In a recent Barron’s article titled, “Where the Smart Money is Headed,” reporter Beverly Goodman highlights mutual fund manager Dimensional Fund Advisors’ success in attracting a growing number of financial advisors who seek to invest their clients’ money in a more “evidence-based” fashion. The attraction is mutual as the folks at DFA refuse to make their funds available directly to individual investors. It isn’t that the company wouldn’t like to gather more assets; it’s that even more than that, they’d like to make sure that their philosophy is properly understood. This helps to ensure that the strategies they employ won’t be undermined by market timers, who can create unnecessary and costly turnover in a fund.
As a consequence of its fundamental belief in markets, DFA doesn’t believe one can add value through individual security selection (aka “hot stock picking”) and this sometimes causes them to be characterized as indexers, a label the company would reject. Here’s how Goodman describes the sometimes subtle distinction between DFA’s investment approach and that of traditional index funds:
DFA’s focus is on academic research that isolates the factors that cause stocks to outperform the market, as well as the risk characteristics that can be eliminated from a portfolio. Indexes are simply measures of an asset class; DFA funds are aimed to capture more of the returns of an asset class with much less risk and at far less cost.