Dimensional Fund Advisers is a curious case in the world of fund managers. It doesn't describe itself as a stock picking firm, and yet its managers believe strongly that the stock markets are both efficient and beatable with the right asset allocation and low fees.
A few well-known names on the investing team, Eugene Fama and Kenneth French, pioneered the idea of efficient markets through their research. Their "three-factor" model of market efficiency centers on the idea that smaller companies and value stocks can outperform the market.
Not surprisingly, some of Dimensional Fund Advisers' most successful funds are small and microcap funds. The DFA Small Cap Value Fund (DFSVX) has returned 11% annually over the last 15 years, compared to a 4.4% annualized return for the S&P 500 index (^GSPC +0.03%). Likewise, its DFA US Micro Cap Fund (DFSCX) has generated 15-year average annual returns of 9.5%, more than doubling the S&P 500's return of 4.4% over the period.
|
Fund |
Total Return |
S&P 500 Total Return |
Russell 2000 Total Return |
|---|---|---|---|
|
Small Cap Value Fund |
11% |
4.4% |
7.6% |
|
Micro Cap Fund |
9.5% |
4.4% |
7.6% |
Annual returns over previous 15 years to August 4, 2015. Data from Morningstar and Russell Indexes.
Its outperformance isn't due to stock picking. In fact, its funds have no real manager in a traditional sense. Stocks are selected algorithmically, as Dimensional looks for factors it believes will lead to outperformance. Such factors typically include smaller market caps, high earnings relative to a company's valuation, and low price to book values. It also has a tendency to ignore low-return businesses, like REITs and regulated utilities, which tend to trade more like bonds than stocks.
Its computer-driven investing model has done well, but it's really only half the story. The company drives a hard bargain to minimize costs. Fees often clock in at less than 0.50% per year on many of its funds, and it handpicks which financial advisors can sell the fund to minimize investor turnover and further reduce costs over time. It also minimizes trading to reduce tax burdens; its small and microcap funds had annual turnover of 2% and 9% respectively, according to Morningstar.
It's hard to argue with its record. Over its history, its funds have routinely beaten a majority of their peers, according to Lipper, a fund ratings service. The funds that have been around the longest -- and have a track record of at least 15 years -- have the best outperformance. That category beat 90% of their peers to the end of 2014.
And while the future rarely looks just like the past, it's notable that the best-performing funds tend to have the winning combination that Dimensional's do: low fees, low turnover, and a bias toward smaller value stocks.
