dimensions of expected return · eduardo repetto, director, co-chief executive officer and co-chief...

Dimensions of Expected ReturnResearch and Implementation

October 7, 2014

Eduardo Repetto, Director, Co-Chief Executive Officer and Co-Chief Investment Officer

This information is provided for registered investment advisors and institutional investors, and is not intended for public use.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

#31108-0213

1. Process Design

2. Process Design: Premiums

3. Process Design: Implementation

4. The Process At Work

5. Summary

Agenda

Process Design

Prices Incorporate All Available Information

• Investors consider all

available information when

assessing expected risks

in order to demand a rate

of return.

• Investors set the price

level in order to satisfy the

demanded rate of return.

• Market prices reflect the

discount rate investors applied

to future cash flows, plus the

company’s book equity.

3

All Available Information

Price

Book EquityNews about Cash

Flows

Risk

Considerations

Book EquityExpected Cash

FlowsDiscount Rate

#33694

Investment Process: Premiums

Dimensions of Expected Returns

We should minimize the probability of chasing spurious correlations, imprecisely

targeting the dimensions of expected returns, or pursuing strategies that may not

be profitable after implementation costs.

Guiding principles

• Sensible basis

• Persistent

• Pervasive

• Robust

• Cost-effective to implement in a diversified strategy

5

MarketEquity premium –

stocks vs. bonds

Company Size Small cap premium –

small vs. large companies

Relative PriceValue premium – value

vs. growth companies

Evolution of Asset Pricing

Relative Price refers to the share price (or market cap) of a firm’s stock, divided by a fundamental variable of the firm (e.g., earnings, cash earnings, dividends, net assets). One of the most widely used measures of relative price is the

price/book ratio. Profitability is a measure of the expected total future profits of a company divided by its current book equity.

Small

GrowthValue

Large

Advances in research continue to deepen our understanding of expected returns.

DIMENSIONS OF RETURNS

Small

GrowthValue

Large

Small

Large

Company Higher Expected Return

6

ProfitabilityProfitability premium – high

vs. low profitability companies

Stock Valuation

7

The price

market

participants are

willing to pay

depends on…

What a company

owns minus

what it owes…

Plus, the

company’s

ability to produce

cash flows in

the future …

Discounted

to the present

value at the

required rate

of return.

Price = Book Equity + (Expected) Future Profits

Discount Rate

#33694

Annualized compound returns (%) in US dollars. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns

are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See “Index Descriptions” in the appendix for descriptions of Dimensional and

Fama/French index data. The S&P data are provided by Standard & Poor’s Index Services Group. MSCI data © MSCI 2014, all rights reserved.

Dimensions of Expected ReturnsIllustrative index performance

HIGH

Rela

tiv

e P

rice

Pro

fita

bilit

yS

ize

1928–2013

1996–2013

1975–2013

EMERGING MARKETS STOCKSUS STOCKS NON-US DEVELOPED MARKETS STOCKS

12.339.78

2.55

S&P 500 Index

Dimensional US Small Cap Index

Fama/French International Growth Index

Fama/French International Value Index

10.63

4.236.40

Dimensional Emerging Markets High Profitability Index

Dimensional Emerging Markets Low Profitability Index

SMALL LARGE SMALL LARGE SMALL LARGE

LOW HIGH

LOW

LOW HIGH LOW HIGH

HIGH LOWHIGH LOW

1928–2013

Fama/French US Growth Index

Fama/French US Value Index

12.628.94

3.68

1970–2013

MSCI World ex USA Index (gross div.)

Dimensional Intl. Small Cap Index

1964–2013

Dimensional US HighProfitability Index

Dimensional US Low Profitability Index

12.98

8.264.72

MSCI Emerging Markets Index(gross div.)

