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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
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
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%
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
Expected Premiums Implementation Costs
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
Expected Premiums Implementation Costs
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
Expected Premiums Implementation Costs
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
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
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 2 INDEX
24
US TOTAL MARKET 2 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
25
#34855-0813
Applying
Profitability:
Russell 3000
Index
Russell 3000
Value Index
US Total
Market 2 Index1
US Total
Market 2 with
Profitability Index1
RETURNS: 1979–2013
Annualized Compound Return 11.98 12.59 13.75 14.23
Annualized Standard Deviation 15.61 14.86 16.52 16.24
Annualized Tracking Error (vs. Russell 3000) — — 3.54 3.42
t-Statistic (vs. Russell 3000) — — 2.90 3.66
CHARACTERISTICS AS OF DECEMBER 31, 2013
Weighted Average Market Cap (millions) $98,844 $104,846 $66,676 $68,244
Median Market Cap (millions) $1,414 $1,227 $1,487 $1,487
Aggregate Price-to-Book 2.35 1.60 1.87 2.04
Weighted Average Profitability/Book 0.34 0.22 0.27 0.33
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
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
• 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
Applying Profitability:
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.
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. 28
Applying Profitability: Returns and Characteristics
#34855-0813
Russell 1000
Index
Russell 1000
Value Index
US Large Cap
Low Relative
Price Index1
US Large Cap
Low Relative Price with
Profitability Index1
RETURNS: 1979–2013
Annualized Compound Return 12.03 12.51 14.46 14.77
Annualized Standard Deviation 15.46 14.83 17.75 17.10
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
CHARACTERISTICS AS OF DECEMBER 31, 2013
Weighted Average Market Cap (millions) $107,368 $113,842 $72,192 $76,385
Median Market Cap (millions) $7,522 $6,547 $9,108 $9,109
Aggregate Price-to-Book 2.37 1.62 1.25 1.42
Weighted Average Profitability/Book 0.36 0.22 0.19 0.22
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
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
Depreciation and Amortization minus Interest Expense scaled by Book. Source:
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
Depreciation and Amortization minus Interest Expense scaled by Book. Source:
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