Case study of the DFA Emerging Markets Sustainability Trust
Dimensional Fund Advisers has launched a new emerging markets fund with a focus on sustainability, called the DFA Emerging Markets Sustainability Trust. DFA's head of Asia Pacific portfolio management, Bhanu Singh, revealed what goes into getting a new fund like this off the ground.
What goes into launching a new product?
An awful lot of work! We have been offering filtered strategies of one kind or another since the 1980s, but have really stepped up on sustainability in the last 12 to 15 years. We knew there was growing demand from our clients for sustainable investments. But first we had to make sure it added up as an investment solution. So, that means ensuring we can offer a broadly diversified product that targets the long-term drivers of higher expected return in a cost-effective way. Then we engage with the climate scientists and other experts to better understand the ESG issues and data. From there, we target measurable ESG outcomes – in this case lowering the carbon footprint of the portfolio and ensuring we can provide transparency through meaningful reporting. Finally, we have to ensure there is sufficient demand for such a product and that we can offer it a competitive price.
Why did you decide to launch now?
Put simply, because our clients were asking for it! We already have sustainability solutions for Australian investors that target developed market and Australian equities, global bonds, and a 70/30 balanced solution, so emerging markets were the next logical step. But it takes a lot of work to get the right data together. And as you know, emerging markets can pose their own challenges in terms of transparency and volatility. But we’re satisfied now we have the right solution.
How did you research market opportunities?
Our process is the same in all our strategies. We’re not a traditional stock-picking active manager that is looking for mispriced securities. But neither are we an index manager that is mainly concerned with minimising tracking error. We take the best parts of both approaches and look at the market systematically. We know that over time, small company stocks offer a positive premium over large cap stocks. We know that low relative price, or value, stocks offer a premium over high priced, growth stocks. And we know there is a premium from more profitable stocks. In fixed income, we target the premiums of term and credit, but again in a systematic, diversified way. That process is the same in sustainable or traditional strategies. Doesn’t change.
What challenges did you face and how were they overcome?
From an operational perspective, there are unique risks when you invest in emerging markets. For example, there are unique settlement cycles, foreign exchange pre-funding requirements, obtaining IDs and authorisation to trade. So setting up operationally for the fund launch required a big effort. Also, you have to remember that historically data coverage on sustainability was not quite as good in emerging markets as from developed markets. But that has improved over time and they’re now similar in quality. Of course, it’s easier to overcome these sorts of challenges when you have investments and operations teams with decades of experience.
How did you decide on service providers?
We have been building up our sources of ESG data providers for more than 15 years now. So by now, we take in data from seven different vendors across a range of issues. We don’t stop there either. We’re continually re-evaluating data quality and coverage, and we also generate and maintain our own internal proprietary datasets. It’s important to note we don’t rely on off-the-shelf sustainability scores. Instead, we source base-level data from vendors that is most relevant to the goal of our strategies.
Can you explain the fee structure?
As with all our trusts, we have a simple ‘all-in’ fee model, where our management cost covers ordinary out-of-pocket expenses like custody and administration costs - which tend to be higher in emerging markets than in developed markets - as well as a management fee paid to Dimensional for running the fund. The management cost for this fund is 0.60%, which is extremely competitive compared with that charged by other emerging market funds available in the Australian market.