Can you buy DFA funds at Schwab without an advisor?

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Can you buy DFA funds at Schwab without an advisor?

Postby CyberBob » Fri Jun 22, 2007 1:14 pm

I noticed at Schwab that DFA funds are listed as having a $1 minimum purchase. (Although, since they aren't part of the Schwab OneSource fund group, there is a hefty $49.95 transaction fee)

Does that mean you can buy DFA funds there yourself without having to go through an advisor or something?

Bob
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Postby Mel Lindauer » Fri Jun 22, 2007 1:18 pm

Hi Bob:

There's a current conversation on M* about someone who's doing exactly that. When he made the post, Jeff T, an advisor who uses DFA funds, said that he was going to e-mail DFA about closing this back-door.

Regards,

Mel
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Postby whitemiata » Fri Jun 22, 2007 1:27 pm

This is such a silly situation it makes little sense.

Either an advisor with DFA funds adds value above the low cost offerings by DFA or he/she doesn't.

If He or she does, then there is not much to worry about from joe schmoe being able to buy DFA funds from an online broker.

If He or she doesn't, then DFA has every incentive to sell their product through the online broker because clearly their *sales force* is not adding any value, just restricting volume.

I'm sure there are SOME people who may pick an advisor over another one based on access to DFA... but I'm not convinced that there would be a statistically relevant group of people who would pick an advisor over NO ADVISOR just for access to DFA.

If that's indeed the case, then DFA advisors don't really stand to lose any meaningful business from thea availability of DFA through Schwab or whoever else.

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Postby rwwoods » Fri Jun 22, 2007 1:31 pm

Schwab indicates that the DFA funds are "Restricted- Call For Information."
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Postby tfb » Fri Jun 22, 2007 2:10 pm

Sounds like Jeff T is very afraid of losing the elite status for selling DFA funds.
Harry Sit, taking a break from the forums.
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Postby Rick Ferri » Fri Jun 22, 2007 2:17 pm

I'm sure there are SOME people who may pick an advisor over another one based on access to DFA... but I'm not convinced that there would be a statistically relevant group of people who would pick an advisor over NO ADVISOR just for access to DFA.


You would be amazed at the great lengths some people go through just to gain access to DFA funds. I just don't understand it. Yes, DFA has a few good funds. However, gaining access to DFA or any other fund company is not a good enough reason to pay an advisor, IMO.

There is only one good reason to hire an advisor. It is because you would rather have someone else manage your portfolio or a portfolio that you are tasked with overseeing.

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Postby Blackhawkzone » Fri Jun 22, 2007 2:38 pm

just pulled this off of paul merriman's site.

http://www.merrimancapital.com/doingbusiness.html

evidently he has his clients open accounts at schwab for custody of the assets ie dba funds....but i guess that merriman gets schwab to remove the lock and allow these accounts to buy dba funds. I suppose that somebody from his office actually does the buying and selling, but I dont know since I dont use it.
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Postby whitemiata » Fri Jun 22, 2007 2:45 pm

Rick Ferri wrote:
I'm sure there are SOME people who may pick an advisor over another one based on access to DFA... but I'm not convinced that there would be a statistically relevant group of people who would pick an advisor over NO ADVISOR just for access to DFA.


You would be amazed at the great lengths some people go through just to gain access to DFA funds. I just don't understand it. Yes, DFA has a few good funds. However, gaining access to DFA or any other fund company is not a good enough reason to pay an advisor, IMO.

There is only one good reason to hire an advisor. It is because you would rather have someone else manage your portfolio or a portfolio that you are tasked with overseeing.

Rick Ferri


Not much amazes me anymore but I get your point.

Well... one thing does amaze me.

It's amazing that I could finish reading your book last night (All about Index Funds - I enjoyed it very much, thanks for writing it) and here you are responding to a post I wrote.

I know this forum is *swarming* :D with authors of books I've enjoyed, but still.

Neat stuff.

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Postby groovy9 » Fri Jun 22, 2007 2:55 pm

whitemiata wrote:It's amazing that I could finish reading your book last night (All about Index Funds - I enjoyed it very much, thanks for writing it) and here you are responding to a post I wrote.

