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Money Management

Dimensional’s Booth focused on company growth, boosting Americans’ retirement savings

David Booth might have stepped down as CEO of Dimensional Fund Advisors LP, but the executive chairman is busy overseeing the expansion of the growing company and thinking about how to solve the fact that most Americans are not saving enough for retirement.

The expansion is more concrete. Austin, Texas-based Dimensional is building an East Coast headquarters in Charlotte, N.C., and adding up to 800 employees to the firm's current 1,200-worker base.

But the 70-year-old Mr. Booth, a pioneer of factor-based investing who co-founded Dimensional more than three decades ago, also has a dream of coming up with a better way for Americans to build a retirement nest egg.

"I think in the ideal world, you'd have defined benefit plans," he said in a May 31 interview at the Austin office. Mr. Booth said a guaranteed payment, which is the promise of a traditional defined benefit plan, ensures a better retirement as opposed to a defined contribution plan, like a 401(k), which has become the option for most workers in the U.S.

With the average American 401(k) balance around $60,000, most Americans are not prepared for retirement, he said.

Mr. Booth believes "it is incumbent" for Dimensional to come up with a solution but said he is still wresting with how that could be done.

"We're really waiting for that great, new idea that we haven't thought of yet," he said.

Mr. Booth said the ultimate idea could be a partnership between Dimensional and a technology company, using the expertise of each, in developing a yet-to-be-defined low-cost solution for retirement savings.

"We're managing the money as well as (it) can be managed, but we're not providing for the needs of the individual," he said.

Mr. Booth stepped down in late February from the CEO role at the asset management firm he co-founded with Rex Sinquefield, taking the executive chairman's role. He said the change allowed him to give up day-to-day management responsibilities and plot the firm's long-term growth. The move also answered questions about succession planning, he said.

"Now, if I fall out of an airplane, everyone knows the team that's in place that's running the show."

Succession plan

Dave Butler, a longtime Dimensional executive, was named co-CEO in February, sharing the title with Eduardo Repetto, Mr. Booth's CEO partner since 2010.

Dimensional's latest changes are coming after years of asset growth for the firm, which specializes in factor-based investing. It crossed the $500 billion mark for worldwide assets under management on April 24.

Company statistics show that between Dec. 31, 2012, and March 31, 2017, assets under management for clients from outside the United States have grown more than 50%, from approximately $45 billion to more than $71 billion.

Despite its growing size, the firm remains primarily owned by Mr. Booth, other employees and members of its board of directors. About 70% of the stock is owned by people affiliated with the firm and 30% is controlled by outside investors, according to company statistics.

Pensions & Investments' Largest Money Managers survey showed the firm reached $345.6 billion in U.S. institutional tax-exempt assets in 2016 — a 20.58% growth rate over the prior year. Among the 25 largest managers of U.S. institutional tax-exempt assets, that growth rate was surpassed, only slightly, by Principal Global Investors and the Vanguard Group Inc.

Just 13 years ago, Dimensional had $50 billion in assets under management. Strong investment performance has helped increase the firm's assets and brought net inflows — so much so that the 15-year plan Mr. Booth formulated in 2004 to reach $500 billion in assets under management became a reality two years early.

Mr. Booth said the 2004 plan for the firm, then based in Santa Monica, Calif., involved building investment strategies, continuing scientific-based investment research, adding hundreds of new employees, outsourcing middle- and back-office functions and adding a second office in Austin, which later became its headquarters.

The executive chairman said he began the plan "because I know it seemed we had a lot of momentum for growth." He won't speculate about how big he thinks the firm could become; "$500 billion is such a large number, I can't think about any number bigger than that."

Heading for $1 trillion?

There is still talk, however, about hitting the $1 trillion mark. "Adding a number of people (new employees) may or may not put us above a trillion," said Gerard O'Reilly, the firm's co-chief investment officer and head of research. "It's giving good client service that will hopefully put us above a trillion."

Mr. Booth said Dimensional's expansion in Charlotte came from the thinking: '"We are probably going to have 2,000 people in 10 years; where are they going to all sit?"'

Mr. Booth said the 2,000-employee number is not an exact forecast. "That's just saying it's sensible to be planning for having 2,000 people right now."

More people or not, the Charlotte building — a 282,000-square-foot, eight-story structure costing $94 million — is under construction and scheduled for completion in late 2018.

