Dimensional Co-CEO Gerard O'Reilly on the Future of Fund Management

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, I have a big, big confession to make about.

Uh-oh. This is gonna actually, like, speak to everything that we do, okay? You ready for it?

Tracy Alloway (0:26)

I'm bracing myself, do it.

Joe Weisenthal (0:28)

So, I sort of ascribe to the general belief that markets are fairly efficient, things are priced in, indexing, probably a pretty good strategy, own the market portfolio, things like that, makes a lot of sense to me. A lot of people seem to generally believe this, is generally true.

Tracy Alloway (0:47)

So far, this is not a confession.

Joe Weisenthal (0:49)

Okay, but the confession is, given that, I don't really understand why the investment industry exists and why do people trade at all? Why does anyone try to beat the market? Why is active management a thing?

We all sort of accept these premises and yet the investment industry continues to exist.

Tracy Alloway (1:07)

Well, I applaud your honesty, Joe, especially given that you work at a large financial organization dedicated to providing data and services to the financial industry. But I don't think it's actually an extremely unusual opinion. I think this has come up at various times that if the best thing for people to do is just index to the market and find the fund or the vehicle that does that at the lowest cost, then why do all these other services and FAs and things like that actually exist?

Joe Weisenthal (1:39)

Yeah, what are we doing here?

What are we doing here, right? Because we talk about all these different things and sometimes on the show, we talk about real economy things and sometimes we talk about sort of strictly market things, but why is anyone paying attention? Why is anyone talking about this? Why is anyone trading on any of it?

Tracy Alloway (1:55)

If I was gonna hazard a guess, I would say there is something innately human about the idea that you can beat the system or outperform the market in one way or another.

Like, it feels unsatisfying to think that no one out there in the entire investment world is able to outperform the market. And yet, if you listen to efficient market hypothesis and things like that, that's exactly what it'll tell you.

Joe Weisenthal (2:19)

Or maybe you can outperform the market. Maybe you just outperform someone else trying to match the market or something like that. Maybe you could beat me or I could beat you, but not necessarily the market. I don't know, this always has bothered me.

Tracy Alloway (2:31)

I love that you've started this podcast on the most existential note that you could possibly find.

Joe Weisenthal (2:36)

Well, I think it's really fitting because today we are going to be speaking.

We're at a company that's sort of known for its deep, academic, data-driven understanding of markets, and it has this incredible lineage of people who have been at the forefront of a lot of this research about market efficiency and where pockets of inefficiency might exist, and what is the best way to invest given certain premises of efficiency and what that even means, market efficiency. And so I think that we can have a conversation today that sort of gets at some of these existential questions about how markets operate.

Tracy Alloway (3:16)

I think that sounds great. I think we are also gonna be speaking to our second, maybe, rocket scientist to have been on the podcast after Josh Younger.

Joe Weisenthal (3:25)

I love when we talk to actual rocket scientists because obviously sometimes that is used as a cliche for a very smart person, but as you mentioned, Josh Younger, former actual rocket scientist turned market econ guy, and yes, we have another one today.

Tracy Alloway (3:38)

All right, let's do it.

Joe Weisenthal (3:39)

All right, I'm very excited. We are going to be speaking today with Gerard O'Reilly. He is the co-CEO and CIO at Dimensional.

Been here since 2004 We're actually recording this at Dimensionals headquarters in Austin, Texas right now. One of the major providers of mutual funds and ETFs, huge player in the industry.

Tracy Alloway (4:01)

The fastest growing.

Joe Weisenthal (4:02)

The fastest growing ETF provider. And so we're going to learn all about this company's philosophy.

Gerard, thank you so much for coming on Odd Lots.

Gerard O'Reilly (4:11)

Thanks for having me on the show.

Joe Weisenthal (4:12)

So I mentioned that Dimensional sort of has this deep academic lineage. What do you sort of give us the quick history of the company and sort of like the ideas and the people from which this emerged?