I know this forum is *swarming* :D with authors of books I've enjoyed, but still.

Neat stuff.


I've never participated in any discussion forum on any subject that had near the level of demonstrated expertise that this one does. 'Unreal' is the word that comes to mind.

I was telling someone recently (after impressing him with a bit of research about something-or-other) that the very best thing about the internet is what you can learn by following discussions between regular people. This forum epitomizes that phenomenon.
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Why not?

Postby drat69 » Fri Jun 22, 2007 3:05 pm

I was wondering why they don't sell their funds to everyone? I looked up their website and found an article.

"Keeping individual investors out makes DFA more economical to run, which boosts the returns of shareholders it is willing to accept."

Hard to believe these guys are keeping their market share small so that the investors will get a fraction of more return.
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Postby Rick Ferri » Fri Jun 22, 2007 3:16 pm

It's amazing that I could finish reading your book last night (All about Index Funds)


Well, you got a lot further in that book than my wife ever did! But then, she couldn't care less about this stuff. Thanks!

i guess that merriman gets schwab to remove the lock and allow these accounts to buy DFA funds. I suppose that somebody from his office actually does the buying and selling, but I don't know since I don't use it.


Yes. That is how it works. The accounts are opened by Merriman under Schwab Institutional after which Merriman (or any other advisor named by the client) then has the authority to buy and sell DFA funds in the accounts.

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Postby Kenster1 » Fri Jun 22, 2007 3:30 pm

I think you can see the DFA funds but can't buy them since they are restricted as others have noted.

Schwab, Fidelity and TDAmeritrade are popular platforms for RIA's in managing client accounts but you have to be authorized to buy the restricted DFA funds.

The fact that Cyberbob found a DFA Fund listed with a minimum of only $1 seems consistent with a DFA advisor I had asked about DFA fund minimums and he basically said there isn't any.
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Re: Why not?

Postby RiskAverse » Fri Jun 22, 2007 6:09 pm

drat69 wrote:I was wondering why they don't sell their funds to everyone? I looked up their website and found an article.

"Keeping individual investors out makes DFA more economical to run, which boosts the returns of shareholders it is willing to accept."

Hard to believe these guys are keeping their market share small so that the investors will get a fraction of more return.


It has to do with all the turnover of having retail investors cashing in and out of the funds.

Honestly, its alot of smoke and mirrors, including the whole exclusive advisors arrangement. There is only one stock market, so its not like anyone has exclusive acess to the VIP area/Champagne Room.

DFA funds don't do anything you can't do by combining TSM funds with an overlay of Value funds. The small/microcap funds are basicly a combo of a microcap index fund (PZI/IWC) with small cap value funds.
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Postby Kenster1 » Fri Jun 22, 2007 9:10 pm

Not a recommendation, just an FYI...

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.
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Postby Kenster1 » Fri Jun 22, 2007 9:19 pm

...continued....

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.
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DFA Funds

Postby tuffy88 » Fri Jun 22, 2007 11:00 pm

They can be bought at TD Ameritrade, but must buy them through an investment advisor. For about 50 basis points.

Charles
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Postby springwater » Sat Jun 23, 2007 2:08 am

If they are concerned about retail churn, they can just put $100,000 minimum investment to get access to the funds and a very high penalty if they sell within 1, 3, 5 years whatever.
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Postby grumel » Sat Jun 23, 2007 2:19 am

However if they are concerned about financial advisors to do the marketing for them, they have to keep giving them a monopoly. And a certain exclusivity, some secrecy and alchemy arent to bad for the marketing either right ?
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DFA - great at fund design, horrible at business

Postby xerty24 » Sat Jun 23, 2007 2:37 am

springwater wrote:If they are concerned about retail churn, they can just put $100,000 minimum investment to get access to the funds and a very high penalty if they sell within 1, 3, 5 years whatever.

