In its first issue of the year 2014, Barron’s published a cover story on Dimensional Fund Advisors (DFA), an investment management firm whose funds Porter, White & Company has frequently recommended. DFA funds are not generally available to the public but may be purchased in accounts managed by financial advisors who share DFA’s approach to investing.
The occasion for the Barron’s story was the award of a Nobel Prize to Eugene Fama in 2013. Through the years, Professor Fama has provided the intellectual basis for many of DFA’s investment strategies and has helped recruit a team of financial economists to serve as DFA directors and consultants, including Dartmouth Professor Ken French and Nobel Laureates Merton Miller, Myron Scholes and Robert Merton. The Barron’s story explains how this intellectual firepower has been brought to bear on the challenge of investing money in public markets and includes a sidebar with a dialog between Professors Fama and French.
We have a high opinion of DFA, its principals and personnel. They are very smart and tough minded, highly knowledgeable, skilled at trading and execution, cost efficient in their operations, and persistent in putting the interests of mutual fund investors before their own. The Barron’s article is consistent with what we know about DFA and provides the best independent summary that we have seen of their approach to investing.
A printed copy is available from our firm.
Among the interesting points made in the Barron’s story are the following.
- According to Morningstar, more than 75% of DFA funds have beaten their category benchmarks over the past 15 years, and 80% over five years.
- DFA portfolios are formed using objective, quantitative criteria without reliance on selection of particular securities. The principal quantitative standards applied by DFA relate to maturity and credit in the case of fixed income securities, and size, book to market ratios, momentum and profitability in the case of equity securities.
- DFA is a long term investor, not a short term speculator. Its strategies require staying the course. As stated by David Booth its co-founder and co-CEO,
Where people get killed is getting in and out of investments.
They get halfway into something, lose confidence, and then try
something else. It’s important to have a philosophy.
- Notwithstanding its use of quantitative methods, DFA is an active not a passive investor. Its portfolios change as securities markets change with investment principles and criteria held constant. DFA does not invest according to third party indices and its funds are not index funds.
- DFA focuses on maintaining low costs in all aspects of portfolio management while emphasizing opportunistic trading. Since DFA portfolios are formed according to quantitative criteria that do not require the purchase or sale of any particular security, DFA is free to engage in patient trading. The Barron’s article observes that “[DFA] serves as a market-maker for the 14,000 stocks it owns, offering to sell when frenzied buying has sent the bid higher, and taking a stock off another trader’s hands when the shares can be acquired cheaply.”
- Professor Fama’s Nobel Prize citation notes his advocacy of the efficient market hypothesis (EMH) and the Barron’s article discusses the extent to which the EMH informs DFA strategies. In the sidebar, Professors Fama and French discuss the efficient market model as the best characterization of securities markets and the market equilibrium model as the best explanation of how prices are set in such markets.
Past performance is not necessarily an indication of future performance.