Profitability Implementation

Welcome everybody and good afternoon. And thanks for tuning in to this webcast, where we'll be looking at profitability implementation. I'm Jake DeKinter Head of Client Communications, and very pleased to be joined by Jed Fogdall, our Global Head of Portfolio Management, as well as Savina Rizova, our Global Head of Research. Now there's a little bit of a continuation on what we touched on on Tuesday, where we had Savina, and Professor Robert Novy March really diving into the research around profitability, looking at alternative metrics, understanding that space a little bit better. Here we'll get more into the implementation of what's Dimensional actually doing inside of the strategies. Now a couple of logistical items before we get started here, this webcast is available for CE credit. During the course of the hour you'll see four different prompts pop up on your screen. What you'll wanna do if you want CE credits, you just click on that, say yes, I'm still with you here, and then you'll get the CE credit that'll process in about 24 hours there. If you don't need the CE credit, just hit the X in the upper corner and you can dismiss out of that. You also have the ability to download the slides for this broadcast. Right below the video player on the viewer that you're looking at there, you can look and see the event resources tab, and download all of that. Get the slides that we'll be covering with Jed and Savina. And lastly, you have the ability to submit questions. I'll be fielding them here. We'll get to as many as we can during the broadcast. Of course if we don't get to any of your questions, we'll make sure that we follow up with you after that. So with that, I wanna go ahead and get started. Jed, Savina, it's great to have you with us here today. Great to be here Jake. I'm excited to actually just sit here and talk about profitability. Because around the time we started to speak about this in the portfolios, was right around the time that I got the job leading the Portfolio Management Group. And so a lot of my early work was to implement this. And so I think back to all the progress that we've made, and starting in 2012 with the Growth Portfolios, then 2013, U S Large Cap Equity, the existing portfolio is implementing profitability, making changes there. And then finally with the High Relative Profitability Portfolios that just past their three year mark, it's been quite an exciting time and we've made quite a lot of progress there. So what you were saying about the research on Tuesday, and that's one fourth of really what we say in our whole investment process, right? Research portfolio design, portfolio management and trading. And so what Savina and I thought we would do today, is dive into those middle two, of the portfolio design and portfolio management, and talk about what does it take to implement a new variable into a portfolio? How does it change and how do we make sure that we get it right? And then kind of finish up with what the experience has been and reflect on the performance impact of profitability. Well, I think that'll be a great discussion. And it's interesting you say that back in 2012, started putting into the portfolios, launch of the growth funds, three year anniversary of the high profitability strategy. So very exciting things about it, and I am glad you're fired up to discuss this today. Well, let's go out actually to a sunny Southern California, although not sunny today Savina, you brought some cloudy weather to us here. But maybe we could start with a little bit of a discussion around design, that second element that Jed talked about. Of course we hit research on Tuesday. Maybe we hit that design element of how we think about putting profitability into the strategies. Sure. When it came to profitability and implementing it broadly in our strategists, back in the day 2012, 2013; it didn't happen instantaneously, the implementation into strategies. Because we took our time to think, what's the best way to implement profitability as another driver of expected stock returns, in the different strategies we have out there. And as you'll see from the next few examples we are gonna share with you, we did take a different approach depending on the strategy with the goal of balancing the trade offs between expected returns, diversification in turnover, and those trade offs are different depending on what kind of strategy we are talking about. I'd like to start with the Core Portfolios, the Core Equity Portfolios. we have here an example with a U S Core Equity 2. It is a broad market solution, that targets simultaneously the size, the value and the profitability premiums as longterm drivers of returns. How did we implement profitability in that type of solution? Well, by including a third kind of sort or ranking in how we evaluate companies in terms of sources of longterm expected returns. Before profitability, we were ranking them based on size and the relative price. With the advent of profitability, we started ranking them as well as on profitability. And we started forming groups based on size, value and profitability of securities with similar characteristics, for example: small value high, profitability, or mega cap growth, medium profitability, and applying over and under weights to those different groups of securities in order to provide more focus on the groups of securities with higher expected returns, and underweight, the groups of securities with lower expected returns. And as we've mentioned on a few webinars already, we have a very nice new way of showing those owner in overweight in our portfolios. We call it the two by two by two data lens. And here we show it again for Core 2, how can you demonstrate that balance simultaneous focus on size, value and profitability in our Core Equity Strategies? Well, the two by two by two lens, is one way to do it. What we can see here is that we've split the market into large and small, large on the left, small on the right. And we can see that we are over weighting small caps, relative to the market wide benchmark Russell 3000, and within large and within small, we can split securities into two groups: top and bottom half on profitability, as well as top and bottom half on the relative price; and see what kind of relative over and under weights we apply to those different intersections of relative price and profitability. We see that we apply the biggest over weights to the group of securities; that based on valuation theory, has the highest expected returns. These are value high profitability stocks, both