Flexibility in Practice: How We Handled GameStop

Althea Trevor, CFA

Head of Equity Portfolio Strategists and Vice President

Dimensional Funds

PERSPECTIVES – February 11, 2021

GameStop has been front and center in the financial news on account of the stock’s significant price volatility over a few weeks. And that has put it top of mind for many clients, as we’ve been fielding questions on how GameStop’s volatility was handled in our portfolios. This incident serves as an opportunity to highlight how Dimensional’s investment process is built to handle developments within markets, given that many of our portfolios held GameStop in January. GameStop’s rise and fall in price was extreme, to be sure. But our process is built to react systematically to the changes in stock prices that happen every day.

Our goal is to increase expected returns and manage risk in our portfolios so that we can deliver better outcomes for our clients. Therefore, it naturally follows that we should use all the information we have about expected returns, and-given that market prices change every day-we believe a daily process is essential to efficiently using this information.

Size, relative price, and profitability contain information about expected returns. By late January, GameStop had increased in size and relative price rather dramatically. Our investment process is set up to respond to new information about securities and their expected returns on a daily basis.

We evaluate stocks daily using many variables to assess long-term and shorter-term expected returns. As the price of GameStop climbed, it quickly moved out of the small cap and value space, becoming a large cap stock. For a dedicated small cap portfolio, we consider that exposure to a large cap stock no longer fits the intended asset class of the portfolio. Importantly, our daily process allows us to consider that in real time as prices change.

In contrast, an index-tracking approach does not have the same flexibility to respond to price changes; by design, an index will wait to respond until its next periodic reconstitution date. Small cap indices holding GameStop quickly saw it become the largest index holding as the stock price increased and generally continued to hold it as the price fell.

After peaking, GameStop’s subsequent fall in price put it in the low profitability growth space of the small cap market, which we exclude across our equity portfolios due to low expected returns. Our daily process allowed us to again respond quickly. By February 3, we had completely sold GameStop from all Dimensional portfolios.

Before the sharp price increase in January, GameStop had been a high revenue earner in our lending program over the previous year due to its high cost to borrow. As we do for all stocks held in our portfolios that lend securities, we work to maximize the revenue received, which we believe benefits the portfolio ‘s overall return.

The cost to borrow a security also contains information about expected returns. We take that information into account when making trading decisions. In addition, we look to avoid purchasing stocks at loan for high fees, as the expected returns on such stocks are low. Dimensional ‘s portfolios stopped buying new shares as the information from the high borrowing rate on GameStop indicated a lower expected return. 

This example highlights how we implement our daily process each and every day. However, what we did with GameStop is not unique to this situation. We regularly use new information about expected returns in a flexible manner to maintain consistent exposure to higher expected returns. GameStop is a case in point of how quickly prices can change and the importance of a robust implementation process that can be nimble and respond systematically.

Meet With Your Advisor

It is important to let us know when you have any changes in your investment objectives or financial circumstances. It is also important to review your account beneficiaries each year to make sure that no personal changes need to be made and the primary and contingent beneficiary designations are up to date and accurate. To notify us about any such changes that have occurred since we last met with you, please contact our office and schedule a meeting with your advisor.

We look forward to helping you stay on course.

Greg Feese, CRPC®
Financial Advisor

PR Wealth Management Group, Inc. a Registered Investment Advisor, doing business as Legacy Wealth Management Group of Las Vegas, LLC.  PR Wealth Management Group, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. PR Wealth Management Group, Inc. and Legacy Wealth Management Group of Las Vegas, LLC. are not affiliated companies. The home office is located at 990 Avenue of the Cities, Suite 4., East Moline, IL. 61244. The Las Vegas branch is located at 8235 S. Eastern Ave. Suite 160., Las Vegas, NV. 89123. Before making investment decisions please call our office at 702.545.0680 to receive a copy of PR Wealth’s Advisory Agreement and Form ADV Part 2A, which includes PR Wealth’s fee schedule. This information is intended to serve as a basis for further discussion with your professional advisors. Although great effort has been taken to provide accurate numbers and explanations, this information should not be relied upon for making investment decisions. Web: www.Legacywmglv.com

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Information is used with the express permission from Dimensional Fund Advisors. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing. For this and other information about Dimensional funds, please read the prospectus carefully before investing. Dimensional funds are distributed by DFA Securities LLC.

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investment strategies have the potential for profit or loss. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. There are no assurances that a portfolio will match or outperform any particular benchmark.

Nothing in this publication should be construed as investment advice. All information is believed to be from reliable sources; however, its accuracy and completeness and the opinions based thereon by the author are not guaranteed and no responsibility is assumed for errors and omissions. Any economic and performance data published herein is historical and not indicative of future results. All rights reserved. Please consult your personal advisor and investment prospectus before making an investment decision.

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Consider the investment objectives, risks, and charges and expenses of the Dimensional funds carefully before investing.  For this and other information about the Dimensional funds, please read the prospectus carefully before investing.  Prospectuses are available by calling Dimensional Fund Advisors collect at (512) 306-7400 or at us.dimensional.com. 

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https://www.dimensional.com/us-en/insights/how-we-handled-gamestop

1. Source: S&P and Dow Jones data© 2021 S&P Dow Jones Indices LLC, a division of S&P Gl All rights reserved. 

GLOSSARY

Profitability is a company’s operating income before depreciation and amortization minus interest expense scaled by book equity.

Relative price refers to a company’s price, or the market value of its equity , in relation to another measure of economic value, such as book value.

Market capitalization is the total market value of a company’s outstanding shares, computed as price times shares outstanding .