It seems like the Dimensional World Equity Fund has consistently underperformed as compared to the MSCI All Country World Index since inception, whether is it in GBP or SGD. Why does Endowus use it? - Seedly
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Anonymous

Asked on 05 May 2020

It seems like the Dimensional World Equity Fund has consistently underperformed as compared to the MSCI All Country World Index since inception, whether is it in GBP or SGD. Why does Endowus use it?

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Hi Anon, to understand why EndowUs uses Dimensional Fund Advisor for the equity allocation, we need to see Fama French 3 factor model.

The current underperformance is only a recent issue. Basically the empirical research shows 3 things.

1) Small companies beat large companies over a long period of time.

2) Value stocks beat growth stocks over a long period of time.

3) Profitable companies beat non profitable companies every time.

What has happened over the last decade and a bit more is that the size premium (small vs large) and the value premium (value vs growth) hasn't showed up.

In the last decade or so, large cap growth has been winning.

This could be a new normal, but we don't have enough data for it.

Possibly due to globalisation and passive indexing which favours lather companies due to how indices are market cap weighted.

But the 90+ years of previous data shows that these dimensions will still prevail.

Thus, taking a long term view with tilting your portfolio towards small cap value stocks unlike the index benchmark which is market weighted and thus tilts towards large cap growth, can still give you out performance over a decade or two decades long.

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Lim Boon Tat
Lim Boon Tat, Mathematics at Cambridge University
Level 6. Master
Answered on 05 May 2020

Based on my reading of their website and blogposts, Endowus have a slight bias towards "quantifiable" trends backed by copious amounts of research and data. The Dimensional funds uses a proprietary framework (i think called Dimensions) to evaluate the "value" and "quality" of a company, and the world equity fund in particular tries to identify value and quality in small cap companies, whereas the MSCI tends to favour large and mid cap companies (like most other indices). My personal opinion is that you should (i) decide whether to bet on the (A) the world, (B) america or (C) emerging markets or (D) some random group of companies, and (ii) decide whether to buy a standard ETF or still an actively-managed ETF.

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