within large and within small. And then next to them, we have the groups of securities with the next highest expected returns, value low prof, and high prof growth stocks. They are very similarly weighted in the Core Equity solution, relative to market. So similar focus there, and then the category of firms that is with the least emphasis in our Core Equity solutions is the group of stocks with the lowest expected returns growth, low profitability names. We see that both in large and in small caps. But overall, what the two by two by two lens shows is that we have a very balanced simultaneous focus on the size, value and profitability premiums in our Core Equity solutions. Now, if we go to something like small caps on the next slide, what we'll see is that here, our approach to incorporating profitability is different. And it is different because when it comes to small caps, we know that deviations from market cap weights, the traditional turnover, and turnover is more costly in small less-liquid names. So the way Dimensional approaches, the integration of premiums in small solution, small cap solutions around the globe is mainly through the exclusion approach. Not through the weighting scheme approach, but through the exclusion approach. And to incorporate profitability in our small caps strategies, we implemented what we call the small growth low profitability exclusion, we highlighted on the next slide. We exclude companies within the small cap space that are least profitable and growthiest. And last year actually using the exclusion approach, we also implemented another consideration, the consideration for the investment premium through the high asset growth exclusion. But generally we prefer to use the exclusion approach in order to integrate premiums in our investment process for small cap strategies in order to minimize implementation costs. So in small caps, we use that approach to incorporate profitability. By the way, we do have the small growth low profitability exclusion in the core equity solutions as well. But the main approach there is the over weight and underweight of course. Hey Savina, let me ask you a quick question that had come in here, and and I think it may apply or be relevant to what you highlighted with core as well as this asset class strategy here with small cap. But, is there any concern about sector concentration, or how do we manage any sector concentration, when we're thinking about implementing profitability? Sector concentration or large sector weights relative to the market, are challenges that might come more with component strategy sets of core solutions. In the core equity portfolios, we generally do not see large deviations from weights of sectors in the market. But in strategies like our values strategies, we have an example with large volume coming up, or large growth, or the high relative profitability portfolio as Jed already mentioned. You see sometimes some sectors having a larger way than what they have in the relevant market, and what we know from historical analysis on the importance or impact of sector ways in component strategies is that whether you run a strategy like a value strategy sector neutral, or sector agnostic, returns historically have been quite similar. However, in a sector neutral strategy, you tend to have lower deviation, lower tracking error relative to the relevant market. But at the expense of more turnover. Because with the sector neutral strategy, you essentially sort companies on profitability or value sector by sector. So you have multiple breaks, multiple boundaries for what's a the profitability stock, or what's a high value stock, or a relative price stock across many sectors, and this leads to additional turnover. So Dimensional , we address this trade off between sector representation in an asset class strategy and turnover considerations, by having dynamic sector caps. So in our value strategies, in our growth strategies, in our high relative profitability strategies, we apply dynamic sector caps. That allow sectors to have higher ways than in the market, but only up to 10% points higher. That for us is a very nice kind of sweet spot of considering both turnover implications as well as sector representation implications. And we can actually now use that as a segue to talk a little bit about how we implemented profitability in our large value, then large growth, and high relative profitability portfolios. So starting with large value, how do we incorporate profitability and large value? Well, large value is constructed by starting with our large cap universe, top 90% of the names in the U S, and then within that universe, we focus on the value as a subset of it, top 30% of companies on book-to-market, or lowest 30% on price-to-book. Within that universe of value, large cap value stocks, we apply both awaiting scheme approach and an exclusion approach to incorporate profitability. We exclude the companies that are least profitable, and least value within the value universe. And we then apply over and under weights to the remaining stocks to emphasize stocks that are deeper value, more profitable and lower market capitalization. So that's the way we apply profitability in the large value strategy. We have one more slide on that, which shows the over and under weights. And from there, we can transition to the large growth portfolios, which were the first actually portfolios to incorporate systematically profitability. They were launched at the end of 2012. We have a U S Large Growth Portfolio, U S Small Growth, International Large Growth, International Small Growth. Here we show an example with the large growth strategy. It starts with the top half of the large cap market sorted on price-to-book. And within that universe, again, we use a of approach, an exclusion approach, as well as the weighting scheme approach to emphasize profitability. We exclude the least profitable names from the large cap growth universe. And then again, within the remaining universe, we overweight companies that are more profitable, lower relative price and lower market capitalization. And now we arrive at the latest strategies incorporating profitability, the high relative profitability portfolio, which were launched as Jed mentioned, three years ago. These are the strategies where the kind of primary cut is on profitability. In these strategies, we have one for the U S and one for developed markets outside the U S. Start with the large cap universe, and within the large cap universe, focus on the top 35% of the market with highest profitability. So the first cut