Exactly. DFA is taking a very foolish approach to the "problem" of turnover/performance chasing among individual investors. If they were run in an economically rational fashion (which they clearly aren't), they would just put a 5% redemption fee on funds invested for less than 1 year so if some day trader wants to jump in and jump out they would more than pay for the privilege. Enough in fact to raise the returns for everyone else in the fund and still kick in a little extra for bonuses at DFA come year end. Maybe they would need a high minimum balance and/or fixed annual fees to deal with small account hassles, but as Vanguard has shown so successfully, this can be done with fund minimums of $3K or $10K, not the $20M you need to get into DFA as an institutional investor.

If DFA were a traded company, shareholders would demand they open up their funds (with appropriate policy changes if necessary to deal with more active traders) in order to increase their assets under management and hence revenues. Heck, if they were public company badly run like this I wouldn't be surprised if some private equity firm LBO'ed them and tried to fix their business model. It's sad for everyone (especially small investors) that they aren't running their business in a reasonable fashion.
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Postby larryswedroe » Sat Jun 23, 2007 8:50 am

Not defending DFA position, just explaining

It is private company as was stated.

A major advantage of being private (besides all the Sarbannes Oxley nonsense) is that they do what they want. And one thing the owners want is to run a nice small company. Not dealing with public allows them to run now $150b company with just 350 people. No one to deal with public. No one to man phone banks, no marketing material, no paperwork with monthly or quarterly statements, etc.

Makes life very much easier for these guys. They like it that way.

BTW-if it had not been for one guy (Dan Wheeler-who got them to open up to advisors) they would still be an institutional only firm IMO.
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DFA Funds

Postby tuffy88 » Sat Jun 23, 2007 12:25 pm

If someone wanted to replicate the DFA's funds they should be able to do it with ETF's. If there is not an ETF clone of each of their funds I bet that there soon will be. DFA might even do it themselves. Of course that would not make their financial advisor associates happy. No one would then have to pay advisors a toll to serve as gatekeepers.. About the same thing that has happened to full service stockbrokers.

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Replicating with ETF's?

Postby Cubsfan » Sat Jun 23, 2007 3:07 pm

I currently have some DFA funds through a financial advisor. Some of the DFA funds could be replaced fairly easily with no real dropoff in performance. Other DFA funds seem to be real standouts. When I try to replicate my entire DFA portfolio with passively managed ETF's and/or low cost index funds, I can't match the performance.

Emerging markets small cap, EM value, international value, and international small cap value seem to be the funds I can't replicate. Can anybody suggest substititutes for them?
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Postby Rick Ferri » Sat Jun 23, 2007 3:39 pm

.x
Last edited by Rick Ferri on Sat Jun 23, 2007 3:44 pm, edited 1 time in total.
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Postby Rick Ferri » Sat Jun 23, 2007 3:39 pm

Tuffy88

If someone wanted to replicate the DFA's funds they should be able to do it with ETF's.


That would only be true for thier large cap funds. The micro cap and small value funds hold too many illiquid securities. ETFs need liquidity so that shares can be created and redeemed.

DFA's biggest issue is the amount of money they are managing. They have outgrown their microcap roots. Consequently, they are changing the way they manage most of their funds to accommodate burgeoning assets from advisors selling the DFA concept. As many people know, several funds are closing in December. New assets will be directed into funds that have "larger" small cap and mid cap stocks. DFA has to do this. They are tapped-out in the micro cap and small cap area. They have hit critical limits on percent ownership of many smaller companies and cannot buy anymore shares.

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Re: Replicating with ETF's?

Postby paulob » Sat Jun 23, 2007 3:45 pm

Cubsfan wrote:Emerging markets small cap, EM value, international value, and international small cap value seem to be the funds I can't replicate. Can anybody suggest substititutes for them?


Maybe DLS for ISV and DODFX for IV. Although DODFX isn't a passive fund, it passes the low-cost test.
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Postby paulob » Sat Jun 23, 2007 3:47 pm

Rick Ferri wrote: As many people know, several funds are closing in December.


Rick, which funds are closing?
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Re: Replicating with ETF's?

