Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

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Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by GreatOdinsRaven »

Another great WSJ article from Jason Zweig- this time on DFA


"Making Billions With One Belief: The Markets Can’t Be Beat"


Usual protocol.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by matjen »

No link so I'll add what I posted and then deleted when I saw you beat me!

MARKETS THE PASSIVISTS
Making Billions With One Belief: The Markets Can’t Be Beat
Mutual-fund company DFA adds nearly $2 billion in net assets per month at a time when investors are fleeing many other firms


http://on.wsj.com/2dSp1sN
The fastest-growing major mutual-fund company in the U.S. isn’t strictly an active or passive investor. It’s both.

Dimensional Fund Advisors LP, or DFA, is the sixth-largest mutual-fund manager, up from eighth a year ago, according to Morningstar Inc., adding nearly $2 billion in net assets per month at a time when investors are fleeing many other firms.

DFA, whose founders and advisers include leading purveyors of efficient-market theory, is built on the bedrock belief that active management practiced by traditional stock pickers is futile, if not an absurdity. DFA’s founders are pioneers of index funds. But these men concluded long ago that investors who respected efficient markets could nevertheless achieve better returns than plain index funds deliver.

“We think indexing is too mechanical,” co-founder David Booth said in a recent interview. “A little bit of judgment can make a difference.”
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by GreatOdinsRaven »

I wasn't sure if I should post the link or just the title. My bad.

Thanks for including it.

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by pkcrafter »

matjen, I was ready to post the same quote you did--
DFA, whose founders and advisers include leading purveyors of efficient-market theory, is built on the bedrock belief that active management practiced by traditional stock pickers is futile, if not an absurdity. DFA’s founders are pioneers of index funds. But these men concluded long ago that investors who respected efficient markets could nevertheless achieve better returns than plain index funds deliver
I'm not buying. This just leaves a bad taste. Not a typical Zweig article. As far as DFA growth goes, I cannot help wondering if the Bogleheads' forum has contributed to this in some small way. Also goes for the recent rise in indexing.

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by TomCat96 »

I'm sorry. Perhaps I'm a little more blunt than the average boglehead because I don't know who to give proper respect to. But that article just reads like junk to me.

I mean if anything, it looks like the proper conclusion I should be drawing is

DFA is good for america because

“I love that [Mr. Booth and DFA] have been true to their economic roots and have grown the company in a gigantic way without ever veering from their beliefs and theories of investing,” he wrote.

I sure need some DFA in my life!

Is that the proper conclusion I should be drawing?
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Robert T »

.
If I recall it was not long ago that DFA [at least David Booth] set a target of $500 billion in AUM – this seemed to have spawned new products and expansion into defined contribution services. I see they are close to reaching it at $445 billion.** At some point size will become an issue. As the article notes they “already hold at least 5% of the total shares outstanding of 545 US listed companies” – the higher the share the larger the market impact of any rebalancing trades.

We are often told DFAs implementation jujutsu can overcame all of this, and perhaps this is partly true. In addition, we are also told by some that DFAs form of jujutsu even adds significant ‘alpha’ beyond factor exposure! The evidence shows this is more marketing than factual. DFA did (and perhaps still does) have an edge in international and emerging markets but there are also now more passive alternatives in these areas.

“Over the long-term what matters is factor exposure and expense”. For all but the most extreme tilts, a desired portfolio factor exposure can be largely achieved with non-DFA funds and likely at lower total cost. Personally I use DFA funds in 529, but non-DFA funds for retirement. In the grander scheme of things, consistent savings and staying the course are a much larger determinant of investment success than the use of DFA or non-DFA funds to achieve portfolio factor load targets.

** As I understand Arnold Schwarzenegger (quoted in the article) is part owner of DFA, so its not surprising that he is happy with its growth.

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by GreatOdinsRaven »

Robert T wrote:.
In the grander scheme of things, consistent savings and staying the course are a much larger determinant of investment success than the use of DFA or non-DFA funds to achieve portfolio factor load targets.
Amen, brother.

I always enjoy your insight, Robert T.

Full disclosure- I have some DFA in a 401(k), but after attending Bogleheads 2016 I'm an even bigger Vanguard fanboy.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by matjen »

Robert T wrote:.
In the grander scheme of things, consistent savings and staying the course are a much larger determinant of investment success than the use of DFA or non-DFA funds to achieve portfolio factor load targets.
Of course I agree. The one thing I will say about DFA and what really attracted me to them was that it is easier to get the loads with DFA funds and not have to worry about them as much. The odds of funds shutting down or changing are slim to none and there are funds that make it very easy since they are balanced across the US market and the International market. For someone like Robert T. this may be inconsequential but for all the folks who admire the three-fund you can get to that type of simplicity AND have Robert T. or Swedroe recommended factor loads.