Dimensional EmergingMarkets Small Cap Index

12.78 11.11

1.67

1989–2013

1992–2013

9.03

3.88 5.15

Dimensional International High Profitability Index

Dimensional International Low Profitability Index

1989–2013

15.0810.06

5.02

Fama/French Emerging Markets Growth Index

Fama/French Emerging Markets Value Index

8

15.11

9.165.95

15.0710.06

5.01

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

DIFFERENCE

Annualized compound returns (%) in US dollars. Market is Fama/French Market, Treasury Bill is One-Month T-Bill, Small and Large are Fama/French, Low Relative Price is Fama/French Large Value Research, High Relative Price is

Fama/French Large Growth Research, High and Low Profitability are Dimensional Large High and Low Profitability Indexes. The Standard Deviation is the annualized standard deviation of the monthly premium (Market minus T-Bill, for

example). Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index

returns are not representative of actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. See “Index Descriptions” in the appendix for descriptions of

Dimensional and Fama/French index data. Fama/French data provided by Fama/French. US bills from Stocks, Bonds, Bills, and Inflation Yearbook©, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex

A. Sinquefield).

Dimensions of Expected ReturnsIllustrative index performance

9

1927–2013 1975–2013 1927–2013 1975–2013

Market 9.84% 12.52% Small 12.12% 15.58%

Treasury Bill 3.50% 5.00% Large 9.84% 12.34%

Standard Deviation 18.77% 15.71% Standard Deviation 12.95% 10.36%

1927–2013 1975–2013 1975–2013

Low Relative Price 12.00% 14.22% High Profitability 14.99%

High Relative Price 9.44% 11.86% Low Profitability 11.23%

Standard Deviation 14.20% 10.92% Standard Deviation 8.94%

Investment Process: Implementation

Considerations for Portfolio Implementation

11

#30605-0113

We want to focus on… but must be mindful of...

Expected Premiums Implementation Costs

Balancing Expected Premiums with Costs

Effective portfolio implementation requires:

• Deep understanding of how expected premiums behave:

– Over time and

– In an integrated portfolio

• Consistent focus on managing premiums and costs throughout the

investment process

Implications for Portfolio ImplementationEfficiently pursuing premiums in a cost-efficient manner

12


xExpected

Days in

Portfolio

Expected

Daily

PremiumsxTurnover

Cost per Unit

of Turnover

Portfolio needs to:

• Be well diversified and consistent

• Consider multiple premiums

• Keep implementation costs in mind

• Make decisions based on rational expectations

and current information

Please see additional information on Historical US Daily Premiums in the Appendix. Past performance is no guarantee of future results.

Maintaining Strategy Focus DailyAnnual premiums are the accumulation of daily premiums

13


xExpected

Days in

Portfolio

Expected

Daily

Premiums

HISTORICAL US DAILY PREMIUMS

Should you treat any day differently?

Can we forecast when premiums

will show up? If not, daily expected

premiums are the same.

Equity

Premium

(1927–2013)

1.5 bps

Value

Premium

(1927–2013)

Size

Premium

(1927–2013)

Profitability

Premium

(1964–2013)

1.4 bps

1.9 bps

3.2 bps

A robust and efficient process to

select and/or weight securities based

on the dimensions of E(R) seeks to:

• Enhance expected returns

• Avoid unnecessary turnover

Targeting the Desired PremiumsSelecting and weighting securities designed to increase expected returns

Weighting selected securities

• Allocate more than market capitalization

weights to securities with higher expected

returns.

• Allocate less than market capitalization weights

to companies with not as high expected

returns (and achieve desired diversification).

• Consider implementation implications including

competing premiums, turnover, etc.

Selecting securities

• When selecting companies, use robust

definitions of the asset class.

• Consider implementation (turnover)

implications when deciding definitions (e.g.,

low-P/B companies in value portfolios).

Desired Dimension

Oth

er

Dim

ensio

ns

14

• Security prices change;

therefore

– its characteristics change

– its expected return changes

• If the E(R) of a security

changes, we should consider

replacing the security.

• No need to wait for artificial

dates to rebalance.

• Strategies can be structured to

provide continuous exposure to

higher expected returns.

Security Prices Change Every DayAnnual premiums are delivered by different securities

Time

Re

lative

Price

Time

Exp

ecte

d R

etu

rns

A dynamic portfolio management process should consider current

information (prices) to make rational decision based on expectations.

15

4

20

12

2627

54

44

60

US Large Cap US Small Cap All DevelopedMarkets

All EmergingMarkets

Basis

Poin

ts

Manager trading cost data was provided by Investment Technology Group solely for Dimensional and not for any other third party. These materials are highly confidential and are not to be copied, displayed, or transmitted in any form

without the prior written permission of Investment Technology Group. Typical (median) manager trading cost is as of September 30, 2013. Typical (average) spread is one year as of December 31, 2013, source: Dimensional Fund

Advisors LP. Developed international markets are Dimensional’s eligible universe (Canada, Europe, Japan, Asia Pacific, UK).