Postby Cubsfan » Sat Jun 23, 2007 5:02 pm

paulob wrote:
Cubsfan wrote:Emerging markets small cap, EM value, international value, and international small cap value seem to be the funds I can't replicate. Can anybody suggest substititutes for them?


Maybe DLS for ISV and DODFX for IV. Although DODFX isn't a passive fund, it passes the low-cost test.



Pretty good suggestions. Thanks.

DLS looks promising, but it has only been around for one year. It's one to watch, but I'm not ready to bail out on DISVX yet.

I do like DODFX (and Dodge and Cox in general) but DFIVX does beat it slightly over 1,3, and 5 years. Several people have voiced concern about possible problems with asset bloat due to the huge numbers of people piling into DODFX over the last few years. I wouldn't be surprised to see it close.
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Re: DFA Funds

Postby RiskAverse » Sat Jun 23, 2007 5:46 pm

tuffy88 wrote:If someone wanted to replicate the DFA's funds they should be able to do it with ETF's. If there is not an ETF clone of each of their funds I bet that there soon will be. DFA might even do it themselves. Of course that would not make their financial advisor associates happy. No one would then have to pay advisors a toll to serve as gatekeepers.. About the same thing that has happened to full service stockbrokers.

Charles


There already exisits the Russell Microcap ETF (IWC). So by combining The Russell 3000,Midcap,Smallcap ETFs + the Value versions of those ETFs together with about 10% in IWC you would have a DFA-esque type portfolio covering stocks from 1-4000

This portfolio would also have the smooth skew to value and small cap of DFA portfolios.
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IWC is out there

Postby Cubsfan » Sat Jun 23, 2007 6:36 pm

Once again, the DFA equivalent outperforms the equivalent ETF. Over the last year, total return on IWC was 17.53%. Total return on DFSCX was 19.78%. There are just certain asset classes where DFA is very tough to beat.
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Re: Replicating with ETF's?

Postby paulob » Sat Jun 23, 2007 7:50 pm

Cubsfan wrote:I do like DODFX (and Dodge and Cox in general) but DFIVX does beat it slightly over 1,3, and 5 years. Several people have voiced concern about possible problems with asset bloat due to the huge numbers of people piling into DODFX over the last few years. I wouldn't be surprised to see it close.


I looked at DODFX and DFIVX returns as very close. After you subtract advisor's fees and transaction (purchase) costs, my guess is that DODFX would be slightly ahead.

I agree asset bloat will cause the fund to close. The good news is that DODGX continues to perform well after it shut the doors which bodes well for it's sister. Also, per Rick's post, DODFX won't be the only fund to close so that shouldn't be a barrier to using it.
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Postby livesoft » Sat Jun 23, 2007 7:54 pm

It seems like assetbuilder is just waiting for us to link to their DFA vs VG page. So here it is.
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Re: Replicating with ETF's?

Postby Cubsfan » Sat Jun 23, 2007 9:36 pm

paulob wrote:
Cubsfan wrote:I do like DODFX (and Dodge and Cox in general) but DFIVX does beat it slightly over 1,3, and 5 years. Several people have voiced concern about possible problems with asset bloat due to the huge numbers of people piling into DODFX over the last few years. I wouldn't be surprised to see it close.


I looked at DODFX and DFIVX returns as very close. After you subtract advisor's fees and transaction (purchase) costs, my guess is that DODFX would be slightly ahead.

I agree asset bloat will cause the fund to close. The good news is that DODGX continues to perform well after it shut the doors which bodes well for it's sister. Also, per Rick's post, DODFX won't be the only fund to close so that shouldn't be a barrier to using it.


If you go out five years, DFIVX is at 23.81% and DODFX is at 23.19%. Very slight edge to DFIVX if you don't overpay for your financial advisor. For all intents and purposes, this one is probably a draw. DODFX does appear to be a capable substitute for DFIVX.

If you follow the link to the DFA vs. VG page, you'll see what I was talking about with EM small cap, EM value, and international small cap value. DFA has been putting up some very impressive numbers in those categories.
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Postby cheapskate » Sun Jun 24, 2007 11:38 am

DODFX has 20% exposure to EM. So DODFX vs DFA Intl LV is not a valid compare. You have to compare that with a spliced 80/20 Intl LCV and EM Value mix. I haven't done this, but I suspect DODFX will trail more significantly in this compare.

