| Stock
Price Best Value Guide,
War or Not
By Ben Wilmot
Australian Financial Review
March 2003 |
|
A visit from one of the world's leading investors casts a fresh light on
how markets work and the effects of the war in Iraq.
"I am looking at the markets right now in the same way I always look at
the markets," said Kenneth French, director of investment strategy at Dimensional
Fund Advisors.
Mr. French is best known for developing, with the investment guru Eugene
Fama, the three-factor model to measure different types of risk. He is also
a professor at the Tuck School of Business in Hanover, New Hampshire.
He observes that war can certainly change prices quickly, but is circumspect
about the limits of this knowledge. "War makes it harder to value the future
because of increased uncertainty," Mr. French said.
But according to his approach, which he calls equilibrium, markets are
efficient and able to assemble and evaluate information effectively so the
price of a stock usually is the best estimate of its intrinsic value-war
or no war.
"[So] I don't believe that war means that prices are too high or too low
on average. The market is smarter than we are," Mr. French said, reciting
a core belief of DFA.
DFA aims to gain an exposure to factors such as the cost of capital that
drive returns, and to take advantage of favourable trading costs. But the
firm doesn't try to out-guess the market: "You're always better assuming
the prices are right," DFA's co-chairman, Rex Sinquefield, said.
The investment style this belief produces is able to capture style tilts
(times at which one form or another of investment becomes more successful)
such as between growth and value, but is not active in trying to identify
undervalued or overvalued stocks.
Instead, DFA seeks to add value in two areas. The first is finding unique
trading opportunities and exploiting them. Unlike active investors, DFA
believes it can exploit liquidity opportunities because it does not need
to hold particular stocks in its portfolio.
"We are in a position to provide liquidity and get paid for it," Mr. French
said. "We don't hate any stocks, we're not in love with any stocks."
The second is that DFA promises disciplined strategies which are designed
to capture the particular style that an investor favours. Mr. Sinquefield
contrasts DFA's way of organising portfolios around particular risk-based
factors, or risk-based asset classes, with those of other fund managers
who are not necessarily organised around clearly identified risks.
"I think of this as our fundamental advantage . . . we
have this disciplined equilibrium view of the markets which we work hard
to maintain," Mr. French said.
DFA has been trading in Australia since the late 1980s and believes that
taking advantage of liquidity opportunities locally does not differ significantly
from other markets.1
"The benefits that we advertise are not because others aren't doing it
exactly our way, it's just that we are taking on certain types of risk [by
buying blocks of stock at a discount and providing liquidity] that the markets
compensate on average," Mr. Sinquefield said.
March 2003