within large caps is on profitability here, and within that universe, they use the overweight-underweight approach to emphasize stocks that are more profitable, deeper value and lower market capitalization. So again, we have the weighting scheme approach to emphasize profitability within the more profitable as the subset of the large cap space. Hey Savina another question that actually had come in ahead of time was, when you think about these things, and let's say that I designed something that moves towards profitability or a higher weight of profitability, does that pull me away from value and towards growth, or how do these things interact? Generally what we observe in the cross section of stocks is that, companies with higher profitability tend to be companies that are larger and on the growthiest side of the rankings. And that's natural to expect, because companies with higher profitability are companies that are for many of them that would be reflected in their prices, meaning in their valuations, higher profitability reflected in higher valuations, higher market capitalizations, higher price-to-book ratios. But even within a segment of companies with higher market capitalization with higher valuations, you can have a focus on more profitability. Actually what valuation theory tells us is that you can find more information as Robert pointed out about differences in expected returns, by looking at combining information from prices and profitability, in every segment of the market. So we can look at, and find companies with higher expected returns by sorting value stocks on profitability. The value stocks with higher profitability will have higher expected returns within the growth segment of the market. The companies with higher profitability, will have higher expected returns. So you can effectively target both the value and the profitability premium in a strategy simultaneously. And the best example of that is our Core Equity strategies which as we saw, targeted two premiums in a quite balanced simultaneous manner. Right, and a couple of times Savina referenced the broadcast earlier this week with Robert. And we've touched on Robert Novy Marx. We've touched on that a couple of times, a recording is gonna be available for all of our viewers. So if you didn't get a chance to tune into that, would highly recommend taking a look at that webcast, great stuff from Savina and Robert earlier this week. Jed let me come back to you. And you mentioned there, we started putting profitability in the funds back in 2012. Anytime we're gonna add a new variable in, there's a lot of things you gotta consider with the management process. So give us an overview how you think of that? Yeah, I, sometimes Jake, I wish it was as simple as adding another column to a spreadsheet or adding another row to a list and saying that that's all you need. But it takes a whole lot of work internally to make sure that we get it right, and that we implement in the way that we've decided, and the way that we've promised to clients. And there are three main aspects of that that I think are worth highlighting. And those three aspects are out of this list of maybe a couple of hundred tasks that need to be done whenever we make a change to a portfolio or launch a new portfolio. But the three big ones are around governance, around tools and around data. Now let's start with governance. What do I mean by governance? Well, for me, that's the process of deciding and finalizing those decisions of how we're going to manage a portfolio. And that's important to me because I happen to run our investment committee. And so I need to put those things in front of the right people and make sure that the right folks are in those discussions. But it's so important, I think, to coordinate that and centralize that, because then when you kick off the process to actually make the change, everyone knows which direction you're going. But just think of all the things Savina just said, you've got so many ways to choose how to use these variables in a portfolio. You have so many ways to measure them, and they can have big impacts on turnover and on expected returns and everything else. And so to formalize that is a very important part of the process. Now, what then does that kick off? Well, you have things like the metrics, you have the break points that we talked about between high and low profitability, you have various other things, but with those, you enable one portfolio managers to know where do they have discretion? Where can they make decisions and where can't they. You have compliance, who needs to write rules in order to check the correct parameters, and make sure that you stay in compliance. You have legal, which needs to make sure that all of the registration statements have all the material data. You need to have marketing, which creates materials, so we can go out and talk to clients about what we propose to do and what we're changing. And so all of that works so much better when you have good governance. And I, the way I think of that is that, solid governance process upfront, sets the stage for successful implementation and successful portfolio management. So once you have that, then you go into the next part of our investment process, which is the portfolio management. And what we're showing on the slide here, is a representation of that process, a very simple representation. But this process is responsible to deliver everything that we've said that we would do in the research. And the way that we think about that is that we have tools and we have people. And when we think about profitability and think about all the various changes in new portfolios, some tools didn't have to change much at all. So for example, the interface between Equity PMS and Equity Traders, didn't have to change at all. We had been managing market-wide strategies, large cap strategies that held large cap stocks, value, and growth, high, and low profitability, trading on the same exchanges, all listed equities. And so none of that had to change and everything that our traders did to achieve high quality and high efficiency execution, stayed intact with all the profitability strategy. So that was good. Some tools had to change maybe a little bit. And for those of you that have been with Dimensional for awhile, may remember that, maybe 10 or so years ago, we had been excluding stocks in a small cap strategy, with very high prices and very low earnings, more or less. When the profitability research came out, and we got a lot better measurement of which stocks were responsible for some of