DFA and Growth funds??

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DFA and Growth funds??

Postby vencat » Fri Feb 01, 2013 7:52 pm

Something strange must be happening in Austin, TX ( DFA headquaters).
In Dec 2012 they started domestic and international GROWTH funds (including the famous black hole, small cap growth). Are they finally joining the Vanguard bandwagon? Should be interesting to hear what the value diehards have to say.

Venkat
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High Profitability = High Expected Returns

Postby EDN » Fri Feb 01, 2013 8:48 pm

They are called "growth" funds but are really funds that hold stocks with the highest profitability, just as their value funds are called "value" but are really funds that hold the lowest book value stocks.

Profitability is a significant factor in returns on par with value and the funds are consistent with the academic literature on the subject. See here: http://schwert.ssb.rochester.edu/f532/r ... e_2012.pdf

Eric

PS--the small funds won't be holding any of the extreme SG stocks with high prices but low profitability that create the "black hole" see Russell 2000 Growth, for example--very high profitability only
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Re: DFA and Growth funds??

Postby EDN » Fri Feb 01, 2013 9:03 pm

Here are the annualized returns of the FF Profitability Indexes in the US from 1975-2011:

Large Cap
High Profitability = 14.5%
S&P 500 = 11.6%
Low Profitability = 10.5%

Small Cap
High Profitability = 17.8%
CRSP 6-10 Index = 15.1%
Low Profitability = 7.8%

Eric
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Re: DFA and Growth funds??

Postby vencat » Fri Feb 01, 2013 9:37 pm

Thanks for the info. And I thought 'momentum' was the 4th FF factor :oops: .

Venkat
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What Makes a Factor?

Postby EDN » Fri Feb 01, 2013 10:16 pm

vencat wrote:Thanks for the info. And I thought 'momentum' was the 4th FF factor :oops: .

Venkat


Yeah, momentum tends to get thrown in the mix as a factor, but really, it's just a price trend. You'd be wise to not jump head-long into negative momentum stocks or be in a rush to sell positive momentum ones. But building an entire fund around it is something else entirely-- 200% plus turnover, etc. that's hard to reconcile with passive investing. Most good indexes with hold ranges/buffer zones do about as much with momentum as needed.

Broad based factors are better looked at in terms of some sort of price or cash-flow variable. Profits, earnings, book value, company size, fixed income maturity, stability of issuer--these are general and intuitive characteristics that should have some ability to segment different types of investments and associated risk/return. And that's all we're looking for from factors: some small improvement in our ability to understand the seemingly random market movements that allow us to better plan and invest our money.

Eric
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Re: DFA and Growth funds??

Postby exeunt » Thu Feb 07, 2013 11:18 am

Eric, where'd you get the FF profitability return data?
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