RR

July 2, 2020
Episode 105: Dimensional's ETFs, Private Equity, and Prescribed Rate Loans
With private equity investments increasing in popularity, you may feel the pressure to expand your portfolio. Today’s episode, we look at the data behind private equity returns to see if these investments add something to your portfolio that you couldn’t get elsewhere. But first, we discuss some big news - that slow-moving Dimensional Fund Advisors are entering the ETF marketplace. After looking at the implications of this move, we use a Harvard paper as our springboard into the topic of private equity. By exploring the shift in demand for private equity, the paper establishes the context for why investors, especially institutions, are seeking higher returns. Looking at research from AQR, we talk about their finding that private equity returns are overvalued, despite them being historically good investments. You’ll hear how the risks underlying private equity are obscured by a ‘return smoothing effect’ and why people are willing to overpay to get smooth returns. We examine how the gap between private and public equity returns has narrowed along with AQR’s argument that market changes have caused private equity investments to perform poorly. After AQR, we move onto a paper by Erik Stafford which shows that small-cap investing yields similar returns to private equity - with the advantage that you don’t have to pay high private equity fees. We round off the episode with a discussion on the benefits of spousal loans before talking about this week’s bad financial advice. This is a valuable episode for those wondering about adding private equity to their portfolios. Listen to find out why that might not be in your best interest.
Key Points From This Episode:
0:00 Updates on our brilliant future guests - Jim Stanford and William Bernstein.
4:50 The big news; Dimensional Fund Advisors are entering the ETF marketplace.
13:12 The benefits of ETFs - if you want out then you have to pick up the spread.
15:39 Other Dimension news; 16 Canadian funds will get a management fee reduction.
17:38 Hear about Capital and Ideology, Benjamin’s book of the week.
19:26 How private equity is becoming increasingly popular.
37:00 Why IRRs, as opposed to PMEs, can be easily gamed, rendering them unreliable.
47:06 How Erik Stafford’s paper agrees that public equity risk is under-stated.
54:24 How spousal loans allow your partner to make investments with your money.
1:06:16 Hear the show’s bad advice of the week; the return of 90s investment ideas.
Books From Today’s Episode:
The Four Pillars of Investing - amzn.to/2AJc0lO
Capital and Ideology - amzn.to/2WnzPaK
Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/podcast/105
‘Looking for Alternatives: Pension Investments Around the World 2008 to 2017’ - www.hks.harvard.edu/centers/m...
AQR - www.aqr.com/
‘Demystifying Illiquid Assets: Expected Returns for Private Equity’ - www.aqr.com/Insights/Research...
Erik Stafford - www.hbs.edu/faculty/Pages/pro...
‘Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting’ -www.hbs.edu/faculty/Pages/ite...
McKinsey Private Market Report 2019 -www.mckinsey.com/~/media/McKi...
How persistent is private equity performance? Evidence from deal-level data - www.sciencedirect.com/science...
The Rational Reminder is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The funds and portfolios discussed are examples only and may not be appropriate for your individual circumstances.

[@Thomas-sb2fg]

Thank you mr. Ben Felix for this excellent content.

[@BenFelixCSI]

And Mr. Cameron Passmore.

[@Jordan-zp4tv]

Thanks Ben for this wonderful content! Cameron Passmore too!

[@cameronpassmore1561]

Thanks. I am here to make Ben look good :)

[@stevo4535]

Love these videos

[@tbarbuto2345]

Why won't dimensional become another statistic in the active vs passive debate?

[@jamescarroll489]

The time tags are awesome. Thanks so much for them. Lost some audio at the end. Is that intentional?

[@michaelrodgers6675]

What's the advantage of Avantis or DFA vs a Small cap Vanguard etf? I don't totally follow do they approach getting factor exposure in a smarter way?

[@eBuddy1999]

Does anybody have a link to a model portfolio with Dimensional ETFs?

