Appendix: Supporting analysis

1. Custom benchmark (incumbent)

The style benchmark used to measure this trust’s expected quarterly returns is a custom index created by the CIC. This custom index includes consideration of the expected risk tilts from this trust rather than just a broad market return which was assumed when previously using the MSCI World ex Australia Value Index (NZD).

The factor exposures to construct the custom index were initially evaluated from a multiple regression performed in May 2020 and are summarised in table 1 below

Factor Factor loading Factor definition Notes

Risk Free 1.00x

Ken French Risk Free Rate

Market 1.10x Ken French Market factor minus Ken French Risk Free Rate

Size 0.10x

Value 0.50x

Profitability nil

Ken French Developed Market Size Factor

Ken French Developed Market Value Factor

Source: Consilium calculations, Ken French Five Factor Model

This is the average return on the three Ken French small portfolios minus the average return on the three Ken French big portfolios.

This is the average return on the two Ken French value portfolios minus the average return on the two Ken French growth portfolios.

Note: using a custom index for attribution analysis or analysis of relative fundamentals such as aggregate price to book or weighted average market capitalisation poses a difficulty. As the custom index is not maintained by an index provider there is no average underlying company exposures for the custom index and so attribution analysis or analysis of relative fundamentals is impossible. When performing these analyses, we instead employ the closest benchmark available for which these analyses can be completed. For this trust that is typically the MSCI World ex Australia Value Index (NZD).

2. Custom benchmark (revised)

Upon completion of the CIC’s updated expected returns analysis as part of the 2021 Strategic Asset Allocation Review, the CIC undertook a review of all Custom monitoring benchmarks including the custom benchmark for the DFA Global Value Trust

Factor exposures to construct the revised custom index were evaluated from a multiple regression performed in December 2021 (although they relate to expected return estimates form Q4 2021 onwards) and are summarised in table 2 below

Risk Free 1.00x Ken French Risk Free Rate

Market 1.05x Ken French Market factor minus Ken French Risk Free Rate

Size -0.10x Ken French Developed Market Size Factor

Value 0.55x Ken French Developed Market Value Factor (LargeHML)

Profitability nil

Source: Consilium calculations, Ken French Five Factor Model

This is the average return on the three Ken French small portfolios minus the average return on the three Ken French big portfolios.

This is the return of the Ken French big value portfolio.

Key changes in the revised custom benchmark loadings were:

1. A reduction in market loading from 1.1x to 1.05x

2. A change in the sign of the size loading from +0.10x to -0.10x

3. A change in the value factor definition (considering only large caps) moving from 0.50x the traditional Ken French developed market value factor to 0.55x the Ken French big value factor

All of these changes (both individually and in aggregate) have the effect of reducing the expected level of fund outperformance versus the custom benchmark. This is particularly relevant in respect of the original 3 year tracking error flag generated by the incumbent benchmark methodology in Q4 2021 (see below)

3. Initial Q4 2021 tracking error chart

Figure 1 – Original three year deviation from the benchmark

Source: Consilium

The three year deviation chart (using the incumbent benchmark loadings) flagged for a performance related EDD in Q4 2021.

This triggered because with a three year market return of 20.0% p.a. and three year SMB and HML factors respectively returning -3.26% and -9.83%, the custom benchmark was “expecting” a fund performance of approximately:

Expected return (after fund fees) = (19.99% x 1.1) + (-3.26% x 0.10) + (-9.83% x 0.50) – fund fees = 15.49%

The actual fund return after fees was 12.36%, and it was the -3.13% deviation between these figures which triggered the EDD flag.

In hindsight, the factor loadings were setting the performance expectations for this trust at an artificially high level and, over time, this was eventually reflected in a long term EDD trigger due to relative underperformance.

This is intuitive The three year period in question had such a high market return (19.99%), that our incumbent expected loading on the market factor implied the fund would deliver 1.1 x this market return (or an additional 2.0 percentage points over the three years). This is clearly too much extra performance to expect simply due to excluding REITs.

4. Three yearly tolerance thresholds (using revised factor loadings)

When we reran an analysis of the three yearly tracking error of the fund returns versus the (revised, 8 factor) custom benchmark returns, we found significantly less underperformance as is displayed in Figure 2 below.

The incumbent factor loadings resulted in the original Q4 flag (Figure 3), while the revised factor loadings based on our 2021 expected returns analysis (Figure 2) show that the deviation is no longer outside tolerance thresholds.

This revised benchmark loading (amongst several that relate to Dimensional style funds) was presented to the CIC for adoption at its meeting in July and was approved for adoption.

The committee considered that since the revised benchmark loadings are clearly a better reflection of the current fund characteristics than the incumbent loadings from May 2020, that the original three year EDD flag from Q4 2021, be considered “satisfied” by updating the benchmark loadings as per our updated research

Disclaimer: The material contained in or attached to this report has been prepared based upon information that Consilium NZ Limited believes to be reliable but may be subject to typographical or other errors. Consilium has taken every care in preparing this information, which is for client education purposes only. Although the data has been sourced from publicly available information and/or provided by the investment managers, we are not able to guarantee its accuracy. Past performance, whether actual or simulated, is no guarantee of future performance. This document does not disclose all the risks of any transaction type described herein, and the recipient should understand any terms including relevant risk factors and any legal, tax and accounting considerations applicable to them.

One or more of the author(s) of this report invest in the analysed security. The author(s) do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Compensation of the author(s) of this report is not based on any outcome of this report.