The key partner that we use in building investment portfolios is Dimensional Fund Advisors. We use them because their investment solutions are grounded in the reality of how investment markets function. And their investment solutions work.
They focus on applying the latest in academic research to building investment portfolios. This includes the '3 factor model', which identifies that small companies and value companies are sources of higher expected returns.
Over the 5 years to the end of October 2006, the returns of the Australian Dimensional Fund Advisor trusts has been:
Large Company Fund (which is very similar to the ASX100 index) 15.35% a year. Keep in mind that very few funds ever beat this index return.
Value Company Fund (which invests in the 30% of the market with 'value characteristics') 21.53% a year.
Small Company Fund (which invests in companies outside of the ASX100) 21.18% a year.
These are truly impressive returns. They don't come from the 'skill' (or 'luck') that most fund managers profess to have in being able to pick stocks that will perform better in the future - they come from studying the reality of how investment markets work, and investing accordingly.
Moreover, the Dimensional approach focusses on tax effeciency, so the after tax returns of the funds remain strong. This contrasts with most managed funds where there is significant underlying trading that means a lot of capital gains tax is passed on to investors over time.
Dimensional Fund Advisors have recently produced a brochure entitled 'The Science of Investing' that explains their philosophy. It is well worth a look.