBP and perhaps the USD interest most here. Both the ETF are accumulating.

Global Core is design to be the core part of your portfolio. This means that if you wish to own equity, a large part of your portfolio should be in something like this.

A large part of your equity portfolio is in the following configuration:

1. Span a developed region.
2. Span different sectors.
3. Consist of large, mid and small caps.
4. Span a lot of securities.

This should be the basis of a large part of your investments because:

1. You don’t want a single security, region, sector’s major problem to make your portfolio mentally hard to live with.
2. Don’t want to have irreparable damage to your portfolio based on #1.
3. Want a portfolio that can systematically self-rejuvenate without you doing anything.
4. Systematically capture the returns of the top performers for the next 20-30 years, especially when no one have an idea who they will be.

These would be critical features that you are looking for in your investments (but you might not know them to be this way).

These funds are just incepted like a week ago so there is no factsheets and no performance returns.

But since the USD class of Global Core Equity Fund was incepted in 2008, we can compare the returns against the MSCI World index (note the World index has no fee while the Global Core equity bakes in a total expense ratio):

Dimensional’s strategy is not a passive indexing strategy. I would call them systematic active because they help you execute a systematic strategy again and again.

I kind of think that if you are an investor who currently has a value approach, you would do something like what Dimensional would do:

1. Decide which market you would want to prowl. Be it Singapore, Hong Kong or… developed markets. This will determine how many securities are available to you. If you would like your catchment in developed markets, you have a lot of securities.
2. You want securities that fit your criteria:
   • Don’t want the companies that are unprofitable.
   • Don’t want companies that are too expensive.
   • Want companies that are significantly more profitable
3. So you either screen or rank the available securities in #1 based on #2.
4. You invest in a basket of them.
5. On a periodic basis, you will review your stocks.
   • You want to sell those stocks that gotten more expensive.
   • Or sell the stocks that are closer to your intrinsic value
   • Re-allocate the capital to those companies that fit #2 again.

If you kind of understand the above because that is what you want to do, then Dimensional funds basically helps you systematically do this.

Each Dimensional fund does the above, but in various degree.

Instead of just selecting the more profitable and cheaper ones, Global Core Equity will overweight those that ranks highest (based on value and profitability). Overweighting means that you will still own those that may be dearer it is just that you own less of it.

The following is the top 10 holdings:

The nice thing about having Dimensional funds in ETFs is that you can click on Download all holdings and you can have a nice spreadsheet of all 4000++ securities!

In the holdings above, you can compare them to MSCI World index. You are still invested in these mega companies, just that you are holding much less of them since they are dearer.

Now, I am gonna try to describe the systematic strategy I say above in a play-by-play manner so that perhaps you have a better idea what it is trying to do.

While the Global Core Equity is based on a global universe of securities, we want to limit the case study to only the US. What I will explain will be done on a global basis.

The universe of US market is made up of companies that we can plot in the following diagram:

We split them into two groups, the larger companies and smaller companies. You will notice that there are much more smaller companies. For each of these groups we plotted them based on how cheap (value) and dearer (growth) and also low profitability to high profitability.

This is what we start with.

The first thing is that for those smaller companies, we want to ELIMINATE the lower profitability and dearer companies. We also want to eliminate those smaller companies with high asset growth.

These are the green dots you see in the diagram above.

Why do we want to do that?

Dimensional won’t eliminate them for no reason.

Based on their research, these are the companies that if systematically held over the long term, the returns are lower.

If you are a fundamental investor, think about it. Would you buy companies that are unprofitable and expensive? You will be apprehensive because you have higher degree of uncertainty whether you are paying good value for companies with no earnings and even more so when they are expensive.

The research shows that over the long term, the numbers support that view.

We also eliminate the companies with asset build up. It is an indirect admittance that for smaller companies, reinvesting back into the companies tends to be poorer return for shareholders.

Once we eliminate these companies we are left with the following:

Now we will apply the following rules in dark black (under Security Weighing) to what is left:

We will overweight the stocks that are cheaper and those that are higher in profitability:

What you have above is the final form.

What you will notice here is that we try to expand the bubbles to be bigger, if we are overweighting them. You will notice that the low profitable and growth large caps are smaller. You still will own them.

