DFA small value... acitve management?

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privatefarmer
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DFA small value... acitve management?

Post by privatefarmer » Sat Oct 20, 2018 12:12 am

from the prospectus on DFAs small value fund DFSVX :

"The Advisor may adjust the representation in the U.S. Small Cap Value Portfolio of an eligible company, or exclude a company, after considering such factors as free float, momentum, trading strategies, liquidity, value, profitability, and other factors that the Advisor determines to be appropriate, given market conditions"

does this not sound like active management? I've been a strong proponent of small value investing but am starting to wonder if over time it's just turned into another "active strategy"? It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...

fennewaldaj
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Re: DFA small value... acitve management?

Post by fennewaldaj » Sat Oct 20, 2018 12:36 am

Aren't all value funds really trading strategies? Slow motion trading strategies but still trading strategies which would be considered a form of active management. This point is made rather well in this post by the writer of the philosophical ecomomics blog and the people at O'Shoughnessey assset management

https://osam.com/Commentary/factors-from-scratch

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JoMoney
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Re: DFA small value... acitve management?

Post by JoMoney » Sat Oct 20, 2018 12:41 am

Picking a style fund is implicitly active management, it's just rules based.
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Re: DFA small value... acitve management?

Post by Lauretta » Sat Oct 20, 2018 1:03 am

I think it's just a question of terminology. People from AQR and DFA define their strategies as active; Swedroe on the other hand defines them as passive bcause they are rules based.
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privatefarmer
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Re: DFA small value... acitve management?

Post by privatefarmer » Sat Oct 20, 2018 1:13 am

My biggest concern is that over time they keep adding new "factors" based on backtested data... it seems like if small/value were true risk premiums that could be extracted they wouldn't need to add all these newer factors...

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Re: DFA small value... acitve management?

Post by jalbert » Sat Oct 20, 2018 1:20 am

Because DFA makes the rules they use and designs their own indices to track, their funds are not actually passive funds, but quantitative active funds. They don’t have an army of stock analysts, but use quantitative algorithms based on a variety of factors either to include or exclude a stock from the investment domain of a fund. Once that is done, they have traditionally held the stocks at market-cap weight, but the cited language suggests that the weighting may also now be managed actively or quantitatively.
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Re: DFA small value... acitve management?

Post by unclescrooge » Sat Oct 20, 2018 1:36 am

privatefarmer wrote:
Sat Oct 20, 2018 1:13 am
My biggest concern is that over time they keep adding new "factors" based on backtested data... it seems like if small/value were true risk premiums that could be extracted they wouldn't need to add all these newer factors...
They hire PhDs who spend their time doing research.

If a factor shows an improvement in performance, wouldn't you want them to incorporate it?

That being said, I think small cap wisdomtree funds do a good job of replicating the value/size factors and I use them.

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privatefarmer
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Re: DFA small value... acitve management?

Post by privatefarmer » Sat Oct 20, 2018 2:11 am

unclescrooge wrote:
Sat Oct 20, 2018 1:36 am
privatefarmer wrote:
Sat Oct 20, 2018 1:13 am
My biggest concern is that over time they keep adding new "factors" based on backtested data... it seems like if small/value were true risk premiums that could be extracted they wouldn't need to add all these newer factors...
They hire PhDs who spend their time doing research.

If a factor shows an improvement in performance, wouldn't you want them to incorporate it?

That being said, I think small cap wisdomtree funds do a good job of replicating the value/size factors and I use them.
yeah. my concern is that other firms also hire PhDs to backtest data and find other strategies that have outperformed.

I know this topic is beaten to death on this forum so I don't need to open a can of worms. But I keep going back to what Mr. Bogle would say - it's a closed system, if someone outperforms then someone else MUST under perform the market. There's no telling who will outperform and who will underperform going forward.

I can no longer argue that they're simply harvesting a "risk premium" when something like "low vol" supposedly INCREASES returns? How does that make sense? Or when large growth has actually had a slightly HIGHER Std Dev and return over the last 25 years than large value... value stocks are supposed to be riskier, hasn't been the case at least domestically over the last 25 years. in the small cap sector, over the last 19 years SCV has had slightly LOWER std. dev but slightly higher return compared to SCB, how does that make sense? I could understand receiving higher returns for taking on more volatility but that just hasn't been apparent when comparing actual funds over the last 20-25 years.

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Re: DFA small value... acitve management?

Post by typical.investor » Sat Oct 20, 2018 2:34 am

privatefarmer wrote:
Sat Oct 20, 2018 2:11 am
unclescrooge wrote:
Sat Oct 20, 2018 1:36 am
privatefarmer wrote:
Sat Oct 20, 2018 1:13 am
My biggest concern is that over time they keep adding new "factors" based on backtested data... it seems like if small/value were true risk premiums that could be extracted they wouldn't need to add all these newer factors...
They hire PhDs who spend their time doing research.

If a factor shows an improvement in performance, wouldn't you want them to incorporate it?

That being said, I think small cap wisdomtree funds do a good job of replicating the value/size factors and I use them.
yeah. my concern is that other firms also hire PhDs to backtest data and find other strategies that have outperformed.

I know this topic is beaten to death on this forum so I don't need to open a can of worms. But I keep going back to what Mr. Bogle would say - it's a closed system, if someone outperforms then someone else MUST under perform the market. There's no telling who will outperform and who will underperform going forward.

I can no longer argue that they're simply harvesting a "risk premium" when something like "low vol" supposedly INCREASES returns? How does that make sense? Or when large growth has actually had a slightly HIGHER Std Dev and return over the last 25 years than large value... value stocks are supposed to be riskier, hasn't been the case at least domestically over the last 25 years. in the small cap sector, over the last 19 years SCV has had slightly LOWER std. dev but slightly higher return compared to SCB, how does that make sense? I could understand receiving higher returns for taking on more volatility but that just hasn't been apparent when comparing actual funds over the last 20-25 years.
Do you hold value now? It’s been difficult. Whatever the std. dev turns out to be in 15 years from now starting from 10 years ago, I think that even if has better returns and lower deviation that many would prefer not holding underperforming assets for what seems an eternity.

And then there is always the risk that value for whatever reason underperforms forever. Maybe from global growth slowing down due to population aging or the secular debt binge ending or some change.