That said, DODFX has been much more tax efficient that DFA Intl LV the past few years.

For investors without DFA access, DODFX is certainly a stellar Intl LV + EM LV option in one.

One of my regrets is that I did not invest in DODGX before it closed. If I had done so, I would have used DODGX for US Large exposure.
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Postby livesoft » Sun Jun 24, 2007 11:44 am

cheapskate wrote:One of my regrets is that I did not invest in DODGX before it closed. If I had done so, I would have used DODGX for US Large exposure.

But DODGX is 18% foreign, so you would be guilty of what you just wrote about: apples to oranges.
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Dodge and Cox & DFA Core Equity Portfolios

Postby SmallHi » Sun Jun 24, 2007 2:20 pm

Over the last 5 years, DODFX's pretax returns have trailed the after tax returns of DFAs TaxManaged International Large Value fund. When you adjust for the 20% Emerging Market stake in DODFX, you find that the after tax returns of DFAs TM ILV and Emerging market Value funds are almost 4% a year ahead of DODFXs pretax returns.

Dodge and Cox is a fantastic management firm with very high ethics and a disciplined approach....thats for sure. In my opinion, however, their performance is being effected by the inflow of to many assets.


As for DFA and their issues with asset growth...I can certainly see why some would say that the development of their Applied Core Equity portfolios are primarily a way to deal with the asset growth in Micro Cap and Small Value portfolios.

As many people know, several funds are closing in December. New assets will be directed into funds that have "larger" small cap and mid cap stocks. DFA has to do this. They are tapped-out in the micro cap and small cap area. They have hit critical limits on percent ownership of many smaller companies and cannot buy anymore shares.


On the other hand, DFA (and specifically Fama Jr.) have been saying since the mid 1990s that investors need to look at their portfolios holistically, as an entire allocation, instead of a collection of asset classes that compete with one another. They have written extensively on how to use the Three Factor Model as an asset allocation tool and not just a performance evaluator.

I am just not sure how widespread this is, however. Most still seem so enamoured with the returns of DFSVX and its Int'l sister fund, they seem unwilling to view the results within the context of a multifactor framework.

With that philosophy in mind, what matters most is total portfolio exposure to Market, Small Cap, and Value stocks -- and there are a number of different ways to achieve the same targets. SV just happens to have the highest degree of concentration to all of these factors.

However, a SV fund in particular is less important to the overall plan than what its total exposures to Small Cap and Value risk are. The degree of exposure to small value (or small and value) stocks are what counts, not the actual fund itself. Since 1973, even a 40% Small Value fund committment wouldn't have been enough to outpace a Mid Cap Index fund if the other 60% of your portfolio was in Large Growth!--clearly, its not the % allocation to a Small Value index fund that matters, its the overall portfolio position on the size and value spectrum.

Consider these more traditional Core/component examples and the improved efficiencies now availble with more direct multifactor portfolio options:

Attempting to develop a total asset allocation with a moderate tilt away from the market (lets say 0.2 Small Cap and 0.25 Value) requires a retail index fund investor to commit 60% of their overall holdings to Large Value, Small Cap, and Small Value holdings -- a pretty bold allocation for someone concerned with tracking error. Even with DFAs more Value and Small Cap tilted portfolios, you are still looking at about 50% outside of a TSM holding (more on both counts if you start with the S&P 500 instead).

Using the Core 2 portfolio, you can achieve that approximate allocation with one fund. Furthermore, it has almost a 95% correlation with the overall market, which is twice as high as even a Large Value fund, and 3-4X more correlated with the market than extreme Micro Cap and Small Value funds.

A more agressive total asset allocation tilt (say 0.4 Small Cap and 0.45 Value) requires a retail index investor to commit almost 85% of their holdings to non TSM component funds. Even the DFA fund investor must commit as much as 80% of their portfolio to Large Value, Micro Cap, and Small Value strategies.