The low profitable and cheaper large caps are slightly bigger. What is greatly expanded are the smaller and cheaper companies (the bottom of the small caps are now a swollen blur). You will also notice that the high profitable and dearer small caps is also enlarged.

Which is perfectly explainable because if you have companies that are suppose to be more profitable, an efficient market should priced them not too cheap. This explains why there is an empty space in high profitable and cheap small caps, because… we aren’t gonna find many off those.

And there you have it.

This is not a passive index strategy but it is systematic in that you delegate to Dimensional to do this again and again.

What is the frequency?

There are ETFs that based their holdings on a multi-factor index. 4 times or 2 times a year, they will buy and sell to reconstitute similar to the factor index.

That is NOT what Dimensional does it.

The portfolio manager managing the Global Core Equity have their portfolio management software that will review all the securities daily. And so if there are stocks that gotten cheaper/dearer, the data shows they are more/less profitable, the securities score would change and their relative rankings will also change.

What is the most optimal portfolio will change.

The portfolio manager will then send a list of prospective securities to buy or sell to the trader. The trader’s job is to get the best price so as to minimize the slippage (which will impact your overall return).

1. They have a list of candidates but they don’t have to buy all prospective securities or have more freedom in quantities they will buy because there are more than enough securities that fit the criteria.
2. They will consider some empirical proven shorter term factors such as momentum and short-term reversal. You would understand this if you have invested before if you wish to buy a stock but the momentum is negative, would you buy the stock? Likely you will wait. And that is what the trader would do. The opposite is also true.

The biggest benefit to you is: By now you would probably be able to relate and some would believe this is logically how you would run it.

But you don’t have the time, and also the resources to do this because you have a full time job.

And that is the appeal of these systematic-active strategies.

It is not for everyone but for those who understand them…

Dimensional Global Targeted Value UCITS ETF

The second fund is something slightly different.

The Global Targeted Value UCITS ETF should mirror the same strategy of their Global Targeted Value Funds.

Here are some details about the fund:

Global Targeted Value will give you either:

1. Cheap small and medium-sized companies in the developed world.
2. More profitable small and medium sized companies that are not too expensive in the developed world.

Unlike the Avantis Global Small Cap Value, Dimensional’s fund listed the MSCI World SMID Value as the comparative index. This means that you would get some companies that are closer to mid-sized.

What is the difference between the Global Targeted Value and the Global Core Equity?

The slide below gives a deeper definition of the selection process:

1. Firstly, the Global Targeted Value is not an overweighting strategy. It basically selects the smallest 20% of stocks by market cap and the lowest 50% off stocks by price-to-book (which mean the 50% cheaper ones)
2. It excludes the REITs and utility companies.
3. They will STILL eliminate the small companies that have low profitability and more expensive.
4. They will STILL eliminate the small companies with high asset growth.
5. For the smallest and cheapest (#1 in the slide above), we will get both low or high profitable companies. This is likely understandable because for such small companies, it is difficult to identify companies that have real longer term profitability because of how uncertain the cash flows can be. This group is the reversion to the mean play.
6. For the closer to mid-cap stocks that are cheap, we want to eliminate the really low profitable ones (#2).
7. For those that are small but less cheap (#3), we also want to eliminate the really low profitable ones.
8. Finally, the mid-cap and not so cheap ones, we want to focus on high profitability (#4).

If you have some experience trying to prospect small cap stocks, you might agree with the rules here.

Since Global Targeted Value UCITS ETF is a new fund, we can also take reference from the unit trust, which is also incepted in 2008 to observe the performance against the MSCI World SMID Value and SMID index:

The past 16 years have not been kind to SMID companies. Still, $1 million in 2009 grew to $2.58 million within that period.

Folks may wonder why should we take a chance with small and medium sized firms. If you take a look at my page Financial Returns Data in One Post, under US Small Cap Value, you would realize that it is the most potent thing out there.

Small and mid caps are more volatile companies, but potentially higher return. The empirical evidence do show that.

Given this, you can understand why it is not the usual advise to form the core of your portfolio with something like the Global Targeted Value.

Still, it has not stop some people.

I won’t tell you who has something like this as a significant part of their portfolio but you can guess. It kind of make you guess where their conviction comes from, what is it that they see that you might fail to see.

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.

Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.

Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.

Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.

You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.

His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.

You can read more about Kyith here.