You don’t need to be a rocket scientist to work at Dimensional Fund Advisors, but Gerard O’Reilly sees it as an asset, particularly when it comes to problem-solving. Now the Co-CEO and Chief Investment Officer of one of the fastest-growing US investment businesses, Gerard received a Ph.D. in aeronautics before entering fund management, attracted to Dimensional because of the opportunity it afforded him to learn from the world-leading economists at the company; including Eugene Fama, Myron Scholes, Merton Miller, Robert Merton, and Ken French. We recently sat down with Gerard to discuss the firm’s research-based culture and rules-based approach to investing. In this episode, we get into the nitty-gritty regarding Dimensional’s distinctive portfolio management decisions and the data sources they draw from and Gerard answers some technical questions regarding risk assessment, factor tilted portfolios, operating profitability, goodwill, and more. We also touch on the value of combining multiple metrics, why small-cap stocks deserve a place in your portfolio, and some of the biggest changes that Gerard has witnessed in Dimensional portfolios over the past decade, as well as how he applies his scientific learnings to make unique portfolio adjustments and some of the various benefits of Dimensional’s integrated approach. Make sure not to miss this informative, insightful, and in-depth conversation with Dimensional CIO and Co-CEO, Gerard O’Reilly!

Timestamps:
0:00 Intro
4:02 Welcome Gerard O’Reilly
14:20 What criteria do variables need to meet before they are considered dimensions of expected returns in Dimensional’s process?
17:50 At a high level, what sources of information does Dimensional draw from to make portfolio management decisions?
21:53 How does Dimensional decide between under-weighting and entirely excluding securities in portfolios?
24:45 Why does Dimensional use operating profitability?
32:19 How does Dimensional deal with goodwill?
41:34 How does Dimensional deal with internally developed intangibles?
47:04 What do you think about the idea that the world has changed so much since Fama and French’s initial research that their findings are no longer valid?
55:43 How does Dimensional target value and profitability together?
59:26 As Dimensional continues to grow, how do you think about capacity for the investment strategies that own small and micro cap stocks?
1:06:18 How important is security lending revenue to the expected returns of Dimensional funds?
1:12:45 How did Dimensional decide to pursue the credit premium?
1:17:28 What are the biggest changes within Dimensional portfolios over the last 10 years?
1:20:16 What are some smaller changes that people may not have heard about, but are still important?
1:27:30 Do you have any examples of seemingly compelling academic papers that Dimensional Research has assessed and rejected for use in portfolios?
1:30:19 Dimensional only recently started publishing internal research on SSRN where anyone can read it, whereas previously all of that research was behind the advisor login. How was that decision made?
1:33:05 What is the “next big thing” that Dimensional Research is working on?
1:34:47 What do you think is the most difficult part of Dimensional to replicate?
1:39:53 What do people need to be aware of in comparing backtests?
1:42:25 What is something that you have learned from a competitor?
1:45:4 What are the commonalities between aeronautics and asset management?
1:48:45 - ICAPM


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‘Five Things I Know about Investing’— Five Things I Know about Investing | Dimensional Fund Advisors
‘Intangibles Are Noisier than You Think’ — Intangibles Are Noisier than You Think
‘Fundamentally, Momentum is Fundamental Momentum’ — Fundamentally, Momentum is Fundamental Momentum by Robert Novy-Marx :: SSRN