Maintaining Strategy Focus DailyAnnual premiums are the accumulation of daily premiums

16


xTurnoverCost per Unit

of Turnover

MEDIAN PEER TRADING COSTS

How much should you trade and

how often?

How do you decide which securities

to trade, and how can you avoid paying

too much to trade them?

Typical Manager Trading Cost (bps)Typical Spread (bps)

1. Asset class and profitability filters were applied to data retroactively and with the benefit of hindsight. Returns are not representative of indices or actual portfolios and do not reflect costs and fees associated with an actual investment.

Please see additional information on Historical US Daily Premiums in the Appendix. Past performance is no guarantee of future results.

• The expected future premium of a buy candidate vs.

a current holding;

• The cost of the two trades (and any

competing premiums)

STOCKS MIGRATE

Trading Costs: Meaningful TurnoverTranslating research into practice requires expertise in balancing premiums and costs

Mega Caps

Mid Caps

Small

Value

#30605-0113

Cost to

Buy and Sell–Expected Daily

Premium

Days in

Portfolio x

Daily premiums and daily expected return

differentials are small:

E(RMidBlend – RSmallValue) ~ -0.8 bps1

BALANCING PREMIUMS AND COSTS

Buying/selling of securities needs to balance:

Only consider meaningful turnover by considering the gains

in expected returns vs. the cost of executing the trades.

Mega Caps

Mid Caps

Small

Value

17

1. Manager trading cost data was provided by Investment Technology Group solely for Dimensional and not for any other third party. These materials are highly confidential and are not to be copied, displayed, or transmitted in any form

without the prior written permission of Investment Technology Group. Typical (median) manager trading cost is as of September 30, 2013. Typical (average) spread is one year as of December 31, 2013, source: Dimensional Fund

Advisors LP. Developed international markets are Dimensional’s eligible universe (Canada, Europe, Japan, Asia Pacific, UK).

2. Please see additional information on Historical US Daily Premiums in the Appendix.

Past performance is no guarantee of future results.

Reduce the cost per trade:

• Security prices move every day

• Not all securities leave the desired asset class on the same day

There is no need to concentrate turnover due to:

– arbitrary rebalancing days or

– predefined holding periods

Spreading turnover reduces trading costs.

• Many securities have similar characteristics and expected returns.

• Daily premiums are small compared with immediacy costs.

Have many candidate orders when trading and

Be willing to trade later to avoid paying for immediacy

MEDIAN PEER TRADING COSTS1

Trading Costs: Cost per Unit of TurnoverTypical trading costs can be high

Typical Manager Trading Cost

(bps)

Typical

Spread

HISTORICAL US DAILY PREMIUMS2

3.2 bpsEquity Premium

(1927–2013)

Value Premium

(1927–2013)

Size Premium

(1927–2013)

Profitability

Premium

(1964–2013)

1.9 bps

1.4 bps

1.5 bps

MINIMIZING COSTS PER UNIT OF TURNOVER

Implementation

Costs = Turnover

Cost per

Unit of

Turnoverx

4

20

12

2627

54

44

60

0

10

20

30

40

50

60

70

US LargeCap

US SmallCap

AllDeveloped

Markets

All EmergingMarkets

Ba

sis

Po

ints

18

The Process at Work

US Total Market 1

For illustrative purposes only.

1. Profitability is measured as operating income before depreciation and amortization minus interest expense scaled by book.

Applying Profitability: Index Construction

A total market index focused on the dimensions of

expected returns

Increased emphasis on higher expected return securities:

• Lower relative price

• Higher profitability

• Lower market cap

US TOTAL MARKET 1 INDEX

21

US TOTAL MARKET 1 WITH PROFITABILITY INDEX

Applying Profitability:

HIGH

RELATIVE PRICE

LOW

LOW

PROFITABILITY1

LA

RG

E

RELATIVE PRICE

LOW HIGH

SM

ALL

SIZ

E

LA

RG

ES

MA

LL

SIZ

E

HIGH

#34855-0813

In USD

1. Indices are rebalanced annually and backtested performance results assume reinvestment of dividends and capital gains. Filters were applied to data retroactively and with the benefit of hindsight. Returns are not representative of actual

portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. It is not possible to invest directly in an index, which is unmanaged.