[@usaball9190]

As a child, I wanted to work for Wall Street in the hope of bettering humanity, good pay in Wall Streets seem to be Private Equity Analyst or Hedgefund managers which is borderline scam...

[@RRR20238]

Hi, Ben. Can you give a hint where can I learn how to calculate expected outperformance of ETFs like you do in your factor investing with ETFs paper? My google skills failed me

[@BenFelixCSI]

It's a rough estimate, but you take the historical premiums and multiply them by the regression coefficients for the fund. If a fund has an SMB coefficient of 0.2 and SMB was historically 2%, the fund would have captured 40 bps of excess return. I treat any coefficient with a t stat less than 2 as 0.

[@RRR20238]

Ben Felix thanks! Do I understand correctly that for the Market factor (unlike other factors) I should first subtract 1 from the ETF’s MKT coefficient before multiplying it by historical MKT premium from Ken French’s data? E.g. if ETF’s MKT is 0.93 and historical MKT premium is 5.09, then I get (0.93-1)*5.09= -0.36

[@BenFelixCSI]

@@RRR20238 That is correct.

[@paulf1113]

What do you make of Ray Dalio's prediction? And Michael Burry's argument about the index bubble?

[@BenFelixCSI]

I don't put much weight on what either of them say. I haven't done anything on Dalio, but here's something on Burry: kzbin.info/www/bejne/jaeToX2ebdJ5oZI

[@paulf1113]

@@BenFelixCSI So you aren't too concerned about Dalio's next Great Depression/paradigm shift talk? If not, is this because you don't think much to Dalio, and therefore are not too concerned about his particular contribution to the debate, but that you do think there are other legitimate reasons to be concerned about a second great depression, or is it because you do not believe that the current situation is one from which a depression is likely to follow? I have no side this, as in I'm not a Ray Dalio fan, I have just seen what he has been saying, and would like to hear any counter arguments given that I would obviously prefer it if there wasn't a great depression on the way, and I'd prefer to have some good reasons not to be thinking there will be one. I appreciate you replying and will watch the video you sent. Thanks.

[@BenFelixCSI]

@@paulf1113 It's all speculation. Nobody, including Dalio, can predict the future.

[@jackpalmer6253]

Control f made the free pirated pdf textbooks in university absolute gold

[@InvestWithQueenie]

Nice video well done 😊

[@areanu1]

Hello Ben, I will dare to ask you once again regarding your Factor Investing whitepaper (too shy to trouble you via email so I'll try here). 1. As of right now, would you still pick IJS to get the small cap value exposure? 2. For a beginner DIY investor from an EM country with no concern for the US estate/dividend taxation and "anti-home country bias", is something like VTI+VXUS+IJS a decent simplification of your 6-ETF portfolio? I currently hold it as 40/40/20, but I plan to shift it to 40/45/15; I'll be only rebalancing a few times a year.

[@RacoonFighter]

Avantis has the best Small Cap Value etfs in the market right now

[@BenFelixCSI]

IJS is out. For question 2, I can't give specific advice here.

[@atableinthewilderness680]

You can look up the factor regressions on different etfs and compare them to their expense ratios. IJS is still good for .25 mer unless you want to tilt even more, but youll be paying more. On a side note, IJR is a blend but the regression tables show a good amount of value and a bit of a quality tilt as well. Only 6 bps mer.

[@atableinthewilderness680]

Just stay away from VIOV. Its only 15 bps mer but it was a nightmare when i tried to add/reduce because of the volume.

[@areanu1]

@@BenFelixCSI Could you please elaborate a bit - do you suggest that a DIY investor should not seek factor exposure (due to complexity, costs or ineffectiveness) or do you simply mean there are better alternatives than IJS for doing so?

[@johnmcclane2401]

drop a like help the podcast grow!

[@RRR20238]

Screw private equity funds! They killed Toys R Us with their leveraged buyouts

[@michaelrodgers6675]

Amazon probably did more to kill Toys R Us than anyone else