Dimensional Emerging Markets Value Trust

Enhanced due diligence for the quarter ended 31 December 2021

Enhanced due diligence trigger

An enhanced due diligence (EDD) on a fund may be required for any number of reasons. Please refer to the CIC Policy and Procedures Manual for more detail.

In the fourth quarter of 2021, the Dimensional Emerging Markets Value Trust flagged for enhanced due diligence (EDD). The EDD flag was due to receiving notification of a greater than 25 percent reduction in the AUM (excluding market performance) over a 12-month period

The fund experienced a decrease in Net Assets of 30% throughout 2021

Investigation with the fund management team

We contacted Dimensional to discuss the nature of this flag. Dimensional informed the CIC that this flag was due to the cannibalisation of the introduction of the Dimensional Emerging Markets Sustainability Trust. With the introduction of this fund in July 2021, assets from the incumbent Dimensional Emerging Markets Value Trust transferred to the new sustainable suite.

Assets within the Dimensional Emerging Markets Value Trust remain in excess of AUD 500m as of December 2021, falling from over AUD 700m in early 2021

The purpose of the AUM monitoring is twofold:

1) We need to be certain the fund can meet withdrawals from any investor without impacting the remaining unit holders.

2) We need to be comfortable the trust can continue to operate given this reduced AUM base.

Dimensional provided comfort that remaining investors were not affected by the processing of the redemption, nor will they be impacted in the future as a result of this reduction in AUM. The remaining AUM of over AUD 500m gives us considerable comfort that the strategy can continue to be managed efficiently despite its now lower base.

The following section quantitatively examines whether we can independently verify Dimensional’s assurance that processing the redemption had no detrimental impact on the remaining investors.

Analysis

In the following analysis, we assess the performance of the trust during the quarter to determine if the returns to remaining investors were acceptable.

The official reference index for the Dimensional Emerging Markets Value Trust is the MSCI Emerging Markets Index, however for our analysis we are using the MSCI Emerging Markets Value Index because this index better reflects the trust’s underlying style characteristics The index explains 90.0% of the fund’s variability of returns. We are therefore able to apply a linear regression model to this relationship for Q4 2021 and to use this model to evaluate whether the returns generated during the redemption months were in line with expectations

We use daily returns for both the fund and the index to determine any variation between the two throughout the fourth quarter of 2021. All but five of the observed returns from the fourth quarter were inside the 90% confidence interval, illustrated below. Of these five data points, three were on the positive side, meaning the fund outperformed the benchmark on these days, while on the other two occasions the fund underperformed the benchmark. Given this is a 90% confidence interval we do expect 1 in 10 observations will fall outside of these ranges Accordingly, having only five out of 66 days (7.58%) outside this range is acceptable

Ultimately this due diligence is to determine if remaining investors were negatively impacted as a result of the fund outflows. These results demonstrate that this is not the case, with fund returns generally in line with the benchmark returns, aside from the five highlighted days in which returns exceeded the benchmark on three out of the five occasions

Accordingly, the committee is satisfied the trust managed this large outflow without compromising the remaining investors.

Jan-17toSep-21

Oct-21toDec-21

Lowerbound

Upperbound

Linear(Jan-17toSep-21)

Conclusion

y=0.9689x +0.0057 R²=0.9016

Following our analysis of the fund, the CIC is satisfied that the reduction in the fund’s AUM had no detrimental impact on the performance received by the remaining fund investors and it is also not expected to impact Dimensional’s ability to efficiently manage the fund on an ongoing basis

Therefore, the CIC assesses that the funds pass this enhanced due diligence flag

March 2022

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.