I am sure value will always go on to outperform, but the issue is what if changes in whatever means there isn’t a premium in my investing horizon.

We see this in international where everyone is chasing US growth. Valuations rule in the end, but there is no telling when it will end or if the end will be in my investing horizon.

That’s what makes value risky I think. Sure growth might not ever reach its expectations, but at least along the way you’ve got a chance to sell.

Wanna rebalance into bonds for retirement? Pretty easy if you’ve been into growth for the last decade. Value investors - not so rosy.

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Re: DFA small value... acitve management?

Post by grok87 » Sat Oct 20, 2018 5:59 am

privatefarmer wrote:
Sat Oct 20, 2018 12:12 am
from the prospectus on DFAs small value fund DFSVX :

"The Advisor may adjust the representation in the U.S. Small Cap Value Portfolio of an eligible company, or exclude a company, after considering such factors as free float, momentum, trading strategies, liquidity, value, profitability, and other factors that the Advisor determines to be appropriate, given market conditions"

does this not sound like active management? I've been a strong proponent of small value investing but am starting to wonder if over time it's just turned into another "active strategy"? It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems like a long list
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Re: DFA small value... acitve management?

Post by nisiprius » Sat Oct 20, 2018 6:00 am

(Shrug) DFA funds are mildly active, in a gentle sort of way. That is why none of them call themselves "index funds." I don't see why there should be any mystery about this except that people want to obfuscate the issue. Their "patient trading" technique is also mildly active, they do some market timing of individual stock purchases although they don't call it that.
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Re: DFA small value... acitve management?

Post by grok87 » Sat Oct 20, 2018 6:30 am

nisiprius wrote:
Sat Oct 20, 2018 6:00 am
(Shrug) DFA funds are mildly active, in a gentle sort of way. That is why none of them call themselves "index funds." I don't see why there should be any mystery about this except that people want to obfuscate the issue. Their "patient trading" technique is also mildly active, they do some market timing of individual stock purchases although they don't call it that.
agree except for the word mildly
it beat its index by 8% in 2013 but has lagged consistently since then (e.g. by 3.5% in 2016) and for the trailing 3 years it's CAGR lags it's index by 2% per year.
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Re: DFA small value... acitve management?

Post by packer16 » Sat Oct 20, 2018 7:59 am

I think the best way to characterize factor funds is quantitatively active. I think a good test for an active vs. passive fund is how much does the fund rely on the market mechanism to determine appropriate weighting (the result of the market becoming more efficient on average) versus its own weighting based upon a manager's judgement in implementing the strategy. Factor funds also require judgement in both the weighting decision and the inclusion/exclusion decision described above. Another characteristic of active funds is their cyclical behavior, in other words they will outperform sometimes and unperformed at other times. It is not surprising that factor funds have the same characteristic & thus again are more like active than passive funds.

IMO quantitative strategies are more prone to arbitrage than other active strategies because of the large number of players who can easily implement similar rules or strategies. It is not surprising then that most factor strategies do not provide the historical returns as expected returns in large part due to this factor.

What I find interesting about the factor as a risk line of reasoning is that its more inductive than deductive. Historically, there has been a premium here therefore we need to explain it & the characteristics of the firms are examined & these firms are more economically sensitive therefore factors as risks makes sense. The deductive test of this would be to screen for economic sensitive firms & see if the same result is found. However, I have not seen such a test & therefore I question the factor as risk line of reasoning making sense.

I think active strategies can add value so I am not against active investing (which I think factor funds are a subset). You just need to recognize a fundamental difference between factor funds and index funds and analyze them with that in mind.

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Re: DFA small value... acitve management?

Post by Elysium » Sat Oct 20, 2018 8:54 am

I do not consider DFA funds as active managed in the traditional sense. You want to know what active management look like in Small Value funds, look at a fund like Third Avenue Small Cap Value (TASCX), this is what variance looks like. DFA funds are quant funds, you may call them passive or rule based. What is really true is that this is not an index fund, so it doesn't track an index exactly year after year. However, over period of time it will be competitive with the small value category, and I would expect it to capture the premium when it is at it's high. Although when the premium is weak the fund should be expected to lag the index funds. I have owned the slightly different DFFVX (Targeted Value) through retirement plan for close to 15 years now and the long term returns have been consistent, no underperformance and may be even a modest outperformance compared to the Vanguard fund. I intend to hold on to this fund for at least another 15 years, and that should give me a full 30 year or more cycle to be able to get the optimal returns from the asset class. This is what it all comes down to with all strategies, you have to stay with the program to get the full benefit.

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Re: DFA small value... acitve management?

Post by moghopper » Sat Oct 20, 2018 9:08 am

The S&P500 has added 16 companies this year, and 26 in 2017.

Are Standard and Poor's active managers?

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Re: DFA small value... acitve management?

Post by stan1 » Sat Oct 20, 2018 9:10 am

Weighting by market capitalization is just another rule. If you've chosen to invest in market capitalization weighted index funds/ETFs you've made an active decision to favor a strategy.

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Re: DFA small value... acitve management?

Post by stan1 » Sat Oct 20, 2018 9:21 am

moghopper wrote:
Sat Oct 20, 2018 9:08 am
The S&P500 has added 16 companies this year, and 26 in 2017.

Are Standard and Poor's active managers?
Yes, they are! The S&P 500, 400, and 600 are managed by a committee of people using a rules based methodology not strictly market capitalization.

The gory details are here:
https://us.spindices.com/governance/met ... formation/

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Re: DFA small value... acitve management?

Post by unclescrooge » Sat Oct 20, 2018 9:28 am

typical.investor wrote:
Sat Oct 20, 2018 2:34 am
privatefarmer wrote:
Sat Oct 20, 2018 2:11 am
unclescrooge wrote:
Sat Oct 20, 2018 1:36 am
privatefarmer wrote:
Sat Oct 20, 2018 1:13 am
My biggest concern is that over time they keep adding new "factors" based on backtested data... it seems like if small/value were true risk premiums that could be extracted they wouldn't need to add all these newer factors...
They hire PhDs who spend their time doing research.

If a factor shows an improvement in performance, wouldn't you want them to incorporate it?

That being said, I think small cap wisdomtree funds do a good job of replicating the value/size factors and I use them.
yeah. my concern is that other firms also hire PhDs to backtest data and find other strategies that have outperformed.