Source: Dimensional using CRSP and Compustat data. CRSP data provided by the Center for Research in Security Prices. Russell data copyright © Russell Investment Group 1995-2014, all rights reserved.

Applying Profitability: Returns and Characteristics

22

#34855-0813

Applying

Profitability:

Russell 3000

Index

Russell 3000

Value Index

US Total

Market 1 Index1

US Total

Market 1 with

Profitability Index1

RETURNS: 1979–2013

Annualized Compound Return 11.98 12.59 13.37 13.74

Annualized Standard Deviation 15.61 14.86 16.29 15.95

Annualized Tracking Error (vs. Russell 3000) — — 2.38 2.11

t-Statistic (vs. Russell 3000) — — 3.36 4.54

CHARACTERISTICS AS OF DECEMBER 31, 2013

Weighted Average Market Cap (millions) $98,844 $104,846 $74,452 $77,812

Median Market Cap (millions) $1,414 $1,227 $1,487 $1,487

Aggregate Price-to-Book 2.35 1.60 2.07 2.32

Weighted Average Profitability/Book 0.34 0.22 0.32 0.39

US Total Market 2




A total market index focused on the dimensions of

expected returns

Increased emphasis on higher expected return securities:

• Lower relative price

• Higher profitability

• Lower market cap

US TOTAL MARKET 2 INDEX

24

US TOTAL MARKET 2 WITH PROFITABILITY INDEX


HIGH

RELATIVE PRICE

LOW

LOW

PROFITABILITY1

LA

RG

E

RELATIVE PRICE

LOW HIGH

SM

ALL

SIZ

E

LA

RG

ES

MA

LL

SIZ

E

HIGH

#34855-0813

In USD.



Source: Dimensional using CRSP and Compustat data. CRSP data provided by the Center for Research in Security Prices. Russell data copyright © Russell Investment Group 1995-2014, all rights reserved.


25

#34855-0813

Applying

Profitability:

Russell 3000

Index

Russell 3000

Value Index

US Total

Market 2 Index1

US Total

Market 2 with


RETURNS: 1979–2013



Annualized Tracking Error (vs. Russell 3000) — — 3.54 3.42

t-Statistic (vs. Russell 3000) — — 2.90 3.66






US Large Cap Low Relative Price

Stocks with lowest

30% of P/B ratios

LA

RG

E

RELATIVE PRICE

LOW HIGH

SM

ALL

SIZ

E Stocks

above

10%

market

cap limit




• Focus on large cap, deep value securities

• Exclude companies with lowest expected returns:

– Lowest profitability and high relative price

• Increased emphasis on higher expected return securities within

selected universe:

– Lower relative price, higher profitability, lower market cap

US LARGE CAP LOW RELATIVE PRICE INDEX

27

US LARGE CAP LOW RELATIVE PRICE WITH PROFITABILITY INDEX


Stocks with lowest

20% of P/B ratios

LA

RG

E

RELATIVE PRICE

LOW HIGH

SM

ALL

SIZ

E Stocks

above

10%

market

cap limit

LOW

RELATIVE PRICE

MID

ME

GA

SIZ

E

HIGH

PROFITABIL ITY 1

LOW

LOWEST

#34855-0813

In USD.



Source: Dimensional using CRSP and Compustat data. CRSP data provided by the Center for Research in Security Prices. Russell data copyright © Russell Investment Group 1995-2014, all rights reserved. 28


#34855-0813

Russell 1000

Index

Russell 1000

Value Index

US Large Cap

Low Relative

Price Index1

US Large Cap

Low Relative Price with


RETURNS: 1979–2013



Annualized Tracking Error (vs. Russell 1000) — 4.80 7.38 6.93

Annualized Tracking Error (vs. Russell 1000 Value) — — 5.22 4.52

t-Statistic (vs. Russell 1000 Value) — — 2.52 3.11






Summary

Summary

Dimensional was founded on the idea of making compelling academic

research investable, and it has consistently sought to add value through

portfolio design, management, and implementation.

Profitability is another example of Dimensional translating research

into application.

Adding this dimension enhances our understanding of expected returns

and enhances our ability to create better solutions for our clients.

30

#30496-0113

Questions?

