The following was originally published by Robert Schmansky for Forbes:
Dimensional Fund Advisors (DFA) is often noted for the cultish attraction financial advisors have for its products but there are plenty of other reasons to pay attention to this firm.
Recently there has been a lot of publicity surrounding DFA’s record growth of assets; $16.7 billion of new assets in the first three quarters of 2013–that’s more than any prior calendar year.
There’s also the news of its director and ideological leader professor Eugene Fama’s winning the Nobel Prize for economics.
There is an amazing track record that the company has built that’s worth understanding and following. Though you may not work with an advisor who has access to the funds, they are still worth any serious investor’s time.
Below are a few of the reasons DFA is worth following:
Academic background. Fama isn’t the only noted academic or Nobel Laureate affiliate with DFA, in fact there have been several. Vanguard recently made a switch to CRSP indexes which have been a standard for DFA and come from many of the same University of Chicago academics.
DFA was founded to bring efficiencies to pension firms investing in the small cap universe. They have built their company with a focus on improving efficiencies for their institutional and individual investors.
Leading versus following trends. Market cap based investing is still widely accepted, but many have admitted increasing the small value tilt and de-risking bond portfolios increases return potential while reducing volatility. Sadly, many traditional Wall Street managers still load up on expensive risk taking strategies that have lower probabilities for outperformance and increase volatility. In addition to the market cap and book-to-market tilts, they introduced market-based portfolios which eliminates the need for “building block” asset allocation models and provides much more stable and purposeful allocations, and recently added a measure for firm profitability. Their international portfolios, especially in the bond and real estate worlds have been steady performers, and were introduced far before many other managers accepted these as worthy asset classes. Most managers wait for excessive returns before entering an asset class; in other words, if they show they provide no value in their predictive powers to provide their investors with good returns beforehand, rather they are reactive to markets.
A few items DFA is known for still have not widely caught on. Being an active shareholder is something more investment managers shy away from; in a 2011 survey DFA was ranked as the top firm for shareholder advocacy.
One that likely won’t ever be popular is the requirement to work a financial advisor who isn’t likely to flip their funds or manage investments in ways that oppose their central philosophy of having a flexible, passive approach to investing in the markets.
In short, DFA sets the standard for investor stewardship, innovation, and application that other firms should live up to. Their academic leadership and consistent philosophy is worthwhile for all investors to take note of, much more so than the short-term traders that we hear from far more often.
Disclosure: I recommend DFA products for many asset classes with my clients.
CFA Video Series on Dimensional Fund Advisors