I know this topic is beaten to death on this forum so I don't need to open a can of worms. But I keep going back to what Mr. Bogle would say - it's a closed system, if someone outperforms then someone else MUST under perform the market. There's no telling who will outperform and who will underperform going forward.

I can no longer argue that they're simply harvesting a "risk premium" when something like "low vol" supposedly INCREASES returns? How does that make sense? Or when large growth has actually had a slightly HIGHER Std Dev and return over the last 25 years than large value... value stocks are supposed to be riskier, hasn't been the case at least domestically over the last 25 years. in the small cap sector, over the last 19 years SCV has had slightly LOWER std. dev but slightly higher return compared to SCB, how does that make sense? I could understand receiving higher returns for taking on more volatility but that just hasn't been apparent when comparing actual funds over the last 20-25 years.
Do you hold value now? It’s been difficult. Whatever the std. dev turns out to be in 15 years from now starting from 10 years ago, I think that even if has better returns and lower deviation that many would prefer not holding underperforming assets for what seems an eternity.

And then there is always the risk that value for whatever reason underperforms forever. Maybe from global growth slowing down due to population aging or the secular debt binge ending or some change.

I am sure value will always go on to outperform, but the issue is what if changes in whatever means there isn’t a premium in my investing horizon.

We see this in international where everyone is chasing US growth. Valuations rule in the end, but there is no telling when it will end or if the end will be in my investing horizon.

That’s what makes value risky I think. Sure growth might not ever reach its expectations, but at least along the way you’ve got a chance to sell.

Wanna rebalance into bonds for retirement? Pretty easy if you’ve been into growth for the last decade. Value investors - not so rosy.
I use small and mid cap value for 20% of my equity holdings.

For US large cap I use an "active index" fund. It uses a quantitative filter to identify publicly traded large cap companies with wide economic moats that are trading at a discount to current value.

The current value is determined by morningstar's analysts who create a discounted cashflow model. Morningstar also maintains the index, for which it gets paid a fee, making this an expensive investment by most BH standards.

It then picks the cheapest 75 stocks from this list. The index is reconstituted every 6 months.

It doesn't work every year, but over the past 11 years it's done exceptionally well, especially in 2008, 2016, and 2017.

In 2015, it was down 5% when SPY was up 1.25%. but then it out performed by 10% and 1% in subsequent years.

It had 3 years in a row (2013/14/15) where it under performed SPY so if you're prone to performance chasing, you'll give up on this strategy. But over the past ten years it's beaten SPY by roighly 200 bps a year.

You can track the index using the ETN: WMW.

Note, this is not a recommendation to follow this strategy and definitely not a recommendation to buy an ETN with an expense ratio of 0.75% per year.

Just an example of a strategy that has outperformed the market in the recent past while following a value-ish philosophy.

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Re: DFA small value... acitve management?

Post by Kenkat » Sat Oct 20, 2018 9:48 am

This has been a long running arguement here - active funds bad, index funds good, DFA funds good - but wait, they seem like they are doing some active management. Oh, yes, well, that’s not really active management per se. Ummm, yes it seems like it is. No, it’s not. Yes, it is. Recycle, repeat.

It doesn’t really matter if it is active or not. What matters is if it is low cost, low turnover, low transaction cost. If it is, the management style, whatever you want to call it, doesn’t really matter when it comes to fund performance.

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Re: DFA small value... acitve management?

Post by alex_686 » Sat Oct 20, 2018 10:02 am

stan1 wrote:
Sat Oct 20, 2018 9:21 am
moghopper wrote:
Sat Oct 20, 2018 9:08 am
The S&P500 has added 16 companies this year, and 26 in 2017.

Are Standard and Poor's active managers?
Yes, they are! The S&P 500, 400, and 600 are managed by a committee of people using a rules based methodology not strictly market capitalization.

The gory details are here:
https://us.spindices.com/governance/met ... formation/
If you belive that, then all index funds are activly managed. They all have committees. Running a index requires sime subjective judgements. I have yet to see sonebody bring forth a goid example of a caperious judgement.

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Re: DFA small value... acitve management?

Post by alex_686 » Sat Oct 20, 2018 10:05 am

privatefarmer wrote:
Sat Oct 20, 2018 12:12 am
does this not sound like active management? I've been a strong proponent of small value investing but am starting to wonder if over time it's just turned into another "active strategy"? It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
Boilerlate legalize. Even pure index funds have such language. The market sometimes goes off the rails and the fund cannot exactly replicate what spreadsheets do. This way you can’t sue them.

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Re: DFA small value... acitve management?

Post by grok87 » Sat Oct 20, 2018 10:32 am

Elysium wrote:
Sat Oct 20, 2018 8:54 am
I do not consider DFA funds as active managed in the traditional sense. You want to know what active management look like in Small Value funds, look at a fund like Third Avenue Small Cap Value (TASCX), this is what variance looks like. DFA funds are quant funds, you may call them passive or rule based. What is really true is that this is not an index fund, so it doesn't track an index exactly year after year. However, over period of time it will be competitive with the small value category, and I would expect it to capture the premium when it is at it's high. Although when the premium is weak the fund should be expected to lag the index funds. I have owned the slightly different DFFVX (Targeted Value) through retirement plan for close to 15 years now and the long term returns have been consistent, no underperformance and may be even a modest outperformance compared to the Vanguard fund. I intend to hold on to this fund for at least another 15 years, and that should give me a full 30 year or more cycle to be able to get the optimal returns from the asset class. This is what it all comes down to with all strategies, you have to stay with the program to get the full benefit.
DFFVX 5 and 10 year returns seem in line with its index benchmark. but over the past 3 years it has lagged its benchmark index by 2% points per year
https://us.dimensional.com/funds/us-targeted-value
cheers,
grok
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Re: DFA small value... acitve management?

Post by garlandwhizzer » Sat Oct 20, 2018 11:22 am

privatefarmer wrote:

It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer

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Re: DFA small value... acitve management?

Post by jalbert » Sat Oct 20, 2018 12:29 pm

moghopper wrote:
Sat Oct 20, 2018 9:08 am
The S&P500 has added 16 companies this year, and 26 in 2017.

Are Standard and Poor's active managers?
Yes, but the index funds that track those indices are passively managed. The difference between that and what DFA does is that index fund managers do not control the index changes.
Last edited by jalbert on Sat Oct 20, 2018 2:13 pm, edited 1 time in total.
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Re: DFA small value... acitve management?

