Much has been written about the so-called price war between providers of index products, but that’s only half truth. While there is some competition between index fund providers in the main asset classes such as core UK and International equity, a closer look at the data shows some providers remain practically unchallenged, even within mainstream product range.
A clear example of this is small cap and value equity products. Dimensional remains the dominant player in this space, and as such able to charge a premium for its products when compared to other ‘passive’ managers. OK, Dimensional isn’t an ‘index’ or ‘passive’ manager in the traditional sense – Dimensional’s funds don’t track indices sheepishly, but its rule-based, quantitative and low-cost approach makes it closer to index funds than active.
7IM recently crashed Dimensional’s party, with its ‘smart passive’ value funds, which include UK, European and Global Value funds. Until now, 7IM remained largely a multi-asset portfolio manager, using predominantly index products to capture asset class return but now it is effectively becoming a provider of single asset class passive funds. So, 7IM is undercutting Dimensional and has cleverly priced its products below Dimensional’s in all the 4 asset classes.
|7IM (OCF)||Dimensional (OCF)|
|European (Ex UK) Value||0.35%||0.56%|
|Emerging Markets Value||0.40%||0.62%|
Of course Dimensional has got a clear advantage; its funds have the performance record that 7IM don’t have. More importantly, Dimensional has the proven methodology for implementing strategies, and since neither Dimensional or 7IM track indices in the traditional sense, the only way for 7IM to demonstrate it is a compelling alternative for investors looking to capture the value premium is simply to show performance data. Unavoidably, this will take a few years. Having said that, 7IM said it is simply just ‘unitising its in-house smart passive baskets of equities that have been running successfully as holdings in the 7IM funds for some time’ meaning it’s been running these strategies in-house for ‘some time’ and it may have some performance data to share with advisers to help them compare against Dimensional’s offering. Whether it’s prepared to do so of course is another matter!
Dimensional had got a loyal following within the advisory market. So much so that advisers have to go through a fairly stringent process before they get approved to use Dimensional’s funds. Once admitted into what some in the industry have dubbed ‘Dimensional’s Cult’ or ‘Church of Dimensional’ (of which yours sincerely is a proud member :), Dimensional provides extensive support which transcend investment management including several areas of practice management and business development programmes. While 7IM also has a substantive adviser following, its core users tend to be advisers who outsource investment management to 7IM, meaning they are far less likely to be using single asset class funds to build their own in-house portfolio, since they have already outsourced.
The point here is that it’ll take 7IM a lot more than lower fees to attract Dimensional’s core users. Having said that, the fact that Dimensional insists on prospective advisers buying into its investment philosophy before using its funds means that there is potentially a meaningful number of advisers who might want to include value index funds in their portfolios but who have hitherto unable to do so due to lack to OEICs/UT alternative to Dimensional. I imagine there’s a potential captive audience for 7IM there.
I think the big coup for 7IM may lie in DIY consumers looking to include value equity products in their portfolios. Dimensional funds are only available via a financial adviser and so there is a potential captive audience waiting to be served, who don’t have access to a financial adviser but keen to include value index funds within their portfolio.
So while 7IM’s entry to this space is great news, it doesn’t appear to be a major threat to Dimensional’s dominance. So we probably shouldn’t expect a ‘price war’ from these two managers anytime soon!