So for instance, I think you are getting near your favored loadings Robert T. with just two DFA funds. No fuss, no muss, hardly any rebalancing necessary other than at the very top level. Not sure you can do that anywhere else. Makes it much easier for dopes like me. ;-)

(DWUSX) WORLD EX US TARGETED VALUE PORTFOLIO
(DFVEX) US VECTOR EQUITY PORTFOLIO

Just add the Intermediate Term Treasury Bond fund of your choice. DFAs or iShares or Vanguard or Schwab, etc.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Random Walker »

I am not sure I agree with the statement that all that matters is factor exposure and cost. I think cost per unit factor exposure is relevant. Funds that have deeper factor exposure allow the investor to achieve desired portfolio tilts with less market risk, resulting in a more efficient portfolio. Moreover, less of the more expensive tilt fund is required to achieve ones goal exposure when the tilt fund has deeper factor exposure. I'm sure this is true when comparing Vanguard to DFA. It definitely needs to be evaluated when comparing the various ETFs to DFA funds.

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by larryswedroe »

Dave, In fact Jared Kizer and Sean Grover, my colleagues, have a new paper in the JPM on the very subject of expense per unit of factor exposure.

Also don't forget the advantages of CORE portfolios which reduce trading costs and minimize, eliminate, the need to rebalance with your own money.

Note we are not exclusive users of DFA, using funds from AQR, Bridgeway, and Stone Ridge as well

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Robert T »

.
Few thoughts:

1. Cost per unit of factor exposure: That was my point in the earlier post. More concretely, I have been tracking two factor matched portfolios in M* since 11/6/08 - a DFA, largely tax-managed funds, portfolio and a non-DFA, largely ETF, portfolio. These portfolios had the same ex-ante estimated factor exposure when set up in 2008. The non-DFA portfolio has a 0.13% lower expense ratio, and a 0.12% lower 5-yr tax-cost ratio (according to M*) for a 0.25% lower combined cost. Any advisor fee for DFA fund access + the $25 cost per trade of DFA funds (as I understand) would need to be added to the total cost of owning DFA funds. The annualized return of the non-DFA, largely ETF, portfolio since 11/6/08 has been 0.3% higher (10.1% vs. 9.8%). This is not a back-test as the portfolios were both set up in 2008. Would just note that these are not portfolios with extreme factor tilts (they have size and value load targets of 0.2/0.4). The more extreme the desired portfolio factor tilts, the more difficult it is to achieve these with non-DFA funds relative to DFA funds.

2. There are "non-factor" risks to both approaches. (i) there can be changes in the long-term factor exposure of the portfolios due to changes to the index tracked by the funds. If anything, over this period there have been more changes to the factor exposure of the DFA portfolio with the addition of profitability in its stock screening process - so the two portfolios may now not be as exactly factor matched as in 2008; (ii) the risk of fund closures is higher with the non-DFA portfolio, but the risk of "advisors leaving" (e.g. Rick leaving Portfolio Solutions) is higher with DFA portfolios. Obviously the associated risks of this is lower with firms like Larry's with a deeper bench.

DFA has great products, and the core/vector funds can add simplicity (at the expense of less control over specific factor exposures), but expectations of significant 'alpha' above a factor matched non-DFA portfolio may lead to disappointment.

IMO, its good to see advisors continually assessing new products coming to market and adapting as needed. I recall these relevant extracts from James Montier's book on Behavioral Investing
"… we are too busy looking for information that confirms our hypothesis .... The only way to test a hypothesis is to look for information that disagrees with it - a process known as falsification [Karl Popper]."

"… In fact it transpires that we are twice as likely to look for information that agrees with us than we are to seek out disconfirming evidence. ... the more sure people were that they had the correct view, they distorted new evidence to suit their existing preference, which in turn made them even more confident."

"... we need to learn to look for evidence that would prove our analysis wrong."
A challenge to us all.

Robert
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Random Walker »

Thanks for your response Robert,
Larry alluded to it in his prior response to me, but thought I would say it explicitly for the whole crowd here. The best way to create a tilted portfolio with DFA is to use cheaper core funds as the dominant component and then add on the more expensive asset class funds to obtain the tilt the individual is looking for. The core funds are structured as whole market funds with different tilts towards small and value. Not only are the core funds cheaper, they also minimize rebalancing costs.

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by larryswedroe »

dave
And the core funds also reduce internal trading costs as stocks migrate across asset classes and that also saves taxes
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by GreatOdinsRaven »

Robert T,

Care to comment on the components of these ex ante sample portfolios or provide a link to M*? Are they similar to the portfolios we talked about in the past on other threads (can't seem to find them this morning...)?

Thanks,
GOR
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by matjen »

GreatOdinsRaven wrote:Robert T,

Care to comment on the components of these ex ante sample portfolios or provide a link to M*? Are they similar to the portfolios we talked about in the past on other threads (can't seem to find them this morning...)?