those negative returns in that area of the market, we were able to change those tools, just slightly to achieve the same expected out performance in a lower cost way. So those things changed maybe a little bit, but not quite as much as the next set, where there were existing portfolios, and we had to create new things in order to give portfolio managers the data at the time they needed it to make the right decisions. And Gerard made a comment on his webcast about integrating premiums is that, to make good decisions, you need lots of inputs. And that applies not only to just life in general, but it applies to investments even more. And so you think about the existing portfolio, you need to have some idea of what the characteristics are of your existing holdings. You need to be able to bring in some tools that talk about eligibility in terms of profitability, for all of the companies that are currently in the market. You need to have ways to make those trade offs systematically every single day, when a portfolio manager takes a look at the portfolio, takes a look at their cash levels and needs to make a decision on how to deploy whatever cash is there. And then we need tools on the output to be able to evaluate what we're proposing to trade before we send a list out to the market. So those were some of the big things that our IT team, technology, our analytics team, our portfolio management team, spent many long hours and long nights making sure those things were in place for a seamless transition when we added profitability. Now, I know Jake you were involved with some of the things back then as well with client service. We also had to do return attributions, portfolio characteristics, other kinds of reporting that we're going to be able to communicate, here's what changed, here's what the portfolio looks like, and here's the impact. And so that was a lot of the work to get profitability into the portfolios. I think that set us up well, for many other things that we do not to mention, being able to work from home pretty solidly this last couple of months. But I think the thing that we can't forget about tools, is that they're designed to put the right data in front of a portfolio manager, at the right time, to make the right investment decision. And you can't do that without good data. And Savina, there was a lot about what we do with the data. And so maybe she can talk us through a little bit how we deal with that. Yeah, let's go back out to Santa Monica and let's shift gears. Let's talk a little bit about that data Savina. And we touched on this a little bit in the Tuesday webcast in terms of, how important we take it, and groups that have been formed around us. So maybe you could start a discussion there on how we approach data and in relation to what we're talking about here with profitability. Absolutely. As Jed mentioned, we manage probably diversified solutions. We actually have a slide kinda summarizing that, that include over 15,000 listed stocks out there, and we take many, many inputs in our daily investment process, ranging from prices, market capitalization, price-to-book profitability, asset growth, momentum, volume traded, trading costs, as well as information on many different corporate actions into account, as Jed said in order to make good portfolio management decision. And in order to do that, we have developed over the years, very robust systems and processes in place to manage all the incoming investment data on a daily basis. And I prepared a few examples for you of what it means to have robust processes in place on a daily to overlook that investment data, in order to make sure that you are working with right data and you are avoiding unnecessary turnover due to noisy or immaterial changes in the inputs you're consuming, or irrelevant changes in the inputs you're consuming. So first of all, every day there is a group called financial data working group at Dimensional , a very nice collaboration between research and portfolio management that oversees all the incoming data and our reviews material changes in financials for different companies. We end up looking at a hundreds of changes every month. In addition to those kinds of individual companies, specific changes in fundamentals which we wanna see, are they correct, or are there any data errors that need to be corrected? And again, if you don't correct them and you act on them, you might be incurring unnecessary turnover in the portfolio. So that's why it matters. But in addition to those kinds of systematic checks for big changes in for example, profits, components of profits coming in, book equity coming in, and the profitability ratios for companies coming in, we also take a look at pending upcoming corporate actions, because these could also lead to important big changes in fundamentals like book equity. For example a company might have an equity offering coming up, or acquisition divestiture spin-off, buy back, and that could materially change the, its fundamentals, as well as its market capitalization. Typically those corporate actions will be reflected in market prices on the day they become effective, but we will see financial statements reflect them only with the lag. And as a result, there is often a period between the effective date of a corporate action, and the time when new financial statements are released by the company. When, if you use existing financial statements and prices at the same time, you're basically comparing apples to oranges. So we take actions in that period. You make sure that we are very careful using financial data for those companies between the time when prices reflect this new information and the time financial statements reflect that new information, again, to avoid unnecessary turnover in our portfolios. Another thing we monitor on a daily basis is company news. News about big oil spills, big dam failures, or big settlements of litigation claims, might mean that the company financials are going to change materially in the coming future. Company's profitability might take a hit in the next quarterly statement. And that hit often happens above the operating profits line. Last time with Robert, we discussed how we arrived at a metric for profitability that aims to stay away from the bottom of the income statement, where we have a lot of nonrecurring items. Well, the truth is that sometimes some of the nonrecurring items actually sneak into the operating profits of the company as well. And you have to be very thoughtful in how you process new incoming operating profits data in order to identify such items, and