Post by packer16 » Sat Oct 20, 2018 1:20 pm

Both factor & index funds are based upon rules but IMO the key difference is the weighting system. In Index funds the weights are determined by capitalization so you are using the market mechanism to weight these stocks. On average IMO this is the best approach. OTOH, factor funds do 2 different things that actually work against the market mechanism of prices. First, they include/exclude certain stocks that would be included in a similar index. Second, the weighting is not based upon the market but some other mechanism that the PM thinks is better. So as a factor investor (or an active investor) you have to believe that the approach you are using will continue to perform versus and index as in the past. IMO there are alot of implicit assumptions associated with factor investing that make it closer to active investing than index investing.

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Re: DFA small value... acitve management?

Post by nisiprius » Sat Oct 20, 2018 1:55 pm

stan1 wrote:
Sat Oct 20, 2018 9:10 am
Weighting by market capitalization is just another rule. If you've chosen to invest in market capitalization weighted index funds/ETFs you've made an active decision to favor a strategy.
It's not "just another rule," because the market portfolio itself, that is to say the sum total of all of the stocks traded in the stock market, is cap-weighted. That may or may not make it the best strategy, but it makes it a different rule with a special status that no other rule has.

To say that it is "just another rule" is to say that the choice of whether to build a tower vertically or have it lean like the Leaning Tower of Pisa is a completely arbitrary choice, "just another angle."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: DFA small value... acitve management?

Post by Elysium » Sat Oct 20, 2018 3:05 pm

grok87 wrote:
Sat Oct 20, 2018 10:32 am
Elysium wrote:
Sat Oct 20, 2018 8:54 am
I do not consider DFA funds as active managed in the traditional sense. You want to know what active management look like in Small Value funds, look at a fund like Third Avenue Small Cap Value (TASCX), this is what variance looks like. DFA funds are quant funds, you may call them passive or rule based. What is really true is that this is not an index fund, so it doesn't track an index exactly year after year. However, over period of time it will be competitive with the small value category, and I would expect it to capture the premium when it is at it's high. Although when the premium is weak the fund should be expected to lag the index funds. I have owned the slightly different DFFVX (Targeted Value) through retirement plan for close to 15 years now and the long term returns have been consistent, no underperformance and may be even a modest outperformance compared to the Vanguard fund. I intend to hold on to this fund for at least another 15 years, and that should give me a full 30 year or more cycle to be able to get the optimal returns from the asset class. This is what it all comes down to with all strategies, you have to stay with the program to get the full benefit.
DFFVX 5 and 10 year returns seem in line with its index benchmark. but over the past 3 years it has lagged its benchmark index by 2% points per year
https://us.dimensional.com/funds/us-targeted-value
cheers,
grok
That may be the case, but I wouldn't worry too much about last 3 years performance against Russel 2000 value. First, if anyone wants to just get the Russell 2000 value index they can through ETF. Same goes for a number of other small value ETFs including S&P 600 value and the indexes vanguard uses. I would think any of these small value funds will do just fine, as long as we are patient enough to hold on for long periods like 30 or 40 years. Most people cannot as they keep on tweaking their strategy. Lastly, I think the last 3 years small value premium is weak, and perhaps the index is lettting more speculative stocks in which DFA screens out. I expect it to do really well compared to the pure index funds when small value premium shows up strength.

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Re: DFA small value... acitve management?

Post by grok87 » Sat Oct 20, 2018 3:22 pm

Elysium wrote:
Sat Oct 20, 2018 3:05 pm
grok87 wrote:
Sat Oct 20, 2018 10:32 am
Elysium wrote:
Sat Oct 20, 2018 8:54 am
I do not consider DFA funds as active managed in the traditional sense. You want to know what active management look like in Small Value funds, look at a fund like Third Avenue Small Cap Value (TASCX), this is what variance looks like. DFA funds are quant funds, you may call them passive or rule based. What is really true is that this is not an index fund, so it doesn't track an index exactly year after year. However, over period of time it will be competitive with the small value category, and I would expect it to capture the premium when it is at it's high. Although when the premium is weak the fund should be expected to lag the index funds. I have owned the slightly different DFFVX (Targeted Value) through retirement plan for close to 15 years now and the long term returns have been consistent, no underperformance and may be even a modest outperformance compared to the Vanguard fund. I intend to hold on to this fund for at least another 15 years, and that should give me a full 30 year or more cycle to be able to get the optimal returns from the asset class. This is what it all comes down to with all strategies, you have to stay with the program to get the full benefit.
DFFVX 5 and 10 year returns seem in line with its index benchmark. but over the past 3 years it has lagged its benchmark index by 2% points per year
https://us.dimensional.com/funds/us-targeted-value
cheers,
grok
That may be the case, but I wouldn't worry too much about last 3 years performance against Russel 2000 value. First, if anyone wants to just get the Russell 2000 value index they can through ETF. Same goes for a number of other small value ETFs including S&P 600 value and the indexes vanguard uses. I would think any of these small value funds will do just fine, as long as we are patient enough to hold on for long periods like 30 or 40 years. Most people cannot as they keep on tweaking their strategy. Lastly, I think the last 3 years small value premium is weak, and perhaps the index is lettting more speculative stocks in which DFA screens out. I expect it to do really well compared to the pure index funds when small value premium shows up strength.
thanks
Keep calm and Boglehead on. KCBO.

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Re: DFA small value... acitve management?

Post by moghopper » Sat Oct 20, 2018 8:15 pm

jalbert wrote:
Sat Oct 20, 2018 12:29 pm
Yes, but the index funds that track those indices are passively managed. The difference between that and what DFA does is that index fund managers do not control the index changes.
I find this to be arbitrary. If DFA had an outside consultant make an "index rule" and then stuck to that - then it would be an index? Or it would only then be passive?

Sorry, but I think most of this is mental gymnastics to make people feel better.

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Re: DFA small value... acitve management?

