This is an interesting article from Kiplinger about DFA Funds.
This Is Rocket Science
Academic ideas spawned one company’s great funds. But to get them, you must play by its rules.
By Bob Frick
From Kiplinger’s Personal Finance magazine, October 2008 The story of dimensional fund advisors is unlike that of any other fund company. You can’t just buy shares. Rather, you must first observe a courtship ritual and then hire an adviser. And if you’re patient enough to listen and you agree with DFA that no one can beat the market, you’ll be allowed to own DFA funds. As DFA’s chief investment officer, Eduardo Repetto, puts it: “If we show you the data and you believe the data, then we are here to serve.”
Just like Saab’s claim that its cars are “born from jets,” DFA funds are born of eggheads. Nobel prize-winning economist Myron Scholes sits on DFA’s board, as does University of Chicago finance professor Eugene Fama — considered a shoo-in for a future Nobel award. Chief executive David Booth and director Rex Sinquefield, who co-founded DFA in 1981, were Fama disciples in college. “When I walk into a board meeting,” says Booth, “I don’t have to worry about being the smartest person in the room.”
The DFA philosophy boils down to the relationship between risk and return. History shows that some riskier stocks — those of small companies and those considered undervalued — produce higher returns on average over time than other types of stocks. “But on average doesn’t mean every year,” says Booth. DFA clients must be willing to endure periods of drought.
But over the long term, many DFA funds boast impressive results. DFA’s marquee fund, U.S. Small Cap Value, for example, beats every relevant benchmark. The fund, which invests mainly in U.S. stocks with the lowest 10% of market capitalizations, returned an annualized 11% over the past ten years (all return data is to August 1). That beat both the Russell 2000 Value index, which measures undervalued small-company stocks, and the typical small-company value fund by an average of almost two percentage points per year. And it left the large-company Standard & Poor’s 500-stock index in the dust by nearly eight percentage points a year. ….
Read the complete article here: