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Who are DFA anyway?

MASECO strongly believes in and practices investment management along the lines of the efficient market hypothesis – that it’s hard to beat the market, and impossible to do it consistently, by stock-picking (Fama, 1965). There are, however, various factors that can be exploited to provide market-beating returns. That, along with sophisticated trading strategies, a keen eye toward tax-efficiency, and low expenses (%) has led MASECO to frequently use Dimensional Fund Advisors (the average DFA fund charges just 0.39). The $332 billion mutual fund firm whose investment strategy is based on Eugene Fama’s early and on-going research, is a principal component of our overall strategy.

Dimensional is unusual in certain respects. The fund family is hardly known to many, even those individuals employed in the financial services world. 85% of its assets are in mutual funds making it the eighth largest mutual fund manager in the US, sandwiched between JPMorgan and Oppenheimer Funds. One of the reasons for its anonymity is that they don’t advertise, which is by design. Because they are institutional class shares, individuals can’t simply go out and purchase them on their own. It requires the use of an advisory firm, much like MASECO. Because Dimensional doesn’t make use of “star fund managers”, its performance is not often written or spoken about. For instance, more than 80% of its funds have beaten their category benchmarks over the past five years and 75% over the past 15 years. This is in great contrast to the fact that nearly 80% of all funds don’t beat their underlying category benchmarks.

Dimensional is exceedingly academic. The firm, as Fama, began with the notion that stock picking is too inconsistent and unpredictable as a rational method of beating the market. There will always be fund managers who beat the market, some will even outperform for a couple of years, but that doesn’t indicate skill. Fama says, “With 3,000-plus active managers, some are going to look good — but that’s what you’d expect as a matter of chance.” Continuing on, he says “it’s very difficult to tell luck from skill.” Even to the degree that skill may be employed, stock picking is not a repeatable process with the consistency and persistence of returns that would provide investors a crystal ball in which to choose those managers likely to outperform, particularly in the light of the costs borne by those bets. Fama continues, “Active management is a zero-sum game, and that’s before costs…that’s not opinion, that’s math.”

 

Mark Scher
Senior Investment Adviser

 

Fama, E., 1965. The Behavior of Stock Market Prices. Journal of Business, pp. 34-105.


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