Post by fennewaldaj » Sat Oct 20, 2018 10:38 pm

To me DFA seems pretty similar to the low turnover high number of holdings subset of quant funds (Although somewhat less expensive). Its just the qaunt process they follow is more transparent. For example LSV funds

large cap value

https://www.morningstar.com/funds/xnas/lsvex/quote.html

small cap value

https://www.morningstar.com/funds/XNAS/LSVQX/quote.html

LSV was actually founded by the academics who wrote the paper Contrarian Investment, Extrapolation, and Risk which was sort of the founding document for the behavioral explanations for value (written just slightly after the famous FF papers).

https://onlinelibrary.wiley.com/doi/ful ... .tb04772.x

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Re: DFA small value... acitve management?

Post by privatefarmer » Sun Oct 21, 2018 12:24 am

garlandwhizzer wrote:
Sat Oct 20, 2018 11:22 am
privatefarmer wrote:

It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer
thanks. I've gone from a TSM guy to a SCV guy back to TSM... I wish it were that easy to get 2-4% "premium" over the TSM but I think that's a pipe dream. The market is simply too efficient, certainly domestically and probably internationally as well. The ER and turnover of DFA is too high. I understand they're cheaper than other "active funds" but you can basically own the total market now for nothing so paying 0.5% ER plus 24% turnover is not logical, IMO. It's too bad I paid a $1000 flat fee to get into DFA funds a year ago, and now am going back to vanguard.... hopefully this time I just stick w/ the TSM and take what the market gives.

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Re: DFA small value... acitve management?

Post by privatefarmer » Sun Oct 21, 2018 12:26 am

moghopper wrote:
Sat Oct 20, 2018 9:08 am
The S&P500 has added 16 companies this year, and 26 in 2017.

Are Standard and Poor's active managers?
yeah, but the cost is basically zero. I prefer TSM to S/P 500, but if you can own 80% of the market w/ basically zero cost then I suppose that's "good enough".

I think we all understand, it's not about active vs passive per say. It's about costs. If you can hold a diversified portfolio of stocks w/ very little turnover and near-zero expenses then that's probably as good as it gets.

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Re: DFA small value... acitve management?

Post by fennewaldaj » Sun Oct 21, 2018 12:33 am

privatefarmer wrote:
Sun Oct 21, 2018 12:24 am
garlandwhizzer wrote:
Sat Oct 20, 2018 11:22 am
privatefarmer wrote:

It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer
thanks. I've gone from a TSM guy to a SCV guy back to TSM... I wish it were that easy to get 2-4% "premium" over the TSM but I think that's a pipe dream. The market is simply too efficient, certainly domestically and probably internationally as well. The ER and turnover of DFA is too high. I understand they're cheaper than other "active funds" but you can basically own the total market now for nothing so paying 0.5% ER plus 24% turnover is not logical, IMO. It's too bad I paid a $1000 flat fee to get into DFA funds a year ago, and now am going back to vanguard.... hopefully this time I just stick w/ the TSM and take what the market gives.
You can hold vanguards small cap value fund with its 0.07% ER as kind of a middle ground.

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Re: DFA small value... acitve management?

Post by MotoTrojan » Sun Oct 21, 2018 12:35 am

fennewaldaj wrote:
Sun Oct 21, 2018 12:33 am
privatefarmer wrote:
Sun Oct 21, 2018 12:24 am
garlandwhizzer wrote:
Sat Oct 20, 2018 11:22 am
privatefarmer wrote:

It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer
thanks. I've gone from a TSM guy to a SCV guy back to TSM... I wish it were that easy to get 2-4% "premium" over the TSM but I think that's a pipe dream. The market is simply too efficient, certainly domestically and probably internationally as well. The ER and turnover of DFA is too high. I understand they're cheaper than other "active funds" but you can basically own the total market now for nothing so paying 0.5% ER plus 24% turnover is not logical, IMO. It's too bad I paid a $1000 flat fee to get into DFA funds a year ago, and now am going back to vanguard.... hopefully this time I just stick w/ the TSM and take what the market gives.
You can hold vanguards small cap value fund with its 0.07% ER as kind of a middle ground.
I feel a better middle-ground would be an S&P600 small-value fund (deeper size premium, more in-line with DFA I'd wager). Looking at 15-25 bp depending on your fund preference (SLYV in tax-advantaged, VIOV or IJS in any account).

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Re: DFA small value... acitve management?

Post by privatefarmer » Sun Oct 21, 2018 1:24 am

MotoTrojan wrote:
Sun Oct 21, 2018 12:35 am
fennewaldaj wrote:
Sun Oct 21, 2018 12:33 am
privatefarmer wrote:
Sun Oct 21, 2018 12:24 am
garlandwhizzer wrote:
Sat Oct 20, 2018 11:22 am
privatefarmer wrote:

It seems like they keep "fine tuning" it/throwing in new factors ie profitability/liquidity etc etc, doesn't seem as passive as I once thought...

would love some input from anyone w/ more insight...
It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer
thanks. I've gone from a TSM guy to a SCV guy back to TSM... I wish it were that easy to get 2-4% "premium" over the TSM but I think that's a pipe dream. The market is simply too efficient, certainly domestically and probably internationally as well. The ER and turnover of DFA is too high. I understand they're cheaper than other "active funds" but you can basically own the total market now for nothing so paying 0.5% ER plus 24% turnover is not logical, IMO. It's too bad I paid a $1000 flat fee to get into DFA funds a year ago, and now am going back to vanguard.... hopefully this time I just stick w/ the TSM and take what the market gives.
You can hold vanguards small cap value fund with its 0.07% ER as kind of a middle ground.
I feel a better middle-ground would be an S&P600 small-value fund (deeper size premium, more in-line with DFA I'd wager). Looking at 15-25 bp depending on your fund preference (SLYV in tax-advantaged, VIOV or IJS in any account).
Thanks. yeah, I'll think about it. I kinda think that for a guy like myself who cannot seem to stay fully committed to any strategy, just sticking w/ the TSM may be the best approach. My largest concern is that the SCV sector is such a small piece of the overall market and has gotten over crowded with inflows, but who knows. You could also argue that large cap growth stocks, like the FAANG stocks etc, are over crowded. it's anyone's guess. I definitely think DFA charges too much, though, and am resolved to going back to vanguard.

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Re: DFA small value... acitve management?