Appendix

Index Descriptions

33

The Dimensional Indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date

do not represent actual returns of the Index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical

performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

Dimensional US Small Cap Index was created by Dimensional in March 2007 and

is compiled by Dimensional. It represents a market-capitalization-weighted index of

securities of the smallest US companies whose market capitalization falls in the

lowest 8% of the total market capitalization of the Eligible Market. The Eligible Market

is composed of securities of US companies traded on the NYSE, NYSE MKT

(formerly AMEX), and Nasdaq Global Market. Exclusions: Non-US companies,

REITs, UITs, and Investment Companies. From January 1975 to the present, the

index also excludes companies with the lowest profitability and highest relative price

within the small cap universe. Profitability is measured as Operating Income before

Depreciation and Amortization minus Interest Expense scaled by Book. Source:

CRSP and Compustat. The index monthly returns are computed as the simple

average of the monthly returns of 12 sub-indices, each one reconstituted once a year

at the end of a different month of the year. The calculation methodology for the

Dimensional US Small Cap Index was amended on January 1, 2014, to include

profitability as a factor in selecting securities for inclusion in the index.

Dimensional US High Profitability Index was created by Dimensional in January

2014 and represents an index consisting of US companies. It is compiled by

Dimensional. Dimensional sorts stocks into three profitability groups from high to low.

Each group represents one-third of the market capitalization. Similarly, stocks are

sorted into three relative price groups. The intersections of the three profitability

groups and the three relative price groups yield nine subgroups formed on profitability

and relative price. The index represents the average return of the three high-

profitability subgroups. It is rebalanced twice per year. Profitability is measured as

Operating Income before Depreciation and Amortization minus Interest Expense

scaled by Book. Source: CRSP and Compustat.

Dimensional US Low Profitability Index was created by Dimensional in January

2014 and represents an index consisting of US companies. It is compiled by

Dimensional. Dimensional sorts stocks into three profitability groups from high to low.

Each group represents one-third of the market capitalization. Similarly, stocks are

sorted into three relative price groups. The intersections of the three profitability

groups and the three relative price groups yield nine subgroups formed on profitability

and relative price. The index represents the average return of the three low-

profitability subgroups. It is rebalanced twice per year. Profitability is measured as

Operating Income before Depreciation and Amortization minus Interest Expense

scaled by Book. Source: CRSP and Compustat.

Dimensional International Small Cap Index was created by Dimensional in April

2008 and is compiled by Dimensional. July 1981 - December 1993: it Includes non-

US developed securities in the bottom 10% of market capitalization in each eligible

country. All securities are market capitalization weighted. Each country is capped at

50%. Rebalanced semiannually. January 1994 - Present: Market-capitalization-

weighted index of small company securities in the eligible markets excluding those

with the lowest profitability and highest relative price within the small cap universe.

Profitability is measured as operating income before depreciation and amortization

minus interest expense scaled by book. The index monthly returns are computed as

the simple average of the monthly returns of four sub-indices, each one reconstituted

once a year at the end of a different quarter of the year. Prior to July 1981, the index

is 50% UK and 50% Japan. The calculation methodology for the Dimensional

International Small Cap Index was amended on January 1, 2014, to include

profitability as a factor in selecting securities for inclusion in the index.

Index Descriptions

34

The Dimensional Indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to their index inceptions dates. Accordingly, results shown during the periods prior to each Index’s index inception date

do not represent actual returns of the Index. Other periods selected may have different results, including losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical

performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital gains.

Dimensional International Low Profitability Index was created by Dimensional in

January 2013 and represents an index consisting of non-US Developed companies. It

is compiled by Dimensional. Dimensional sorts stocks into three profitability groups

from high to low. Each group represents one-third of the market capitalization of each

eligible country. Similarly, stocks are sorted into three relative price groups. The

intersections of the three profitability groups and the three relative price groups yield

nine subgroups formed on profitability and relative price. The index represents the

average return of the three low-profitability subgroups. The index is rebalanced twice

per year. Profitability is measured as Operating Income before Depreciation and

Amortization minus Interest Expense scaled by Book. Source: Bloomberg.