think, are they going to be a one off big impact on a company's operating profits and profitability? Should I then exclude them from my computation of operating profitability in order to avoid unnecessary turnover? Or should I let them flow in, if I think these are gonna be ongoing persistent adjustments to your profitability from now on for that company. And then there are broad systematic changes in accounting that we are also monitoring on an ongoing basis. One big change that happened both in the U S and outside the U S in 2018, is a change in how companies could account for, only U S gains and losses of equity investments on their books. Up until then companies get different ways. They were allowed to account for that, but from 2018 on, companies are required to report under U S gains and losses. So movements in the value of equity investments, they hold on the balance sheet, in their operating income on a quarterly basis in the U S, for example. This means that when there are big shifts in the value of those equity investments, that could appear to be a big shift in the operating profitability of a given company. And we had a very compelling example of that happening in Q4 of 2019, in Q1 of 2020 with Berkshire Hathaway, for example. In Q4 of 2019, its profitability appeared to double, only because of the market in the U S going up 10% in the last quarter of 2019. And as a result, the equity investments of Berkshire Hathaway reporting big unrealized gains. Well, we all know what happened after that in Q1 of 2020, the market in the U S dropped by 20%, for example, our overall, and as a result, the unrealized gains turned into big unrealized losses, and operating profitability of Berkshire Hathaway then, would have dropped by half, because of the unrealized losses. Now, if you're not thoughtful about how you consume investment data and how you put it in front of your portfolio managers on a daily basis, what will happen, is that you are gonna be doing unnecessary trades for companies like Berkshire Hathaway when the profitability jumps up and down so much quarter to quarter, because of changes in accounting treatment that actually are triggering material volatility in operating profitability; and moving you away from what you're trying to capture. Last time with Robert, we discussed that the goal of a current measure of profitability, is to capture the systematic, persistent longterm profitability of the company. Clearly big jumps in unrealized gains and losses on equity investments are not necessarily indicative of the longterm profitability of the company. So you wanna be very careful how you feed them in consuming operating profits for a company like Berkshire Hathaway. And that leaves us of course, to COVID-19 impact on financials of companies. We actually have put together a few slides for our viewers today, to show the impact so far we've seen on company financials, reporting Q1 performance for this year. The first slide we have is for the U S market. Here we report operating profits by sector in the U S, comparing Q1 of 2020 versus Q1 of 2019. So year on year change in total operating profits for U S companies for all those that have reported by end of May. And what we see here is that for across most of the sector actually, the changes in profitability reports are not that large. The exceptions are energy and financials, where received the changes in profitability year on year. And if we look at the next country in our example, China, the picture is relatively similar. Overall, not big changes in operating profits. Some changes again in energy of course. The one thing we have to consider with international reporting, is that not all countries are on a quarterly cycle of reporting earnings. Some are on semiannual cycle. In the next few examples we have for U K and Japan. And in those two countries, they follow the same annual reporting schedule. As a result we have less than 50% of companies reporting new financials by May of 2020. And what we see here is again, not dramatic differences in profitability across many of the sectors, some sectors, more so than others. But overall, what we have been looking at is, should we freeze financials for companies in a given country until most of the companies in that country report new financials, reflecting impact of COVID-19? What we have decided to do is not freeze financials, because what we saw in the data is that overall, there are not large changes in the rankings on profitability, across companies in a given country due to COVID-19 so far. But we are continuing to monitor and assessing the situation working closely between research and portfolio management together with our CIO to decide what to do on an ongoing basis. Yeah, it's a great overview there Savina, just of the data piece of it. All of the things that we have to take into consideration there. You talked about the number of securities we've gotta look at across countries. Obviously you start to apply that and think about break points inside of the funds, then you expand it and think about all of the different potential adjustments you may need to make in the examples that you highlighted here. And just a lot of moving pieces and the data is so incredibly important, to ultimately deliver something through the portfolio management group Jed, that you guys can use effectively. Now we're gonna go into performance here in just a second here. But one question that did come in Jed that I wanna ask you is, if you look at the number of names, inside of the high profitability funds, compared to something like small cap fund core, it's a little bit lower. Just thoughts in terms of the number of names of what we have inside of the high profitability strategies. Yeah, you think about 3000 each in the U S, if you include large caps and small caps. And you'd find that core equity would have something reasonably close to that number, but this would be on the other end of the spectrum, besides rates that has fewer than that. But let's say this is the other end of the spectrum with 200-300. And I think the way to think of that is obviously the market as you get larger in market cap, each of those companies makes up a bigger and bigger percentage. And so if you're trying to fill up a bucket of 35% of market cap, in the large cap universe, you gotta to fill that up a little bit faster with companies as you start to stack the high profitability on top of each other. I think in my opinion, these are fairly round numbers, but the approach we take in like a large value and a large high prof, which are different