Thanks,
GOR
Here are Robert T.'s portfolios: http://socialize.morningstar.com/NewSoc ... &viewTab=6

Here is the ETF portfolio that can match anything from the fancy pants companies like DFA or AQR with similar factor loadings IMO (I agree with Robert T. on this point): http://socialize.morningstar.com/NewSoc ... C1FF7784FC

It has 8 funds. My suggested portfolio above has 3 funds and is within spitting distance (if good at spitting ;-) ). According to portfolio visualizer DWUSX (covering International and Emerging) has a .2 size and .37 value load while DFVEX (covering US) has .45 size and .28 value. Robert T. shoots for .2 and .4*

*Robert T. please be gentle with me if I am too loose with the facts here. :happy
Last edited by matjen on Fri Oct 21, 2016 9:53 am, edited 4 times in total.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Robert T »

.
I understand the theory and intuition of the core/vector concept - lower internal trading costs, lower taxes, cheaper. The question is what is the magnitude of these effects?

Here an (evidence-based) example: Using the time period from Jan. 2007 to August 2016, the market, size, and value loads of the DFA Vector portfolio could be matched by a portfolio comprising 21% DFA US Large Company, 11% DFA Tax-Managed US Marketwide Value, and 68% DFA Tax-managed US Targeted Value. Both portfolios had market, size, and value loads of 1.06, 0.45, and 0.29 over this period. https://www.portfoliovisualizer.com/fac ... ssetType=1

Annualized returns (%) / SD / Sharpe Ratio over same period https://www.portfoliovisualizer.com/bac ... tion4_2=68
  • DFA Vector = 5.83% / 19.63 / 0.36
    DFA Component = 5.97% / 19.75 / 0.36
The DFA Vector portfolio has a lower expense ratio of 0.04% to 0.06% depending on the share class of DFA funds used in the component portfolio, but the DFA component portfolio had lower fund level 5-yr tax efficiency of about 0.05%. How much would rebalancing across funds add to the tax costs? If using periodic savings to rebalance its less of an issue, but my sense is that individual fund tax costs are larger than across fund rebalancing tax costs.

So why the 0.14% higher return of the DFA component portfolio in the above example? Perhaps its due to the rebalancing return Bernstein talks about. Here's an extract from his book on Rational Expectations.
  • "...tilt is tilt, and these core fund have a small transactional advantage over a component approach. This is because fewer companies have to be bought and sold as they cross the borders between the older four-corner pigeonholes. This small advantage has to be weighed against the loss of control over the fine-tuning of value/small loadings and of the benefit of rebalancing with the four corners."
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Robert T »

GreatOdinsRaven wrote:Robert T,

Care to comment on the components of these ex ante sample portfolios or provide a link to M*? Are they similar to the portfolios we talked about in the past on other threads (can't seem to find them this morning...)?

Thanks,
GOR
Another perhaps easier presentation (from viewtopic.php?f=10&t=7353).

Image

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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by GreatOdinsRaven »

Robert T,
Thank you.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Robert T »

.
https://www.portfoliovisualizer.com/bac ... ion18_3=25

The link includes the more specific allocations. The first two portfolios were factor matched at inception in 2008 - and so far very little difference in return - exactly as the Fama-French research implies (no significant alpha beyond factor exposure). This ignores any advisor fees to access DFA funds. As indicated, with changes in the DFA screening methodology to include profitability, these may now not be as closely factor matched as in 2008. The third portfolio has a larger size tilt (so not factor matched), but over this period there was not much difference in return.

Select portfolio factor load targets, construct a portfolio to achieve these at lowest cost. Stay the course and ignore the noise (helped by establishing portfolio factor load targets to anchor decisions in the first place). Most backtested comparisons of tilted portfolios are not factor matched where it is easy, ex-post, to construct one portfolio to outperform another based on difference in factor loads. IMO this only adds noise to the investment decision process. Anchor the process with portfolio factor load targets, then focus on achieving these at lowest cost.

Robert
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by matjen »

Thank you Robert T. Another gem of a post. :beer
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Sunny Sarkar »

Robert T wrote:In the grander scheme of things, consistent savings and staying the course are a much larger determinant of investment success than the use of DFA or non-DFA funds to achieve portfolio factor load targets.
This is precisely the reason I decided not to "tilt". My fear is I would "fall" when tracking error goes negative - I'd second guess the heck out of myself. If I've learned anything from 15 years of being a Boglehead, it's this: portfolio engineering is overrated, avoiding behavioral mistakes is where the money is.
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Re: Latest Jason Zweig article on DFA: Making Billions With One Belief: The Markets Can’t Be Beat

Post by Random Walker »

Sunny Sarkar wrote:
Robert T wrote:If I've learned anything from 15 years of being a Boglehead, it's this: portfolio engineering is overrated, avoiding behavioral mistakes is where the money is.
Avoiding behavioral mistakes was one reason I ultimately decided to go with an advisor. Admittedly, when I chose an advisor I was mainly focused on DFA access, but I also knew a screen protecting myself from me was another benefit. I know Larry has said that avoiding one behavioral error can overcome years of AUM fees.

Dave
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