In December, I discussed the principles that guide our construction of investment portfolios:

  • Keep fees low
  • Buy index funds
  • Diversify
  • Don’t attempt to time the market
  • Remain disciplined

This month I want to look at how those principles translate to our fund choices.

Whether viewed through the critical lens we had when as a young start-up or the rigorous review we apply to our choices each year, Dimensional Fund Advisors (DFA) always bubbles to the top.

We are not alone in this assessment. The financial world is beginning to see the value in DFA’s approach to investing. According to Morningstar, DFA became the fastest-growing mutual fund family in the U.S. as of November 2016. While investors flee all of the major fund families – save Vanguard – DFA pulls in nearly $2 billion in net new assets each month. This shift moved DFA from 8th to 6th on Morningstar’s list.

For 30 years, DFA has traded the investment industry’s conventional “wisdom” for meticulous academic evidence that persists across time and markets. The firm maintains no Wall Street office and dedicates zero resources to economic forecasting. Its resources are instead used to identify the dimensions that impact returns.

DFA funds improve our customers’ investment outlook because of their core beliefs and academic research:

  1. Capital markets are efficient. Active management practiced by traditional stock pickers is futile. Even the “Oracle of Omaha” Warren Buffett told his investors to opt for low-fee index funds and ignore the predictions of stock-pickers.
  2. Quantitatively active index funds. DFA Founder David Booth said in a recent interview: “We think indexing is too mechanical, a little bit of judgment can make a difference.” By applying financial science to the practical world of investing and using patient and flexible trading practices, DFA funds are not slaves to a public index. This offers a buffer to the whims of the market.
  3. Tilt toward value, small cap funds, and profitability. These factors are born from the work of Nobel Laureates Eugene Fama and Kenneth French. DFA employs this academic research to invest in smaller, underpriced companies with a tilt to direct profitability. This process marries modern financial evidence with index investing, and thus influences additional dimensions of return.
  4. Asset class coverage. The inclusion of asset categories that respond uniquely to varying market conditions protects a portfolio from significant losses. DFA is the only index fund company with asset category coverage including emerging markets small cap and international small cap value.

Occam’s Razor tells us that the simplest line of reasoning is often correct. DFA funds embody that spirit. Though the research employed to by DFA to achieve this end is complex, the resulting funds are elegant in their simplicity. We believe that these funds offer our clients the best chance for lasting investment success.