July 2, 2020 Episode 105: Dimensional's ETFs, Private Equity, and Prescribed Rate Loans With private equity investments increasing in popularity, you may feel the pressure to expand your portfolio. Today’s episode, we look at the data behind private equity returns to see if these investments add something to your portfolio that you couldn’t get elsewhere. But first, we discuss some big news — that slow-moving Dimensional Fund Advisors are entering the ETF marketplace. After looking at the implications of this move, we use a Harvard paper as our springboard into the topic of private equity. By exploring the shift in demand for private equity, the paper establishes the context for why investors, especially institutions, are seeking higher returns. Looking at research from AQR, we talk about their finding that private equity returns are overvalued, despite them being historically good investments. You’ll hear how the risks underlying private equity are obscured by a ‘return smoothing effect’ and why people are willing to overpay to get smooth returns. We examine how the gap between private and public equity returns has narrowed along with AQR’s argument that market changes have caused private equity investments to perform poorly. After AQR, we move onto a paper by Erik Stafford which shows that small-cap investing yields similar returns to private equity — with the advantage that you don’t have to pay high private equity fees. We round off the episode with a discussion on the benefits of spousal loans before talking about this week’s bad financial advice. This is a valuable episode for those wondering about adding private equity to their portfolios. Listen to find out why that might not be in your best interest. Key Points From This Episode: Books From Today’s Episode: The Four Pillars of Investing — https://amzn.to/2AJc0lO Capital and Ideology — https://amzn.to/2WnzPaK Links From Today’s Episode: Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website - https://rationalreminder.ca/podcast/105 ‘Looking for Alternatives: Pension Investments Around the World 2008 to 2017’ — https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/looking-alternatives-pension-investments-around-world-2008-2017 AQR — https://www.aqr.com/ ‘Demystifying Illiquid Assets: Expected Returns for Private Equity’ — https://www.aqr.com/Insights/Research/White-Papers/Demystifying-Illiquid-Assets-Expected-Returns-for-Private-Equity Erik Stafford — https://www.hbs.edu/faculty/Pages/profile.aspx?facId=6625 ‘Replicating Private Equity with Value Investing, Homemade Leverage, and Hold-to-Maturity Accounting’ —https://www.hbs.edu/faculty/Pages/item.aspx?num=50433 McKinsey Private Market Report 2019 —https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Private%20markets%20come%20of%20age/Private-markets-come-of-age-McKinsey-Global-Private-Markets-Review-2019-vF.ashx How persistent is private equity performance? Evidence from deal-level data — https://www.sciencedirect.com/science/article/abs/pii/S0304405X16301775 The Rational Reminder is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The funds and portfolios discussed are examples only and may not be appropriate for your individual circumstances.