ON THE COVER A calendar year of Dimensional’s global equity trading is presented as a ring of fifty-two weeks of activity. The inner blue spectrum represents buy volume for all strategies; the outer orange spectrum is sell volume. As a snapshot of market movement, portfolio rebalancing, and client purchases and redemptions, this calendar gives a sense of the scope of Dimensional’s global trading capability. 2011 Week 1 (January) Week 26 (June) Marketwide MARKETWIDE LARGE CAP Large Cap All Sells ALL CORE CoreSELLS SMALL CAP Small Cap TARGETED Targeted MICRO CAP Micro Cap Marketwide MARKETWIDE Large Cap LARGE CAP All Buys ALL Core COREBUYS Small Cap SMALL CAP TARGETED Targeted MICRO CAP Micro Cap Source: Dimensional. Chart data based on total volume of all equity trades for 2011, using closing FX rate for the date of each trade.
ACROSS THE WORLD A look at Dimensional’s trading volume over the last five years paints a picture of growth despite market volatility. Since 2007, fixed income volume has grown in concert with new strategies, including many that deliver currencies and yield curves beyond the US. Meanwhile, the distribution of equity volume has begun to settle evenly across Dimensional’s three trading operations in London, the US, and Sydney. Dimensional has also increasingly shifted its trading volume to Direct Market Access. By accessing trading venues directly, Dimensional can execute in a more cost-effective and sensitive way. FIXED INCOME TRADING: INTERNATIONAL UNITED STATES EQUITY TRADING: AUSTIN/ SANTA MONICA SYDNEY LONDON Q1 2007 2008 2009 Behind every Dimensional investment strategy is a commitment to rigorous ORDER-GENERATION academic research, transparent portfolio engineering, and cost-effective Dimensional’s strategies require access to dozens of markets every trading day, implementation. This heritage of applied science goes beyond theory and design and many of those strategies hold thousands of securities. Amidst changing to embrace smart, opportunistic trading. cash flows and shifting market prices, portfolio managers work with traders to As we have expanded our strategies in response to client needs, our trading maintain each portfolio’s characteristics. Order-generation drives the process. infrastructure and systems have evolved to thrive in a virtually continuous global trading cycle. The increasing complexity and integration of new trading “Order-generation has three key inputs. One: the ideal portfolio that we’re venues requires vigilance to ensure that we maintain investment guidelines, targeting to achieve. Two: a snapshot of the holdings on the day. Three: the control transaction costs, and manage portfolio tradeoffs. amount we have to spend. Working from there, we upload the orders and give instruction to Trading that they can go trade on the markets.” This is the story of a day in the life of Dimensional’s trading process, as told —John Law, Portfolio Manager, Santa Monica by a few of the portfolio managers, traders, and analysts who implement our strategies. Their personal perspective describes the daily cycle that connects “We’re looking at trading all portfolios fairly: to be the advocate for the people, information, and markets across the globe. portfolio and look after its best interests. Are there securities I should be2 DIMENSIONAL FUND ADVISORS CANADA
