Since 1981, Dimensional Fund Advisors of Santa Monica, Calif., has based its investment style on academic research. Earlier this year, the firm decided to try to replicate the success it has had in the U.S. in Europe. Dimensional hired David Salisbury, former chief executive of Schroders, in March to serve as chief executive of DFA Ltd., its London office. In April, Philip Nash joined DFA as marketing director from Barclays Global Investors.
Mutual Fund Market News' Andrew Brent recently discussed DFA's new European initiative with both Salisbury and Nash. An edited version of their conversation follows.
MFMN: When did DFA open the London office?
Salisbury: Dimensional has been in Europe in the form of a joint venture since 1986 and then directly through its own subsidiary since 1991. But that has only been managing European investments for U.S. clients. So it's literally with my arrival on the first of March and then Philip's arrival that we have started the business development effort for local clients.
MFMN: What prompted DFA to begin going after European clients?
Salisbury: Firstly, I think the fact that we've built up a pretty good track record in managing money in Europe over the past nine or 10 years. That's important, number one. Secondly, our academic approach is attractive to institutions in Europe, which are increasingly looking for scientific solutions, rather than active management. And we've also had an operation in Australia for five years that is beginning to be quite successful. I think David Booth and Rex Sinquefield, who founded Dimensional, thought that they could repeat the same success in Europe.
It also happened to be the case that while I was at Schroders, we provided capital to Dimensional to establish themselves, and I personally sat on the board for eight years before Schroders sold its investment in 1996. When I left Schroders last August, David Booth picked up the phone and said he was interested in talking with me about a venture in Europe. We immediately began looking for a marketing director and found Philip.
MFMN: In terms of offering products to European institutions, can you use DFA's existing products or do you have to register new ones in Europe?
Salisbury: Good question. We could sell the existing products in Europe, but our U.S. funds are heavily invested in U.S. securities and our international funds tend to be non-U.S. European investors interested in domestic funds would want to invest in European securities and those investing in international funds would want to include U.S. stocks.
We have decided to set up a family of funds in Dublin, Ireland for European investors and may set up another series of funds in the U.K. specifically for English investors because English investors find funds domiciled within the U.K. more attractive.
MFMN: How many funds are you planning to launch?
Salisbury: We are launching three small-cap value funds each for the U.S., the U.K. and Continental Europe; two market-wide value funds for Continental Europe and the U.K.; and a global short bond fund.
These initial six funds, domiciled in Dublin, are approved and available, although they are not yet funded because we're only just starting our marketing campaign. We wanted to have something in our quiver before we started.
And we also have quite a successful history in fixed-income management, so we may offer those types of funds as well.
MFMN: Within Europe, is it possible to have a single marketing strategy for the entire region? Or is it crucial to have a separate strategy from country to country?
Nash: I think the answer to that question is both yes and no. I think there is a single strategy that one can adopt and implement in reaching the institutional market. There are a significant number of influential institutions operating in Europe with sizable assets that are up to speed with what's happening in the U.S. investment marketplace. We regard these highly sophisticated institutions as a very attractive target segment for us, given that Dimensional is a sophisticated academic investment manager with high quality products and research.
However, Western Europe is still a highly fragmented region, and the country factor is still very heavily dominant in the savings and pension market across Europe. There are many different regulations throughout Europe, and investors there have markedly different investment behavior. You can see this by looking at the exposure to equities on the part of U.K. institutions and compare that to the equity exposure on the part of French or German institutions, and it is very different, indeed. There are lots of perfectly good reasons why that is the case, such as various tax and accounting codes.
MFMN: Will this mean that you will have to approach institutional investors in each country differently?
Nash: Yes, but because we are a relatively small investment firm, it can actually be somewhat easier for us than for a giant such as Fidelity. Because we're smaller, we can be more focused and speak just to the people we think will be very sympathetic toward us.
However, in terms of tackling the retail segment of the asset management industry, clearly a firm of the size of Fidelity has got huge resources that it can throw at that market. We're much more limited in that regard, and we therefore have to be much more careful about trying to pursue the retail market, particularly in some countries where the barriers are higher than elsewhere. Markets in Southern Europe, including Italy, Spain and France, are quite tricky.