Post by MotoTrojan » Sun Oct 21, 2018 2:10 am

privatefarmer wrote:
Sun Oct 21, 2018 1:24 am
MotoTrojan wrote:
Sun Oct 21, 2018 12:35 am
fennewaldaj wrote:
Sun Oct 21, 2018 12:33 am
privatefarmer wrote:
Sun Oct 21, 2018 12:24 am
garlandwhizzer wrote:
Sat Oct 20, 2018 11:22 am


It seems to me that you've got plenty of insight yourself, private farmer. Factor investing has become more complex and more like active management as time has passed. Fine tuning is done because the old rules don't work so well any more: P/B as sole value criterion for example. Factor investing currently aims at a moving target because lots of quant dollars have chased the old established target. This tends to arbitrage away a portion of the outperformance that academia has identified on long term cost free backtesting. Add to that the increased costs involved in fees and increased fund portfolio turnover. Getting outperformance from factor approaches after costs going forward may not be the slam dunk that academic backtesting suggests.

Garland Whizzer
thanks. I've gone from a TSM guy to a SCV guy back to TSM... I wish it were that easy to get 2-4% "premium" over the TSM but I think that's a pipe dream. The market is simply too efficient, certainly domestically and probably internationally as well. The ER and turnover of DFA is too high. I understand they're cheaper than other "active funds" but you can basically own the total market now for nothing so paying 0.5% ER plus 24% turnover is not logical, IMO. It's too bad I paid a $1000 flat fee to get into DFA funds a year ago, and now am going back to vanguard.... hopefully this time I just stick w/ the TSM and take what the market gives.
You can hold vanguards small cap value fund with its 0.07% ER as kind of a middle ground.
I feel a better middle-ground would be an S&P600 small-value fund (deeper size premium, more in-line with DFA I'd wager). Looking at 15-25 bp depending on your fund preference (SLYV in tax-advantaged, VIOV or IJS in any account).
Thanks. yeah, I'll think about it. I kinda think that for a guy like myself who cannot seem to stay fully committed to any strategy, just sticking w/ the TSM may be the best approach. My largest concern is that the SCV sector is such a small piece of the overall market and has gotten over crowded with inflows, but who knows. You could also argue that large cap growth stocks, like the FAANG stocks etc, are over crowded. it's anyone's guess. I definitely think DFA charges too much, though, and am resolved to going back to vanguard.
If you have a shed of doubt in your ability to stick with anything, then I agree TSM is the best approach (well, maybe some International...) and I wouldn't lose any sleep on not tilting to any factors.

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Re: DFA small value... acitve management?

Post by Random Walker » Sun Oct 21, 2018 8:40 am

I believe DFA is totally passive. They define a segment of the market with specific rules: size by market cap and price by book to market (I believe they still only use one metric because they believe it is the most stable one). They access the SV segment with a passive rules based market cap weighted fund. There is no individual stock picking or market timing.
As new evidence has become available that explains the returns of portfolios, that evidence has been incorporated into the funds: profitability screen, momentum screen, exclusion of stocks that have historically underperformed (IPOs, bankruptcy). These are not willy nilly adaptations; they are very few, far between, extensively well researched, and permanent. Once again, all these adaptations are rules based with no individual stock picking or market timing. Forced trades are a real weakness of pure indexes, and patient trading allows DFA to negate this disadvantage of pure indexes and possibly even use patient trading as an advantage for the fund. That little bit of wiggle room certainly forces the lawyers to make all sorts of statements in a prospectus that leaves wide room for active behavior, but that is not the culture of DFA as I understand it.

CAPM explained about 65-70% of portfolio returns with a single factor. Fama-French 3 factor model increased explanatory power to about 90%. Adding momentum and profitability factors further increases the explanatory behavior to about 95%. DFA has simply incorporated these academic findings into their funds in a formulaic manner that is agnostic to individual stocks and timing.

Dave

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Re: DFA small value... acitve management?

Post by packer16 » Sun Oct 21, 2018 9:17 am

The real question here is what is passive vs. active. The pure passive is market weighted non-tilted index funds. The pure active is individual stock selection & weighting based upon some strategy like value investing. Factor funds are somewhere in the middle. Another difference is how much judgement is used to put together the portfolio (stock selection & weight). From some of the description of factor funds there is as much or more judgement on stock selection & weight as there is in active funds. Another perspective is active management assumes you know something the market does not & thus you will get a better risk/reward combination than market weighted indices. The power of the market is a powerful mechanism & on average is right more than any alternative, so choosing to be active in any form, including factors, is stating you know more than market. I am skeptical you can do this across factors given the limited constraints in investing that way. IMO a more promising approach to active investing is investing in the niches were the competition is less.

Packer
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Re: DFA small value... acitve management?

Post by Random Walker » Sun Oct 21, 2018 10:23 am

packer16 wrote:
Sun Oct 21, 2018 9:17 am
The power of the market is a powerful mechanism & on average is right more than any alternative, so choosing to be active in any form, including factors, is stating you know more than market.

Packer
I don’t think passive factor investing is at all “saying you know more than the market”. I think it is saying the investor has no clue what the market might do, so he is diversifying as broadly as possible across potential sources of return, both risk based and behavioral based.

Dave

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Re: DFA small value... acitve management?

Post by whodidntante » Sun Oct 21, 2018 10:32 am

There is value in not blindly following an index, if you trust DFA to follow a quantitative, rules based approach instead of hero stock picking.
Since they were the first shop to do factor funds at scale, and they still support research and hire good people with high conviction, I think you can. It's true that the most modern index funds are well managed. But DFA can be providers of liquidity, versus having to pay for it like an index fund will often do.

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Re: DFA small value... acitve management?

Post by packer16 » Sun Oct 21, 2018 12:14 pm

Random Walker wrote:
Sun Oct 21, 2018 10:23 am
packer16 wrote:
Sun Oct 21, 2018 9:17 am
The power of the market is a powerful mechanism & on average is right more than any alternative, so choosing to be active in any form, including factors, is stating you know more than market.

Packer
I don’t think passive factor investing is at all “saying you know more than the market”. I think it is saying the investor has no clue what the market might do, so he is diversifying as broadly as possible across potential sources of return, both risk based and behavioral based.

Dave
What it is saying is that via factors you know better than the market the appropriate weight to put on securities and whether to include them or not in your set of securities you are using to develop your factor fund. It is stating you know that the factors you select are the drivers of performance. Remember factors are empirically derived not economically derived so their future performance is dependent upon the past relationships holding. Again these are implicit assumptions in factor investing that make it IMO more active than passive. All you are doing with diversification is making more bets that your factors are in fact correct.