DIMENSIONAL TRADING: A DAY IN THE LIFE Cross-hatching shows non-DMA trading volume.09 2010 2011 Q4 2011 Source: Dimensional. Volume for fixed income trades and equity trades in US dollars, using closing FX rate for the date of each trade. Fixed income data excludes trades in short-term maturities. GOING TO MARKET adding, or securities I should be removing? While we want to move toward A window into the market opens with each sunrise at Dimensional’s trading those targets, we keep an eye on the tradeoff between the cost of seeking the floors around the world. Each security is accessible through at least one trade and the benefit of establishing or changing a position.” trading venue. Cash coming into a portfolio might be invested among —Robert Ness, Portfolio Manager and Vice President, Sydney hundreds or even thousands of securities. As the day progresses, traders patiently work their opportunity sets, assisted by a strong market philosophy. “We cover more than forty markets. Different markets close at different times. So when we come in the morning, about 5:30 Pacific time, the Sydney desk has “Anytime there’s a large cash flow, we have orders ready to go to trading. closed, the trading day in London is about half over, and the markets in the We’re generating new order candidates on a constant basis. We want to US are soon opening. When it comes to a new investment, we want to get the give traders as much flexibility and control as possible so they can pursue cash properly allocated, but always with cost-efficiency in mind. Our software opportunities in the marketplace.” systems help us make those decisions. The order-generation system is really —Allen Pu flexible. It takes in a lot of different data, such as what the portfolio holds, what you want to buy, and the market price.” —Allen Pu, Portfolio Manager and Vice President, Santa Monica MATRIX BOOK 2012 3
“The portfolio managers send me a list of approximately forty accounts, to keeping those in-house. DMA expands our ability to create customized which I coordinate. We utilize various tools to monitor progress throughout strategies to help us execute. We can send orders down those pipes ourselves. It the trading day. The market changes, so we adjust the way we trade.” keeps the control in our hands.” —Erhan Oktay, Trader, Austin —Sam Willis, Senior Trader, Sydney “The portfolio managers’ trade requests will come through—we have a “We always use as much information as possible about the status of a bond minimum, a target, and a maximum, but we always want to stay flexible. It’s issue as we consider buying it. For example, we’re not going to blindly follow a guideline to work through the trading day. We don’t have to be in a specific a conventional credit rating for a particular bond. We use a market-based name in a portfolio at a specific time. We don’t chase after names. We’re rating process that combines a wide variety of sources, including FINRA’s patient. We have a whole list of orders to choose from.” TRACE data on recent transactions, what’s being offered on venues, and other —Chris Rink, Trader, Austin measures. We’ll pay close attention to where a bond is trading; prices and spreads mean more to us than a credit agency rating.” “Unlike equity, with fixed income, we don’t have a basket of names and a —Polly Weiss, Investment Associate, London target cash amount to spend every day. Our capacity and constraints are different. A portfolio manager identifies bonds that, from an expected “Our approach is flexible enough to allow us to monitor the tradeoffs when return point of view, the portfolio needs. My job is to see how the bond trading in a specific country. Local markets can be very different and can looks in the market in real time and see if we want to trade it.” change overnight. We try to minimize unnecessary costs where possible. —David LaRusso, Senior Trader, Austin