Dimensional International High Profitability Index was created by Dimensional in

January 2013 and represents an index consisting of non-US Developed companies. It

is compiled by Dimensional. Dimensional sorts stocks into three profitability groups

from high to low. Each group represents one-third of the market capitalization of each

eligible country. Similarly, stocks are sorted into three relative price groups. The

intersections of the three profitability groups and the three relative price groups yield

nine subgroups formed on profitability and relative price. The index represents the

average return of the three high-profitability subgroups. The index is rebalanced twice

per year. Profitability is measured as Operating Income before Depreciation and

Amortization minus Interest Expense scaled by Book. Source: Bloomberg.

Dimensional Emerging Markets Low Profitability Index was created by

Dimensional in April 2013 and represents an index consisting of emerging markets

companies and is compiled by Dimensional. Dimensional sorts stocks into three

profitability groups from high to low. Each group represents one-third of the market

capitalization of each eligible country. Similarly, stocks are sorted into three relative

price groups. The intersections of the three profitability groups and the three relative

price groups yield nine subgroups formed on profitability and relative price. The index

represents the average return of the three low-profitability subgroups. The index is

rebalanced twice per year. Profitability is measured as Operating Income before


Bloomberg.

Dimensional Emerging Markets High Profitability Index was created by

Dimensional in April 2013 and represents an index consisting of emerging markets

companies and is compiled by Dimensional. Dimensional sorts stocks into three

profitability groups from high to low. Each group represents one-third of the market

capitalization of each eligible country. Similarly, stocks are sorted into three relative

price groups. The intersections of the three profitability groups and the three relative

price groups yield nine subgroups formed on profitability and relative price. The index

represents the average return of the three high-profitability subgroups. The index is

rebalanced twice per year. Profitability is measured as Operating Income before


Bloomberg.

Dimensional Emerging Markets Small Cap Index was created by Dimensional in

April 2008 and is compiled by Dimensional. January 1989 - December 1993:

Fama/French Emerging Markets Small Cap Index. January 1994 - Present:

Dimensional Emerging Markets Small Index Composition: Market-capitalization-

weighted index of small company securities in the eligible markets excluding those

with the lowest profitability and highest relative price within the small cap universe.

Profitability is measured as operating income before depreciation and amortization

minus interest expense scaled by book. The index monthly returns are computed as

the simple average of the monthly returns of four sub-indices, each one reconstituted

once a year at the end of a different quarter of the year.

Source: Bloomberg. The calculation methodology for the Dimensional Emerging

Markets Small Cap Index was amended on January 1, 2014, to include profitability as

a factor in selecting securities for inclusion in the index.

Index Descriptions

35

Results shown during periods prior to each Index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance is

hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of dividends and capital

gains.

Fama/French US Value Index Provided by Fama/French from CRSP securities data.

Includes the lower 30% in price-to-book of NYSE securities (plus NYSE Amex

equivalents since July 1962 and Nasdaq equivalents since 1973).

Fama/French US Growth Index Provided by Fama/French from CRSP securities

data. Includes the higher 30% in price-to-book of NYSE securities (plus NYSE Amex

equivalents since July 1962 and Nasdaq equivalents since 1973).

Fama/French International Value Index: 2008–present: Provided by Fama/French

from Bloomberg securities data. Simulated strategy of MSCI EAFE countries in the

lower 30% price-to-book range. 1975–2007: Provided by Fama/French from MSCI

securities data.

Fama/French International Growth Index: 2008–present: Provided by

Fama/French from Bloomberg securities data. Simulated strategy of MSCI EAFE

countries in the higher 30% price-to-book range. 1975–2007: Provided by

Fama/French from MSCI securities data.

Fama/French Emerging Markets Value Index: 2009–present: Provided by

Fama/French from Bloomberg securities data. Simulated strategy using IFC

investable universe countries. Companies in the lower 30% price-to-book range;

companies weighted by float-adjusted market cap; countries weighted by country

float-adjusted market cap; rebalanced monthly. 1989–2008: Provided by

Fama/French from IFC securities data. IFC data provided by International

Finance Corporation.

Fama/French Emerging Markets Growth Index : 2009–present: Provided by

Fama/French from Bloomberg securities data. Simulated strategy using IFC

investable universe countries. Companies in the higher 30% price-to-book range;

companies weighted by float-adjusted market cap; countries weighted by country

float-adjusted market cap; rebalanced monthly. 1989–2008: Provided by

Fama/French from IFC securities data. IFC data provided by International

Finance Corporation.

Index Descriptions

US Total Market 1 Index was created by Dimensional in July 2013 and

represents a portfolio consisting of US companies with an emphasis on

companies with smaller capitalization and lower relative price and is compiled

by Dimensional from CRSP and Compustat. The index excludes REITs, non-

US companies, UITs, and investment companies. US Total Market 1 with

Profitability Index was created by Dimensional in July 2013 and represents

an index consisting of the US Total Market 1 Index with the addition of a

profitability overlay, which overweights companies with higher profitability and

underweights companies with lower profitability. Profitability is measured as

operating income before depreciation and amortization minus interest

expense scaled by book.

US Total Market 2 Index was created by Dimensional in July 2013 and

represents a portfolio similar to US Total Market 1 Index, but with a stronger

emphasis on companies with smaller capitalization and lower relative price

and is compiled by Dimensional from CRSP and Compustat. The index

excludes REITs, non-US companies, UITs, and investment companies.

US Total Market 2 with Profitability Index was created by Dimensional in

July 2013 and represents an index consisting of the US Total Market 2 Index

with the addition of a profitability overlay, which overweights companies with

higher profitability and underweights companies with lower profitability.

Profitability is measured as operating income before depreciation and

amortization minus interest expense scaled

by book.

US Large Cap Low Relative Price Index was created by Dimensional in July

2013 and represents a portfolio of large cap US companies with low relative

price and is compiled by Dimensional from CRSP and Compustat. Large cap

companies are generally defined as the top 90% of the eligible market. Large

cap value companies are defined as large cap companies whose relative price

is in the bottom 20% of the large-cap market after the exclusion of utilities,

companies lacking financial data, and companies with negative relative price.

The index excludes REITs, non-US companies, UITs, investment companies,

and utilities. US Large Cap Low Relative Price with Profitability Index was

created by Dimensional in July 2013 and represents an index similar to the

US Large Cap Low Relative Price Index, but it emphasizes companies with

higher profitability, lower relative price, and lower capitalization. Profitability is

measured as operating income before depreciation and amortization minus

interest expense scaled

by book. Large cap value companies are defined as large cap companies

whose relative price is in the bottom 30% of the large-cap market after the

exclusion of utilities, companies lacking financial data, and companies with

negative

relative price.

36The indices are rebalanced annually and backtested performance results assume reinvestment of dividends and capital gains. Filters were applied to data retroactively and with the benefit of hindsight. Returns are not representative of

actual portfolios and do not reflect costs and fees associated with an actual investment. Actual returns may be lower. It is not possible to invest directly in an index, which is unmanaged.

#34855-0813

The Annual Equity Premium is the average annual Fama/French Total US Market Research Factor. The Annual Size

Premium is the average annual Fama/French US SmB Research Factor. The Annual Value Premium is the average annual

Fama/French US HmL Research Factor. The Annual Profitability Premium is the Average Annual Return on six

Dimensional High Profitability Indexes (Small/Low Relative Price, Small/ Medium Relative Price, and Small/High relative

Price, Large/Low Relative Price, Large/ Medium Relative Price, and Large/High Relative Price) minus the average annual

return on the equivalent six Dimensional Low Profitability Indexes. Dimensional indexes used data from the Center for

Research in Security Prices (University of Chicago) and Compustat. Index descriptions available upon request.

The Dimensional Indices have been retrospectively calculated by Dimensional Fund Advisors LP and did not exist prior to

their index inceptions dates. Accordingly, the results shown during the periods prior to each Index’s index inception date

do not represent actual returns of the Index. Other periods selected may have different results, including

losses. Backtested index performance is hypothetical and is provided for informational purposes only to indicate historical

performance had the index been calculated over the relevant time periods. Backtested performance results assume the

reinvestment of dividends and capital gains.

Returns do not represent actual portfolios and do not reflect costs and fees associated with an actual investment. Daily

premiums are calculated by dividing the annual premiums by 264, the approximate number of trading days in one year,

back to 1927. Profitability is calculated by dividing the annual premiums by 252, the approximate number of trading days in

one year, back to 1964. Past performance is no guarantee of future results. Diversification does not protect against loss in

declining markets.

Historical US Daily Premiums

37

dimensions of expected return · eduardo repetto, director, co-chief executive officer and co-chief...

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