Some Dimensional fixed income funds have high portfolio turnover rates. Is this inconsistent with a passive investment approach?
Dimensional’s fixed income approach is “passive” in one sense—it involves no interest rate or economic forecasting. Some Dimensional fixed income funds though, are “active” in implementation. Research conducted by Eugene Fama at the University of Chicago suggests a variable maturity strategy that targets segments of the yield curve with the highest expected return can add value relative to a conventional indexed approach. The optimal maturity targets are constantly reviewed using information provided in the yield curve, and transactions are made if the increase in expected return exceeds the cost of making the trade. High annual portfolio turnover, sometimes in excess of 100%, is not unusual. An important element of the variable maturity strategy is a focus on short-term instruments with high credit quality. These issues are very liquid and can be traded at very low cost.