Although we’re aware of benchmarks, we also maintain flexibility. Where an index would be constrained, we can take advantage of excess supply and “Our willingness to be patient is key. We have a tremendous amount of demand and target exposure in a systematic way.” flexibility, not only in the portfolio and the names, but also in how we trade. —Nathan Lacaze, Portfolio Manager and Vice President, London The trader has a monitoring function and makes many decisions throughout the day—for instance, how aggressive to be in a given portfolio or in a group “Something that will work in one market may not work in another. Things of portfolios.” such as spreads, volatility, liquidity, exchange rules, regulators … there’s a whole —Carl Snyder, Senior Trader and Vice President, Austin raft of market microstructure procedures that will be different. As traders, we need to understand those microstructures and work on which strategies best suit which market.” BEFORE AND AFTER THE TRADE —Sam Willis The more a portfolio trades, the more the cost of trading can impact portfolio returns. Meanwhile, amid intense competition and changing price information, achieving quality market access is crucial in fulfilling a strategy’s mandate. CLOSING THE LOOP Dimensional has continued to focus on direct access to markets, allowing traders Custom software connects portfolio managers and traders around the world, the control to engage counterparties with reduced friction. irrespective of geography. While the technology is global, the human expertise is very much local. Wherever possible, trading takes advantage of the mechanisms “In recent times, as markets around the world have opened up to Direct and limitations of a specific venue or market. Like the instrument panel of an Market Access, we’ve seen a fundamental shift from passing orders to brokers aircraft, the Order Management System (OMS) brings to light a complex set of information to help every trader better navigate a portfolio through the day. A DIRECT ADVANTAGE “When the market opens, it will either go up or down, and I don’t want to As global markets have adopted Direct Market Access, be aggressive unnecessarily. I just maintain the Dimensional mantra and let Dimensional has implemented a growing share of its trades in house, resulting in enhanced control and creative execution. executions come our way. We set all the parameters—where to peg, at what price, and how aggressive we want to be. We have all of that control on the HIGH TOUCH Negotiated and computer screen.” delegated orders (cash desk) LOW TOUCH —Le Tran, Trader, Santa Monica Electronic trading (program desk) “Because we’re in different time zones, we have the OMS to send trades to different offices: Sydney, London, Austin, and Santa Monica. From my DMA perspective, we send spending requests to the traders. They go out and trade in Direct Market Access (self-directed desk) the marketplace. They report back and tell us how much they have done. For example, if we want to spend five million dollars, we may send three million to each region. If Sydney doesn’t reach our target, London will take over.” Q1 2006 2011 —Allen Pu Global Trade Value by Broker Type, January 2006–September 2011 Source: Dimensional. Chart data based on all equity agency trades, globally.4 DIMENSIONAL FUND ADVISORS CANADA