MFMN: What, then, are the key markets for you on the institutional side and will you spend more time in those markets?
Nash: If you look at the way savings have developed across Western Europe, with the U.K. as a good example, savings have been channeled quite effectively through the classical defined benefit pension funds. So a lot of the people in the U.K. have a reasonable level of pension fund savings.
Elsewhere in Europe, the pension segment is very underdeveloped, and individual investors have taken it upon themselves to save. In other words, people have bought unit trusts, they've bought insurance policies, they've put money under the mattress, wherever they have found opportunities to hide money away. That means that the savings environment has become less institutionalized in those counties.
So for us, looking at Europe, we would tend to look at markets that have become more institutionalized because it's in an institutional environment that sophisticated equity strategies become more appealing. If you ask a general man on the street how his investment is allocated, by and large, it'll be pretty conservative. It's only when you pool assets into very large chunks, with sophisticated management and administration on top of that, that you can start taking more risk. That's a generalization, but it's the way I see things.
Countries where the savings industry has become more institutionalized include the Netherlands, parts of Scandinavia, Switzerland and the U.K.
MFMN: How do you educate people about DFA's products? Do you do any advertising in institutional trade magazines or the like?
Salisbury: I don't think the company has ever advertised anywhere in its 20-year history. We've relied on you and your peers in the journalism field to be one channel. Otherwise, it's been through speaking at conferences, through the academic recognition that is afforded to Eugene Fama and Kenneth French, who are the two primary U.S. professors behind our work. And we've relied on getting out and talking to clients ourselves directly.
MFMN: Have you set any goals for the number of clients you want to secure in the next few years?
Salisbury: I think it's always terribly dangerous to make these targets because people like yourself then remind us when we either don't beat them or beat them by a lot. We believe we can establish a profitable niche business within three years. In the longer term, it seems to me that the opportunity for Dimensional in Europe is comparable to the opportunity we have had over the last 20 years in the U.S.
MFMN: What do you think the impact will be of the new amendment to the UCITS directive?
Nash: On the specific point of money funds and fund of funds falling under the UCITS umbrella, I have a suspicion that cash management will become much more of a recognized asset class than it has been in Europe in the past. In the United States, people are very comfortable using money market funds, whereas the European cultures tend to have money in the bank.
On the fund of funds issue, the immediate thing that strikes me is that hedge funds will benefit from having the fund of funds being a recognized entity. It seems to be that the preferred way that institutions are going into hedge funds is to buy a fund of funds rather than try to select individual hedge fund managers. Again, that's a trend we're pretty comfortable with.
MFMN: It was my understanding that Mr. Nash is responsible for marketing in the Middle East as well. Is that correct?
Salisbury: The operation here in London will cover Europe, the Middle East and Africa. Basically, if you divide the world into three, you have the Americas, you have the European time zone, including the Middle East and Africa, and then you have Asia. We actually have a member of our team based in Santa Monica covering the Middle East, but ultimately Philip is in charge of marketing for the whole area.
MFMN: Broadly speaking, what does marketing to institutional investors in the Middle East entail? I imagine that there are some significant differences from marketing in Europe.
Nash: Well, there are significant differences. Just on the simplest level, in the Middle East there are a number of institutions that are of very high net worth. These have got wealth that has emerged from oil revenues and it needs to be saved in some shape or form. So we think that there's a natural equity or at least long-term investment orientation to some of those big international-type organizations. Those are ones that we, like many other asset managers, will be targeting. Unlike Europe, in the Middle East, much of the wealth tends to be concentrated in a much smaller number of hands. It's not so broadly based. So our ambitions will be very much to focus on those large-scale institutions.
We will approach these investors the same way we would any other sophisticated institution. They ask exactly the same questions as a U.K. consultant or a West Coast consultant.
MFMN: Have the increased tensions in the Middle East had any impact on those institutions' investments?
Nash: No. That wealth needs to be saved irrespective of the current political conditions.
Salisbury: And, of course, the vast majority of it is invested outside the region. In that sense, the portfolio carries on, regardless of the political issues in the region.