If you are saying you do not know what the market will do, why not rely on market weighting of securities? The reason is factor investors think they know how to get a better risk/reward relationship via factors. They (like all active managers) ignore the equity market signals the market is providing. This IMO is biggest difference between factor investing and index investing.

Packer
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Re: DFA small value... acitve management?

Post by privatefarmer » Mon Oct 22, 2018 2:34 am

Random Walker wrote:
Sun Oct 21, 2018 8:40 am
I believe DFA is totally passive. They define a segment of the market with specific rules: size by market cap and price by book to market (I believe they still only use one metric because they believe it is the most stable one). They access the SV segment with a passive rules based market cap weighted fund. There is no individual stock picking or market timing.
As new evidence has become available that explains the returns of portfolios, that evidence has been incorporated into the funds: profitability screen, momentum screen, exclusion of stocks that have historically underperformed (IPOs, bankruptcy). These are not willy nilly adaptations; they are very few, far between, extensively well researched, and permanent. Once again, all these adaptations are rules based with no individual stock picking or market timing. Forced trades are a real weakness of pure indexes, and patient trading allows DFA to negate this disadvantage of pure indexes and possibly even use patient trading as an advantage for the fund. That little bit of wiggle room certainly forces the lawyers to make all sorts of statements in a prospectus that leaves wide room for active behavior, but that is not the culture of DFA as I understand it.

CAPM explained about 65-70% of portfolio returns with a single factor. Fama-French 3 factor model increased explanatory power to about 90%. Adding momentum and profitability factors further increases the explanatory behavior to about 95%. DFA has simply incorporated these academic findings into their funds in a formulaic manner that is agnostic to individual stocks and timing.

Dave
problem is, DFA small value fund has 24% turnover, vanguards total market fund has 3% turnover. DFA turns over their entire fund ~4 years, vanguard ~33 years.

One sounds much more passive to me than the other. I don't believe DFA is anywhere near as "active" as many other active funds and they certainly try to market themselves as being closer to Vanguard, but I think it's clear - with that high of turnover there is a lot of active decisions being made and thus costs being incurred.

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Re: DFA small value... acitve management?

Post by fennewaldaj » Mon Oct 22, 2018 2:44 am

privatefarmer wrote:
Mon Oct 22, 2018 2:34 am
Random Walker wrote:
Sun Oct 21, 2018 8:40 am
I believe DFA is totally passive. They define a segment of the market with specific rules: size by market cap and price by book to market (I believe they still only use one metric because they believe it is the most stable one). They access the SV segment with a passive rules based market cap weighted fund. There is no individual stock picking or market timing.
As new evidence has become available that explains the returns of portfolios, that evidence has been incorporated into the funds: profitability screen, momentum screen, exclusion of stocks that have historically underperformed (IPOs, bankruptcy). These are not willy nilly adaptations; they are very few, far between, extensively well researched, and permanent. Once again, all these adaptations are rules based with no individual stock picking or market timing. Forced trades are a real weakness of pure indexes, and patient trading allows DFA to negate this disadvantage of pure indexes and possibly even use patient trading as an advantage for the fund. That little bit of wiggle room certainly forces the lawyers to make all sorts of statements in a prospectus that leaves wide room for active behavior, but that is not the culture of DFA as I understand it.

CAPM explained about 65-70% of portfolio returns with a single factor. Fama-French 3 factor model increased explanatory power to about 90%. Adding momentum and profitability factors further increases the explanatory behavior to about 95%. DFA has simply incorporated these academic findings into their funds in a formulaic manner that is agnostic to individual stocks and timing.

Dave
problem is, DFA small value fund has 24% turnover, vanguards total market fund has 3% turnover. DFA turns over their entire fund ~4 years, vanguard ~33 years.

One sounds much more passive to me than the other. I don't believe DFA is anywhere near as "active" as many other active funds and they certainly try to market themselves as being closer to Vanguard, but I think it's clear - with that high of turnover there is a lot of active decisions being made and thus costs being incurred.
The first article I posted above explains the concept well but essentially to the extent that value strategies work they depend on the turn over. The idea is that the reason it works at all is you buy stocks cheap wait for their multiples to expand and then sell them. The article deconstructs the data and shows that has been the case. So a value fund has to have a turnover in the 10-25% range or its not going to work. Also note Vanguards small value fund has a 19% turnover. A small value fund can have stocks exit both by getting too big or too expensive so its always going to have some turnover.

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Re: DFA small value... acitve management?

Post by GreatOdinsRaven » Mon Oct 22, 2018 5:42 am

Random Walker wrote:
Sun Oct 21, 2018 8:40 am
I believe DFA is totally passive. They define a segment of the market with specific rules: size by market cap and price by book to market (I believe they still only use one metric because they believe it is the most stable one). They access the SV segment with a passive rules based market cap weighted fund. There is no individual stock picking or market timing.
As new evidence has become available that explains the returns of portfolios, that evidence has been incorporated into the funds: profitability screen, momentum screen, exclusion of stocks that have historically underperformed (IPOs, bankruptcy). These are not willy nilly adaptations; they are very few, far between, extensively well researched, and permanent. Once again, all these adaptations are rules based with no individual stock picking or market timing. Forced trades are a real weakness of pure indexes, and patient trading allows DFA to negate this disadvantage of pure indexes and possibly even use patient trading as an advantage for the fund. That little bit of wiggle room certainly forces the lawyers to make all sorts of statements in a prospectus that leaves wide room for active behavior, but that is not the culture of DFA as I understand it.

CAPM explained about 65-70% of portfolio returns with a single factor. Fama-French 3 factor model increased explanatory power to about 90%. Adding momentum and profitability factors further increases the explanatory behavior to about 95%. DFA has simply incorporated these academic findings into their funds in a formulaic manner that is agnostic to individual stocks and timing.

Dave
Dave,
Over 50% of my portfolio is in various DFA factor funds, both US and Intl. With that said, even David Booth the founder of DFA says that DFA is active management and they are not index funds. They’re also certainly not totally passive. Here’s the interview where he says so.

Around here I think we all like to think of DFA as “passive” because Larry made “passive” a safe word. There’s nothing passive about them. They’re not index funds. It’s ok, even the people who only invest in the S&P500 are using active management.