A MATTER OF SCALE“Negotiating on price is often a game of perception. If we see it trading at one Trading today involves more than just stocks and bonds. Portfolio Managementspread on TRACE, can I do better? Who is out there that I can work with? and Trading generates a significant volume of trading in currencies to support international securities trading and hedging. Larger still is the volume in short-I’ll spend a lot of the day communicating with brokers. I’ll discuss it with the term investments for securities lending and cash management.portfolio manager. They can weigh the tradeoff of the transaction cost versusthe impact of not being in or out of the bond. We want to stimulate as muchactivity as possible. We want brokers to compete.” SHORT-TERM INVESTMENTS $553.5BB—David LaRusso“We’re not making a judgment about a security. It trades where it trades. CURRENCIESWe try to buy or sell that security in the best way possible. At a certain level, $270.2BBthere’s always a bid and offer spread. If we’re buying, we try to get the bid. Wetry to have people come to us so we can capture the spread, which benefitsour funds and our clients.” BONDS EQUITY $79.9BB—Le Tran $63.5BBBEYOND BUY AND SELL Global Trade Value by Category, 2011Markets are always in motion. To deliver the right composition, each portfolio Source: Dimensional. Volume for fixed income trades in US dollar issues andrequires continuous oversight—for example, handling incoming cash and international (non-USD). In US dollars, using closing FX rate for the date of each trade. “Bonds” volume includes trades in short-term maturities.redemptions, checking screens, monitoring corporate actions, and rebalancingpositions. As the markets close in one region, the process picks up in another.The results of the day are routed to the appropriate portfolio manager for “When a trader receives an order, you want to make sure you’re seeing thereview the next day. security in the most competitive environment possible. Ultimately, we need to do our job and get the best execution so our clients have the portfolio and“I get in around 8 in the morning. We run through the cash sheets. We investment they signed up for. At the end of the day, it’s doing right by them.”reconcile cash balances. I send reports to portfolio managers globally. We —Claudette Higdon, Trader, Santa Monicawait for the guys in trading to pull western Asia from Sydney. Then we’ll havea full cash picture. The main thing that I look for is a balance: The goal is adiversified portfolio.” AT THE END OF THE DAY—Alexander Moore, Portfolio Analyst, London As the computer displays on each trading floor dim for the night, the work continues. The first thirty-one years of Dimensional’s history have witnessed“The work goes beyond buying and selling positions. We have a large universe dramatic change in the mechanics of trading at both the industry and firmof securities to manage—corporate actions, where there may be a dividend, levels. Just as Dimensional’s client-driven research will guide future strategiesthere may be a merger, a tender. If you think of 10,000-plus securities, they all and solutions, so too will dedicated people and an empirical process drivehave to be responded to on a timely basis.” Dimensional’s trading.—Allen Pu Interviews with more than twenty members of Dimensional’s Portfolio“The trading and investment style are both sitting absolutely side-by-side: One Management and Trading group, and the comments and feedback of many moreempowers the other. It’s not uncommon for us to have positive transaction were essential to this profile. A special thanks to the following leaders in Portfoliocosts through our flexible approach.” Management and Trading for their guidance:—Sam Willis —Joseph Chi, Co-Head of Portfolio Management and Vice President, Santa Monica“Flexibility means always being able to walk away from an