Money Maze Podcast: The Evolution of Multifactor Strategies—with Savina Rizova

Dimensional Global Head of Research Savina Rizova recently explored the world of multifactor, or systematic, investing with Robin Wigglesworth of the Financial Times on an episode of the Money Maze Podcast. Below are some key takeaways from the conversation.

There are so many different flavors of systematic investing that it is hard to give a succinct definition. At Dimensional, we seek to add value in every step of the investment process, from strategy design to portfolio management to trading.

We first identify reliable, long-term drivers of expected returns to build our portfolios around. Then we add value in portfolio management through daily monitoring, in which we evaluate tradeoffs between premiums, costs to pursue those premiums, and diversification. We use information in real-time market prices to evaluate those tradeoffs every day.

The firm’s investment philosophy is based on a belief in competitive markets and the power of market prices. We believe that, in competitive markets, prices quickly incorporate new information and reflect the aggregate expectations of market participants.

Systematic investing can be a reliable and efficient way to manage investments. Historically, people started investing actively. After many years and a lot of research showing the inability to systematically outguess market prices, there has been a big shift to indexing. But studies conducted in the last 10–20 years show that there are unnecessary rigidities with indexing. These rigidities can be avoided by investing in a more intelligent, flexible manner. That flexible, daily implementation is at the heart of how Dimensional manages investments. It is, essentially, the thoughtful implementation of sensible ideas.

There is a whole zoo of factors out there that just appeared in the last couple of decades. We’ve seen a lot of proliferation of different factors and smart beta strategies because of that attempt to identify new, interesting, shiny objects out there that can potentially contribute to a better investment experience. The reality is, only a few of them are reliable, long-term drivers of returns.

Dimensional will launch new solutions when there is strong, well-identified market demand for them; when the investment proposition behind a solution makes sense; and when we see ourselves as able to provide sustainable, long-term value-add in that solution. For a long time, ETFs didn’t allow for the incorporation for systematic-yet-flexible implementation, which we see as a key value-add. Then things changed. In September 2019, the SEC [Securities and Exchange Commission] adopted an ETF rule that made it possible for us to have a lot of flexibility in how we balance our portfolios within an ETF wrapper. As soon as that rule passed, we started preparing to offer ETFs and launched our first ones in 2020.

Systematic investing is even better supported empirically in fixed income. Generally speaking, equities are noisier than fixed income. The price of an equity today depends on the discount rate, but also on the expected future cash flows. Those cash flows are highly uncertain. In fixed income, the cash flows are known in most cases. It’s relatively easy to price a bond and a lot of the movement in bond prices is directly related to yields and discount rates. That relation between market prices or yields and future expected returns is even stronger, more visible, more reliable, more compelling in fixed income than in equities.