dimensions, but the same kind of idea, they've both got a couple, 200, 300 names in them on average. And so I think it's reasonably close to large value, but definitely a lot less than small caps or core equity. Well, and as we were talking about before, if you, we'll just use the large value example. If you compare that to something like a Russell 1000 value, you might see fewer number of names inside of our large value, but we're trying to give you pure value exposure. Right, and yeah, exactly. And you see big number of names because the first thing is in that particular index. Yep. 50, 50 split in market cap, but it's not necessarily a 50, 50 split names. There could be some overlap in names between the two indices. So is it values of growth? Yes. And you see the same kinds of thing when you look at a growth portfolio with one of the growth portfolios we manage versus a growth benchmark, you'll see some bleeding in the benchmark over to what we would consider value stocks. And so we try to stay pretty strict with how we define things and throw things out that are not in that universe. Well, and there's a lot of different trade offs that we've gotta consider inside of any of the strategies, high profitability as well, right? We're thinking about expected returns with diversification, expected returns with turnover, with costs, a lot of different things that we have to consider when we're ultimately designing and then managing these strategies. For sure. So Jed let's talk just a little bit about the performance piece of it. We talked that we hit the three year anniversary of high profitability, I believe last month. Yep. So the standalone funds, and maybe we start with just a discussion about premium performance in general, and then we can go into fund specific. Yeah, I think the thing with profitability that's been been kind of exciting and a challenge in some cases, is that because it goes into an integrated approach and we use it in different ways, depending on the portfolio, the conversations can be different. You can't just point to here's profitability and here's the impact on the portfolio. So for example, if you look at U S small cap strategy, where Savina described the exclusion of the stocks with the lowest profitability, those happened to be the stocks that have done pretty well. And so the exclusion has hurt in the small cap universe, but that's a fairly easy one to see. That when you talk about the integrated approaches where you're considering the different variables simultaneously, it gets to be more challenging. And Gerard actually showed this a couple of weeks ago and you have to make some assumptions, you have to make some maybe do some analysis to figure it out. But Gerard was showing that in the value strategies, which obviously are driven mostly by the value exposure, but have the profitability overlay on them, that profitability has been a pretty strong contributor in recent years, despite the negative value premium. Same with Core Equity. You have profitability as a fairly strong contributor, even despite the negative size and negative value premiums in certain markets. So those conversations can get more involved. But we can usually come up with a good proxy or a good estimate of what the impact of profitability has been. On the next couple of slides here, the nice thing about our high profitability portfolios is that they provide maybe a more direct proxy for the performance of profitability relative to just a neutral market. And so if you look here the bottom row on this slide, this is U S equities premium performance, bottom row here's the profitability premium. And if you look over the last seven years or so, since we've had profitability, since we've had the growth portfolios and included profitability, you've got about five in the last seven years, where you see a positive profitability premium. Now if you look at the last three years, specifically when the high relative profitability portfolio has been in existence, those are all three fairly strong positive profitability premiums. Now you look up the next couple of rows, and you see that there are some yellow negative bars on the value and on the size, the size is gonna have a bit of an impact when we talk about the returns of the U S high profitability, but let's get to that in a minute. Let's first go to the non U S markets profitability premiums. And a similar idea there that on the bottom row, you see the profitability premiums. And for the last seven years, we've had a positive profitability premium there. And so in other words, it's been a pretty good time to have profitability in the portfolios, especially in these high relative profitability portfolios. And if you would flip to the next slide, let's look at the U S high profitability. Now I know these are through the first quarter, and we're a couple of weeks away from the end of the second quarter. And so all of the reporting will be updated. But let's just look at this and then I'll fill you in on the quarter to date numbers. Since inception performance has been 2.8 or so percent, on the high relative profitability portfolio relative to the Russell 1000 Neutral Index; we saw the first full year of 2018, you see there's a slight negative performance. We did have that positive profitability premium that we looked at in the previous slide, but because we had some of those tilts towards mid caps and towards the value stocks within that universe, that brought us back down just a little bit towards relative to the performance of the benchmark. 2019 has been very good. Now you see that in the first quarter, we were down 17% relative to a 20% in the benchmark. At quarter to date, we're up about 19%, and lagging the benchmark a little bit, but still since inception we're about 2% outperforming. So things still looking pretty good for the U S high relative profitability portfolio. Now similar on the International High Profitability Portfolio, that's also had a strong relative performance, weak absolute performance, along with the rest of the market. But strong out performance. Now in this case, it's also up about 19.5% quarter to date. And so not quite back to even for the year yet. But in international markets, the profitability premium has been much more positive than in the U S. And so we're actually outperforming since inception by a little bit more than what's shown on this slide. So again, portfolios behaving as we have designed them to, it's nice to see a positive profitability premium because we talk enough about a negative value premium that it's good to have something contributing