Dimensional Fund Advisors

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Dimensional Fund Advisors
Founded 1981
Founder(s) David G. Booth, Rex Sinquefield
Headquarters Austin, Texas
Key people David G. Booth co-CEO, Eduardo A. Repetto co-CEO
Products Mutual funds
529 plan portfolios
Annuity sub-accounts
AUM US $315.4 billion
Website DFA

Dimensional Fund Advisors (DFA) is a mutual fund company located in Austin, Texas. The fund company is of particular interest to Bogleheads® because of a corporate culture that is strongly tied to passive investing.

DFA was founded in 1981 by David G. Booth and Rex Sinquefield. (The University of Chicago's Booth School of Business was renamed in Booth's honor in 2008 in recognition of a $300 million gift to the school, said to be the largest donation ever made to a business school.)

Booth was involved in the creation of the Samsonite Luggage Fund [1] at Wells Fargo in 1971; this fund "was to hold an equal dollar amount of each of the 1,500 or so stocks listed on the NYSE, which seemed the most appropriate replication of ‘the market." Some have claimed this to be the "first index fund," a claim which John C. Bogle does not abide [2]; but in any case Booth was involved in the pioneering days of the passive approach.

DFA is known for the use of academic research to inform investing strategy, and boasts of its formal associations with prominent financial economists, including 2013 Nobelist Eugene F. Fama, Kenneth R. French, Roger G. Ibbotson, and Nobelists Robert C. Merton and Myron S. Scholes.

With approximately $315 billion in assets under management (AUM) as of 2013, DFA is much smaller than Vanguard ($1.6 trillion) or Fidelity ($1.4 trillion), and in 2013 Investment News described it as the 8th largest mutual fund company. [3]. It is less well known than some comparably-sized mutual fund companies because it does not sell directly to retail investors, and thus cannot be purchased through retail brokerages. DFA mutual funds are available mostly through advisors. [note 1]

Expense ratios

DFA's expense ratios are low by most standards, but higher than Vanguard's. It's hard to define "corresponding funds." If one uses Vanguard's Admiral shares on the assumption that most DFA investors probably would qualify for Admiral shares--one might compare DFA U. S. Core Equity 1 Portfolio (DFEOX, 0.19%) with Vanguard Total Stock Market Index (VTSAX, 0.05%); or, DFA International Small Company Portfolio (I) (DFISX, 0.54%) with Vanguard FTSE All-World ex-US Small-Cap (VFSVX, Investor--Admiral not available--0.40%; or ETF, VSS, 0.20%). The need to purchase through an advisor adds another layer of fees.

The following table, based on Morningstar data, compares the firm-wide asset allocation and expense ratios of DFA and Vanguard mutual funds.

Comparing expense ratios (January 2013) [4] [5]
Asset class DFA Vanguard
Allocation Expense ratio Allocation Expense ratio
Domestic 37.74% 0.34% 42.49% 0.19%
International 46.81% 0.53% 9.01% 0.22%
Municipal bonds 1.40% 0.24% 6.01% 0.16%
Taxable bonds 12.96% 0.21% 23.16% 0.12%

Some Bogleheads are cost-sensitive do-it-yourselfers, and express distaste for the need to pay an advisor for access. DFA-approved advisors must undergo DFA training. Using advisors as gatekeepers is supposed to ensure that customers will be under the guidance of advisors who understand a disciplined, long-term approach, and insulate DFA from the difficulties and transactional costs of investors flooding in and out of funds based on recent performance.

Investment strategy

DFA funds are index-y funds in the sense that they do not use managers' judgement to pick individual stocks, but try to capture the overall characteristics of a well-defined category of assets in a systematic way. [note 2] But they are not index funds. Compare the stated objective of Vanguard Small-Cap Value Index Fund and DFA U.S. Small Cap Value Portfolio. The index fund's objective is "to track the performance of a benchmark index that measures the investment return of small-capitalization value stocks." The specific index is named elsewhere in the Prospectus. In contrast, the DFA fund's states with utter vagueness, "The investment objective of the U.S. Small Cap Value Portfolio is to achieve long-term capital appreciation," which it achieves by "using a market capitalization weighted approach, purchases a broad and diverse group of the readily marketable common stocks of U.S. small cap companies that the Advisor determines to be value stocks."

DFA funds do not slavishly follow an index, but use various adjustments and modifications, and use a transactional technique called "patient trading." [6] Bogleheads sometimes debate whether DFA funds are truly passive or whether their approach actually represents a mild form of active management. It is, in any case, worlds away from the stock-picking star managers of truly active funds like a Fidelity Contrafund or a Fairholme Fund.

DFA's website has a set of six short linked essays in which they outline their investment philosophy in their own words.

  1. Research
  2. Markets Work
  3. Dimensions
  4. Diversification
  5. Structure
  6. History

See also

Notes

  1. DFA funds may be available options in some corporate 401k plans. DFA has a portion of their website devoted to defined contribution plans at Dimensional Managed DC. See also Life-cycle Finance and the Dimensional Managed DC® Solution by Wade Phau, Advisor Perspectives, May 2012. In addition to DC plans, DFA funds are available to 529 savings plan investors through the West Virginia Smart 529 Select Plan.
  2. The DFA website provides a step-by-step examination of DFA strategies and methodologies, beginning with Philosophy: Markets Work and proceeding page links.

References

External links

Bibliography