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The Mystery of DFA
By Sue Stevens
Sometimes in life, it’s not developing the best answers, but developing the right questions.
-- David Booth, co-founder of DFA
Dimensional Fund Advisors. DFA. It’s a fund company, like Vanguard or Fidelity. You’ve heard of
those, but you may not have heard of DFA. Even when I explain it, clients usually forget and I
find myself explaining again. At Stevens Wealth Management, we use a lot of DFA and
Vanguard funds. Why? Low cost, passive investing. A fund company that’s built on academic
research. There’s a lot to like here.
Academic Roots
I like that Dimensional invited all these Nobel laureates on their board before they got
their Nobel Prizes. It’s easy to invite them afterward.
--Merton Miller (taught at University of Chicago and won the Nobel Prize in 1990)
DFA was co-founded in 1981 by David Booth and Rex Sinquefield, both graduates of University
of Chicago School of Business (now the Booth School). While there they studied with Eugene
Fama who later won the Nobel Prize in Economics in 2013. Fama has been on the board of DFA
since inception.
DFA’s investment philosophy is built on academic principles of market efficiency and guided by
theoretical and empirical research. The approach is rigorous and disciplined. It takes a longterm approach and is not swayed by passing fads.
It’s just fun to do research, learn new stuff, and potentially have an impact on the way
other people are thinking about the world.
--Kenneth R. French (taught at University of Chicago, on the DFA board now and well
known for his work with Eugene Fama)
Investment Philosophy Matters
We build diversified portfolios that capture the dimensions of expected return.
--Eugene Fama
In a nutshell, DFA builds portfolios that use factors, or dimensions, to guide portfolio
investments. Fama and French did ground breaking work in 1992 on a three-factor model that
© 2017 Stevens Visionary Strategies. All Rights Reserved. Reproduction without permission prohibited. Contact us at (847) 282-9910.
used the factors of size, market and value. Later in 2015, they added two more factors,
profitability and investment (conservative versus aggressive) to their models.
DFA uses four of these factors to build portfolios that expand beyond traditional indices. They
seek to add value beyond what a “pure” index would deliver by adding judgement to the
equation. All the while, keeping costs low and trading efficient.
Because DFA funds don’t have to follow a strict index approach, they can keep turnover lower.
They can substitute one stock for another as long as it fits the desired characteristics of the
strategy. DFA has an in-house research team and is guided by academics on the investment
committee.
Here’s what Morningstar, a leading investment research firm, has to say about DFA:
Dimensional Fund Advisors is one of the industry’s best stewards, so it earns a Positive
Parent Pillar rating. All its strategies are grounded in an unwavering belief in market
efficiency and transaction cost management. They attempt to profit from the types of
risk that the market compensates by emphasizing securities with characteristics that
historically have been associated with higher returns.
The firm generally has been disciplined about launching new strategies in each of the
markets where it operates. Each strategy must be economically sound, consistent with
its philosophy, and backed by empirical evidence. That said, the firm has adapted some
of its strategies to meet client demand in all markets. This behavior bears watching, but
for the most part the firm has maintained strong research integrity. It is also selective
about the clients it works with. Individual investors can gain access to the firm’s funds
only through an intermediary or financial advisor that the firm has screened to mitigate
short-term trading that can hurt long-term investors.
Manager retention here is high. The firm’s team- and rules-based approach to portfolio
management mitigates the impact of departures when they do occur. An investment
committee provides additional oversight and continuity. Dimensional is organized as a
private partnership, with significant employee ownership.
The approach is working. Assets have grown to nearly half a trillion dollars. It ranks in the top
ten largest mutual fund companies and does so with no traditional advertising. Individuals and
institutions turn to DFA for it’s disciplined, research-based (some call it evidence-based)
philosophy.
Dimensional’s investment philosophy is about more than returns—it’s about a great
client experience that can really help people relax.
--David Booth
Teaming with Advisors
But not everybody can invest with DFA. They only work through investment advisors. And
unlike other fund companies, advisors are not compensated from recommending DFA funds.
© 2017 Stevens Visionary Strategies. All Rights Reserved. Reproduction without permission prohibited. Contact us at (847) 282-9910.
They do it because they think the philosophy makes sense and will help their clients meet their
goals.
DFA has an active education outreach. They recognize investors can be emotional and advisors
can help them avoid very human mistakes. Advisors help their clients find an asset allocation
they can stick with. The focus is on goals, not quarter-by-quarter returns.
DFA also saves money as a firm by having advisors answer client questions rather than manning
a large call center to do just that. I’m sure many of you have experienced long waits on hold
while trying to get your question answered. Hopefully your advisor can do better than that.
Not just any advisor can work with DFA. Advisors must be screened and generally adhere to
DFA’s investment philosophy. That means the “hot money” is not welcome here. They want
investors in it for the long haul. Once an advisor passes the initial screen, DFA continues to visit
the advisors in their offices and talk about trends and how DFA can help. They also offer many
ongoing rigorous educational conferences and webinars.
In sum, there is much to like about the DFA family of funds. Costs are low. Maybe not the
lowest, but still low. There is a thoughtful methodology to the approach to investing. It’s
something you can stick with over the long run. And the results are all 21 funds that are rated
by Morningstar are medal winners and the Corporate Culture is rated an A.
Investing is not about being a hero. It’s about managing risk and delivering good longterm performance to have happy clients.
The money we manage is not our money—it’s our clients’ past and their future.
--Eduardo Repetto, DFA board of directors and executive committee
© 2017 Stevens Visionary Strategies. All Rights Reserved. Reproduction without permission prohibited. Contact us at (847) 282-9910.