Mr. Booth said Charlotte was chosen for the new complex because of its affordable living costs, an attraction that had lured many employees to Austin from Santa Monica.

Continued solid investment returns will also help keep the firm growing, consultants and asset owners said. They noted Dimensional has been able to capitalize on the movement from active management, capturing investors interested in a more aggressive passive approach than a standard capitalization-weighted index portfolio.

Roots in Chicago

Dimensional's asset pricing model was developed as a consequence of Mr. Booth's educational pedigree. He was a student and research assistant of Eugene Fama at the University of Chicago Business School in the late 1960s. In 1992, Mr. Fama and Kenneth French, now the Roth Family Distinguished Professor of Finance at Dartmouth College's Amos Tuck School of Business, developed the investment model that identifies small-cap and value stocks as being the principle drivers of equity returns over the long term. In 2012, profitability was added as another factor.

In 2008, the school was renamed the University of Chicago Booth School of Business after a $300 million donation from Mr. Booth. In 2013, Mr. Fama — now the Robert R. McCormick Distinguished Service Professor of Finance at the Booth school — shared the Nobel Memorial Prize in Economic Sciences for his work in finance.

Both Mr. Fama and Mr. French are involved in Dimensional. Mr. Fama is a member of the firm's board of directors and Mr. French, also a board member, is the firm's head of investment policy.

"They (Dimensional) were the first to capitalize on the very comprehensive research that Gene and Ken did to identify the small-cap and value premia that exists, and that's part of the better mousetrap," said Michael Rosen, principal and chief investment officer at institutional investment consultant Angeles Investment Advisors in Santa Monica. "So, whatever the universe is, there's a small-cap and value premium that exists."

Small-cap start

Dimensional started as a small-cap firm but over the years developed a full range of equity strategies as well as a fixed-income franchise. Part of that was a necessity to grow, Mr. Booth noted, because small-cap strategies have capacity limits.

Mr. Booth said the firm has stuck to its knitting, including small-cap stocks in core equity portfolios. He noted that even in large-cap strategies, the firm can find companies with relative smaller capitalizations in keeping with the theories developed by Messrs. Fama and French.

In fact, Dimensional statistics show that its most popular offering is the U.S. large-cap value strategy, with $24.3 billion in assets under management. The strategy has outperformed its benchmark, the Russell 1000 Value index for multiple periods. For the 12 months ended March 31, the strategy returned 22.93% vs. 19.22% for the index. For three years, the Dimensional portfolio returned an annualized 8.77% vs. 8.67%. For the five years, Dimensional's strategy returned an annualized 14.65% compared to the benchmark's 13.13%. For the 10-year period, the strategy had an annualized 6.71% return compared to the benchmark's 5.93%.

One of Dimensional's hallmark strategies, meanwhile, its $15.5 billion U.S. small-cap strategy, underperformed its benchmark on a one-year basis ended March 31. Its 22.49% return compared to the Russell 2000 benchmark's 26.22%. But the small-cap strategy has outperformed the benchmark on a longer-term basis. On a three-year annualized basis, it outperformed the benchmark, 7.71% to 7.22%, and on a five-year basis the strategy returned 13.49% to the benchmark's 12.35%. For 10 years, the small-cap strategy returned 8.33% to the benchmark's 7.12%.

Mr. Booth said it is "absolutely critical" for Dimensional to beat index fund performance. "If we don't outperform index funds, then we don't have a business," he said.

And with good reason. While Dimensional's fees are usually less than active management, they are more costly than index funds. The company cites a 33 basis point weighted average fee for funds. Index strategies can be used by institutional investors for a fraction of the cost.

Dimensional also works to enhance its returns by its trading practices. Jed Fogdall, co-head of portfolio management, said the company will wait days or even weeks to get the right price for a stock because it does not feel compelled to buy a security on a given day.

Consultants say they expect the firm to keep growing.

Russell Campbell, CEO of money management consultant Your Second Opinion LLC, Las Vegas, said Dimensional is able to win institutional clients with strong presentations that document its long-term investment track record.

"Most money managers say things but they can't really prove it," he said. '"Oh, look at our performance,' they'll say. But they can't really prove the specific aspects of the investment process that they use, in fact, result in that higher performance. So you end up wondering, is it luck or is it good management? With DFA you don't have that feeling."