Content area
Full text
Smart beta may be all the rage right now, but there?s another fund family that?s quietly but exponentially growing using a similar investment approach. I?m referring to Dimensional Fund Advisors, which has been around for 34 years ? long before the fundamental indexing approach often branded as smart beta was invented.
According to Morningstar, DFA is now the 10th-largest fund family with $295 billion in assets, as of May 31. During the past five years ended Dec. 31, 2014, all of DFA funds? cash inflows have been greater than inflows to all of Vanguard?s fund offerings, when measured as a percentage of growth over asset base. Since DFA funds can, for the most part, only be purchased by individual investors through an advisor, this growth rate is even more astounding.
FAVORING SMALL CAPS
DFA funds are low cost, passive (but not indexed) portfolios that often allow advisors to tilt portfolios toward similar factors as used by smart beta, such as size, value, and profitability. The firm was founded in 1981 using research that demonstrated that small cap stocks outperformed large cap issues. Then, in 1992, when Eugene Fama and Ken French published research on what?s become known as the Fama-French Three Factor Model, DFA launched funds based on this framework as well. John Rekenthaler, Morningstar vice president of research, credits DFA for indirectly influencing the creation of the Morningstar style box, which uses these same dimensions to classify equity funds.
Both Fama and French have long been involved with DFA and ? along with Nobel laureate Myron Scholes and Yale professor Roger Ibbotson ? are members of its board of directors. Other DFA funds use other benchmarks, such as credit and term premiums for fixed income, and profitability measures for stocks. The fund family is now owned by employees, board members and outside investors.
Advisors using DFA funds have looked pretty good to their clients. Morningstar gives them high historic performance ratings, with (by my calculations) a weighted average performance across all categories of 3.5 out of five stars. According to Morningstar, DFA fund performance is especially strong in equities, which represent the lion share of their assets. Per David Butler, head of DFA Global Financial Advisor Services, about 55% of current assets are derived...