It starts with Roger Ibbotson and his book, Stocks, Bonds, Bills & Inflation almost twenty years ago while completing my MBA at the University of Colorado. His research and work made sense to me through his historical market information and data from US small capitalization stocks. These are the stocks of companies that have a small market capitalization and have historically had much better returns than that of large company stocks like the S&P 500. I noticed that Dimensional Funds Advisors (DFA) 9-10 (since renamed, Dimensional US Micro Cap fund), were the stocks with the returns that caught my attention. I knew then that I would pursue the use of Dimensional funds in my practice.
I first contacted Dimensional Fund Advisors about a year after starting Diversified Asset Management in 1996. They informed me that only “approved” advisors could use their funds because they didn’t want just anyone using them. In order to be “approved”, one had to participate in their introductory conference and write a paper. They wanted you to understand their research and believe in their philosophy if you were going to use their funds. Following the conference, advisors that were still interested had to demonstrate their belief in their passive asset class investing by submitting a thorough paper about it.
At the conference, there was heavy emphasis on the mathematics with a lot of research on the financial markets and how they designed their mutual funds. I would characterize their conference as beyond PhD research, which intrigued me, so I moved forward in becoming an approved advisor.
Who Is Dimensional Funds (DFA)?
DFA was founded in 1981 and is currently headquartered in Austin, Texas. Its governing board includes a who’s who list of respected academics and financial economists such as Nobel Laureate recipients Eugene F. Fama (founding board member), Merton Miller, Myron Scholes and Robert Merton. Dimensional Funds started out managing pension funds for some of the largest companies in the world and made a name for themselves in the pension funds after creating their small capitalization fund that was and still is used as a model in the industry. Today DFA only distributes its funds through independent investment advisors and institutions such as pension funds.
Why haven’t we heard more of Dimensional Funds? They don’t spend a lot on marketing. No TV advertising or ads in periodicals. They don’t even have an 800 number! To keep expenses of the fund low and the turnover of the fund low (minimizing taxes), Advisors that trade frequently are banned from Dimensional Funds. In the end, this benefits all shareholders.
With all this said, they are one of the fastest growing fund companies in the world and currently manage about 380 Billion and in the top ten in assets.
Why Passive Asset Class Investing?
Dimensional Fund’s Passive Asset Class investing is a low cost and low turnover investment strategy which delivers asset class and returns to the investors in their funds. The funds target specific asset classes such as small and large company stocks and value stocks for both domestic and international markets.
Three significant advantages of passive asset class investing are:
• A passive investment strategy means a low turnover investment strategy. This means less trading in the mutual fund portfolios with better return and lower taxes.
• Dimensional funds also targets different dimensions of risk such as creating mutual fund portfolios, which target value stocks. Value stocks typically have historically had higher returns than growth stocks.
• As an Advisor, you know that the asset class funds are comprised of the asset class that is specified in the name. You know that the fund will not drift from its mandate when another asset class gets hot. For example, other fund companies might have a fund which starts out as a US small company fund and before you know it, the find company has loaded up on emerging markets because they are performing well (hot). As an advisor, it helps me keep strict portfolios and makes the rebalancing job much more efficient since I don’t have to worry if a fund manager has drifted significantly from its mandate.
The use of Dimensional Funds in our client’s portfolios just makes sense. They mirror our drive to maintain a wealth management plan designed to keep you on your path toward financial success.