execution. In order —Steve Clark, Senior Portfolio Manager and Vice President, Austinto do that, we must have many substitutes available, which we do.” —Jed Fogdall, Co-Head of Portfolio Management and Vice President, Austin—Robert Ness —Henry Gray, Head of Global Equity Trading and Vice President, Santa Monica —Jason Lapping, Head of Asia Pacific Trading and Vice President, Sydney“The structure allows us to be patient, but we do need to trade. When you do —Dave Plecha, Senior Portfolio Manager and Vice President, Santa Monicathat and how you do that—that’s what the experience of the trader brings to —John Romiza, Head of International Trading and Vice President, Londonthe table.”—Richard Mar, Trader, Sydney MATRIX BOOK 2012 5
TABLE OF CONTENTSDIMENSIONAL TRADING: A DAY IN THE LIFE 2ANNUALIZED RATES OF RETURNS (%) 8HOW TO USE THIS BOOK 9TOTAL RETURNSS&P 500 INDEX (IN US DOLLARS) 1926–2011 11US SMALL CAP STOCKS (IN US DOLLARS) 1927–2011 13US SMALL CAP VALUE STOCKS (IN US DOLLARS) 1927–2011 15US LARGE CAP VALUE STOCKS (IN US DOLLARS) 1927–2011 17US SMALL CAP GROWTH STOCKS (IN US DOLLARS) 1927–2011 19US LARGE CAP GROWTH STOCKS (IN US DOLLARS) 1927–2011 21US REAL ESTATE SECURITIES (IN US DOLLARS) 1978–2011 22CANADIAN LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) 1977–2011 23CANADIAN LARGE CAP GROWTH STOCKS (IN CANADIAN DOLLARS) 1977–2011 23S&P/TSX COMPOSITE INDEX (IN CANADIAN DOLLARS) 1957–2011 24CANADIAN SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1991–2011 25MSCI EAFE INDEX (IN CANADIAN DOLLARS) 1970–2011 26INTERNATIONAL SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1970–2011 26INTERNATIONAL LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) 1975–2011 27INTERNATIONAL LARGE CAP GROWTH STOCKS (IN CANADIAN DOLLARS) 1975–2011 27JAPAN SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1970–2011 28JAPAN LARGE CAP STOCKS (IN CANADIAN DOLLARS) 1970–2011 29UK SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1956–2011 31UK LARGE CAP STOCKS (IN CANADIAN DOLLARS) 1956–2011 32MSCI EMERGING MARKETS INDEX (IN CANADIAN DOLLARS) 1988–2011 33US LONG-TERM GOVERNMENT BONDS (IN US DOLLARS) 1926–2011 35US LONG-TERM CORPORATE BONDS (IN US DOLLARS) 1926–2011 37DEX LONG-TERM BOND INDEX (IN CANADIAN DOLLARS) 1948–2011 38DEX SHORT-TERM BOND INDEX (IN CANADIAN DOLLARS) 1980–2011 39DEX UNIVERSE BOND INDEX (IN CANADIAN DOLLARS) 1980–2011 40CANADIAN ONE-MONTH TREASURY BILLS (IN CANADIAN DOLLARS) 1974–2011 40REAL RETURNS (INFLATION ADJUSTED)INFLATION: CHANGES TO THE CONSUMER PRICE INDEX 1970–2011 41S&P 500 INDEX (IN CANADIAN DOLLARS) 1970–2011 42US SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1970–2011 42US SMALL CAP VALUE STOCKS (IN CANADIAN DOLLARS) 1970–2011 43US LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) 1970–2011 43MSCI EAFE INDEX (IN CANADIAN DOLLARS) 1970–2011 44INTERNATIONAL SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1970–2011 44INTERNATIONAL LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) 1975–2011 45INTERNATIONAL LARGE CAP GROWTH STOCKS (IN CANADIAN DOLLARS) 1975–2011 45S&P/TSX COMPOSITE INDEX (IN CANADIAN DOLLARS) 1970–2011 46DEX UNIVERSE BOND INDEX (IN CANADIAN DOLLARS) 1980–2011 47CANADIAN ONE-MONTH TREASURY BILLS (IN CANADIAN DOLLARS) 1974–2011 47CANADIAN DOLLAR VS. US DOLLAR 1952–2011 49WORLD MARKET CAPITALIZATION 51SOURCES AND DESCRIPTIONS OF DATA 53 MATRIX BOOK 2012 7