I agree with Gus Sauter the retired chief investment officer at Vanguard. The only true index fund is the total market portfolio. Anything else is active. He gave a great talk at the Bogleheads meeting in 2016 or 2017 about the Vanguard MCV index and went out of his way to say that it isn’t a true index fund, because it deviates from the total market cap index.

I really wish people would just own up and admit that they’re investing in active funds with any fund that isn’t the total market portfolio. DFA, Vanguard style funds, AQR... It’s not a big deal...
GOR
"The greatest enemies of the equity investor are expenses and emotions." -John C. Bogle, Little Book of Common Sense Investing. | | "Winter is coming." Lord Eddard Stark.

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Re: DFA small value... acitve management?

Post by typical.investor » Mon Oct 22, 2018 5:47 am

GreatOdinsRaven wrote:
Mon Oct 22, 2018 5:42 am
I agree with Gus Sauter the retired chief investment officer at Vanguard. The only true index fund is the total market portfolio. Anything else is active. He gave a great talk at the Bogleheads meeting in 2016 or 2017 about the Vanguard MCV index and went out of his way to say that it isn’t a true index fund, because it deviates from the total market cap index.

I really wish people would just own up and admit that they’re investing in active funds with any fund that isn’t the total market portfolio. DFA, Vanguard style funds, AQR... It’s not a big deal...
GOR
Does the "total market portfolio" include global equities as well?

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Re: DFA small value... acitve management?

Post by Elysium » Mon Oct 22, 2018 6:46 am

typical.investor wrote:
Mon Oct 22, 2018 5:47 am
GreatOdinsRaven wrote:
Mon Oct 22, 2018 5:42 am
I agree with Gus Sauter the retired chief investment officer at Vanguard. The only true index fund is the total market portfolio. Anything else is active. He gave a great talk at the Bogleheads meeting in 2016 or 2017 about the Vanguard MCV index and went out of his way to say that it isn’t a true index fund, because it deviates from the total market cap index.

I really wish people would just own up and admit that they’re investing in active funds with any fund that isn’t the total market portfolio. DFA, Vanguard style funds, AQR... It’s not a big deal...
GOR
Does the "total market portfolio" include global equities as well?
Yes, the Total World Stock Index does.

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Re: DFA small value... acitve management?

Post by Random Walker » Mon Oct 22, 2018 9:03 am

privatefarmer wrote:
Mon Oct 22, 2018 2:34 am
Random Walker wrote:
Sun Oct 21, 2018 8:40 am
I believe DFA is totally passive. They define a segment of the market with specific rules: size by market cap and price by book to market (I believe they still only use one metric because they believe it is the most stable one). They access the SV segment with a passive rules based market cap weighted fund. There is no individual stock picking or market timing.
As new evidence has become available that explains the returns of portfolios, that evidence has been incorporated into the funds: profitability screen, momentum screen, exclusion of stocks that have historically underperformed (IPOs, bankruptcy). These are not willy nilly adaptations; they are very few, far between, extensively well researched, and permanent. Once again, all these adaptations are rules based with no individual stock picking or market timing. Forced trades are a real weakness of pure indexes, and patient trading allows DFA to negate this disadvantage of pure indexes and possibly even use patient trading as an advantage for the fund. That little bit of wiggle room certainly forces the lawyers to make all sorts of statements in a prospectus that leaves wide room for active behavior, but that is not the culture of DFA as I understand it.

CAPM explained about 65-70% of portfolio returns with a single factor. Fama-French 3 factor model increased explanatory power to about 90%. Adding momentum and profitability factors further increases the explanatory behavior to about 95%. DFA has simply incorporated these academic findings into their funds in a formulaic manner that is agnostic to individual stocks and timing.

Dave
problem is, DFA small value fund has 24% turnover, vanguards total market fund has 3% turnover. DFA turns over their entire fund ~4 years, vanguard ~33 years.

One sounds much more passive to me than the other. I don't believe DFA is anywhere near as "active" as many other active funds and they certainly try to market themselves as being closer to Vanguard, but I think it's clear - with that high of turnover there is a lot of active decisions being made and thus costs being incurred.
Not a fair comparison. Need to compare small value to small value. The VG Small Value Index Fund, VISVX, has a turnover of 19.3%.

Dave

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Re: DFA small value... acitve management?

Post by Random Walker » Mon Oct 22, 2018 9:12 am

fennewaldaj wrote:
Mon Oct 22, 2018 2:44 am
So a value fund has to have a turnover in the 10-25% range or its not going to work. Also note Vanguards small value fund has a 19% turnover. A small value fund can have stocks exit both by getting too big or too expensive so its always going to have some turnover.
And note that if a fund is willing to be patient with its buys and sells it can potentially add value in a formulaic passive fashion. Using buy and hold ranges together with a momentum screen a passive fund can hold off on purchasing stocks that display negative momentum and hold stocks continuing to display positive momentum.

Also, I believe that overall a value strategy tends to be relatively tax inefficient. I believe though that tax managed value fund might display somewhat increased turnover in its attempt to offset gains with losses.

Dave

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Re: DFA small value... acitve management?

Post by packer16 » Mon Oct 22, 2018 9:24 am

Dave,

Is not the smart trading you mention an active trading strategy? If they are doing this how can this be passive? I agree it is formulaic but passive IMO means no or little trading (only when the index constituents change, not when they think they can gain a trading advantage). It appears to be part of the strategy of the fund so how can it be passive? These guys think they know how to beat the market (market-cap indices) & are running their fund that way just like other active managers.

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Re: DFA small value... acitve management?

Post by Random Walker » Mon Oct 22, 2018 9:26 am

GOR,
It’s actually Fama’s definition of passive I believe. Larry uses Fama’s definition: no individual stock picking, no market timing. I will certainly agree with you that there is a distinction between a passive fund and an index fund. All index funds are passive. Many passive funds are not at all index funds. I’ll look at the Booth comment. I realize too that Asness describes his funds as active whereas Larry describes them as passive. So we are probably just wrapped up in semantics. What’s important is understanding what the various funds do and don’t do.

Personally, I can accept formulaic, passive, quant type management agnostic to individual stocks or market timing as clearly passive. Once subjective human decision making gets involved, I perceive that as active. To me it’s the human thought and emotion element that defines active.

Dave

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