FACE TO FACE INTERVIEW Booth gets by with a little help from his (Nobel) friend By Ellen Kelleher (3 November 2013)

Dimensional Fund Advisors, a quantitative shop run from sleepy Austin in Texas, serves as a quasi-laboratory for Gene Fama, one of this years three Nobel Prize winners in economics. Or so says David Booth, its founder. He met Professor Fama in 1969 while studying at the University of Chicagos Business School, which was rechristened the Booth Business School in his honour a few years ago, following a $300m donation. Mr Booth, who became rich on the back of Prof Famas research, remains an enthusiastic disciple of his former teachers principles in the same way yoga practitioners eagerly follow their gurus. My first class at the University of Chicago was taught by Gene Fama, Mr. Booth remembers. That is when my life began to change. He taught me this view of investing that seemed to make sense to me. Back then, Prof Fama, who developed the controversial theory of efficient markets, or the idea that share prices reflect all the information available, was just starting to preach about how tough it is to predict the direction markets will take, and to outpace them. It was not until the 1990s that he and Ken French, a fellow academic, concluded in an explosive piece of research that factors other than beta, namely a companys size as measured by market capitalisation and its book to market ratio, a measurement of its price, influence the ups and downs of share prices. After a stint working as Prof Famas research assistant, Mr. Booth decided academia was not for him. I was in the PhD programme at the time and I wanted to apply ideas rather than try to research them, or as Prof Fama says, Beat em to death. He adds: As Fama tells the story, I walked into his office and said, I know what you do and I dont want to do it. Thats his side of it. In 1981, Mr Booth, who by then had some experience creating index funds, converted the spare bedroom in his cramped apartment in Brooklyn Heights into a trading room and launched Dimensional. He called Prof Fama and asked him to be head of research, a director and a founding shareholder. Gene has been involved since the beginning, says Mr. Booth. Prof Famas friend, Ken French, co-creator of the Fama-French three-factor model, also serves on Dimensionals board. Data mining and Prof Famas tenets for investing are key to Dimensional, which these days has $300bn under management. We try to sift through the data and figure out what seems to get priced in the marketplace, Mr Booth says. There are many different types of risk. In keeping with these ideas, Mr Booth and his researchers refuse to believe that they can outguess the markets. They also hold more shares in smaller companies, lower-priced stocks and companies that are more profitable. A focus on cutting good deals on trades is also important. Execution is more important than anyone realises, says Mr Booth. Our approach gives us a lot of flexibility on any given day on when we buy and sell. For their part, Profs Fama and French, and the rest of the investment committee, make sure the investment policies the fund houses researchers develop do not have unintended consequences. That is where it is helpful to have scientists involved, says Mr Booth. Dimensional has ballooned over the years from an institutional shop into a fund house that sells versions of its retail funds (which hold 60 per cent of its assets) across Europe, Australia and Canada as well as the US. The muscular returns of a number of its equity funds serve as proof for the credibility of Profs Fama and Frenchs investment views. Dimensionals Emerging Markets Value Portfolio I fund, for example, returned 304 per cent in the past decade, which was more double the 145 per cent return offered by the MSCI Emerging Markets index. Its Asia Pacific Small Company Portfolio I fund also gained 214.3 per cent over that period, against a 178.4 per cent return from the MSCI Pacific Ex Japan Small Cap index. Mr Booth does not shut funds down, even if they underperform. We dont come out with something unless we believe in it, he says. We are structuring these portfolios based on long periods of research. They wont outperform in every period. Mr Booth admits that sometimes it is difficult to get his investors to accept his academic theories. In most industries, if you work harder or smarter, you will end up with better results, he says. But markets are a zero-sum game in the sense that the average dollar that is invested in the stock market gets a particular return. He stresses that many investors in the funds he runs will not receive market-beating rewards for the risks they take for decades. We look at 20, 30, 40 years of research . . . We are saying it is difficult to try to gain an edge in the short term, as whatever mispricing there is will be wiped out. When your results are disappointing, it is tempting to deviate from that view of markets. When his line of funds underperforms against their benchmark, Mr Booth and his team differ from conventional money managers who own up to their stockpicking mistakes and pledge not to repeat them. When our results are disappointing, we say it is because risk was not rewarded over that particular time period, he says. If risk were always rewarded, you wouldnt call it risk. Looking ahead 20 years, Mr Booth thinks that as many as five or six factors will decide stocks outperformance as Profs Fama and Frenchs multi-factor research evolves. We think that will just improve portfolio construction. A lone area where Mr Booth thinks his skills are superior to those of Prof Fama is the mechanics of trading. I have been around Fama long enough to know that if I have a different academic opinion than him, I will take his judgment, he says. But he is a scientist. He doesnt get involved in making trading decisions. So, in those matters, Ill take my own judgment. Dimensional Fund Advisors Assets under management: More than $300bn Offices 11 globally Employees: 750 Ownership: Privately held

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