STEPHEN CRANSTON: The smart dimension

Financial Mail
6 April 2017
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Whether you are reading this in Malawi, Kenya or Senegal, you all have the same go to guy for one of the most interesting international fund managers around.

 

Costa Economou from Colourfield, when he isn’t spending his time redesigning the Colourfield Salad (a key feature of the menu at JB’s Corner in Melrose Arch), is the Africa rep for Dimensional Fund Advisors from the US. It has US$500bn under management And this multitasker even finds time for his day job of offering liability driven investing to pension funds.

 

Economou tells me one of the best features of Dimensional is “Farmer & French”. I took this to be one of those overstaffed American sandwiches. In fact he meant Eugene Fama and Kenneth French, who built a more scientific approach to asset management.

 

They are Dimensional’s lead academic consultants. The firm should present proof that their theory works in practice. Robert Merton is an academic consultant and Myron Scholes an independent director. I can still remember them as principals of the Long Term Capital Management hedge fund which was bailed out nearly 20 years ago, after what we now call black swan (unforeseen) events hit the market. It was a victim of the Asian and Russian financial crises in 1997/1998.

 

But Dimensional portfolios are a lot more conservative. They are not gearing up nor taking short positions.

 

Dimensional plays in the space popularly known as smart beta, but it doesn’t like the name. Smart beta is after all associated with Research Affiliates, a rather more lowbrow outfit headquartered close to a very pleasant beach in Southern California. Dimensional breathes the more wholesome air of Austin, Texas.

 

The firm believes it is an active manager: its funds are built around indices, but ones that have been constructed by Fama and French.

 

The core references are growth and value indices for the US, the other developed markets and emerging markets. It also works with high profitability and low profitability indices.

In its global core equity fund, Economou tells me that in constructing its core equity product it looks at factors which should provide systematic expected premiums such as company size, relative price and profitability. So it quacks like smart beta However, in spite of the influence of academics, none of the portfolios runs off an algorithm.

 

The strategy for the global core equity fund worked particularly well in 2016, with a healthy 2.4% premium over the MSCI world index. But it has given a more muted annual outperformance of 0.7% — still a net gain after paying Dimensional’s 0.3% fee — since inception in 2008.

 

Keeping Marriott independent

Last week was one of the bleakest, with the news that Simon Pearse, head of Marriott Asset Management, had died unexpectedly. He did a great deal to build up listed property as an asset class, though he lost confidence in recent years.

 

He also positioned Marriott as a house focused on income, at a time when there was an unhealthy obsession with ephemeral capital gains. And he ensured that Durban kept a toehold in fund management even after the disappearance of its only large financial institution, NBS. A breakaway from Marriott, now known as Bridge, operates in the city. Pearse was strong enough to keep Marriott independent after Old Mutual acquired it. It would have been so much easier to become dull corporate clones — but no chance.

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