Still looking for inspiration about where to invest this year’s individual savings account? Over the past week my colleagues and I have been polling independent financial advisers to find out where they will be, or already have, invested this year’s allowance and one name keeps cropping up - Dimensional.
Never heard of it? I had a vague knowledge of it, having written about it before, but it was years ago and I needed a refresher on what it is all about and why it has such a fan base.
Take a look at Dimensional’s website and prepare to be bowled over by the names that are associated with the firm. There are the Nobel Prize winners Myron Scholes and Robert Merton. Then there is Eugene Fama, the economist considered the father of the Efficient Market Hypothesis, as well as a range of other academics well known in the investment world.
So what has all this collective brainpower resulted in? A process that is known as enhanced indexing. This approach rejects the notion that active management is the way to go as it encourages speculative trading which generates higher turnover, transaction costs and taxes which eat into overall returns.
But it also rejects traditional index tracking as it is too passive. Trackers are forced to buy expensive stocks just to ensure they continue to mirror whatever index they are tracking.
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Dimensional tries not to do that. Its research aims to identify areas of long term growth and keep transaction costs to a minimum. If say returns for small cap stocks are expected to be greater, the relative weight of small caps will be increased. That’s why a growing number of financial advisers like the approach - it can deliver above-index returns at very low cost.
So where can you buy its funds? Dimensional does not sell direct and is picky about the advisers it deals with. It wants to ensure that the clients understand its approach and are in it for the long-term. You’ll need to find a Dimensional-approved financial planner to be allowed in but there is help finding them on its website.
Another name that is also popular for its low cost approach is the more traditional index tracker Vanguard. It has a minimum investment of £100,000 if you buy direct but Vanguard’s funds are also available on fund platforms such as Alliance Trust Savings and Hargreaves Lansdown.
If you still want to take a chance picking an active fund manager there are still plenty of advisers out there who like them too. In the run up to the end of the tax year we will be printing many more recommendations so keep checking out these pages if you still can’t decide what to do with your cash.