When possible, we will use passively managed institutional class mutual funds from Dimensional Fund Advisors (DFA). We use DFA because they are one of the best solutions for clients to meet their financial objectives.
For over 30 years, DFA has helped investors pursue dimensions of higher returns through advanced portfolio design, management and trading. They are pioneers of financial engineering. They manage approximately $500 billion in assets globally as of June, 2017 and offers funds to individual investors through a select network of fee-only financial advisors.
DFA summarizes their approach taken in their funds into Factors:
- Stocks (3 Factors) are riskier than bonds and have greater expected returns. Relative performance among stocks is largely driven by size (small vs. large),
- Relative price (value vs. growth),
- Expected profitability (high vs. low).
Many economists believe small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. Research also shows that among stocks with similar price-driven characteristics, companies with higher expected profitability have greater expected returns.
Relative performance in fixed income (Bonds) is largely driven by two Factors:
- Term - Longer-term bonds are subject to the risk of unexpected changes in interest rates.
- Credit Risk - Bonds with lower credit quality are subject to the risk of default.
Extending bond maturities and reducing credit quality increases potential returns.
With this understanding, investors can plan the total expected return profile of their portfolios, considering how much of each equity and fixed income dimension to target in pursuit of their financial goals.
Moreover, DFA funds combine the Factor strategy with a passive strategy designed to be highly cost effective and tax efficient. DFA funds are not index funds and therefore do not include the same investments as popular benchmarks. This allows for more targeted exposure to specific asset classes and lower trading costs since mechanical tracking of an index is not required.
For more on Dimensional Funds please see the following: