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Designing a robust portfolio requires considerable expertise, data, and experience. And while there are plenty of published articles that can guide how you build your portfolio, they are not investment solutions by themselves. Wei Dai is the Head of Investment Research and Vice President at Dimensional Fund Advisors, and she joins us today for a comprehensive and informative conversation on portfolio design for higher returns. Her background includes a Doctor of Philosophy degree in Statistics, Operations research, and Financial Engineering from Princeton. She has also earned a bachelor's degree in mathematics and applied mathematics from Zhejiang University. Her work has been published in multiple journals, including The Financial Analysts Journal. She has also collaborated on articles with esteemed figures such as Professor Robert C. Merton and Robert Novy Marx. In our conversation with Wei, we explore the contents of these articles, key findings from research conducted by Dimensional Fund Advisors, and how they are implementing this knowledge in their portfolios. We discuss the fundamental aspects of portfolio design, like expected return, risk, and costs, with Wei providing a detailed breakdown of each subject. There’s a lot to be learned from today’s conversation, and while things get pretty technical, you are in very capable hands! Tune in for a fascinating dive into the latest research on portfolio design and much more.
Timestamps:
0:00:00 Intro
0:04:46 The main risk premiums that Dimensional targets in portfolios
0:06:51 How the magnitudes of the expected size, value, and profitability premiums vary across regions
0:10:27 Some typical approaches to pursuing multiple premiums in a portfolio
0:12:41 The main trade-offs with these different approaches
0:19:54 Some of the ways to approach assigning individual security weights, given a desired level of factor exposure
0:22:43 How Dimensional approaches assigning individual security weights
0:30:42 How investors should decide whether to currency hedge their foreign asset exposures
0:35:13 Why timing exposure to the premiums is so tempting
0:40:31 The timing strategies that worked in Wei's research
0:48:27 The implications of this research when pursuing premiums
0:50:50 The importance of diversification to capturing the premiums
0:56:20 What investors should look for when choosing a systematic manager
1:07:09 How reversals are related to liquidity
1:12:20 How Dimensional uses all of this information in portfolios
1:21:22 Wei defines success in her life
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582.
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — [email protected]
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Wei Dai on Linkedin — https://www.linkedin.com/in/wei-dai-64a3071a/
Wei Dai’s Academic Papers — https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=2888456
Dimensional Fund Advisors — https://www.dimensional.com/
Papers From Today’s Episode:
Assessing the Relative Magnitude of Premiums — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3981766
Pursuing Multiple Premiums: Combination vs. Integration — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3793594
Weighting for the Right One: Weighting Scheme Design for Systematic Equity Portfolios — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4016481
To Hedge or Not to Hedge: A Framework for Currency Hedging Decisions in Global Equity & Fixed Income Portfolios — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3703333
Another Look at Timing the Equity Premiums — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4586684
Premium Timing with Valuation Ratios
How Diversification Impacts Investment Outcomes: A Case Study on Global Large Caps
How Diversification Impacts the Reliability of Outcomes — https://carlsoncap.com/wp-content/uploads/DFA_-How-Diversification-Impacts-the-Reliability-of-Outcomes.pdf
On the Valuation of Performance Fees and Their Impact on Asset Managers’ Incentives — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3686987
Reversals and the returns to liquidity provision — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4339591