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Financial Happenings Blog
Wednesday, October 01 2008

I have come across an online article published on Kiplinger.com that provides a really great summary of the approach taken by Dimensional Fund Advisors - This is Rocket Science.  It refers to the US operations of the organisation but the commentary is also a fair representation of the Australian based funds offered by DFA.

 

The key points in the article were:

  • The board of DFA contains Nobel prize winning economist Myron Scholes along with University of Chicago finance professor Eugene Fama

  • The DFA philosophy boils down to the relationship between risk and return:

         Riskier stocks - small companies & those considered undervalued - produce higher returns on average over time.

  • They use an index based approach but are different from index funds in that they employ pragmatic tactics:

1.             Flexible approach to indexing

a.       E.g. no REITs in the small company trust

b.       E.g. no recently listed companies in the small company trust

2.             Buying and selling shares based on momentum

a.       DFA believes that a stock that's moving dramatically one way or the other tends to stay in motion for a while

                                                                     i.      This means they won't buy a share that spirals down into the small company buy zone nor will they automatically sell a share that soars out of the small company range

3.             In the emerging markets arena they avoid whole countries that might otherwise be included in an Emerging Markets Index.  The main example at present is Russia because of an absence of strong property rights.

  • DFA also offer modest operating costs.  The maximum fee on the funds that we use is 0.76% on the Emerging Markets trust.  The lowest fee is 0.25% on the Australian Large Company trust.

Dimensional funds make up a core part of the investment portfolios we recommend to clients.  We are impressed with the academic research that has gone into developing their strategies and also the relatively low cost alternative they create for investors.

If you wanted to see how we incorporate them into our investment philosophy take a look at our Building Portfolios page.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 09:08 pm   |  Permalink   |  Email
 
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