ANNUALIZED RATES OF RETURNS (%) One Five Ten Twenty Fifty Eighty Year Years Years Years Years Years 2011 2007–2011 2002–2011 1992–2011 1962–2011 1932–2011 S&P 500 INDEX (IN US DOLLARS) 2.1 -0.2 2.9 7.8 9.3 10.8 US SMALL CAP STOCKS (IN US DOLLARS) -5.4 1.5 7.2 10.3 11.7 14.0 US SMALL CAP VALUE STOCKS (IN US DOLLARS) -10.8 -1.5 8.7 12.9 14.4 16.3 US LARGE CAP VALUE STOCKS (IN US DOLLARS) -19.9 -11.5 -2.0 5.4 10.4 12.2 US SMALL CAP GROWTH STOCKS (IN US DOLLARS) -4.4 0.7 3.0 5.7 7.6 10.9 US LARGE CAP GROWTH STOCKS (IN US DOLLARS) 6.4 4.0 2.6 6.8 8.5 10.1 US REAL ESTATE SECURITIES (IN CANADIAN DOLLARS) 9.4 -2.0 10.1 10.8 — — CANADIAN LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) -13.5 7.6 8.0 10.0 — — CANADIAN LARGE CAP GROWTH STOCKS (IN CANADIAN DOLLARS) -16.4 -0.8 4.0 6.4 — S&P/TSX COMPOSITE INDEX (IN CANADIAN DOLLARS) -8.7 1.3 7.0 8.7 9.2 — CANADIAN SMALL CAP STOCKS (IN CANADIAN DOLLARS) -12.4 2.7 8.3 10.5 — — MSCI EAFE INDEX (IN CANADIAN DOLLARS) -10.3 -7.3 0.1 3.9 — — INTERNATIONAL SMALL CAP STOCKS (IN CANADIAN DOLLARS) -13.8 -5.9 5.6 5.1 — — INTERNATIONAL LARGE CAP VALUE STOCKS (IN CANADIAN DOLLARS) -15.3 -6.6 4.3 9.1 — — INTERNATIONAL LARGE CAP GROWTH STOCKS (IN CANADIAN DOLLARS) -6.5 -6.5 -0.3 3.0 — — JAPAN SMALL CAP STOCKS (IN CANADIAN DOLLARS) 1.5 -3.6 4.3 0.4 — — JAPAN LARGE CAP STOCKS (IN CANADIAN DOLLARS) -12.5 -9.0 -1.5 -1.2 — — UK SMALL CAP STOCKS (IN CANADIAN DOLLARS) -8.5 -7.7 3.0 7.4 13.2 — UK LARGE CAP STOCKS (IN CANADIAN DOLLARS) -1.8 -6.0 0.8 6.5 10.3 — MSCI EMERGING MARKETS INDEX (IN CANADIAN DOLLARS) -16.4 0.0 9.2 7.8 — US LONG-TERM GOVERNMENT BONDS (IN US DOLLARS) 28.2 10.7 8.9 8.9 7.6 5.9 US LONG-TERM CORPORATE BONDS (IN US DOLLARS) 17.9 8.8 8.3 8.1 7.6 6.2 DEX LONG-TERM BOND INDEX (IN CANADIAN DOLLARS) 18.1 8.3 8.9 9.8 8.9 — DEX SHORT-TERM BOND INDEX (IN CANADIAN DOLLARS) 4.7 5.1 4.8 6.3 — — DEX UNIVERSE BOND INDEX (IN CANADIAN DOLLARS) 9.7 6.4 6.5 7.7 — — CANADIAN ONE-MONTH TREASURY BILLS (IN CANADIAN DOLLARS) 0.9 1.7 2.2 3.6 — — INFLATION: CHANGES TO THE CONSUMER PRICE INDEX 2.3 1.9 2.1 1.9 — — CANADIAN DOLLAR VS. US DOLLAR -2.1 2.7 4.6 0.6 0.0 —8 DIMENSIONAL FUND ADVISORS CANADA
HOW TO USE THIS BOOK For example, to find the annualized compound rate of return for US Large Cap Value Stocks for the interval 1996–2004: 1 Locate the column for the first year of the interval (1996). Years are labeled at the top and bottom of each column. 2 Locate the row for the last year of the interval (2004). Years are labeled at the beginning of each row. 3 The return can be found where the first year’s column meets the last year’s row. In this example, US Large Cap Value Stocks had a compound rate of return of 7.8% per year for the nine-year period. 1993 1 1993 24.5 1994 1994 11.4 -0.3 1995 1995 20.2 18.2 40.1 1996 1996 20.2 18.8 29.6 20.0 1997 1997 22.8 22.3 31.0 26.7 33.7 1998 1998 20.9 20.2 25.9 21.6 22.4 11.9 1999 1999 18.8 17.9 21.9 17.7 17.0 9.4 7.0 2000 2000 15.3 14.1 16.7 12.5 10.7 3.9 0.1 -6.4 2001 2001 13.2 11.8 13.7 9.8 7.8 2.2 -0.9 -4.6 -2.7 2002 2002 7.8 6.1 6.9 2.9 0.3 -5.3 -9.2 -14.1 -17.6 -30.3 2003 2003 10.1 8.8 9.9 6.6 4.8 0.6 -1.5 -3.5 -2.5 -2.5 36.4 20042 2004 10.8 9.6 10.6 7.8 6.3 2.9 1.5 0.4 2.2 3.8 26.7 17.7 2005 2005 10.7 9.6 10.5 8.0 6.7 3.7 2.6 1.9 3.6 5.3 20.8 13.6 9.7 2006 2006 11.4 10.5 11.4 9.2 8.1 5.6 4.8 4.5 6.5 8.4 21.1 16.3 15.6 21.9 2007 2007 9.7 8.7 9.4 7.2 6.1 3.7 2.8 2.3 3.6 4.7 13.5 8.4 5.5 3.4 -12.2 2008 2008 4.0 2.8 3.0 0.6 -0.9 -3.6 -5.0 -6.2 -6.2 -6.7 -2.0 -8.3 -13.9 -20.6 -35.9 -53.1 2009 2009 5.7 4.6 5.0 2.8 1.6 -0.7 -1.7 -2.6 -2.1 -2.1 2.8 -1.9 -5.4 -8.9 -17.3 -19.7 37.5 2010 2010 6.5 5.5 5.9 3.9 2.9 0.8 -0.1 -0.7 -0.1 0.2 4.8 1.0 -1.6 -3.7 -9.2 -8.2 28.5 20.2 2011 2011 4.9 3.9 4.2 2.2 1.2 -0.8 -1.8 -2.5 -2.1 -2.0 1.8 -1.9 -4.4 -6.6 -11.5 -11.3 9.8 -1.9 -19.9 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3 MATRIX BOOK 2012 9