Dimensional Fund Advisors (DFA) was founded in 1981 by David Booth and Rex Sinquefield to apply academic research on capital market behavior to the practical world of managing investment portfolios. DFA maintains close links with the University of Chicago and other research centers for financial economics. Board members and consultants include some of the nation’s most distinguished academic theorists, including Eugene Fama, Kenneth French, Roger Ibbotson, Donald Keim, Nobel laureate Merton Miller, and Myron Scholes.
Dimensional Fund Advisors manages $596 billion and serves over 200 corporate, government, college endowment, charitable, and Taft-Hartley clients. Beginning in 1989, DFA began offering its low-cost institutional mutual funds to individual investors through a network of selected investment advisory firms. As one of these advisors, Yeske Buie plays a key role in educating clients about asset class investing, developing portfolio allocations to meet specific objectives, and helping them maintain the necessary discipline to ensure long term success. Dimensional Fund Advisors does not distribute its funds through direct marketing or conventional broker/dealer firms.
Dimensional’s approach is firmly rooted in the belief that markets are “efficient”, and that investors’ returns are determined principally by asset allocation decisions, not market timing or stock picking. All portfolios employ a passive strategy designed to capture the return behavior of an entire asset class. DFA has no economists forecasting business cycles or interest rates, no investment strategists shifting allocations between stocks and bonds, and no analysts searching out “undiscovered” stocks.
While conventional index managers also employ this passive approach, DFA differs in several key respects. Dimensional funds do not necessarily track popular market benchmarks, but are designed to capture separate dimensions of worldwide returns which are accompanied by independent sources of risk. These dimensions are identified by rigorous academic research, often conducted by one or more of the leading financial economists with which DFA maintains a relationship.
DFA also places great emphasis on minimizing trading costs. Unlike conventional passive managers who replicate an index in mechanical fashion, Dimensional funds employ a sophisticated equity block trading strategy that allows for slight variations in day-to-day portfolio balance versus a market index in return for substantial cost reductions and hence improved total return. DFA claims to achieve negative trading costs in illiquid market sectors such as U.S. small company stocks.
In its ongoing effort to maintain the low expense characteristic of institutional mutual funds, Dimensional requires us to place client trades through one of several firms (e.g. Schwab Institutional) who maintain an “omnibus” account relationship with Dimensional and aggregate buy and sell orders on a daily basis. By adhering to this approach, we are able to purchase fund shares in amounts as small as $2,500, versus DFA’s published minimum of $2,000,000.
“It’s about ideas!” – That’s the mentality of David Booth, founder of Dimensional Fund Advisors, and we certainly don’t know of another fund company that has been more about ideas than Dimensional. And not just any ideas, but the best thinking coming out of academic research in the science of economics.
As a consequence of that focus, the company has, from the beginning, filled its board of directors and advisory committees with top thinkers in the field. Dimensional has re recruited a number of Nobel Laureates, including such luminaries as Gene Fama, Myron Scholes, Merton Miller, and Robert Merton.
Few economists have had a greater influence on how we think about the markets and how we structure client portfolios than Gene Fama. Gene was one of the developers of the notion of “efficient markets” – he was actually the one who first coined that phrase – which is simply the idea that markets rapidly incorporate new information into the prices of securities. The biggest implication of this is that stock prices are at all times reflective of everything that can be known about a company and will change only as new information emerges, rendering the research efforts of individual analysts redundant. Put another way, one cannot consistently “beat the market” through individual stock picking.
Working with collaborator Ken French of Dartmouth University, Fama also developed the “three-factor” model for explaining the cross section of stock market returns in 1992. We studied this work with great interest when it was first published and it immediately influenced how we assembled client portfolios.
All DFA funds are “no-load”, although certain international equity Portfolios levy a reimbursement fee of 0.50% – 1.00% on purchases. This fee is payable to the Portfolio, not Dimensional, and is intended to spread the burden of transaction costs in illiquid markets in the most equitable manner. In the absence of this fee, long term shareholders would suffer diminished returns due to trading activity of investors moving money in and out of a Portfolio.
Dimensional Fund Advisors focuses only on market dimensions where research documents a reward for risk taken. As a consequence, DFA offers no strategies investing in long-term bonds, non-investment grade debt, or “growth” companies since research has failed to identify attractive risk/return characteristics for these asset classes.