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Which large mutual fund company is driven by Nobel prize-winning research? Hint: It’s not a household name but it’s the 8th largest company ($376 billion). Answer:  Dimensional Fund Advisors (“DFA”

Full disclosure: My clients are invested in Dimensional Fund Advisors mutual funds in my financial planning/investment practice. DFA provides me and my clients with a rigorous investment foundation that improves upon the conventional investment approach I took when I worked as an equities analyst and portfolio manager in the 1980-1990s. At that time I assumed good research could help me identify winning stocks that would outperform other stocks over time (this is called “active” investing). The only problem was data showed this approach was hit-or-miss.  Fold in additional staffing costs for “stock pickers” and the conventional approach underperforms over longer periods of time. .

What about index investing – Vanguard’s forte?  Vanguard is wonderful and I’ve referred hundreds of clients  (hundreds of millions of dollars) if they were “do it yourselfers” and weren’t a good fit for my comprehensive planning/investment practice. Vanguard keeps costs extremely low, mimics an index and generally outperforms “active” (conventional) investing over long periods of time. (note: some of their products assume more tactical/conventional investing – that’s a different story). Overall, they do an excellent job for the do-it-yourself investor who doesn’t need financial planning support.

And then there’s a  3rd approach – a “third dimension “ so to speak:  Dimensional Fund Advisors (“DFA”). DFA uses “evidence-based investing” because it draws heavily upon both in-house and academic research (University of Chicago) to build their investment  funds. I’m convinced the DFA “evidence-based investing” approach is superior to either “conventional (active) investing” (my former investment life) and “passive (index-based) investing.” (e.g. Vanguard).  According to Barron’s , 75% of their mutual funds beat their category benchmarks over the past 15 years.

Here are some of the reasons Dimensional Fund Advisors funds do a great job for investors:

  1. They have very low expense ratios (approx. 0.1-0.4% range for most funds).
  2. When investing in stocks, they tilt toward small cap (smaller companies) vs. large cap (larger companies). Small cap companies outperform larger companies across all markets (US, international) over longer periods of time.
  3. They tilt toward “value” (low book/market) over “growth” stocks because the former outperform. This holds across all markets (US, international) over longer periods of time.
  4. They diverge from indexes – when needed – and buy or sell off market to minimize affecting share prices. Since they don’t need to make daily adjustments to holdings to match an index. DFA can take its time to increase or decrease positions.
  5. When investing in bonds, they focus on the best fit between “return” and “duration.” They adapt to a shifting yield curve so investors don’t “overpay” (take undue risk) for a given return.

In a nutshell, DFA’s “evidence-based” investment approach means:

  1. Market timing doesn’t work. The investor needs to sit through the entire dinner – even the boring bits – to gain full advantage of long-term investment gains in stocks, bonds and alternative investments.
  2. Investing with a “rear view mirror” (buying what’s already done relatively well) doesn’t work over the long term.
  3. Keeping investment costs low means the investor gets more of the gain (same approach as Vanguard) and
  4. There are differences between expected returns and actual returns (smaller companies outperform bigger companies, value outperforms growth companies). DFA mutual funds are structured to capture these higher expected returns.

There is much more to be said here about Dimensional Fund Advisors ( than space allows here. I’ll close by saying that DFA funds are accessible in some 529 Plans (e.g. State of Utah), some 401(k) plans and through some fee-only advisors. There is no mark-up by fee-only advisors to invest in these phenomenal funds. You only need to appreciate what they bring to the table!

Copyright (C) by Eve Kaplan, 2015. All Rights Reserved.