that we can highlight. And also these are, just been strong performers and something that clients have taken quite a bit of interest in. So it's nice to be able to talk about them and highlight the good performance. Well, and I like what you showed there on the yearly observations of the premium. This is something that we talk about all the time is, you've got these different drivers of returns inside of equity portfolios. We've got obviously the equity premium size value profitability; and in many years, as you highlighted there, they don't necessarily move in the same direction, which is a good thing for us. And if you went back into, let's just say, we go all the way back to the 80s, we really had to pick up expected return from size, which meant you really had to kind of tilt the portfolio pretty strong. Now you've got these different kind of levers that can contribute to expected returns. Right. Yep. And that's if not to plug another one of the webinars, which have been very good, but back in the models webinar, showing what you can achieve by different mixes of portfolios, illustrates that really well, I think. Yeah, and maybe, let me ask you that question there. 'Cause we do get that question all the time and we had a couple come in, just thinking about asset allocation in general, and we've highlighted a bunch of different funds. So we've obviously got market-wide solutions for core tilt towards profitability, we can do the asset class component funds, size, value, now profitability, just, how do you kind of think about the relative profitability funds inside of a complete allocation? Yeah, I think it goes back to one of the things you said before, and I think some of the things that Savina said that, by combining the different, by price metrics, balance sheet metrics, income statement metrics, you have some, I guess for lack of a better word, some independence of where you're pushing things. And so you can really achieve multiple exposure simultaneously without wandering down the others. And so of course it depends on what an investor's, Of course. current portfolio is Right. And where these might fit. But when you add it to something that has maybe the big size and value tilt, you can make up quite a bit of ground, relative, in terms of either expected returns, or lower tracking error, or whatever really you wanna do, just depending on how you combine it and what you're starting. So I think I would guess that the versatility of something like this is one of the reasons that folks have seem to be using it a lot. Yeah that makes complete sense. And actually Savina, let me bring you into the discussion here, 'cause Jed highlighted a couple of times the models webcast, and we did do that webcast a couple of weeks ago, just thinking about that rollout of Dimensional Wealth Models and Dimensional Wealth Index Models, when you were going through sort of the thought process of what those things were gonna look like, how did you take into consideration profitability, profitability funds, how was it all gonna work together with the models that we were putting together? As you say we put a lot of thought in the Dimensional Wealth Models, or we try to build them as asset allocation solutions that will help clients achieve their wealth goals in a very robust, reliable manner. And when it comes to using emphasis on premiums to achieve higher expected returns, we know from a lot of research that a balanced emphasis on premiums is the most reliable robust manner to target higher expected returns, because we don't know which premium, when it's gonna show up, but by having an integrated approach to premiums, you can improve the reliability of expected out performance. So that was one of the guiding principles we use when we put together the Dimensional Wealth Models. In the Core Models, we use the Core 1 and Core 2 funds, for example in the U S International Core Equity and Emerging Core Equity, all of them generally give you a very balanced exposure to the size value and profitability premiums. In the Core Plus Models, we want it to kind of provide clients with an alternative way to put together an asset allocation, which could allow you to push even further on all of three dimensions of higher expected stock return, size value, and profitability. And so to do that there, we include not only the Core Funds, but also the high relative profitability funds in the U S and in developed X U S markets. And but it's more like the value solutions as well, targeted value solutions, which allow you to push more on the small in value side of the market. And you have the high relative profitability fund as a tool to push further on the profitability dimension. So for clients out there who want to have additional levers to pursue further the size, value and profitability dimensions, having the components solutions, like targeted value and high relative profitability is a great way to compliment the core solutions again, if you want a further emphasis on higher expected returns. Well, that's a good way to think about the the Model Construction there Savina, and I appreciate that background. Jed kind of an interesting question that we got in here was just talking about, they're looking at the U S high relative profitability fund, talking about IT Exposure in there had gone up to 35%, and I'll ask you the question and I'll allow you to take a kind of in whatever direction you wanna go there, talking about how the percentage had gone up with that, but then also asking the question about correlation of that with strong momentum as well. Just how do we think about profitability in relation to momentum, implementation side of the funds? And I gotta believe it's consistent with what we do in the other equity strategies. Yeah, it's consistent. And I think in any time you see a short term phenomenon like that, I would be really surprised if it was not correlated with momentum. Meaning that momentum that we apply is done in the context of a decision to buy or sell today. So in other words if you're buying, you're probably under weighting negative momentum and over weighting up momentum, if you're selling, vice versa. So if stocks have gone up and have become a bigger percentage of the portfolio, it probably means a lot of them are going to be in upward momentum. We saw that in the first quarter with energy, where a lot of energy stocks that were just falling faster than everybody else in the market, became down mentum. And in a value strategy, when you have down momentum stocks, the price is dropping. That means deeper value, that also means