John Hancock Investments and Dimensional Fund Advisors will partner to bring their own exchange-traded funds to market for the first time, according to
a filing Monday with regulators.
Boston-based John Hancock will use Dimensional as the manager on its first ETFs, a series of index funds that join an onslaught of products attempting to capture returns surpassing the market without hiring pricey stock or bond-picking active managers.
Yet Dimensional will bring to ETFs a deep pedigree both in that investment strategy, sometimes called smart beta or factor investing, and in selling funds to financial advisers.
Dimensional, based in Austin, Texas, is one of the earliest proponents of factor investing. They blend elements of index-based investing and active investing in order to predictably exploit market returns and minimize trading costs. Many of today's smart beta products — from index providers including FTSE Russell, WisdomTree, Research Affiliates — are based on a similar premise.
The firm argues that trying to consistently beat the market is a fool's errand, and instead uses academic research like
the factor models of the Nobel laureate Eugene Fama and Kenneth French to capture long-identified sources of excess returns. Messrs. Fama and French both sit on Dimensional's board of directors.
The popular fund company has relationships with a devoted group of institutions and financial advisers, who must be approved to use its products after participating in seminars offered by the redemption-averse firm. So far this year they're the sixth top-selling fund company, according to Morningstar Inc., bringing in $11.6 billion from investors.
Alex Potts, chief executive officer at San Jose, Calif.-based Loring Ward Group Inc., said his firm will stick with Dimensional's traditional offerings in part because they are more discretionary. Dimensional funds are not strictly tied to an index, meaning they can use trading tactics to improve returns and tax efficiency. He said some advisers may view the ETFs as a departure from the firm's core philosophy.
“It will be confusing for advisers,” said Mr. Potts, whose investment-outsourcing firm makes extensive use of Dimensional's lineup and manages $12 billion in assets. “Normally, running a sector fund wouldn't be anything they'd recommend for an individual's portfolios.”
But Mr. Potts said a deeper relationship with John Hancock is a feather in Dimensional's cap and a recognition of their success in money management.
John Hancock, a more traditional mutual fund shop employing stock- and bond-picking fund managers,
has been quickly working to build an ETF lineup. Once an industry backwater, the funds now account for more annual sales by advisers than mutual funds and manage $3 trillion globally.
“To my knowledge, DFA (Dimensional) hasn't necessarily been against the ETF structure in and of itself, but rather didn't like the idea of not having control over who was able to buy and sell their products,” said Phil Huber, chief investment officer at Huber Financial Advisors, a Lincolnshire, Ill.-based advisory firm managing $849 million. “Working with John Hancock from a sub-advisory standpoint would provide access to DFA's management to retail investors that may not have otherwise been able to unless they worked with a DFA approved adviser.”
John Hancock manages nearly $130 billion in mutual funds and money-market funds. Dimensional manages $406 billion. Dimensional already advises on John Hancock-branded mutual funds that have $3.2 billion in assets.
