DFA funds are only available to institutional clients (pensions, 401(k), etc.) and through select Fee-Only Advisors. Milestone Asset Management Group, LLC is one of a handful of advisors to be approved to offer clients direct access to DFA funds to our clients.
Research shows that 92% of active fund managers underperform their benchmarks. Index funds virtually eliminate this risk of underperformance. Dimensional Fund Advisors (DFA), however, has engineered an even better mutual fund. The tenets of DFA’s approach has resulted in a sizable return advantage over both active and index mutual funds. The firm’s investment process draws on the latest research by Fama and many other leading academics to inform its own research and testing. It then applies new findings and insights to the development of investment strategies and the improvement of its portfolio management and trading processes.
“More than 75% of its (DFA) funds have beaten their category benchmarks over the past 15 years, and 80% over the past five years, according to Morningstar.”
Dimensional is driven by research. In fact, it is the most research-intensive investment firm we have ever encountered. To keep its knowledge of markets current and actionable, it maintains very close working relationships with a number of the world’s foremost academic theorists and researchers of capital markets and asset prices
Dimensional’s mission is simple: to translate robust, time-tested and innovative investment research into real-world strategies and to thereby provide an outstanding investor experience at a compelling price.
Dimensional tracks more than 400,000 securities around the world, but the firm’s research process extends much deeper than simply statistics about securities into real-world dynamics and realities such as portfolio design and architecture, price momentum, trading efficiency and tax management.
One of Dimensional’s core beliefs is that capital markets work: that over time investors are rewarded commensurately for the risks that they take. The data in this first graph, which details the historical performance of four different U.S. asset classes from 1926 through 2013, clearly support this belief. Investors in the riskiest and most volatile asset class, small-cap stocks, achieved by far the best returns while investors in the safest asset class, U.S. Treasury Bills, achieved by far the lowest returns. In the long run, historical data indicate that investors have been rewarded for the risks they take, provided, of course, that they stay the course during periodic downturns.
Through its research, Dimensional has uncovered in global equity markets four factors and in global fixed income market two factors—dimensions—that indicate differences in the expected future returns of securities.
Dimensional, in constructing its portfolios, systematically tilts them to overweight securities that, based on these dimensions, have higher expected future returns. It does so within the context of broadly diversified portfolios while using a flexible trading methodology to balance risks and costs.
Dimensional’s U.S. and international equity strategies have several common characteristics: systematic targeting of securities with higher expected returns, broad diversification, and patient, flexible trading.
“Tilting” Toward Higher Expected Returns. Dimensional believes in constructing portfolios by “tilting” them toward (or overweighting) securities that have higher expected future returns. Such securities are identified using the value and market capitalization criteria shown above. The historical performance data are compelling on this point: in both U.S. and international markets, value stocks and small-cap stocks have provided significantly higher returns than broad market indexes over time. We believe the graph below is one the most important graphs for investors to understand. (Please see the chart to the left)
Diversification. Diversification is also a hallmark of Dimensional portfolios as the firm seeks to capture returns offered by broad segments of capital markets while mitigating exposure to uncompensated investment risks. Typically, Dimensional holds a large number of securities in each of its equity portfolios. For example, the DFA U.S. Core Equity 2 Portfolio holds more than 2,900 securities, multiples more than the average large-cap fund. Within that broad exposure however, it holds greater percentages in smaller and value-priced stocks that the firm’s research has shown to have higher expected returns.
High quality fixed income markets often perform independently of equity markets, thus providing investors with a useful tool for both achieving better portfolio diversification and for creating a reliable income stream.
Dimensional’s fixed income portfolios are designed and managed around three factors: term, credit quality and diversification. In each of its fixed income funds, Dimensional seeks to provide consistent and predictable exposure to fixed income markets with regard to term and credit quality so that investors can use each fund to create a tailored investment solution. Dimensional fixed income strategies are focused on investment grade issues with short-to-medium maturities. Dimensional research has shown that while non-investment grade and long-term issues have generated slightly higher historical returns, these types of securities also come with significantly higher volatility—giving them a poor risk/reward trade off. As with its equity strategies, Dimensional uses flexible and cost-efficient trading strategies when buying and selling individual issues.
It is critical that investors keep trading costs to a minimum. All too often in the investment industry, funds sacrifice a significant amount of potential return by trading too much. The average mutual fund has a very high rate of portfolio turnover. While such turnover is not disclosed as a specific cost of owning a fund, shareholders pay for it dearly in the form of lower returns.
Dimensional conducts its trading in a prudent, shareholder-friendly manner and its portfolios feature very low turnover. In addition, its proactive, flexible and patient trading regimen seeks to neutralize as much as feasible the negative impacts of trading. Dimensional has built up its trading infrastructure over 25 years and now has several trading desks located across the U.S., Europe and Asia-Pacific, enabling the firm to continually monitor global capital markets and its investment strategies. Dimensional has a particularly strong trading presence in more illiquid small-cap markets.
On any given day, there are many securities that Dimensional tracks that reach buy or sell points based on their pricing and underlying valuation fundamentals. However, traders at Dimensional are not under pressure to buy any particular security at any particular time. Because its trading is quantitatively-driven, the firm is agnostic as to whether it buys Security A or Security B on a particular day. It will only buy either when it can do so at a very favorable price. Dimensional seeks to capitalize on trading realities such as low liquidity and wide bid/ask spreads by employing a patient, flexible and price-sensitive trading strategy that exploits the eagerness of others to trade. As often as possible, Dimensional seeks to trade opportunistically in a cost-conscious, unhurried fashion from a position of negotiating strength. To learn more, please click here.
The chart below describes some of the differences between Dimensional and other types of investment managers.