negative momentum. And so you probably have more of an impact on investment decisions when it comes to a value strategy. But I think certainly in this case, when you have a sector moving more than the rest of the market, you're gonna have some high momentum stocks in that sector. Yep, we had some additional questions come in, very strategy-specific, for our viewers that ask those strategies-specific questions outside of the high relative profitability funds, we'll make sure that your Dimensional representative follows up with you on that, answers to those questions and gets it. Jed actually a couple of questions that came in here just about profitability inside of the sustainability funds. We're getting a lot of questions about sustainability in general, how do we think about it inside of those solutions? Well, I think that's a design question. Savina may have some things to say about that. But in a similar manner, of course the sustainability, the emphasis on total potential emissions and emissions intensity is going to be an important thing that's gonna change some of the characteristics relative to a non-sustainability portfolio. But other than that, what we're trying to do is achieve the highest expected returns given what the eligible universe is. And so in that sense it's not much different. But you may see differences of characteristics because of the other screens. And that makes sense. Savina let's go out to you and in California, any additional comments to add to that just around profitability inside of the sustainability solution. I would echo what Jed said. We do take into account drivers of expected returns along with sustainability considerations in our sustainability focused solutions, and the broad diversification in those solutions as well as our systematic approach to targeting higher expected returns, allows us to combine the sustainability considerations with the robust investment approach to pursuing higher expected returns, in solutions that actually can accomplish both, without kind of sacrificing one goal for the other. Very good. Well, I appreciate that. Jed, any final comments, just thoughts on the broadcast, what you want our viewers to walk away with around profitability, and then I'll come back to Savina for her final comments as well. Yeah, probably for me, one of the things that I was hoping to get across was that, anytime we make a change to the portfolio, we're very confident in the research behind it. I would like as the Head of Portfolio Management for our clients to be just as confident that our implementation is solid, and that they can trust that whatever we tell them from a marketing point of view, or from any sort of document that we show, that they can expect to see, on the output of the whole process, that the portfolio is gonna look what they expect, look like what they expect. And all of the things that maybe aren't all that exciting externally, get me out of bed in the morning and make me happy to come to work. And so hopefully clients understand that and appreciate it. Oh, good point there. Savina, let me come to you for just a couple of final comments to wrap up. Sure, I think what we mentioned also on Tuesday, profitability is a wonderful example of the ongoing innovation happening at Dimensional , ongoing innovation in research, in portfolio design and in portfolio management. Well, and great summary there. And I think we've referenced that to that Tuesday webcast quite a bit. If you didn't have a chance to check that out, please dive into it. We had a couple of questions actually that came in around operating profitability, cash profitability, we touched on a number of those on that Tuesday broadcast. So again, if you didn't have a chance to check that out, please do. And I just think it's very exciting when you talk about Dimensional , how we're always understanding the research, looking at what we can put inside of the portfolios to ultimately improve the investment experience for our clients, not jumping on every new idea. We wanna test this stuff thoroughly. And as Jed mentioned, and Savina touched on, there's a lot of things that have to be thought of and put in place before we would put a new variable into a strategy. And then even once we put it in there, a lot of data management that has to be taken into consideration. So Jed and Savina, really appreciate your time on the broadcast today. Great overview of profitability inside of the solutions. As we mentioned, we just hit the three year anniversary on our high profitability funds. So if you haven't had a chance to take a look at that, look at performance, look at the construction, please dive into it and make sure you get with your Dimensional representative to get you all of the information. Really exciting when we think about that, because now we've got market wide solutions that have profitability inside of them, we've got the asset class funds that have it, as well as standalone profitability investments. So really you can pull that asset allocation in whatever direction you want to, and come up with a good solution for clients. Well, as I mentioned, we tried to get through as many questions as we can. I think we touched on almost everything. Some of those can be answered with the webcast on Tuesday. If we didn't get a chance to get to your question, we'll make sure that we follow up with you and you all of the information that you need. One thing I do wanna highlight for our viewers coming up, is we've got a couple more webcasts that'll be taking place here in the next week or so. Marco Di Maggio from Harvard Business School is gonna be back on Tuesday, talking about a new paper on exchange fees that he's got very excited to have him on the thought leader broadcast next Tuesday. And then we'll come back with our Investor Experience Series on Thursday, kinda giving a recap of what we've seen in the first half of 2020, inside of markets volatility, as well as kind of looking forward to the second half of the year, and maybe some different events that are coming up there. So if you get a chance, make sure you're tuning in to those. As I mentioned, we'll get that CE processed as fast as possible, normally it takes about 24 hours, a recording of this webcast will be made available. So if you have colleagues that didn't have a chance to tune into it, we'll send that out to you, make sure where the link is on My Dimensional , and you can review it, as well as pass that on to any colleagues. With that, I wanna thank you for spending some time with us this afternoon, and everybody have a great rest of the day.