US Vector, on the other hand, can achieve this tilt consistently with the need of only 1 strategy. And even Vector is still about 87% correlated with TSM, which puts its level of tracking error on par with a Large Value holding! Far more TE efficient than Micro Cap or Small Value funds it will likely replace.

For many multifactor investors, IMO, these Core portfolios serve as an efficient replacement for allocations that are extremely heavy in remote areas of the equity factor map. They also represent an improvement for investors unable to commit sizeable amounts of future dollars to their plan to keep in rebalanced, or are unwilling to take big capital gains to rebalance factor exposures. They are also better able to manage migration of small stocks and value stocks as they transition from one asset class to another (small to mid or value to blend).

Also, it should be noted that these portfolios are actually more diversified than the older component portfolios. While US Micro Cap will be closing in December I am told, Core 1, Core 2, and Vector contain every single MicroCap stock currently held in DFSCX. They just don't hold the same %s because they are able to get some of their size tilt from small cap stocks, and even mid cap stocks.

Ultimately, these portfolios are not perfect, I'll admit.

Their expense ratios are only inline with similar component portfolios -- given how the older funds have become even cheaper in the last year or two. Much of the cost savings exists inside the funds from lower turnover and trading costs, which is difficult to measure.

Some investors maybe reluctant to target entire regions of the world with only 1 mutual fund -- confusing diversification by # of mutual funds for diversification by # of securities (which is what really matters).

DFA seems slow to release Tax Aware versions of existing Core/Vector funds, and the tax sensitivity of taxable versions is not yet clear.

Finally, the biggest drawback in my mind is that there as of yet exists no Int'l or Emerging Market Vector portfolios. Investors benefit most from smaller and more value oriented portfolios in overseas regions from a return/diversification perspective. Elminating the need for 4-6 seperate asset class holdings in what usually amounts to only 25% to 40% of equity exposure through the use of 2 Vector portfolios (Int'l and EM) would seem to be one of the greatest advantages of an integrated portfolio strucutre...yet there are more US Core vehicles than Int'l and EM combined (excluding the EM Social Core fund). This is one area I would think will be improved in years to come.

All in all, I think the Core portfolios are a major step forward, however. If nothing else, I cannot see how anyone could still consider DFA a "small cap manager", as has often been mentioned. DFA arguably makes it easierand more efficient to target a global small cap and value tilted equity/fixed income portfolio than any other combination of management firms.

I can certainly see how advisors who have been using dedicated SV funds in portfolios for 10 to 15 years would be a bit gunshy to gravitate towards a Core Equity structure. SV has been good to them, no doubt. However, if you have faith in the FF multifactor model, then it supercedes the worship of any particular investment. Much of the recent work out of FF on mutlifactor investing (Including "Migration") points to the integrated Core structure as an improvement over the old component portfolio formation process.

My opinion of course.

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Postby Rick Ferri » Sun Jun 24, 2007 2:42 pm

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a SV fund in particular is less important to the overall plan than what its total exposures to Small Cap and Value risk are. The degree of exposure to small value (or small and value) stocks are what counts, not the actual fund itself.


I have been saying that for years. You do NOT need DFA funds to get small and value exposure in a portfolio. It does not matter where you get the small and value exposure, the issue is how much to have. Fama Jr. has been saying that for as long as I can remember.

Since 99.99% of investors do not own a portfolio that is 100% in small-value, they do not need to be in DFA funds! You can easily replicate the small and value exposure of a typical "all DFA portfolio" by using Vanguard index funds and ETFs.

DFA has some fine funds that fit well in into the small and value category if you decide to hire an advisor that has access. If you don't, no big deal. Use index funds and ETFS. Hire an advisor because you want someone else managing your portfolio. Do not hire an advisor just to gain access to DFA funds or any other product.

DFA is a wonderful company and they create some very unique funds; but the funds are tremendously OVERSOLD by advisors trying to capitalize on the exclusivity of the firm. If some advisors lost that exclusivity, their RIA companies would be completely and utterly dead. They would have nothing to market, and would not know how to get clients or what to do in a portfolio.

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