Staying Ahead of the Curve: The History of Dimensional Fund Advisors (EP.28)

Episode Summary

Executive Summary: Brad Steinman of Dimensional Fund Advisors Canada explains how the firm’s evidence-based investment philosophy, advisor-centric business model, and disciplined research process shape its products and client relationships. He recounts joining Dimensional after discovering market efficiency research, discusses why the firm embraces multifactor investing but avoids momentum as a standalone factor, defends the mutual fund structure, and shares how Dimensional’s long-term, fee-based approach and selective advisor access support implementation quality. He closes with a personal reflection on happiness grounded in positive psychology and mindfulness.

Main Topics: Brad Steinman’s path to Dimensional (Priority: 5/5): Steinman describes how Fama’s research and Dimensional’s mission led him from traditional asset management to joining the firm, emphasizing the pull of ideas, people, and client-first culture. Dimensional’s philosophy: evidence, expectations, and patience (Priority: 5/5): He explains how Dimensional’s early and ongoing experience with small-cap/value underperformance reinforced the importance of realistic expectations and sticking to a coherent investment philosophy. How Dimensional evaluates academic research (Priority: 5/5): Steinman outlines the firm’s high bar for incorporating new factors: sensible explanation, persistence, pervasiveness, robustness, and cost-effective implementability. Why Dimensional avoids a momentum factor portfolio (Priority: 4/5): He argues momentum is poorly understood and difficult to capture after costs, while still acknowledging it in trading decisions to avoid fighting short-term price trends. Adding profitability as a factor (Priority: 4/5): The discussion covers Dimensional’s process for validating new research, replicating results internally, stress-testing robustness, and implementing only what fits the firm’s portfolio construction framework. Why Dimensional uses mutual funds and selective advisor access (Priority: 4/5): Steinman defends mutual funds over ETFs for implementation flexibility and explains the firm’s selective distribution model as a way to protect long-term investors in commingled portfolios. Happiness and positive psychology (Priority: 3/5): In a personal segment, Steinman discusses meditation, the limits of money/status for happiness, and the PERMA framework as a science-based path to well-being.

Key Arguments: Dimensional’s appeal comes from its evidence-based philosophy and client-first culture, not just its products. Early small-cap underperformance did not derail the firm because investors had appropriate expectations and understood long-term uncertainty. Academic research must meet a high evidentiary bar before becoming a portfolio dimension: it must make sense, persist over time, work across markets, be robust, and be implementable after costs. Momentum is not used as a dedicated factor because its economic rationale is unclear and implementation costs/turnover often prevent live funds from capturing it effectively. Dimensional does not ignore momentum; it incorporates it implicitly in trade timing to avoid buying/selling against short-term price trends. Profitability was added only after internal replication and stress testing showed it was robust and compatible with the firm’s multifactor framework. Mutual funds can offer better portfolio management flexibility than ETFs because trading can be spread continuously rather than concentrated around index reconstitution dates. Selective advisor access and commingled portfolios are meant to preserve economies of scale and prevent performance drag caused by short-term trading or performance chasing. The advisor channel was chosen deliberately because fee-based advice aligns incentives with clients and reduces conflicts common in commission-based distribution models. Happiness is better pursued through relationships, meaning, engagement, and mindfulness than through money, status, or possessions.

Data Points: Dimensional global assets under management: in excess of $700 billion - Hosted conversation introduction describing Dimensional’s scale worldwide Dimensional Canada assets under management: around $15 billion - Mentioned by Brad Steinman during the intro and discussion Year Brad Steinman joined Dimensional: 2002 - He joined after being drawn to the firm’s philosophy and mission Time period of his initial aha moments at Dimensional: late 1999 / early 2000 - He attended an introductory conference around this time Worst historical period for small vs. large stocks: about 7 years - Steinman said the early Dimensional period was the worst such stretch in history Growth of the business during that early period: from zero to $7 billion - He cited the firm’s growth despite weak small-cap performance Dimensional Canada growth: from zero to $15 billion - Used as evidence that client understanding and patience matter Dimensional research staff: more than 80 people - He described the internal research function Researchers with PhDs at Dimensional: 19 - Within the internal research group Academic/advisor educational events in 2018: 65 events - Steinman used this to illustrate the firm’s commitment to education Participants in 2018 advisor events: almost 5,000 - Attendance across Dimensional’s educational events Start of advisor business: 1989 - He referenced early advisor-channel development Publicly available live-funds momentum research: not quantified - Steinman noted Dimensional had researched live funds trying to capture momentum and found most failed after fees PERMA model dimensions: 5 - Positive psychology framework Steinman cited for well-being Merton Miller and Myron Scholes involvement: early board members/advisors - He told the story of recruiting academics early in Dimensional’s history

Pivotal Quotes: "if you can find someone who does what Dimensional does, better or cheaper, you have an obligation to use them because you don't work for Dimensional, you work for your clients" — Dan Wheeler (quoted by Brad Steinman): Steinman described his first Dimensional conference as a formative moment in understanding the firm’s client-first culture "the most important thing about an investment philosophy is that you have one you can stick with" — David Booth (quoted by Brad Steinman): Used to explain why long-term expectations and discipline matter more than chasing recent performance "momentum doesn't cause us to trade, but it may cause us not to trade" — Ken French (quoted by Brad Steinman): Steinman summarized how Dimensional accounts for momentum without building a dedicated momentum strategy

Implications: Listeners should expect Dimensional-like strategies to rely on patience, evidence, and cost-aware implementation rather than chasing every academic anomaly. For advisors, culture and client alignment matter as much as factor exposure.